QuickStockAnalysis.com

According to Warren E. Buffett, this is “by far the best book on investing ever written”. In the following post, I wish to share with you some of the basic ideas.

INTRODUCTION

• A stock is not just a ticker symbol; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.
• The intelligent investor is a realist who sells to optimists and buys form pessimists.
• There is no such thing as a good or bad stock; there are only cheap stocks and expensive stocks.
• The art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries.
• Obvious prospects for physical growth do not translate into obvious profits if most other investors are already expecting the same.
• Stocks become more risky as their prices rise (this is obvious but very few follow this core principle).
• The more enthusiastic investors become about the stock market in the long run, the more certain they are to be proved wrong in the short run (rule of opposites).
• Never buy a stock immediately after a substancial rise or sell immediately after a substancial drop.

INVESTMENT VERSUS SPECULATION

• An investor calculates what a stock is worth, based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody else will pay even more for it.
• Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.
• For most of us, 10% of our overall wealth is the maximum permissible amount to put at speculative risk.

GENERAL PORTFOLIO POLICY

• Investor should never have less than 25% or more than 75% of his funds in common stocks (inverse range in bonds). The common-stock component should be below 50% when the market level has become dangerously high.
• A long term investor is the only kind of investor there is. Someone that can´t hold on to stocks for more than a few months is doomed to end up as a loser.

STRATEGIES AND OPPORTUNITIES

• Good opportunities appear when large companies are going through a period of unpopularity (disappointing results, special situations, etc). For instance, a strategy called “Dogs of the Dow”, that consists on picking the 10 companies with lower PER in the DJIA, has almost always had better performance than the DJIA as a whole.
• Buying bargain issues. These are the large companies that sell for less than the companý´s net working capital alone (current assets minus its total liabilities). They must also have strong financial position, good PER value and prospects of future earnings.
• Valuation of growth stocks; the value is equal to the current (normal) earnings multiplied by (8,5 plus twice the expected annual growth rate). The growth figure should be that expected over the next seven to ten years.
• Companies to avoid:
  • serial acquirers, the ones that on average add more than three companies per year are sign of potencial trouble.
  • the ones that rely on one customer for most of its revenues.
  • if cash from operating activities is consistently negative
  • if a company reprimes or reissues its stock options for insiders (Form 4 fillings show whether a firm´s senior executives and director have been buying or selling shares).
  • Companies whose stocks are owned in more than 60% by institutions; they are probable overowned.

SOME STOCK-MARKET FACTS

• Bull-markets periods are usually characterized by the transformation of a large number of privately owned businesses into companies with quoted shares. For instance, between 1960 and 1962, 590 companies went public. In 2001, the IPO market was so dead that only 88 new stocks were created
• Nearly all bull markets are at historically high price level, high PERs and low dividend yield against bond yields.
• Fast growing companies tend to overhead and flame out. Great expectations lead to great disappointments if they are not met.
• Incredibly, Wall Street practice is to value stocks dividing the current stock price by next year´s earnings. This is called the forward P/E ratio. The last financial year earnings should be used.