# How long does it take you to study an individual business?



## RandomInvestor (11 May 2017)

So there are 2 components in successful value investing. Finding quality businesses and finding out their intrinsic value then buying the stock which is alot lower than its true value. How much time do you spend on each would you say? This investor on youtube said takes about 1000 hours to get ready to make an investment decision, that sounds crazy to me, what the hell do you do for 1000 hours? Surely it doesn't take that long to figure out whether or not the business is of high quality.


----------



## tech/a (11 May 2017)

Are there any papers showing evidence that your
Ideas are in fact profitable.

All the fundamental follow my trades shown on ASF don't appear to be that profitable.

From what I see the majority of Managed funds struggle to out perform their index.
They have floors of analysts attempting to find what your after.

It's not about being right
It's about being profitable


----------



## RandomInvestor (11 May 2017)

tech/a said:


> Are there any papers showing evidence that your
> Ideas are in fact profitable.
> 
> All the fundamental follow my trades shown on ASF don't appear to be that profitable.



What ideas? You are referring to "my ideas" I didn't say any, not sure what you mean.


----------



## Klogg (11 May 2017)

RandomInvestor said:


> So there are 2 components in successful value investing. Finding quality businesses and finding out their intrinsic value then buying the stock which is alot lower than its true value. How much time do you spend on each would you say? This investor on youtube said takes about 1000 hours to get ready to make an investment decision, that sounds crazy to me, what the hell do you do for 1000 hours? Surely it doesn't take that long to figure out whether or not the business is of high quality.




I would suggest that if you only have a small amount of capital (i.e. dealing with retail products only, so less than $2m for arguments sake), then there's really only one part to it - finding out the business' intrinsic value. Once you have a feel for it and you notice the price is well below that value, you perform the transaction, nothing to it really.

1,000 hours seems extreme, but perhaps in some complex situations it may not be enough. For example, you want to understand:
- Company management
- The history of the company (at least 5 years worth)
- The balance sheet, any conditional or off-balance sheet liabilities, a good feel for their assets (e.g are they listed at purchase price or market value), etc
- Their operational model, what proportion of costs are fixed vs variable, gross profit margins
- The background behind any licensing/intellectual property 
- Industry mechanics 
- Industry standards, margins (e.g. who's the lowest cost player)
- Regulation or lack thereof
- Exchange rates/currency risk (e.g. if a U.S. company has AUD revenues, what is the impact if the AUDUSD yield spread narrows?)

Sometimes when you're dealing with companies that are cheap enough, you don't necessarily need to know all of this. For example, if you could buy a company at a significant discount to asset value and these assets were listed at under market value, then you could argue that future growth is less important, as you potentially get it for free.

An example that comes to mind is UOS. Debt free, swimming in cash, trading at 2/3 * NTA and about 6 times earnings (although last year had some property revaluation within it). I still need to understand currency risk, management history (and age in this case), any balance sheet liabilities and potentially look at their major subsidiaries. But I don't need a lot of detail around who the lowest cost player is, because the NTA backing is large enough to provide minimal downside in my investment.

On average, I probably spend about 40hours looking at a particular company, mostly in thought about the "what if" scenarios. If I find a situation I can't answer, I'll get as much information as I can to do so, then think again.

Perhaps I'm not spending enough time evaluating the company... I can't answer that. But 1,000 hours does seem extreme.


----------



## tech/a (11 May 2017)

Your two components of successful value investing


----------



## RandomInvestor (11 May 2017)

tech/a said:


> Your two components of successful value investing



Ah ok. Well I believe they are the 2 components what else is there to being a successful value investor.


----------



## RandomInvestor (11 May 2017)

Klogg said:


> I would suggest that if you only have a small amount of capital (i.e. dealing with retail products only, so less than $2m for arguments sake), then there's really only one part to it - finding out the business' intrinsic value. Once you have a feel for it and you notice the price is well below that value, you perform the transaction, nothing to it really.
> 
> 1,000 hours seems extreme, but perhaps in some complex situations it may not be enough. For example, you want to understand:
> - Company management
> ...



