Value Investing Course: Essential Strategies for Market-beating Returns (Wiley Finance) Book

The book is a compilation of insights from 'great' investors, categorized by topic. It is useful for thinking through a specific topic or finding a quote on one from someone with more authority.

One thing I like is that the book intentionally includes quotes in each section that conflict. This makes it more balanced, and gives the reader the opportunity to think through each side before taking his or her own position.

Here are some quotes that I liked (note I couldn't include them all due to the character limit. Email me for the full file):

PHILOSOPHY
It does not take a genius or even a superior talent to be successful as a value analyst. What it needs is, first, reasonable good intelligence; second, sound principles of operation; third, and most important, firmness of character. —Benjamin Graham, Common Sense Investing

DOES QUALITY MATTER?
Value to me often derives from competitively strong companies in structurally attractive industries supported by secular growth. —Morris Mark, Mark Asset Management

I've learned that to meet my return goals I can't have big losers. So regardless of how cheap something is or how much potential upside there is, that means avoiding companies that can wipe out—with too much debt, unproven business models, secularly challenged end markets or no durable competitive advantages. —Zeke Ashton, Centaur Capital

In my experience, it's been more important to be involved with a powerful trend with accelerating potential returns than to get too hung up on valuation. That's not at all to say valuation doesn't matter, but there have been many times when I've been right about the trend but didn't buy a leader because it was 20 percent too expensive and that turned out to be a mistake. —John Burbank, Passport Capital

THE VALUE MINDSET
Starting with the first recorded and reliable history that we can find—a history of the Peloponnesian war by a Greek author named Thucydides—and following through a broad array of key historical global crises, you see recurring aspects of human nature that have gotten people into trouble: hubris, dogma, and haste. The keys to our investing approach are the symmetrical opposite of that: humility, flexibility, and patience.

On the humility side, one of the things that Jean-Marie Eveillard firmly ingrained in the culture here is that the future is uncertain. That results in investing with not only a price margin of safety, but in companies with conservative balance sheets and prudent and proven management teams. If you acknowledge your crystal ball is at best foggy, you follow the advice of Ben Graham and invest to avoid the landmines.

In terms of flexibility, we've been willing to be out of the biggest sectors of the market, whether it was Japan in the late 1980s, technology in the late 1990s or financials the late 2000s. That wasn't necessarily because of any particular gift of foresight, but reflected a recognition that each of those areas embodied very widely accepted and high expectations. It's painful and not socially acceptable to be out of the most revered sectors of the market, but those types of acts of omission have been a key contributor to the strong performance.

The third thing in terms of temperament we think we value more than most other investors is patience. We have a five-year average holding period. Particularly in a volatile market like today's, people are trying to zig and zag ahead of every market turn that they're hoping they can forecast with scientific precision. We like to plant seeds and then watch the trees grow, and our portfolio is often kind of a portrait of inactivity. That's kept us from making sharp and sometimes emotional moves that we eventually come to regret.
—Matthew McLennan, First Eagle Funds

INDUSTRY PREFERENCE
We'd like to believe any business is analyzable, but when you have product cycles of only twelve months, as an investor you're very reliant on the company hitting that window exactly right. If they don't and somebody else does, you can buy low all you want, but you find out pretty quickly that you were buying a future income stream that was a mirage.

We haven't sworn off technology entirely, but we've essentially sworn off investing in shortproduct- cycle technology. We look for technology companies where the business cycles are glacial in comparison. —Larry Robbins, Glenview Capital

High-quality businesses tend to be characterized by things like strong brand names, customer loyalty, pricing control, some cost advantage and growing long-term markets. Low-quality businesses, which don't have much control over their futures, exhibit the opposite characteristics. We generally consider cyclical, commodity businesses to fit this more negative profile and so are less invested there. —Bill Nygren, Harris Associates

I've always had an affinity for companies that actually make things. We favor companies with transparent businesses that we can understand fairly quickly and those that have large and recurring maintenance, repair, and overhaul revenues from an installed base, such as elevator companies or aerospace-parts firms. —Alexander Roepers, Atlantic Investment Management

One thing about being an investor for 20 years is that experience leads you to write off big chunks of the market. I don't do retail because you have to recreate the demand every day. I don't do financial services because it's a spread business with no real free cash in it—you have to grow equity to grow assets to make more spread. I don't do much in industrials because the capital demands are high and, long term, the cost structure—particularly with labor and energy prices—is challenging in a global economy. I don't do commodities—we like price-makers that set prices based on value added, as opposed to price takers.

