Investment Process
I personally view value investing as a type of defensive methodology that filter stocks and shortlist investment opportunities. Investment opportunities can consist of :
1) cigar butt stocks, whose price is heavily depressed such that we can have comfortable profit
2) stocks whose net asset value, based on your calculation as if company is being run at normal situation, is discounted by Mr Market.
3) stocks, whose hidden values can be unlocked by activists.
4) stocks being in financial distress
5) stocks, whose earning power is intact or growing but is being undervalued by Mr Market
However, I develop my interest in growth at the reasonable price (GARP) investing because I enjoy reading business stuffs. In essence, understanding how the business operate by selected employee tells us how they manage to be profitable going concern entity for a long time. That is why known growth should be free if you identify the stock to be priced reasonably by Mr Market. It is difficult to identify and/or understand unknown growth. Unknown growth is usually the source of huge return for capable firms. On the other hand, known growth will provide return to certain level and stop there if there is no further progress in terms of technology, internal control, and ideas.
It is understood that Benjamin Graham has not integrated growth variable in his methodology because it is difficult to quantify with highest degree of defense mechanism. In fact, growth variable is the mixture of quantitative and qualitative measure. Over the years, academic in accounting area has been providing more interesting input to the managerial accounting/performance management.
We, very often, have been using financial data to generate our quantitative analysis. I am sure that at least 95% of us in the investing world is doing like this and ignore non-financial data. Non-financial data should be considered. It can be obtained by setting up survey, non-financial measures, and unbiased observation. I believe that if we spend sufficient time to study these non-financial data, we will have some ideas about growth variable in quantitative term.
Philips Fisher has provided interesting methods about 15 points. They are useful to provide us ideas about qualitative part of growth variable. Someone with sharp observation and keen listening will catch on the necessary ingredients. It can happen during unexpected conservation with your friends. If we want to do it purposely, we need to develop our understanding about the causes of good businesses.
Over the years, I have been investing with the mind of improving my own methodology in terms of qualitative and quantitative. In my opinion, once you get investment methodology right and comfortable, the satisfactory returns will come to you.
All above things said is something I am very comfortable and confident with. There is one area I am not sure and comfortable. We all love companies who do not have debt or have reasonable level of debt. Over the years, I have observed that some companies with depressed stock prices due to the bad ratings given by professional analysts in the financial industry and with high debt load tend to generate such high return.
After studying financial literature for years, zero debt do not provide any financial headache but can cause poor financial discipline in terms of capital allocation and capital investment. Debt, although can give plenty of financial headache, can instill discipline to managers on what they should manage. However, we need to question the rationality of the managers - there are some irrational managers do not confirm to above said actions.
I once saw Alcatel Lucent stock selling below US$1 per share last year. It has legendary research team which it acquired Bell Lab long time ago. What deterred me to buy this stock is sky high debt amount. I need to know how they manage the debt. With no hindsight, I couldn't buy it. Today, it generates more than 100% return.
It is not only stock with such characteristics I saw. There is other stocks too. That is why I feel that this area should be carefully researched.
This year, I will be visiting USA to study some industries with my own eyes. At the same time, I will be attending Berkshire Hathaway's shareholder meeting. I wonder who is going there.
1) cigar butt stocks, whose price is heavily depressed such that we can have comfortable profit
2) stocks whose net asset value, based on your calculation as if company is being run at normal situation, is discounted by Mr Market.
3) stocks, whose hidden values can be unlocked by activists.
4) stocks being in financial distress
5) stocks, whose earning power is intact or growing but is being undervalued by Mr Market
However, I develop my interest in growth at the reasonable price (GARP) investing because I enjoy reading business stuffs. In essence, understanding how the business operate by selected employee tells us how they manage to be profitable going concern entity for a long time. That is why known growth should be free if you identify the stock to be priced reasonably by Mr Market. It is difficult to identify and/or understand unknown growth. Unknown growth is usually the source of huge return for capable firms. On the other hand, known growth will provide return to certain level and stop there if there is no further progress in terms of technology, internal control, and ideas.
It is understood that Benjamin Graham has not integrated growth variable in his methodology because it is difficult to quantify with highest degree of defense mechanism. In fact, growth variable is the mixture of quantitative and qualitative measure. Over the years, academic in accounting area has been providing more interesting input to the managerial accounting/performance management.
We, very often, have been using financial data to generate our quantitative analysis. I am sure that at least 95% of us in the investing world is doing like this and ignore non-financial data. Non-financial data should be considered. It can be obtained by setting up survey, non-financial measures, and unbiased observation. I believe that if we spend sufficient time to study these non-financial data, we will have some ideas about growth variable in quantitative term.
Philips Fisher has provided interesting methods about 15 points. They are useful to provide us ideas about qualitative part of growth variable. Someone with sharp observation and keen listening will catch on the necessary ingredients. It can happen during unexpected conservation with your friends. If we want to do it purposely, we need to develop our understanding about the causes of good businesses.
Over the years, I have been investing with the mind of improving my own methodology in terms of qualitative and quantitative. In my opinion, once you get investment methodology right and comfortable, the satisfactory returns will come to you.
All above things said is something I am very comfortable and confident with. There is one area I am not sure and comfortable. We all love companies who do not have debt or have reasonable level of debt. Over the years, I have observed that some companies with depressed stock prices due to the bad ratings given by professional analysts in the financial industry and with high debt load tend to generate such high return.
After studying financial literature for years, zero debt do not provide any financial headache but can cause poor financial discipline in terms of capital allocation and capital investment. Debt, although can give plenty of financial headache, can instill discipline to managers on what they should manage. However, we need to question the rationality of the managers - there are some irrational managers do not confirm to above said actions.
I once saw Alcatel Lucent stock selling below US$1 per share last year. It has legendary research team which it acquired Bell Lab long time ago. What deterred me to buy this stock is sky high debt amount. I need to know how they manage the debt. With no hindsight, I couldn't buy it. Today, it generates more than 100% return.
It is not only stock with such characteristics I saw. There is other stocks too. That is why I feel that this area should be carefully researched.
This year, I will be visiting USA to study some industries with my own eyes. At the same time, I will be attending Berkshire Hathaway's shareholder meeting. I wonder who is going there.
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