Nichols, Taking Charge with Value Investing

Investing primers are a dime a dozen, so what makes Brian Nichols’ Taking Charge with Value Investing: How to Choose the Best Investments According to Price, Performance, and Valuation to Build a Winning Portfolio (McGraw-Hill, 2013) worth a look?

To start with, it’s an easy read, where stories break up what—almost by definition—is the tedium of measuring value. Second, it goes beyond the metrics of stock selection and deals at some length with the psychology of investing. Nichols also offers an unconventional model of diversification.

“Most of the time,” Nichols writes, “an investor’s fundamental knowledge is sufficient to return gains, but it’s her emotions that get the best of her.” He recounts his own early failings. “You may not realize it, but the more engaged you are with your investments, the more likely you are to return a loss. When I first began investing, I was the worst in the world; I watched every fluctuation of a stock throughout every day. I could barely focus at work because I was so worried about logging onto my online brokerage account to see how much I had either lost or gained. If it was a day when the market fell by 150 points and I lost $300, I was selling my stocks with no questions asked, regardless of the loss. … I would become even more frustrated as the stock would rise the following day or week because I could see the gains that I had missed. Seeing the potential gains led to desperation on my part, so I would buy as the market was trading higher and repeat the process all over again when the market turned for a day’s loss.” (pp. 137-38)

Nichols now uses limit orders both to buy and to sell. He keeps these limit orders in place for one year or until the stock hits his target entry and exit (as a rule of thumb, a 20% gain) levels. “This strategy eliminates the need for both buying and selling a stock, so all you have to do is find a stock that is fundamentally growing, has strong metrics, and is priced for value.” (p. 144) He sometimes has multiple limit orders on a single stock and sells a fraction of his position at each level.

Nichols introduces the reader to his ten-ten-to-ten system, which offers a rough heuristic for finding companies that are presenting value. Its baseline is a value of ten for each of three measured metrics: growth, valuation, and performance. “In theory, a company with 10 percent growth, a P/E ratio of 10, and a one-year return of 10 percent would be fairly valued.” (p. 186) Stocks can be measured against this baseline to get an idea of whether they are under- or over-valued. It’s just a starting point, Nichols admits, but a useful one nonetheless.

As should be evident from these excerpts, Nichols’ book is not merely an introduction to value investing for the novice. It offers tips that more seasoned investors might explore profitably.