If you buy a high-quality business, you only have to be right once—buying at the right price. The sale is fairly easy to execute. In cyclical or commodity areas, you have to be right twice, on the buy and the sell. If you miss the exit, it might be awhile before it comes back around. —Jeffrey Ubben, ValueAct Capital

One thing we are very conscious of is the degree of leverage in a business. That can be financial leverage, which is reflected on the balance sheet. It can be operational leverage, where you look at how much of the cost base is fixed or variable. It can also be the degree of leverage to a particular industry or geography. In general, I'm uncomfortable with companies that are vulnerable to more than one of those kinds of leverage going against them at the same time. A cyclical business that has a lot of fixed costs, for example, should not have a lot of financial leverage or be too levered to one geography or industry. If things go the wrong way, management has its hands tied in trying to get out of trouble. This is a big reason we rarely find opportunity in more commodity-type businesses. —David Herro, Harris Associates

One of the keys to Warren Buffett's early success was investing in high return on capital consumer businesses that were relatively immature when he bought them and that grew enormously along with the U.S., the largest economy in the world. He owned companies like Gillette, Wells Fargo, and Washington Post Co. over a period in which consumer products, financial, and media companies grew from being a relatively small part of the S&P 500 to a very large part of it. That's a natural evolution in any large, developing economy and we expect that dynamic to create considerable value in places like India for a long time. —John Burbank, Passport Capital

The human brain is incapable of conceptualizing something vastly different from what's happening today. But the big-money ideas are those where the changes are far beyond what you can conceive today. The closer you can get to conceiving those types of changes and the higher the probability they might happen, the more likely you are to find big winners. —Lisa Rapuano, Matador Capital Management

IDEA GENERATION
Most of our initial research is on finding the true standouts in any given business. That's largely a numbers-driven exercise, focusing on returns on equity, margins, and growth in key sales and profitability metrics—all in comparison with the competition. We've identified more than 400 companies—primarily in the U.S., but not exclusively—that we could imagine owning and that we try to keep fairly close track of. —Francois Rochon, Giverny Capital

RELIABLE SOURCES
I like to have information pushed at me, so I've set up keyword alerts on something like 3,000 companies, which results in 20 to 25 press releases a day announcing things like management changes, reorganizations or new dividends. Ideas come out of that all the time.
Another thing I've done in my personal account is to buy one share of probably 250 micro-cap companies, which is kind of my own customized research service. The daily mail delivery is kind of a Christmas grab bag—you never know when an annual or quarterly that arrives is going to catch your eye. —Paul Sonkin, Hummingbird Value Fund

We also like to search article databases using keywords that indicate problems or big changes at a company—things like “profit warning,” or “spin-off,” or “restructuring.” —David Samra, Artisan Partners

We've over time built a number of systems and reports that enable us to track globally the movement of debt, equity and assets around on balance sheets. We follow in a disciplined way things like spinoffs, rights offerings, new equity issuance and buybacks. —James Crichton, Scout Capital

I'd much rather steal a good idea than generate a bad one myself. —Steve Morrow, NewSouth Capital

CUTTING THROUGH THE NOISE
Money managers must keep firmly in mind that the only things they really can control are their investment philosophy, investment process, and the nature of their client base. Controlling your process is absolutely crucial to long-term investment success in any market environment. —Seth Klarman

MACRO VS MICRO
One element to our process I have added in recent years is what I call “PEST” Control. I grew up in the business with the basic assumption that I didn't need to worry much about macro issues as long as I had enough margin of safety from a cheap stock price. That's no longer a safe assumption, so we force ourselves to more fully assess the risks of Political, Economic, Social and Technological changes that could derail our thesis. —Jeffrey Bronchick, Cove Street Capital

We're bottom-up stock pickers, so the main reason we concern ourselves with the macro environment is to pressure-test the companies we invest in. Using a nautical analogy, we're looking at the weather forecast to make sure our boat will be strong enough, not to pick the day to go sailing.
Even our macro views stem largely from bottom-up work. We were interested in Fannie Mae in 2007 but first wanted to understand their credit risk better. We spoke with the ratings agencies and asked them what would happen if house prices fell. “You mean a six-sigma event?” they asked. “No,” I said, “just if prices fell 5 or 10 percent.” They said, “That's six-sigma!” Well, if house prices going back to where they had been just 12 months earlier was considered six-sigma by the ratings agencies, I thought we were in trouble. —Boykin Curry, Eagle Capital

I would argue that if macro factors are too big a determinant in your appraisal of a company's intrinsic value, you should just sit that out. We just move on to where the micro is driving value. —Staley Cates, Southeastern Asset Management

While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better. —Seth Klarman, The Baupost Group

Our goal is to find earnings streams that are defensible in good times and bad and that also demonstrate secular growth. It's frankly an advantage to not get overly distracted by macroeconomic concerns, which can make it hard to pull the trigger on a great business when the opportunity presents itself. —Jeffrey Ubben, ValueAct Capital

BUSINESS FIRST
We focus on companies with long competitive-advantage periods, which puts a premium on our truly understanding the business dynamics over time. As a result, features of businesses we're tempted by typically include stable market shares, stable margins, pricing power and long data series, so we can evaluate how the business has performed through good times and bad. —James Crichton, Scout Capital

