The central tenent of value investing is that prices in the short term are irrational so that the day to day fluctuations in stock market values are driven by investor psycology rather then any material changes.
I sort of skimmed through last year’s Secret Sauce and nothing stood out but I could be wrong - are you able to share any L3 material that you think might be relevant? Thanks.
In due course you will see them published under Investments.
Well, in my view - these multiples alone do not capture the true definition of value. It’s just how the Street likes us to believe - as it is their lingo to define it in such a way. Value for me is putting a price on the intrinsic quality of an ongoing operation of a business without being influenced by the current market price (note that as it stands the market price is inclusive of all of the ratios above). I am not trying to imply that my definition is correct - I only bring it up because this is a subset of the due diligence I conduct either to ‘seek out a bargain and avoid the value trap’ - which are the areas we are trying to investigate. Let me expand a bit on the other part of due diligence work.
When a stock filters through my initial screen I perform lots of qualitative research - with the focus on company’s corporate strategy. For example, I investigate in depth its ability to sustain incremental capital, especially if it’s in a declining industry. I look at how much of the incremental cash earnings are contributed to its core competencies (the real economical engine behind its earning power). In similar fashion, I look at its competition in an industry setting - who are the key players and what advantage does it have over them. What are its current product offerings - what are the customer retention or turnover rates like. What is likely to increase their growth long term: any new products on the pipeline or are they planning to expand their geographical boundaries. And so on. Note that a few of these are from Porter’s framework - I have found that including of all of his forces are either too complex or somewhat trivial - so I’ve learned to develop my own framework over the years. All this ‘connecting the dots’ eventually leads me closer to answer the question of moat-ability - how strong is the company’s barriers likely to hold for the next 3-5 years. A positive answer here helps to avoid some of the value traps we’ve talked about. I also do a similar analysis on management and their ability to continue to seamlessly drive the company forward.
We would have noticed that this part of valuation is more of an art than science - no algebraic formula exists that let us avoid the value trap and seek out a bargain. This is our own unique insight and contribution into the valuation process - and thus more likely to unlock previously hidden value - this uniqueness can’t be achieved with the readily available multiples (the ones above) at the hands of the market. We would like to have enough confidence in our research to be able to satisfy the ‘approximately right and not precisely wrong’ mantra. And I take the view that although we might have our own unique way of formulating our strategies our conclusion should line up at the end.
I think I mentioned previously somewhere in the thread that inward-out macro view is something that needs to be considered as it may be part of a broader strategy for the firm ( and thus, may have a direct impact). The ones we ignore are the outward-in types (i.e. decrease in consumer spending) that may possibly have no direct impacts. All of the other concerns mentioned are something that cannot be quantitatively defined - only diligent qualitative research will be able to provide us with some level of comfort.
Well, as I’ve said, now I think you’ll probably make a better use of other materials. Also, I can’t make justice to L3 material, especially because a lot of interesting data is buried in a couple sentences in random chapters (and most of isn’t directly related to the kind of value analysis you like).
From the main topics, I can brush a couple of examples:
Behavioral Finance: Always nice to keep your “irrationality” in check. Helps you in avoiding mistakes you may be making. Random tip - it´s good to document what you thought before entering an investment. Later, that helps you see if your thesis was right or if you simply got lucky. In the case of a bad investment, was the bad result really unpredictable? There’s a lot of stuff like that.
Econ is partly applied Economics - how such and such affect the macro situation. This comes in handy when you want to decide when to stay in cash, for instance. I think it’s useful for value because, if the market is overpriced, some value opportunities may still be value, just not so much right now. Let’s say you have very of your value checks in place but the company may not look that cheap (like Buffet buying Coke) - maybe you should keep that company on your list until the market normalizes (maybe a recession kicks in)
Corporate Governance should please you - what’s good, why is it good, what sucks, what’s dangerous and what not. If L2 curriculum is the same as 2011 you’ve had a little bit of it already - L3 seems to cover more ground.
Performance Evaluation can probably be pretty useful. It helps you tell if you’re making money from choosing the right stocks, the right market, the right (or wrong) benchmark, and a lot of stuff like that. It’s a little geared for picking managers, but it helps in revealing where you’re unlocking value and where you’re just getting lucky.
There’s a lot of stuff like that, stuff that could be useful to you but it’s probably not directly related to the core knowledge you want for what you do. There’s good stuff in the curriculum, but there’s also some good stuff in different books and sources. If you want to take the exam however, you’ll have to read and learn a lot of CAPM related stuff - but then again you did that for the previous levels so you kinda know CFA’s angle.
You’ll probably have more interest in reading/re-reading Lynch, Greenblatt, Damodaran, Benninga, Porter, Buffet, etc… If you have the passion and the discipline to study them as hard as you would for the CFA, that’s probably gonna keep you sharp. I still think the pro of CFA is to keep you open - you have some knowledge of alternative inv, derivatives, fixed income, and what not. You have that figured out already.
PS: As you know, running your own book is also different than working for someone else. For the latter, a bunch of stuff such as Risk and IPS may get way more important.
What are you guys even arguing about? Maybe you should take those pages of posts and use them to develop investment ideas.
they should just pull down their pants and pull out the measuring rod instead of all this jabbering about investments or whatever it is they’re talking about…