Ah ok thanks great information. I'll try implement it all.


----------



## tech/a (11 May 2017)

Many aspire to be here.(successful)
I don't know any who have.(Value investors)



RandomInvestor said:


> Ah ok. Well I believe they are the 2 components what else is there to being a successful value investor.




Its a great and very logical theory---practice.

Books have even been written about it.
But with so much confliction from one practitioner to another on value
AND the amount of time you have to STAY wrong to find out things weren't
as they seemed.------
Not all move from Undervalued to higher value. Many fall lower despite valuations.

If everyone agreed then you'd see it immediately in any chart where its trading at a discount.
By the time you see it the parties over!


While not exhaustive.


----------



## RandomInvestor (11 May 2017)

tech/a said:


> Many aspire to be here.(successful)
> I don't know any who have.(Value investors)
> 
> 
> ...



I'm not sure exactly what you're trying to say.


----------



## tech/a (11 May 2017)

That's ok
Carry on


----------



## Klogg (11 May 2017)

tech/a said:


> Many aspire to be here.(successful)
> I don't know any who have.(Value investors)
> 
> 
> ...




https://www.tilsonfunds.com/superinvestors.html


----------



## galumay (11 May 2017)

I certainly wouldnt spend that amount of time studying a business before taking a stake of ownership! Hell I probably wouldn't spend that much time before I started a company!! I wonder if what the person meant was that it takes up to 1000 hours of studying before you are really ready to be an investor?

Even then its an abitary number, some will learn a lot from 100 hours of study and some will learn very little from 10,000 hours!

I think that for any successful strategy of investing you need to do a lot of reading and learning to become confident and proficient, I think so many people have a personality unsuited to investing, they are really gamblers looking for instant gratification. Also I think the disciplines to study are much broader than people understand generally. Aside from learning the basics of finance so you can read and understand financial reports, I have also read a lot of human psychology, the building blocks of science, physics, chemistry, biology, geology.., mathematics - particularly statistics and probability but also algebra, I also read all the standard investing texts, from Graham, thru Buffett, Munger, Lynch, Dreman, Marks, Speziale, etc etc.

I read a lot of blogs about investing and thinking and improving ones mental processes, there is some amazing stuff out there and I think devoting significant time each day to reading is one of the most powerful things you can do.


----------



## Lone Wolf (11 May 2017)

RandomInvestor said:


> So there are 2 components in successful value investing. Finding quality businesses and finding out their intrinsic value then buying the stock which is alot lower than its true value.






tech/a said:


> Are there any papers showing evidence that your Ideas are in fact profitable.






RandomInvestor said:


> Ah ok. Well I believe they are the 2 components what else is there to being a successful value investor.




You might not agree with Tech's view on value investing, but I think he raises a valid point.

So you've found a quality business and calculated that it's currently priced at a discount to its intrinsic value. That alone hasn't made you any money yet, so there must be other components to success.

If you bought every quality business the moment it trades below intrinsic value and held until it returned to intrinsic value, is that profitable? What if you only bought the ones that were trading at more than 20% discount? How far does price need to drop below intrinsic value before it's worth buying? Will you buy more if it gets cheaper? If it continues falling, is there a point at which you consider your evaluation may be flawed in some way? Do you sell when it returns to intrinsic value or do you hold, expecting the quality business to rise in value? Or maybe you sell when it's "close enough" to intrinsic value, freeing up some cash to put into a more heavily discounted business?

I'm not actually asking these questions, just presenting them as examples. I know nothing of value investing. I don't have what it takes to be a value investor. But I suspect that generating a list of quality business trading at a discount is only a small part of what makes an investor successful. When you eventually come up with a detailed investment strategy, remember this thread and ask yourself what the duck asked - How do I know this is profitable?


----------



## Boggo (11 May 2017)

Intrinsic Value by definition...
"The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors."

