Share Sleuth: helpful texts for value investors
21st July 2016 14:12
by Richard Beddard from interactive investor
Share on
Sometimes it's the simplest questions that present the greatest challenges. Recently, a correspondent asked me for guidance on starting out as a do-it-yourself (DIY) investor.
He was looking for a book, or a website, perhaps the equivalent of a DIY manual. He'd already read The Intelligent Investor by Benjamin Graham and a guide to UK stocks and shares.
Benjamin Graham is often hailed as the father of value investing, and his book is a classic. Although the latest 2003 edition of The Intelligent Investor includes annotations by the respected financial journalist Jason Zweig, it is essentially a 45-year-old text with 45-year-old examples.
Buffett advice
The introduction by legendary investor Warren Buffett urges readers to pay special attention to chapters eight and 20. Taking his advice perhaps too literally, they're the only chapters I have ever read.
Chapter eight of The Intelligent Investor includes a salutary and oft-quoted parable warning investors to ignore hyperactive "Mr Market" and form their own opinions of how much a company is worth.
Chapter 20 urges investors to invest with a "margin of safety" by buying shares in good companies and paying less than they're worth. The examples are dated, but the advice remains the basic strategy of successful, independently-minded value investors today.
There's probably a good reason why there are countless do-it-yourself (DIY) manuals that will show you how to fill a hole or replace a ballcock, but my correspondent was left wanting by the DIY investing books he'd read.
Unlike plumbing and plastering, every company is different, and companies change radically over time. This makes it more daunting to go from the theory - what you can read in a book - to the practicalities of picking good companies at cheap prices.
One way to bridge the gap is to follow a system. Joel Greenblatt, a hedge fund manager, refined the principles of Graham and Buffett into a "Magic Formula", which he described in a book called The Little Book That Beats the Market.
Although the Magic Formula doesn't appear to be working as well as Greenblatt's backtesting implied it might, the book does a very good job of explaining what makes a good company good (the ability to invest profitably), and how to calculate whether it's cheap.
Checklists
John Kingham, publisher of the UK Value Investor newsletter, has developed rules of thumb to identify good companies at cheap prices and explained them in a book, The Defensive Value Investor, published earlier this year.
Like the Magic Formula, Kingham's system uses financial ratios to identify good companies, but it also contains checklists to help investors distinguish between those companies likely to remain profitable in the future, those that have competitive advantages, and those that are disadvantaged: the so-called value traps.
Kingham's rules of thumb are, I believe, a sincere attempt to help would-be DIY investors make the leap from theory to practice.
Although I have yet to read his book, I'm familiar with his methods and I would put The Defensive Value Investor high up my correspondent's reading list, along with The Little Book That Beats the Market and chapters eight and 20 of The Intelligent Investor.
Ultimately the goal of any self-respecting DIY investor is to develop his or her own methods, but it's a good idea to start from firm foundations.
On Wednesday 29 June I added 45 shares in retailer to the Share Sleuth portfolio. After adding a £10 charge in lieu of broker fees and £10.89 in lieu of stamp duty, the transaction cost £2,199, approximately one thirtieth of the value of the portfolio. The share price was £48.40.
In the past month, three companies in the Share Sleuth portfolio have published annual reports: , and .
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.