Invest Like a Guru

How to Generate Higher Returns At Reduced Risk With Value Investing

Charlie Tian

• Publisher: Wiley
• Year: 2017
• ISBN:
  9781119362401
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Adopt the investment strategy that built Warren Buffett's fortune

Invest Like a Guru provides an invaluable resource for high-quality-focused value investing, with expert insight and practical tools for implementation. Written by the man behind GuruFocus.com, this book expands on the site's value strategies and research tools to provide a primer for those exploring pathways to higher returns at lower risk. The book begins with an insightful explanation of high-quality-focused value investing concepts, then quickly moves into practical, detailed guidance on analysis, valuation, key factors, and risks to avoid. Case studies demonstrate real-world application of various analysis methods, and the discussion walks you through important calculations using real examples. Author Charlie Tian draws upon his own experiences and lessons learned to provide true insight on high-quality-focused value investing as a strategy, providing both reference and expert advice in this singularly useful guide.

Warren Buffett once said, "I would rather buy good companies at fair prices than buy fair companies at good prices." That's how he built his fortune, and his method is what we now call high-quality-focused value investing. This book shows you how to determine what constitutes "good companies" and "fair prices, " with practical tools for real-world application.

• Learn the principles and concepts of high-quality-focused value investing
• Understand the analysis process and valuation of prospective investments
• Avoid the value traps that can trigger permanent losses
• Study clear examples of key ratios and calculations

We can't all become the next Warren Buffett, but we can boost returns while reducing risk using the right investment strategy. High-quality-focused value investing provides a path to profit, and Invest Like a Guru is the one-of-a-kind guidebook for getting on track.

CHAPTER 1
The Gurus

“Those who keep learning will keep rising in life.”

—Charlie Munger¹

The painful experience I had in the stock market during the dot-com bubble made me realize that I knew nothing about stocks. So, I started to learn. In the years that followed, I was reading everything I could find from some of the best investors. I read their books, their quarterly or annual shareholder letters, and any articles about them I could locate. I looked at their portfolios for investment ideas. And, in 2004, I started GuruFocus.com to share what I had learned. Then I learned even more, as many of the investors came to the website to share what they had learned.

I discovered that investing can be learned. I discovered that there is no trick to becoming a better investor. You simply need to learn, learn from the best, and learn from mistakes—mistakes of others, but mostly your own. And you need to work really hard.

The Gurus who had the most impact on me and my investing philosophy are Peter Lynch, Warren Buffett, Donald Yacktman, and Howard Marks. Lynch, Buffett, and Yacktman taught me how to think about business, companies, and their stocks. Marks made a great impression on me regarding how to think about market cycles and risks. What follows in this chapter are the important points that I gleaned from these Gurus.

Peter Lynch

Peter Lynch is the Guru from whom I learned the most about stock picking. The legendary mutual fund manager of the 1980s at Fidelity invested in thousands of companies and generated an annualized average return of 29 percent a year for 13 years. His bestselling books, Beating the Street² and One Up on Wall Street,³ are the first books I read, and they helped me build the foundation for my investing knowledge. I read these books over and over and still learn something from them. I will use some of Lynch's quotes to explain the key factors in his investing.

“Earnings, Earnings, Earnings”

A company's earnings and its stock price relative to earnings are by far the most important factors in deciding if the stock is a good investment. Though stock prices can be affected by daily headlines about the Federal Reserve, the unemployment rate, the weekly jobs report, or what's going on in Europe, over the long term, the noise from the news is canceled out. As Lynch wrote:⁴

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People may wonder what the Japanese are doing and what the Koreans are doing, but ultimately the earnings will decide the fate of a stock. People may bet the hourly wiggles in the market, but it's the earnings that waggle the wiggles, long-term.

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Lynch places all companies in six categories:

1. Fast growers
2. The stalwarts
3. Slow growers
4. Cyclicals
5. Turnarounds
6. Asset plays

Excluding the last category, asset plays, the companies are categorized based on what their earnings do. A fast grower can grow its earnings at above 20 percent a year. The stalwarts can grow at above 10 percent a year. The slow grower grows its earnings at single digits a year. Cyclicals are obviously the companies that have cyclical earnings. Turnarounds are those that have just stopped losing money and have started to generate earnings.

To Lynch, a company's earnings, earnings growth, and the earnings related to valuation ratios are the first things to look at before you consider a company further, unless you know it is an asset play. You can find all this information in a company's income statement. After I learned this, I went back to check the earnings of the fiber optics companies I bought. This was what I found in ...