One of the best ways to learn about anything is reading. Books about investing get a bad rap for being boring, but I am here to tell you that is just not true. Below is a list of my favorite books on investing. They range from beginners to more advanced books. They are all well written and very informative and have been a tremendous influence on me as well as countless others. Some of them are extremely well-known and are some of the best of investing classics. But they are still amazing and should be read by everyone.
I have said this before, and I will repeat it again. Learning about investing is like learning a new language. Reading is one of the best ways to immerse yourself in that language. As you learn more you will want to find out more; it is very addicting in that way. As you learn the language and build your knowledge, these following books will help you create more blocks to continue your learning.
There are affiliate links for these recommendations and based my choices on my opinion and the influence they have had on me and my journey. I hope you enjoy them as much as I have and am confident that you will benefit from them as well.
One of my first books that I read about investing. Written by Guy Spier who is the manager of the Aquamarine Fund, which is a hedge fund that he runs out of Switzerland.
Continue reading “Books on Investing: My 15 Favorite Books to Learn Investing”
“The difference between a good business and a bad business is that good business throw up one easy decision after another. The bad businesses throw up painful decisions time after time.”
We all want to know how to improve our investment decision making. How do we develop a better understanding of a company, its future, and present, its products? Over the years I have read all the Letters to Shareholders of Berkshire Hathaway. I have read most of the books and articles on Warren Buffett, and his mentor Benjamin Graham, and his partner Charlie Munger. I have also listened to hours of audio from interviews via Youtube. All in the effort to gain insights into how Warren Buffett developed their “framework” for investment decisions. And how they arrive at a winning investment decision.
During my research, I came across an interview that Charlie Munger gave to the BBC which discusses his thoughts on how a framework for making better decisions when making investment decisions. You can find the video here. The comments that we will be discussing occur at 5:59 of the video.
The framework is called the Four Filters, and it first appeared in the 1977 Letters to Shareholders in this form.
“We select our marketable securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can easily understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at an attractive price.”
Continue reading “Invest Like Charlie Munger Using His Four Filters”
How do normal investors like you and I invest in a bank? According to Warren Buffett, the answer is pretty simple. Look to the bank’s return on assets or ROA.
“Well, a bank that earns 1.3% or 1.4% on assets is going to end up selling above tangible book value. If it’s earning 0.6% or 0.5% on the asset, it’s not going to sell. Book value is not key to valuing banks. Earnings are key to valuing banks. Now, it translates to book value to some extent because you’re required to hold a certain amount of tangible equity compared to the assets you have. But you’ve got banks like Wells Fargo and USB that earn very high returns on assets, and they at a good price to tangible book. You’ve got other banks … that are earning lower returns on tangible assets, and they’re going to sell — they’re going to sell [for less].”
The attraction of return on assets is its simplicity. It captures so much of the essence of a bank, without getting caught up in the complexity of the big bank accounting mess.
In our continuing series of discovering the formulas and ideas to value a bank or financial institution, we will discuss the return on assets or ROA.
Definition of Return on Assets
So what is a return on assets?
According to Investopedia.
“Return on assets (ROA) is an indicator of how profitable a company is about its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.”
This term is often referred to as return on investments or ROI.
Continue reading “Return on Assets: How to Find Banks that Generate Profits”
In his 1978 Berkshire Hathaway Letter to Shareholders, Warren Buffett stated.
“We believe a more appropriate measure of managerial economic performance to be return on equity capital.”
Measuring the performance of management of a business is a tricky proposition as there are no direct ways to measure it. We have the overall performance of the business, of course. Additionally, we can look to return on invested capital, growth in sales or earnings, or overall business health.
With a return on equity, we have a metric that can help us measure a management’s ability to generate profits from every dollar of shareholder’s equity. After all, creating wealth from the money we invest in a company is what we are all after. We want great businesses that compound our money to generate greater returns.
This formula is great for comparing businesses in related fields, i.e. retail, tech, oil, biotech, etc. One word of caution, this formula is not perfect. There are problems with it, and we need to be aware of those when we are using these numbers to value a company.
Continue reading “Return on Equity: Quick and Easy Way to Find Asset Creators”
One of the first stocks I purchased using my new found value investing philosophies was Corning (GLW). It was the perfect vehicle for value investing with a low P/E, extremely low debt, and a great balance sheet. When I discovered the company in my weekly screening process, it jumped out +99at me as a possible candidate, and as I did more investigation, it quickly became apparent that this “boring glass company” could be the right fit.
As I dug into it more, I thought this would make Benjamin Graham proud, and were the perfect vehicle for my further exploration of the principles that make value investing so great. My valuations of the company at the time of my first purchase in 2012 still hold up today and is such a great buy for long-term investors.
There a lot of great things going on with this company that we will dig into further and the continuing dividend and share buybacks have added even more value to the shareholders.
Corning can trace their beginnings to a glass factory established in 1851. Talk about longevity; they have been a leader in specialty glass for more than 165 years.
They are based out of Corning, New York and currently have approximately 40,000 people employed with them worldwide, speaking of global they have plants in 17 countries.
Continue reading “Corning: This Glass is Far From Brittle”
Dividends are the best friend an investor has. They are the gift that keeps on giving and finding a company that pays them consistently over a long period of time is a great way to build your wealth. Finding the intrinsic value of a dividend paying company is paramount to investing with a margin of safety. This helps protect our investments and grow our wealth. Using the dividend discount model is a great way to find that intrinsic value, and the use of the two-stage dividend discount model is a fantastic way to get a more precise view of that value.