I had a go at some of these calculations years ago but gave up.
I found that no two individuals could arrive at the same value, that the data was dynamic and dependant on the day to day associated market environment and that the broker/economist type published data values were based on out of date and usually up to six month old inputs.

The second area of concern is why an entity would trade below its intrinsic value. Wouldn't that imply that the majority see a different intrinsic value (assuming a totally fundamental influence).
Quite often it seems to be the case that it wasn't trading below its perceived intrinsic value, more a case of the delay between the published values that were used and the current actual values.
VOC was a recent example of this and further back I remember TGA being another example.

I am not saying it is wrong as guide or that intrinsic value is a term more suited to in the money options but in a volatile or erratic market there seems to be more cases where the current market value is a more reliable measure of reality that a perceived intrinsic value.

Anyway, just my observations and thoughts when I see or hear that term being used as a reason to buy.


----------



## ducati916 (12 May 2017)

Value investing does work......just not quite as advertised.

There are two very broad components or considerations that must be in place to make value investing work.

The first is patience. I don't need to expand too much on this as it is self-explanatory, other than to say, you may think you have patience, until you try value investing.

Second is a method by which you 'get paid' while exercising the first quality. There are two primary  ways of doing this.

(a) buying specific parts of the financing. This may be (i) preferred stock, (ii) convertibles, (iii) bonds. All of these structures rely on dividends/interest payments. It is a yield play.

(b) using options to generate a 'return' on common stock

Usually (b) is the better way to go as it gives you far higher returns, but requires far more effort.

jog on
duc


----------



## tech/a (12 May 2017)

Boggs puts it exactly as I would had I been as articulate.

Klogg
Thank you for the link.the point made here is a wide discrepancy in
Intrinsic value and market value.The wider the better.
20% doesn't cut it
> 100% is more like it. They are as rare as a lottery win.But someone wins the lottery every week

Duc
Good to see you posting again.
My question to all looking at this----given what I said to Klogg and what Boggs said
Is it worth the effort!

Personally
I'm visual I want to be able to make a profit NOW if I'm wrong I want to know I'm wrong before I'm terribly wrong
If I'm wrong about being wrong I want to be able to instantly see it and do something about it
WITHOUT AMBIGUITY

Crashes help guys like me find large intrinsic discrepancies


----------



## galumay (12 May 2017)

There is no doubt Ducat 916 raises one of the most important aspects to successful investing - you need patience, and its a sort of patience most people dont actually have even if they think they do. Coupled with that an investor needs nerves of steel - to paraphrase Keynes, the market can remain irrational and inefficient much longer than most people have the patience to wait. That means the investor needs to be able to watch paper losses and not panic.

The same nerves and patience are required on the other side of the ledger - to not sell out of businesses too soon.

For much of the time there is no discernible difference between being right, too soon, and being wrong. 

Ultimatley it wont matter how many hours you spend studying a business, if you dont have the temperament for value investing you wont be profitable.


----------



## Klogg (12 May 2017)

tech/a said:


> Boggs puts it exactly as I would had I been as articulate.
> 
> Klogg
> Thank you for the link.the point made here is a wide discrepancy in
> ...




Couldn't agree more. There is a lot of waiting involved before you can find something with such a large discrepancy. But when you get it right, the 2x/3x/4x gain (or whatever it may be) is amazing.


----------



## tech/a (12 May 2017)

galumay said:


> There is no doubt Ducat 916 raises one of the most important aspects to successful investing - you need patience, and its a sort of patience most people dont actually have even if they think they do. Coupled with that an investor needs nerves of steel - to paraphrase Keynes, the market can remain irrational and inefficient much longer than most people have the patience to wait. That means the investor needs to be able to watch paper losses and not panic.
> 
> The same nerves and patience are required on the other side of the ledger - to not sell out of businesses too soon.
> 
> ...




And this for me is a big problem
I have endless patience when in profit
No patience if I'm waiting for profit

Particularly if I wait and I miss many opportunities.