We focus on industry structure. We like concentrated industries with two or three primary players. As value investors, we are typically buying the underperformer. There are issues to fix, but the customers are rooting for you and the leading competitor, with high margins and a high stock price, is probably not going to go for the jugular. —Jeffrey Ubben, ValueAct Capital
There are usually only a few things you have to get right about a company for it to be a successful investment. What are the key drivers of the business and how are they changing? What is the company doing to position itself for that future, and what is it doing to operate more efficiently and effectively? How are they redeploying capital? Our view is that if you can get 85 percent of the way there by answering the big questions, don't waste your time on the last 15 percent because the marginal utility isn't worth it. —Steve Morrow, NewSouth Capital

WHAT QUALITY MEANS
When you're putting 8%, 12% or 15% of your money in something, it's not a day trade. You have to focus first and foremost on high-quality businesses that can't blow up and should grow in value over time. —William Ackman, Pershing Square Capital Management

What makes a high-quality business? At a basic level, the product or service being sold is critical to customers but is only a small part of their cost structure, and the customer relationship tends to be sticky and recurring. Generally, we end up in intellectual-property-based businesses that can price off of a value-add rather than some sort of cost basis. —Jeffrey Ubben, ValueAct Capital

We're looking for businesses with low capital intensity, the ability to generate high levels of free cash flow, and a privileged business model that enables the company to produce excess capital. We want the financial and business models to be transparent. In terms of competitive dynamics, we want to understand the value of the company's product or service to customers and the strength of its competitive moat. From an industry perspective, we ideally want to see long-term sustainable growth and secular tailwinds. —James Crichton, Scout Capital

WHAT COULD GO WRONG?
One [of my more common mistakes] would be ignoring the potential impact of leverage. I know the effect goes both ways, but say you do a sum-of-the-parts analysis and think the assets of a company are worth $100. If the company has $70 of debt, overstating the asset value by only $10 makes the equity value go from $30 to $20. In the grand scheme of things, being 10 percent off isn't that big a mistake, but when there's heavy leverage, it is. —Jean-Marie Eveillard, First Eagle Funds

One element we've added to the tail end of our analytical process in recent years is to consider scenarios that could send the stock down 30 percent or more and we would not want to add substantially to our position. Common examples would be things like the loss of a giant customer, or market incursions from a powerful competitor. Given the outsized positions we take, we want in a disciplined way to contemplate those scenarios up front and pass on the investment if they're even somewhat likely. —Kian Ghazi, Hawkshaw Capital

HOW IMPORTANT IS MANAGEMENT?
Making judgments about management is important to us and something I think value managers tend to underweight. You can analyze something statistically, but if you expect to own it for 10 years, management is going to make thousands of decisions you can't predict and may never even know about, which collectively make earnings compound at a rate more or less than they would have otherwise. Those things can add up over time to the difference between a great performer and an also-ran. —Boykin Curry, Eagle Capital
I'm at a stage in my career where I'd say human behavior is the most important determinant of a business's long-term success. I don't care how smart an analyst you are, you can't really know what's going on inside a business. We want to invest not only in highly capable managers, but also those with clear track records of integrity and acting in shareholders' best interest. —Chuck Akre, Akre Capital Management

I don't think you can spend too much effort trying to understand the quality of management—at the end of the day, it's the most important investment criterion. I've learned over time that great management teams deliver positive surprises and bad ones deliver negative surprises. —Lee Ainslie, Maverick Capital (maybe judge this by assessing historical skew of surprises)
I think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power. —Charlie Munger, Poor Charlie's Almanack

We're looking for managers who have demonstrated they are killers at business execution, and who have a history of always acting in the best interests of all shareholders. I'm not interested, for example, in CEOs who appear personally greedy. I frequently ask CEOs how they measure success. They often speak about meeting the needs of their various constituencies, including shareholders, employees, customers, and the community. Many have said they measure their success by the rise in the share price. The closer they get to saying they measure success by growth in the company's real economic value per share, the more interested I am. —Chuck Akre, Akre Capital Management

The most important discussion we have with management is when we ask how they allocate capital. You can usually pick out the empire builders with that question alone—they tend to have a hard time zeroing in on a concrete answer. The best managers can usually say clearly and with confidence where they see the highest return-on-invested-capital opportunities and what they expect those returns to be. They also are typically smart about buying back their shares—not just on some systematic basis, but opportunistically when they believe the shares are cheap. —Robert Williamson, Williamson McAree Investment Partners

RED FLAGS
There's just a huge amount of skill in exposition. Part of being a wise person is resisting the other person's expository—to know nonsense when you see it. If you're like me, you can conceal your contempt for the person even as they speak. —Charlie Munger, 2006 Wesco Annual Meeting