Intelligent Investor

Date

2020/05/24

Description

Amazon Link

Takeaways

• Speculation vs Investment
  • Investing (according to Graham)
    • you must thoroughly analyze a company and the soundness of its underlying businesss before you buy its stock
    • you must deliberately protect yourself against serious losses
    • you must aspire to adequate, not extraordinary performance
  • An investor calculates what a stock is worth and a speculator gambles that a stock will go up
• Inflation
  • Inflation eats away at gains and should be considered when investing
  • Bonds alone have not been historically enough to overcome inflation
  • Stocks, although riskier than bonds are better at overcoming inflation
  • A mix of stocks and bonds should be chosen over one or the other
    • The ratio should be chosen with consideration of inflation rate and market conditions (bear or bull market)
  • Other investments like REITs and TIPs can be mixed in to better handle inflation
• Defensive investment strategy
  • 50% stocks and 50% bonds
  • with a bull market, sell stocks and buy bonds
  • with a bear market, sell bonds and buy stocks
  • never go more than 75% towards stocks or bonds
• Active vs Passive Investing
  • Both can be intelligent
  • Active is demanding on your time and energy, making more frequent changes based on market conditions
  • Passive is demanding emotionally and requires very infrequent changes
  • Some people take a hybrid approach
• Defensive investing and common stocks
  • There should be adequate but not excessive diversification
    • minimum of 10 and maximum 30
  • Each company should be large prominent and conservatively financed
  • Each company should have a long record of paying dividends (at least 20 years)
  • Impose some limit on the price paid for the issue on thr average earnings over the past 7 years
    • 25x the average earnings and not more than 20x the last years average
  • Growth stocks
    • Some classify as a stock that doubles its per share esrnings every 10 years
    • Beware these stocks often fluctuate with market conditions
  • Portfolio evaluation and changes should be done one per year
  • Re-balancing should be done every 6 months
  • Dollar cost averaging
    • make a regular contribution, say once a month and buy the same portion of stocks
    • this prevents speculation
• Aggressive investing
  • Be weary of junk bonds
  • If you do but junk bonds there are index funds for these, but they’re still very risky
  • Foreign bonds can be a good compliment since the have a low correlation to the DIJA
  • IPOs can be a good investment, but you need to be able to get in at the offering price
  • Growth stocks are often overvalued, since they are priced at more multiples than their current revenue
  • Bargain shares
    • Stocks who’s prices are below 50% of the appraised value
• A method for doing an appraisal on a company
  • Download the most recent report from the EDGAR database on https://www.sec.gov
  • From the companies current assets subtract its current liabilities (including prefferred stock and long term debt)
  • Compare the current value of all stocks to the value of the company
• Market Fluctuations
  • Typically, the more successful the company the larger the fluctuation in price of shares
  • With the aggressive investment strategy, concentrate on selecting issues that are resonably close to their tangible asset value, say not more 1/3 above the the asset value
• Investment Funds
  • Mutual funds are investments that are (typically) managed by a professional who manages the portfolio
    • Can be comprised of a number of different type of investments, say stocks and bonds
    • Can also have a theme, say a portfolio of tech focused stocks
  • Investment funds have been analyzed over the last 50+ years and have shown some trends
    • the average fund does not pick stocks well enough to overcome its costs of researching and trading
    • the higher the funds expense the lower the return
    • the more frequently a fund trades its stocks the less it tends to earn
    • highly volatile funds, which bounce up and down more often are likely to stay volitile
    • funds with high past returns are unlikely to remain winners for long
  • High quality investment funds tend to have the following qualities in common
    • Their managers are the biggest shareholders
    • They don’t have high fees
    • They dare to be different – they don’t always follow the same trends everyone else is doing
    • They don’t take everyone’s money
      • Too much money can force the portfolio manager to make one of several bad decisions
        • Hold onto the cash to invest later
        • Invest more into stocks it already owns, which could be inflated
        • Spend time and effort investing in new stocks
  • Most fund buyers choose to invest looking at the following criteria
    • look at performance
    • look at the managers reputation
    • look at the riskiness of the fund
    • look at the expenses
  • The intelligent investor looks at this in the reverse order
  • Operating expenses: maximums
    • Taxable and municiple bonds: 0.75%
    • U.S. Equities (large and mid-sized stocks): 1.0%
    • High-yeild (junk) bonds: 1.0%
    • U.S. Equities (small stocks): 1.25%
    • Foreign stocks: 1.50%
  • When to sell index funds
    • A sharp and unexpected change in strategy
    • An increase in expenses
    • large and frequent tax bills
    • Suddenly erratic returns
• Security Analysis For The Lay Investor
  • value = current (normal) earnings * (8.5 + (2 * expected anual growth rate))
  • Do analysis in two steps
    • First work out the past performance
    • Second, work out any modifications to the past performance value
  • When determining the value of a company consider the following factors:
    • the companies long term prospects
    • the quality of its management
      • Do acronyms like EBITDA take priority over net income or “pro forma” earnings used to mask actual loses
    • its financial strength and capital structure
      • look at ratio of earnings to fixed charges, if earnings falls below interest costs for example – the bond holders rather than the shareholders could end up owning the company
    • its dividend record
      • Depending on the company, it may make more sense for a company to re-invest dividends into the company and accelerate growth
    • its current dividend rate
• Per-share earnings considerations
  • look for things like special charges in the footnotes
  • sometimes the special charges will be used to write off future losses (like closing down a factory or product line)
    • this can be done to tie expected loses to a bad year and provide a clean slate for the future, but be weary since this can be repeated
  • often times special charges are seen as one time costs but sometimes they end up being recurring costs
• A comparison of 4 listed companies
  • Seven statisical requirements
    • Adequate size
    • A sufficiently strong financial condition
    • Continued dividends for a least the past 20 years
    • No earnings deficit in the past 10 years
    • 10 year growth of at least one-third in per-share earnings
    • Price of stock no more that 1.5 times net asset value
    • price no more than 15 times average earnings of the past 3 years
• Stock Selection Of The Aggressive Investor
  • Some new rules (in contrast to the defensive strategy)
    • Financial condition
      • current assets at least 1.5 times current liabilities
      • debt not more than 110% of net current assets
    • Earnings stability
      • No deficit in the last five years covered in the stock guide
    • Dividend record
      • some current dividend
    • Earnings growth
      • Last years earnings more than (x?) years before
    • Price
      • Less than 120% net tangible assets
  • Make sure you choose 15+ stocks in this type of portfolio to get diversification
  • Practice! There are portfolio trackers
    • https://www.morningstar.com/
    • https://finance.yahoo.com/
    • (there are others as well)
  • ROIC (return on investment capital)
    • Signal to use to show well the company is using investor money
    • More details: https://www.investopedia.com/terms/r/returnoninvestmentcapital.asp
    • ROIC of 10% is attractive but 6-7% can be good if the company has a good brand and is temporarily down
• General Rules For The Intelligent Investor
  • Know what you are doing – know your business
  • Do not let anyone else run your business unless (1) you can supervise thier performance and (2) have unusually strong reasons for placing implicit confidence in their ability
  • Don’t invest when their is little to gain and much to lose
  • Have the courage of your knowledge and experience – think for yourself