----------



## RandomInvestor (12 May 2017)

galumay said:


> I certainly wouldnt spend that amount of time studying a business before taking a stake of ownership! Hell I probably wouldn't spend that much time before I started a company!! I wonder if what the person meant was that it takes up to 1000 hours of studying before you are really ready to be an investor?
> 
> Even then its an abitary number, some will learn a lot from 100 hours of study and some will learn very little from 10,000 hours!
> 
> ...



Interesting.


----------



## RandomInvestor (12 May 2017)

Lone Wolf said:


> You might not agree with Tech's view on value investing, but I think he raises a valid point.
> 
> So you've found a quality business and calculated that it's currently priced at a discount to its intrinsic value. That alone hasn't made you any money yet, so there must be other components to success.
> 
> ...




Ah ok. Yeah their are those questions.  Well if the price does fall alot I guess you analyze why it fell alot and possibly buy more because it could be cheaper. Or sell because you made a mistake depending on why it dropped of course. The 2 components I was talking about I believe I heard it from Roger Montgomery. I mean sure there is stuff like competitors that you must look at but I believe these are the 2 core components.


----------



## craft (12 May 2017)

tech/a said:


> Many aspire to be here.(successful)
> I don't know any who have.(Value investors)



Yes you do!


----------



## craft (12 May 2017)

RandomInvestor said:


> So there are 2 components in successful value investing. Finding quality businesses and finding out their intrinsic value then buying the stock which is alot lower than its true value. How much time do you spend on each would you say? This investor on youtube said takes about 1000 hours to get ready to make an investment decision, that sounds crazy to me, what the hell do you do for 1000 hours? Surely it doesn't take that long to figure out whether or not the business is of high quality.



What is "value" investing anyway - so many different interpretations that you can't say anything general about it really. I would be ready to start an investment accumulation in a few minutes of understanding, when I see the right thing. The longer your first assumptions play out, the longer you get to stay the more you will get to know. The more you know the greater opportunities in the future.


----------



## RandomInvestor (12 May 2017)

craft said:


> What is "value" investing anyway - so many different interpretations that you can't say anything general about it really. I would be ready to start an investment accumulation in a few minutes of understanding, when I see the right thing. The longer your first assumptions play out, the longer you get to stay the more you will get to know. The more you know the greater opportunities in the future.



Ah ok.


----------



## galumay (12 May 2017)

tech/a said:


> No patience if I'm waiting for profit




Thats why you are a trader and not an investor, its a perfect example of matching your temperament to your strategy. Of course it tales more than that, given that 90%+ of traders lose their shirts over time, to be one of the less than 10% - which you obviously are - must be a function of lots of hard work and finding edges that others cannot perceive.


----------



## tech/a (12 May 2017)

craft said:


> Yes you do!




Let me alter my view.
I only know of one who has.



galumay said:


> Thats why you are a trader and not an investor, its a perfect example of matching your temperament to your strategy. Of course it tales more than that, given that 90%+ of traders lose their shirts over time, to be one of the less than 10% - which you obviously are - must be a function of lots of hard work and finding edges that others cannot perceive.




Yes Both Craft and I would agree in our chosen methods of trading/investing.


----------



## ROE (12 May 2017)

knowledge is accumulated over time and how much stuff you read and how good are you at processing those information, it not a precise science that you have to put in this number of hours.

it is something that hard to fast track if you start young and start reading financial books, paper, news
chance are you picked up a lot of knowledge from a lot of business and over time it like a compounding thing, once you get to that stage it doesn't necessary mean you have to studies some business for 1000 hours or 100 hours to be able to invest in them

It just comes naturally and from that knowledge, you can come up with your own set of rules and strategy.

I been reading for many years I know which business I don't want to be in and which one I want to be in and with what criteria and it from there it pretty straight forward once you accumulated that compounding knowledge.

