Photo by Tingey Injury Law Firm on Unsplash These are the 5 simple steps I take when I do value investing:
1. Find a company
2. Read the Wikipedia or about page
3. Read the annual letters
4. Do a 10 year analysis
5. Do Scuttlebutt and think about the company deeply
Actually, I do many more steps as each step is a high level overview but I hope these steps serve as a simple enough guide.
After read numerous books over the years and trying out each value investing method one by one, this is the checklist I have generated and I think gives the best overview of ‘ how ’ to do value investing without requiring too much ‘ theory ’.
I can’t say for sure if I’ve been successful with this method since results take years to arise, but I can say that I have used this method enough to identify companies that would traditionally fall into the value investment category — or so I think anyway. But before you accept my advice, you may ask: “What does a hobbyist investor know anything about investing? If he was any good, he’ll be a professional financial analyst.” Honestly, I’ve got no come back for that, but I can say there are great investors out there who have never been professional financial analysts yet still became great investors. For example, Charlie Munger was a practising lawyer before he became an investor, and without any formal financial training too. 1.Find a company
The hardest part of value investing is knowing which companies to investigate. There’s so many on the stock exchanges.
I got about this in 3 ways:
1. Find a list and go from A to Z. ( I got this from Warren Buffett )
2. Keep your eyes on the news for special situations eg. spinoffs ( I got this from Joel Greenbalt )
3. Look at the products you buy the most and investigate the parent company. ( I got this from Peter Lynch )
There are probably other methods out there, but I find that the three methods above will help you find companies to look at. 2. Read the Wikipedia page or About Page
Even before downloading any annual reports, I like to first know what the company does. I tend to avoid some industries because I don’t have a circle of competence in those fields, or find them too hard to understand.
For example, I understand little about how financial and resource companies work and so avoid them, but I tend to understand a bit more about IT and pharmaceutical companies because I’ve personally worked in those fields.
Moreover, I prefer Wikipedia pages because they tend to give a broader and less subjective overview than a company’s about page. I feel like a company’s ‘About Page’ is made too selectively by its marketing team.
For example, the Coca-Cola ‘About Page’ tells us you that the drink was invented by John Stit Pemberton, but it won’t tell you unlike, Wikipedia ,that Pemberton was a morphine addicted who created Coca-Cola to get off his morphine addiction. Furthermore, it won’t tell you that Pemberton even though the Coca-Cola creator, didn’t make the product famous and he died in poverty.
Nevertheless, you still need the ‘About Page’ when a Wikipedia article doesn’t exist for the company. 3. Read the annual letters
Usually, the annual letters will tell you the year’s overview and give you updates on project successes and future projects.
The letter is a good starting point to see how the management thinks. Are they emphasising on the business’ successes and failures in that year, or are they kowtowing to shareholders and highlighting financial gains while conveniently omitting that the gains are related to capital investment?
Unfortunately, you won’t actually know if the letter is written by management or some sort of relations team.When you read the letters, you aren’t reading to be persuaded by the management team that they are doing a good job. Your job is actually to detect if there’s something fishy about management. Honest managers will tell you as it is. Dishonest managers will make everything sound fanciful.Here are some things I consider as warning signs when reading annual reports. Does an old banking institution really know how to acquire a suitable FinTech? Or, if one director leaves every year, is it the sign of directors moving onto their next career or is it the sign of a dictator CEO?I got these ideas of how to scrutinise the annual letter after reading […]
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