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New here + Rule#1 question


tombgrt
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Hello,

my name is Tom and I am in my graduate year of my bachelor 'finance & insurance' in Belgium, Europe. I have found this website through google as I am a big fan of both Warren Buffett and Prem Watsa. I hope I can be of some value to the community here, although I am rather new to investing.

 

I have been reading a lot, the first book I read was The Intelligent Investor by Benjamin Graham which gave me a lot of insights. Also, I have been reading tons of blogs and this forum.  :)

Now I am halfway through Rule#1 by Phil Town but I have my doubts as it is written in a very commercial way and because he claims its "so easy" to get 15% annual returns. He also says that, in order to prove the moat of a company, it should at least have a growth rate of 10% on the big five (being ROIC, EPS, equity, sales and cash) for 10 years in a row. With that thought in mind I started looking for such companies (leaving out 2008-2009 which would make it even harder). After I looked at about 20+ companies which seemed to be very strong growers with a good moat compared to others, I still didn't find one company that had most of the criteria fulfilled, let alone all 5 of them.

Before I start looking any further I would like to ask your opinion about this method. Totally useless?

It seems to me that only extreme growth companies which are widely known such as Apple and Google might get to fulfill those 5 criteria + have a strong moat. Then I am wondering how you could ever get such stocks at depressed prices with a big margin of safety which mostly only occurs when the results are down (which means again that they wont fulfill the criteria?).

 

What am I missing?

Anyone any thoughts or experience with this book/method?

 

 

Tom

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I actually listened to the book a few years ago via audio. I dont remember much of it aside from the commercial style of it. I dont think you are missing anything. The only formula which consistently works is buying a $1 for 50 cents and selling when it hits a dollar. The secret is in the sauce / valuation and that is something you will have to develop a method for overtime.

 

I think Pabrai has a better way of looking at valuation, and his methods should be combined with the ability to identify business cycles and moats. If you can do both of those you should be on your way.

 

I think moat is best reviewed from a qualitative vs. quantitative perspective. The number should help confirm but shouldnt lead the show inmo.

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Ok great, seems like my scepticism is probably justifiable.

 

I have also bought "The Little Book That Still Beats The Market" and "Value Investing From Graham To Buffett And Beyond" for some more ideas on valuationmethodes and I will certainly look into Pabrai as well. As you've said, I'll have to develop my own method over time with influences of others.

 

Thanks for your input!  :)

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Hi Tom ... Welcome!  You might also find Philip Fisher's "Common Stocks and Uncommon Profits" good reading.  Fisher has a great checklist for evaluating a business.  Even the best investments do not pass all the criteria however it is useful to consider in what ways your actual/contemplated investments compare to Fisher's checklist.  To Fisher's checklist, I would add one more item, marketing "genes", which are essential for most companies to succeed long term.  Best wishes, ws.

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Hello,

my name is Tom and I am in my graduate year of my bachelor 'finance & insurance' in Belgium, Europe. I have found this website through google as I am a big fan of both Warren Buffett and Prem Watsa. I hope I can be of some value to the community here, although I am rather new to investing.

 

I have been reading a lot, the first book I read was The Intelligent Investor by Benjamin Graham which gave me a lot of insights. Also, I have been reading tons of blogs and this forum.  :)

Now I am halfway through Rule#1 by Phil Town but I have my doubts as it is written in a very commercial way and because he claims its "so easy" to get 15% annual returns. He also says that, in order to prove the moat of a company, it should at least have a growth rate of 10% on the big five (being ROIC, EPS, equity, sales and cash) for 10 years in a row. With that thought in mind I started looking for such companies (leaving out 2008-2009 which would make it even harder). After I looked at about 20+ companies which seemed to be very strong growers with a good moat compared to others, I still didn't find one company that had most of the criteria fulfilled, let alone all 5 of them.

Before I start looking any further I would like to ask your opinion about this method. Totally useless?

It seems to me that only extreme growth companies which are widely known such as Apple and Google might get to fulfill those 5 criteria + have a strong moat. Then I am wondering how you could ever get such stocks at depressed prices with a big margin of safety which mostly only occurs when the results are down (which means again that they wont fulfill the criteria?).

 

What am I missing?

Anyone any thoughts or experience with this book/method?

 

 

Tom

 

Hello Tom. Welcome to the board. There are many different ways of finding value in companies, as you likely know being a near graduate. I would personally relax some of those assumptions you mentioned and find what investing style makes sense to you, and not necessarily what someone else recommends, no matter how popular the book. If the share price of your company declines by a significant amount, it is only then that you will feel comfortable in the analysis, when based on your own analysis and investing style. There are many talented investors that have drastically different styles for making out-sized returns.

 

You mention authors Greenblatt and Pabrai as recent book purchases. Their books are very simple to read that I found very enjoyable, and very much suit my usual stlye of investing. In fact, 2 of the 5 books i gave my nephew when he graduated from college were The Little Book that Beats the Market and Dhando Investor.

 

I would not strictly follow any rules or checklists that any particular book recommends, but find what makes sense to you based on your own growing knowledge base, and adapt your own valuation factors when choosing an investment.

 

You found a good board to learn from here that has many individuals with different styles. The quality of discussion is usually higher than the majority of other investment forums that i have come across. Hopefully it stays that way as its membership grows, though that is usually not the case. There are a few particular persons here that i really enjoy reading and sharing ideas with. Cheers.

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welcome

 

i think another aspect you should look into in addition to the technical aspect (valuation, understanding financials etc etc) is the psychological aspect of investing, figureing out what type of person you are, what your tendencies are, what to do when fear/greed grips you (and knowing when to recognize them)

 

i find this aspect very important also on par with the technical aspect of investing

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