You are previewing The Business of Value Investing: Six Essential Elements to Buying Companies Like Warren Buffett.
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The Business of Value Investing: Six Essential Elements to Buying Companies Like Warren Buffett

Book Description

A blueprint to successful value investing

Successful value investors have an ingrained mental framework through which all investments decisions are made. This framework, which stems from the father of value investing, Benjamin Graham-who believed that investment is most intelligent when it is most businesslike-can put you in a better position to improve the overall performance of your portfolio.

Written by Sham Gad-founder of the Gad Partners Funds, a value-focused investment partnership inspired by the 1950s Buffett Partnerships-The Business of Value Investing effectively examines the fundamental tenants of this approach and skillfully illustrates the six essential elements of the entire process. Opening with some informative discussions of how value investing focuses more on buying a piece of a business, and less on buying a company's stock, this reliable resource quickly moves on to detail exactly what it takes to become a successful value investor.

  • Outlines the six essential elements required for a successful risk averse value investment approach

  • Contains case studies that illustrate how to approach investing in an intelligent, businesslike fashion

  • Walks you through the pitfalls that most investors initially fall into

With The Business of Value Investing as your guide, you'll quickly become familiar with one of the most effective investment strategies ever created.

Table of Contents

  1. Copyright
  2. Acknowledgments
  3. Introduction
  4. 1. Invest in the Business, Buy the Stock
    1. 1.1. Stock Prices are More Noise than Information
    2. 1.2. A Businesslike Approach to Valuing the Business
    3. 1.3. The Making of a Legend
    4. 1.4. A Simple Idea, Really
  5. 2. The Only Three Types of Investments You Need to Know
    1. 2.1. Stocks Prices Aren't Always Rational
    2. 2.2. The Business Side of Investing
    3. 2.3. Three Buckets: Undervalued, Overvalued, and Fairly Valued
    4. 2.4. Price Determines Value
    5. 2.5. Key Takeaways
  6. 3. The Six Elements of Intelligent Investing
    1. 3.1. All Investing Is Value Investing
    2. 3.2. Learn from the Masters
    3. 3.3. The Sum of Its Parts: A Fundamental Framework
    4. 3.4. A Mental Latticework
    5. 3.5. Overview of the Six Elements
    6. 3.6. Emphasize the Process, Not the Outcome
    7. 3.7. Key Takeaways
  7. 4. Establish a Sound Investment Philosophy: THE FIRST ELEMENT
    1. 4.1. Preservation of Capital Is the Name of the Game
    2. 4.2. Price Paid Determines Value Received
    3. 4.3. The Starting Point Matters
    4. 4.4. Avoid Using Margin
    5. 4.5. Focus on Absolute Returns
    6. 4.6. Key Takeaways
  8. 5. Develop a Search Strategy: THE SECOND ELEMENT
    1. 5.1. Ignore the Media
    2. 5.2. Imitation Is the Sincerest Form of Flattery
      1. 5.2.1. Copying the Great One
      2. 5.2.2. Where to Look
    3. 5.3. Basic Search Strategies
      1. 5.3.1. Magic Formula
      2. 5.3.2. Value Line
      3. 5.3.3. 52-Week Low Lists
      4. 5.3.4. Value Investors Club
      5. 5.3.5. Your Own Common Sense
    4. 5.4. Advanced Search Strategy
      1. 5.4.1. Read, Read, Read
    5. 5.5. Key Takeaways
  9. 6. Effective Business Valuation: THE THIRD ELEMENT
    1. 6.1. Value Investing 101: Margin of Safety
    2. 6.2. Value Investing 201: Intrinsic Value
      1. 6.2.1. What Is Intrinsic Value?
      2. 6.2.2. A Primer on the Discount Rate
    3. 6.3. Value Investing 301: Seek Businesses with a Wide Moat
