Reviews for New Era Value Investing A Disciplined Approach to Buying Value and Growth Stocks

The average rating for New Era Value Investing A Disciplined Approach to Buying Value and Growth Stocks based on 2 reviews is 3 stars.

Review # 1 was written on 2016-12-10 00:00:00 Carolyn Humphreys Excellent book, especially for novice investors. Some notes from the book: A. Core rules - Do thorough research on business and make sure understand it well - Find good business with economic moats - Have a margin of safety - Hold for a long time - Know when to sell B. Mistakes to avoid - Do not try to figure out the next Microsoft, just stick to business with economic moats - Learn lessons from the past and try to avoid them in future - Be objective about business - Keep calm and stay away from crowd madness and emotion - Do not try to time the market - Never ignore valuation part - Do not just rely on earnings when value stocks C. Investigate economic moats 1. Evaluate profitability - Free cash flow to sales >= 5% - Net margins >= 15% - ROE >= 15% - ROA >= 6-7% 2. Find economic moats - Real product differentiation (by special features or superior technology) - Perceived product differentiation (by brands or reputation) - Low costs - High customer switching cost: client training, tight integration with customer business, industry standard, long term contract, small benefit - High barriers to entry for competitors 3. Find competitive advantage period -> Moat width: how long it lasts? -> Moat depth: how much money it can make? -> Often technology-based product is narrow or no moats 4. Do some industry analysis - Sales are shrinking or increasing in general? Look for trends - Is the industry cyclical or consistently making profit? - How is the market share? How intense is market competition? -> Look at industry reports. Find out statistics on sales, earnings, margins, growth rates -> Analyze some firms to compare with industry average -> get the feel of the industry D. Analyze business quality (fundamentals assessment) 1. Growth - Possible sources of growth (sales growth - orgnanic growth): selling more goods/services, selling new goods/services raising price, buying companies -> Identify the sources of growth and how much growth comes from each source and the quality of the growth -> Be careful with non-orgnanic growth: cost cutting, tax rate change, one-time gain,... -> low quality 2. Profitability - ROA = net margin x asset turnover - ROE = ROA x financial leverage ratio = ROA x (total asset / equity) - FCF/Sales >= 5% -> Look for trends over a long period and compare with other business -> ROE >= 20% is good, but >= 40% needs to investigate why (too good to be true) -> Banks and financial firms have large debt (big leverage ratio) -> Other ratios can be used: + ROIC (return on invested capital) = NOPAT (net operating income after tax) / Invested capital = EBIT - tax + ROCE (return on capital employed) = EBIT (earning before tax and interest) / Capital employed + Invested capital = Capital employed = Total asset - current liabilities (non bearing interest) - excess cash -> remove affect from debt -> assess business core profitability more precisely -> Use profitability matrix to investigate both ROE and FCF 3. Financial health - Financial leverage ratio <= 2 - ICR (interest coverage ratio or times interest earned) = EBIT / interest expense -> the higher the better - Current ratio = current asset / current liabilities >= 1.5 - Quick ratio = (current asset - inventory) / current liabilities >= 1 4. Risks -> Investigate bear cases when bad things happen -> see if business overcomes -> Investigate the affect from external factors like technology innovation, economic business cycle, ... 5. Management - Compensation: -> proxy statement - Character - Operations E. Analyze business stock (stock valuation) - Stock total return <- speculative return + investment return 1. Price mutliples -> Do peer comparison - P/S : + not much noise like earning, hard to doctored, different based on industry (very low in retail, but high in health care,...) + unable to evaluate profit + only compare P/S between business in the same industry or with the same level of profitability - P/B : + careful to use when it comes to intagible assets + not much meaningful to non capital-intensive (like service firms or high tech firms) + very good to evaluate financial business (because of marked-2-market book value) + go hand in hand with ROE when evaluate business - P/E : + do P/E inter-company, intra-company, market average and horizontal analysis for the full picture + affect by risks, capital structure and growth rate -> higher P/E for low debt, less capital and high growth business + More useful with mature companies than with growth companies - PEG : + no growth is the same, each growth goes with different risk + take into account also risks and capital structure + useful for growth companies - Cash return : + FCF / EV (Free cash flow / Enterprise value) > current bond rate + not meaningful to banks and financial firms 2. Discounted cash flow (DCF) -> Estimate the business intrinsic value * Basic concepts: - A business worths all expected future cash flow, reflected at present -> 3 factors affect business future cash flow: amount, timing and riskiness - Present value: value of future cash flow reflected at present -> time value of money, oppoturnity cost, inflation - Risk-free rate: interest rate from government bonds (government default risk is considered 0) - Risk premium rate: additional risk to take to get more return -> Required rate of return(hurdle rate) = Total risk = Cost of capital = Discount rate = risk-free rate + risk premium rate - Present value of discounted future cash flow in year N = CF in year N / (1 + discount rate) ^ N - Perpetuity value in year N = CF in year N x (1 + CF perpetual growth rate) / (discount rate - CF perpetual growth rate) - Discounted perpetuity value = Perpetuity value in year N / (1 + discount rate) ^ N -> Total equity value in N year = Discounted perpetuity value (in the last year N) + All discounted cash flow from year 1 to N - Estimate discount rate based on + Size: smaller size -> more risk + Financial leverage: more debt -> more risk + Cyclicality: more cyclical -> more risk + Management: bad management -> more risk + Complexity: business hard to understand -> more risk + Economic moats: less moats -> more risk -> There is no exact discount rate. In general, the higher the risk the higher the discount rate -> Estimate discount rate for an average business, for example: 10.5% (Morningstar) - Estimate annual CF growth rate to calculate CF for each year in the future -> Estimate the future growth rate based on + Compound annual growth rate CAGR in the last N year = [(Beginning CF / Ending CF) ^ (1/N)] - 1 + Use discount rate checklist estimation to adjust - Estimate perpetual growth rate + Usually range in [inflation rate, GDP growth rate] + Use discount rate checklist estimation to adjust 3. Margin of safety -> Buy stock at lower price than the estimated intrinsic value F. Quick stock screening - Firms follow SEC regulation? - Firms ever generate operating profit? - Firms generate consitently cash flow from operating activity? - ROE > 10% consistently with reasonable leverage? - Earnings growth is consistent? - How clean the blance sheet is? too much debt? where debts come from? business is stable? - Firms generate free cash flow? How consistent? - Number of share oustanding remain consistent over the year? - Management is transparent and clear? G. Important industries to find value stocks - Banks and financial services - Business services: technology-based, hard-asset-based, people-based - Health care: pharmaceuticals, biotech, medical device, health care service - Media

