Book Summary — The Little Book of Value Investing

You can find all my book summaries — here.

This book fit-in perfectly as I started thinking about investing in stock myself.

The Book describes the theory of value investing — investing in undervalued companies and holding them for a long time, even though / especially if they are not party-hot companies, but genuinely undervalued.

You need to invest but you don’t need to be a genius to do it smartly.

• more people own stocks today than at any point in the past

Value Investing is long-term investing in undervalued stock. The author also recommends investing in index’ to diversify the portfolio.

What is it worth?

Think like a banker → assess what the stock is worth.

1. Intrinsic value — what is it worth
2. Margin of safety — don’t lose money

This is what rational investors do. They sit back and wait for the market to offer stocks for less than they are worth and to buy the same stocks back for more than they are worth.

Intrinsic Value

Buy Stocks like Steaks… On Sale

The time to buy stock is when it’s low in price.

Buy stocks at a low multitude of their earnings.

Tips

Debt → company should own 2x of what it owes

Cycles → industries / companies are more/less dependent on the economy (ie food is not dependent)

Competition → only if there is a clear advantage

Fraud → if you don’t understand their financial statement, don’t buy

Currencies → don’t speculate on currencies, hedge them

Stay within your own circle of competence.

Examination

Balance Sheet — shows the companies’ stamina

• Liquidity

current ratio = current assets / current liabilities → should be 2x

quick ratio = as above just excludes inventory

• Working capital = current assets — current liabilities → the more the better
• Trends — observe them over last 5 years — liabilities, debt, assets, etc
• Debt to Equity Ratio — how much debt is in the company?

Income Statement — what can the business earn?

• Revenue over time by department / product
• COGS
• Profit Margin
• OpEx over Revenue
• EBITDA
• Earnings per Share (EPS) = Net profits / Number of shares outstanding
• Diluted EPS = if all convertible instruments convert into stock
• Return on Capital (ROC) = Annual earnings / Capital at start

Questions to Consider

1. Pricing — outlook? raise?
2. Sell — possible to sell more? would increase gross profit?
3. Gross profit margin as sales increase?
4. Can it control expenses?
5. Can sales be grown at no additional cost?
6. Profitable — as it’s competitors
7. Growth — how will it grow?
8. Cash — what will it do with the cash?
9. Competitors — what are they doing?
10. Financial — how does it compare with other companies’ doing the same
11. Worth — how much would it be worth if you sold?

Margin of Safety

First rule of investing: Don’t lose money.

Second rule of investing: Refer to rule number one.

Leave yourself a cushion in case you made a mistake

Companies with debt → less appealing with less debt as they can survive tough times better

Diversification → both in terms of stock you own and industry they are in (ie invest globally)

How to Find the Right Company

Stock

• Bloomberg
• Yahoo!Finance
• Zacks.com
• MSN

You can even check who else owns the stock.

Funds

• Morningstar

When to Buy

Buy when insiders buy — they have many reasons to sell their stock, but only one reason to buy it → in the US insiders have to announce that they are buying 2 days in advance

It’s time in the market, not market timing, that counts.

Don’t check prices every day → you’re investing in the long term.