I am reading the Intelligent Investor, and I feel like writing down some notes about companies I should avoid buying for future reference:
1. Extensive Acquisitions
2. A lot of debt or financing activities
3. One or few customers
4. Lack of durable competitive advantage
5. Unstable or unsustainably fast earning growth
6. Too little or too much R&D Spending
7. A huge salary for CEO means the company is run by managers for managers
8. Options dilutes stock value
9. Repeated insider selling
10. Recurring Extraordinary items
11. Declining or unstable cash from operations
12. Retained Earnings does not translate into growth
On the other hand, we should focus on investing in the following type of stocks:
1. Adequate Size (Market Cap more than hundreds of millions)
2. Strong Financial Position (Current Asset / Current Liabilities > 2 AND net current asset > long term liabilities)
3. Stable Earnings.
4. Uninterrupted Dividend record.
5. Stable and Sustainable earnings growth.
6. Low P/E ratio and price-to-book ratio.
Well, in short words, value investing is buying stocks on bargain. This is actually a very simple concept. If we think of stocks as pairs of jeans that can be bought and sold, it all makes sense. First we pick the jeans that never goes out of style (classics), then we buy them when the stores are on sales. When the prices return to normal levels, we sell them for a handsome profit. This is a pretty sure thing as long as we can correctly identify those styles that does not die off. No wonder warren buffet is as rich as he is.
While Graham argues against speculation, claiming it is too dangerous or not safe. I dare not to agree. If there is an intelligent investor, there should also be an intelligent speculator at work. In general, it is much harder to be a speculator than an investor, for he should know what are the styles of jeans that will define this year’s fashion trend. And the trick is, he must realize it before everyone else does so he can buy the jeans before the prices go up. It is possible to follow the crowd and capture short term profits with speculation, but there is a chance we might take a hit in the price crash. However, if we have 70% chance of doubling our investment (we made the right bet) and 30% chance of losing it (we got into a price crash), the game is still worth playing. I can see Graham argue against playing such game because there are 30% chance of losing all of our investment. However, by using correct money management techniques (Kelly Criterion, Diversification), it is possible to control and risk. It is pretty obvious now that speculation requires a lot more work than value investing. But mastering it would make the road to rich much shorter.