Our goal is to find the approximate value of a company, not to quibble about the minor details, we must remember that valuation is an art. What one investor sees as value, another might see as a liability, it can be seen as in the eye of the beholder.
The dividend discount two-stage model is a little more involved than the Gordon Growth model that we addressed last week, but it is definitely doable on our part. We will walk through all the steps to help you calculate it on your own and give you examples to help illustrate what we are doing.
What’s the big deal with dividends, and why do we keep talking about them?
To give you an example of the power of dividends, let’s take a look at our favorite guru, Warren Buffett. Over the years Buffett has grown his wealth by investing in and buying businesses with strong competitive advantage (moat) that have traded at fair or better prices.)
His favorite company to invest in is one that pays him a dividend. Did you know that:
- Over 91% of his portfolio is invested in stocks that pay a dividend
- His top 4 holdings, which make up over half of his holdings pay a dividend yield of 2.9%
- Best of all, most of his stocks have paid a rising dividend for decades.
Continue reading “Breaking Down the Two-Stage Dividend Discount Model for Beginners”
In our quest to find the intrinsic value of stocks that we are interested in investing in, we have looked at several different types of formulas to help us determine that value. We haven’t considered the role that dividends play in these valuations, and as dividend investors, this is an important fact to factor in. Today we will discuss the dividend discount model to find the intrinsic value of dividend paying stocks.
Dividends are such an important variable to building our wealth, it is in our best interests to continue to add to our toolbox the different methods of calculating intrinsic value. The dividend discount model is simplicity itself and requires only three inputs to determine the value of a stock.
As we continue to strive to find the fair value of any stock that we wish to purchase, it is important to remember that the calculations that we do should never replace other methods of investigation, such as reading the 10-k, looking into other metrics, and doing our research.
In our efforts to narrow down our investing processes and learn more about different formulas to help us find intrinsic value, it is important to remember that we should try not to go down the rabbit hole in search of minutiae. A thought from Warren Buffett on intrinsic value.
“It’s better to be approximately right, than precisely wrong.”
That being said we should strive to be as accurate as we can, to help narrow down our errors in finding intrinsic value.
Dividend Discount Model Definition
Continue reading “Dividend Discount Model: A Simple Three Step Guide to Valuation”
“A truly great business must have an enduring “moat” that protects excellent returns on invested capital.”
–Warren Buffett, 2007 Shareholder Letter
Return on invested capital is one of the best ways to calculate whether or not a company has a moat. Finding a company with a moat that gets a great return on its invested capital makes investing easy, not that this is an easy thing to find. The reason this makes it easy is the company can grow their value over the years and you can compound along with it. Helping grow your wealth as they continue to add assets and grow their business.
The trick to finding a company that is a great allocator of capital is finding a company that has had success in the past getting a great return on invested capital. The higher the percentage the better allocators they are.
Today we are going to look further into return on invested capital. We will take a look at what it means and how to calculate it, along with examples for you to follow along.
Let’s dive in.
Definition of Return on Invested Capital
What is a return on invested capital?
“Return on invested capital (ROIC) is a profitability ratio. It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us how good a company is at turning capital into profits.”
“We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year.”
-Charlie Munger, 2008 Berkshire Hathaway Annual Meeting
Another great thought from Charlie. I love this explanation and this is a great idea to strive for, finding a business that is conservatively financed that can write us a check every year. Better yet, would be a company that in addition to giving us a dividend would be fantastic compounders.
Continue reading “Return on Invested Capital in Two Easy Steps”
Recently GameStop (GME) has taken a beating in the market with the release of some very unflattering news. As we all know the stock market is a very unforgiving place.
GameStop came across my radar a few years ago when I was doing my regular screening looking for new opportunities. Until recently I hadn’t pulled the trigger on the company, but after digging into it a little more it appeared to be a great opportunity. In the light of recent news, I am wondering if I made a good decision or walked into a value trap.
I admit I was first attracted to the 6% dividend yield, which was very enticing. In addition to the low P/E ratio, it appeared this was a great opportunity, as well as other financial strengths.
In this article, I will take a look at my findings again and re-evaluate my decision to buy and whether or not to stay in at this point or to sell and just cut my losses.
Retail is a brutal environment and the competition can be fierce. With the recent announcement of Microsoft’s (MSFT) Xbox’s subscription service there has been a lot of concern among GameStop investors in how this will affect the company long-term.
Let’s take a look.
Founded in 1994 in Grapevine, Texas. GameStop operates more than 7600 stores now. These stores are located in the U.S., Australia, Canada, and Europe.
Continue reading “GameStop: Is this Game Still Worth Playing?”
Finding a company with a strong competitive advantage like an Apple (AAPL) is what every investor is looking for. It is not easy and there are not a lot of formulas that you can use to find them. We are all on the lookout for companies with wide investment moats. Especially value investors. We love these types of companies. Companies with wide investment moats are likely to be around for a long time, not that they are invincible. But they are great companies for growing wealth over time.
“But all the time, if you’ve got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it.”
Warren Buffett from a talk he gave to MBA students at the University of Florida
What is the definition of an investment moat?
Charlie Munger and Warren Buffett are generally accepted as the originators of the term “moat”.
A moat refers to “business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.”
Competitive advantage is going to be any factor that allows a company to provide a good or service that is essentially the same as it’s competitors. But allowing them to beat their competitors in profits.
An example of this would be if you shop online for a product. Chances are you will see many different companies offering the same product but one stands out because they offer a lower price or perhaps free shipping.
This gives that company a competitive advantage over their competitors because of the free shipping, that the others may not be able or willing to offer.
Continue reading “How to Find Wide Investment Moats the Easy Way”