A bit about my background: I was really into science growing up and for the first half of college, ended up studying economics and really liking it, decided I wanted to do finance instead of science because I wanted to get more involved with investing and just really decided I like thinking about firms and value. Now I'm a year into my investment banking job and looking to move to a hedge fund so I can really learn how to invest. My biggest issue is that I never really got any training on analyzing businesses. At my current job, I do a lot of financial modeling and valuation, but we don't really do the digging into assumptions or try to understand businesses at a deeper level as an analyst. I have been interested in investing for a while but I really wish I knew more about different industries and what makes a great business in those industries.
What advice can you give to someone who really wants to learn how to better understand companies and how businesses create value? I've been reading books on investing such as Value Investing, You Can Be A Stock Market Genius, some Benjamin Graham books, and etc. - these are great. I also keep up with valueinvestorsclub.com and WSJ. Any other advice you can give?
Thanks in advance.
good to great by collins
Porter's 5 Forces and broader economics provide a good framework for thinking about businesses. Does the business make money? Are they earning returns above their cost of capital? Do they have a lot of opportunities to reinvest capital at attractive rates? What kind of barriers to entry are in place that will keep them earning high returns for a long time or will supply increase more than demand?
Take all that, then you need to ask yourself what is currently in the stock price. It's not good enough to have a great business if the stock price already reflects that and the company's future opportunities. On the sell-side that's a Buy (I'm probably being a bit mean), on the buyside, that's a stock that is going nowhere.
Backtesting old pitches from VIC is really the best way I know of, personally. Going through an individual companies life cycle, seeing what analysts (buy side like the VIC guys) think, and reading through 10-k's, and listening to conference calls w/ management is useful. Just so you can follow a company through time to see how expectations actually line up w reality. Also, read everything you can by Mr. Pink Money - hes great.
//www.wallstreetoasis.com/forums/the-hedge-fund-experience-good-bad-ugly //www.wallstreetoasis.com/forums/preparing-for-the-hf-informational-inter… //www.wallstreetoasis.com/blog/throwing-good-money-after-bad
Ear, I think you are on the right track. Below is what I have done over the past 10 years (intentionally outlined at a very high level for the benefit of people who may be less experienced):
1) Read as many investment books as you can (Graham, Buffet Shareholder letters, Lynch, etc.). This will help you determine what type of investor you are or would like to become. I say "you are" because I believe that we all possess inherent traits and developed perspectives that shape how we approach investing. Many people who read Graham immediately grasp on to the concepts of value investing because it coincides with the above.
2) Choose an industry that you are interested in and become an expert (i.e. build a circle of competency). This should be done by getting your hands on industry primers, equity research reports, and by reading SEC filings for all of the major players. Identify a company that you believe to be undervalued or overvalued and drill down even further into the company specific risks and growth prospects. Use Porter's 5 Forces for example to help you think about company risks and prospects (or develop your own framework).
3) I believe we learn best by doing and in the case of investing by having skin in the game. Buy shares of the company that you identified above and begin tracking your position over an extended period of time to better understand how market factors and company specific factors drive the stock price.
4) Do steps 2 and 3 for a handful of industries and positions.
5) In addition to the above continue to read financial publications such as the WSJ, Economist, and FT in addition to various online blogs. As a longer term value investor I do my best to ignore the noise of daily news while simultaneously trying to maintain an overall understanding of the macro environment
If any of the above feels like too much work and/or you do not enjoy it you are better off just passively investing in ETFs and index funds. Best of luck to you.
Thank you very much for the advice!
Like what the others have said, read, reread, and take notes on as many books about investing as possible to establish the fundamental knowledge necessary for a good investment idea. The strategies my fund employs stem directly from the books you listed. To this day, I continue to reread and reference concepts found in those masterpieces. Begin to build an investment process around the knowledge you acquire. My investment process consists of a long checklist of questions to assist in identifying good undervalued businesses. If you know what your looking for ahead of time, it'll be easier to find answers. Finally, the best way to succeed at anything is by practicing. You can read about how to be a detective, but you will succeed at becoming a good one only if you venture out to solve crimes. Throughout the years, what really helped me get good at analyzing businesses was writing a lengthy investment thesis for every company I analyzed and subsequently following the business. If I happened to be wrong on an idea, happens many times, I would try to discover why I wrong and ultimately learn from my mishaps. It started off as a hobby in College and follows me to this day. It takes practice to be able to connect statements and information in a 10-K to theoretical concepts you read about in books.
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