Review # 2 was written on 2015-09-21 00:00:00 Jeremy Frommer Amazing book for beginners! This book was recommended to me by a colleague after I showed some interest in stock investing. Prior to reading this book, I knew practically nothing about businesses or the market at all. I had no clue what an index was, or what equity, assets or liabilities are. On my own time I would follow the stock price of some companies that were always under the highlight (apple, google, facebook, tesla) and imagine what would happen if I were to speculate and try to beat the market. Oh, how naive I was.... Pat Dorsey introduced me to a whole other world that I didn't even know existed. I learnt what the purpose of stocks and the market really is. Why people invest, and why they don't. I learnt that this isn't just a game where one gets lucky by stealing or outsmarting the other person by properly timing his buy/sell, but that stock investing is actually a science. Though there are assumptions and speculations one needs to consider, there are objectively bad right and wrong decisions that one could make. It is difficult to express how excited I was about applying the lessons I learnt from this book to the real world, but I need to remember that patience is virtue. In this book, I learnt about the inner workings of a company and it's management. I learnt about how finances are tracked. Most importantly, I learnt how to identify and evaluate good businesses. Seeing how stocks are always in the news, and that we all work for companies which are valued at something, regardless of whether they are public or private, I have gained a lot of insight into the world around me. In addition to learn a useful skill of what I should do with money, I also learnt how the company I work at operates, and believe that the skills I gained may also be very beneficial in the future if I choose to pursue entrepreneurship. I've always had a keen interest as to how companies function, but never knew how to act on this impulse. While reading this book, I started watching videos on youtube, reading various articles, and just browsing investopedia to educate myself furthermore. I realize that this is just the beginning, but it ignited a spark that has turned into a roaring flame. Some parts of the book I very dense, and even though I took my time reading through it, I still couldn't retain everything I learnt. That being said, it was written in such a way that I could use it as a reference until I familiarize myself very well with all the concepts it discusses. And if not, then the foundation that it has set up is priceless. Even though this book is a little outdated given how much our economy has changed over the past 12 years, I still think that it's a must for anyone who is interested in learning about stock investing but knows nothing about it.