      1. 6.3.1. "The Security I Like Best"
      2. 6.3.2. Monopolistic Tendencies
      3. 6.3.3. The Real Value of Competitive Advantages
      4. 6.3.4. The Franchise Value
    4. 6.4. Value Investing 401: Calculating a True Intrinsic Value
      1. 6.4.1. Intrinsic Value Analysis: ENSCO Corp
    5. 6.5. The Value of Management
      1. 6.5.1. Eating Their Own Cooking
      2. 6.5.2. Executive Compensation
      3. 6.5.3. Qualifications and Experience
      4. 6.5.4. Operating Results Report Card
      5. 6.5.5. The Net Value of a Business
      6. 6.5.6. Great Managers Focus on Return on Invested Capital
    6. 6.6. Understanding Return on Equity: Microsoft Corporation
    7. 6.7. Key Takeaways
  10. 7. Have the Discipline to Say No: THE FOURTH ELEMENT
    1. 7.1. In Investing, Discipline Is Everything
    2. 7.2. Discipline Affects the Price Paid, Which Determines the Value You Get
    3. 7.3. Be Prepared to Look Stupid
    4. 7.4. Don't Split Hairs
    5. 7.5. Unveiling Investor A: Warren Buffett
    6. 7.6. Discipline Is Simple but Rarely Easy
    7. 7.7. Key Takeaways
  11. 8. Practicing the Art of Patience: THE FIFTH ELEMENT
    1. 8.1. Swimming against the Current
    2. 8.2. The Benefits of Waiting for a Good Pitch
    3. 8.3. Ignorance Can Be Bliss
      1. 8.3.1. Ups and Downs of Market Liquidity
      2. 8.3.2. Avoid Meaningless Data
    4. 8.4. The Benefits of a Buy-and-Hold Approach
      1. 8.4.1. DryShips: Hidden Value in the Assets?
      2. 8.4.2. Growing Intrinsic Value Provides Undervaluation
    5. 8.5. Conservative Tests of Safety a Must
    6. 8.6. Key Takeaways
  12. 9. Invest Significantly at the Maximum Point of Pessimism: THE SIXTH ELEMENT
    1. 9.1. Putting It All Together
    2. 9.2. Pessimism Leads to Value
    3. 9.3. Avoid That Which Is Most Valuable
    4. 9.4. Remain Flexible in the Approach
      1. 9.4.1. Myth: Value Investors Only Invest in Bear Markets
      2. 9.4.2. Myth: Only Low P/E Stocks Qualify as Bargains
      3. 9.4.3. Myth: High-Growth Businesses Cannot Be Value Investments
      4. 9.4.4. Myth: Value Investors Don't Short Stocks
    5. 9.5. All or Nothing
    6. 9.6. Key Takeaways
  13. 10. More Than One Way to Find Value: CASE STUDIES SHOWING THE APPROACH AT WORK
    1. 10.1. A Reminder: Process First, Outcome Second
    2. 10.2. Case Study #1: Finding Value in an Unloved Industry Sunrise Senior Living (SRZ)
      1. 10.2.1. Company Background
      2. 10.2.2. Investment Analysis
      3. 10.2.3. Valuation
      4. 10.2.4. Free Cash Flow Valuation
    3. 10.3. Case Study #2: Money Machine South of the Border Ternium Steel
      1. 10.3.1. Company Background
      2. 10.3.2. Valuation
      3. 10.3.3. Discounted Cash Flow Analysis
      4. 10.3.4. Alternative Valuation
    4. 10.4. Case Study #3: A Tale of Two Shares Mueller Water Products
    5. 10.5. Fertile Hunting Ground
      1. 10.5.1. ATP Oil and Gas (ATPG)
      2. 10.5.2. Horsehead Holding Company (ZINC)
      3. 10.5.3. AgFeed Industries (FEED)
    6. 10.6. Conclusion
    7. 10.7. Key Takeaways
  14. 11. Avoiding Common Stumbling Blocks
    1. 11.1. Growth and Value: Two Sides of the Same Coin
      1. 11.1.1. How Will the Growth Be Achieved?
      2. 11.1.2. Businesses without Current Earnings
    2. 11.2. Book Value: More Than Meets the Eye
      1. 11.2.1. Goodwill Basics
    3. 11.3. What Matters Most
    4. 11.4. Key Takeaways
  15. 12. Starting an Investment Partnership
    1. 12.1. Two Key Considerations
    2. 12.2. Service Providers
      1. 12.2.1. Attorney
      2. 12.2.2. Fund Administrator
      3. 12.2.3. Fund Custodian (Broker)
      4. 12.2.4. Accountant and Auditor
    3. 12.3. Quality Matters Most
  16. Notes
  17. About the Author