Wednesday, May 3, 2017

Tian, Invest Like a Guru

If you’re new to value investing and want a fast-reading primer, Charlie Tian’s Invest Like a Guru: How to Generate Higher Returns at Reduced Risk with Value Investing (Wiley, 2017) is just the ticket. If you’ve already read a couple of books on the subject, this one won’t add much to your store of knowledge.

Tian, who runs the website, draws on the insights of Peter Lynch, Warren Buffett, Donald Yacktman, and Howard Marks to advocate for a style of investing that avoids the sometimes bottomless pits of deep-value investing. Buy only good companies, he recommends, following Warren Buffett’s famous advice: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” He offers a 20-point checklist for buying a good company at a reasonable price, covering the nature of the business, its performance, financial strength, management, and valuation. The final question is more personal: “How much confidence do I have in my research?” That question, he says, “determines your action once the stock suddenly drops 50 percent after you buy.”

In 2009 GuruFocus began tracking a portfolio of 25 companies that had been consistently profitable over the previous ten years and were undervalued as measured by the discounted cash flow model. Between January 2009 and September 2016 the portfolio returned an annualized 15.7%, whereas the S&P 500 returned 12.0%. In 2010 the website started two other portfolios of consistently profitable companies that sold at close to the 10-year price/sales low and price/book low. Both of them outperformed the S&P 500 by about 2.5% a year.

Tian outlines some of ways analysts evaluate companies. It goes without saying that “none of these valuation methods can justify the stock prices of Amazon and Netflix.” Maybe not, but Bill Miller certainly juiced his Legg Mason Value Trust fund’s returns by investing in Amazon.

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