Anything to do with Argi like plantation is a no go zone for me
No airlines, No Mining, unless it trading at excessively cheap where they can cut cost, flock off an asset that can drive price higher, once that objective is done I am out, but as a long term hold and buy I never do for these type of business.

I prefer Amcor, smartgroup, Pact group, ansell, credit corp, greencross, brambles etc.. business for long term holding

Then there regulation and market dynamics you got to keep an eye on the business you have holding and act accordingly etc..

I start out as buy and hold but my knowledge is decent enough now for me to branch out with shorting and options play and opportunity trading.

Buy and hold still a large part of it for dividend but I expect the other strategies will play a significant part going forward as well.

Trading, shorting has been a bonanza for me this year

The other part is risk management, it important as well, I never let one stock do damage to more than 1 year worth of my dividend and that around 30-40K
worse case for me is I lose one year worth of dividend  and I have plenty of capital to come back in no time

Obviously this number will grow over time as the portfolio get bigger each year but the proportion still stays the same.

My tips subscribe to AFR and read them every day  after a few years your knowledge would be pretty good on most business, regulations and bad management


----------



## RandomInvestor (12 May 2017)

This is hard to implement :
Industry mechanics
- Industry standards, margins (e.g. who's the lowest cost player)
"
can't really find any info on this


----------



## RandomInvestor (12 May 2017)

In a summary when analyzing this is what i do read few years worth of annual reports input all the financial statements data into a excel spread sheet make some ratios like roe,roa, roic, fcf etc. And by that decide if its a good company, I also look it if has long term prospects, dividend history. Also look at what company does where revenue comes from and where does most of it arrive from what countries. All this doesn't take more than 10 hours I'd say. But I always think to my self surely there is more research to do. It can't just be getting numbers and doing ratios on them. I guess I could use all the information I have saved over the 2 years and try implement it. Maybe cause the company I am researching "A2milk" there isn't much to know about it? It's just a simple company that sells 1 product?


----------



## Boggo (15 May 2017)

Below is an extract from a report (late 2016) on a company I am currently reading up on.
What can anyone derive from these numbers ?

_At a financial level, the Company's performance met the earnings guidance that was provided at the start of the year. FY2016 Cash EBITDA – which is the best measure of how the business has performed – was $62.2 million, up 8% on FY2015. Cash revenue of $175.5 million was 16% higher than FY2015, with increases across all the Company's main revenue streams. Net Profit After Tax of $90.1 million was lower than FY2015, however this was due to a reduction in non-cash revenue driven by foreign currency movements. Our cash position at year end was a strong $107 million, putting us in a strong position to deliver further growth in FY2017. The Board also elected to maintain the current fully franked dividend._


----------



## galumay (15 May 2017)

Boggo said:


> What can anyone derive from these numbers ?




Not much, without the context of the full financials and an understanding of the business and its management they mean very little. (eg it could be lifted from the Quintis report!)


----------



## Boggo (15 May 2017)

galumay said:


> Not much, without the context of the full financials and an understanding of the business and its management they mean very little. (eg it could be lifted from the Quintis report!)




Well done galumay, it was from the 11th Nov 2016 chairman's briefing to shareholders of QIN.

A good example of the fiction that can (and does) mislead.
Very interesting reading the reports and financials etc while comparing positions on the chart, especially the annual report to Dec 2016 that was issued on the 27th Feb 2017 and where the price was at that point.


----------



## galumay (15 May 2017)

Boggo said:


> Well done galumay, it was from the 11th Nov 2016 chairman's briefing to shareholders of QIN.




LOL! Not really, while I would like to credit my insight and apply my dear old Dad's principal that there are two things in llife, "good management and bad luck", I have to say it was pure co-incidence that i chose my eg of QIN. I guess there might have been some subliminal prompting given that the tread on QIN was in the recent posts list, but I have never looked at the financials of QIN nor had any interest in the business.


----------



## Boggo (15 May 2017)

galumay said:


> LOL! Not really, while I would like to credit my insight and apply my dear old Dad's principal that there are two things in llife, "good management and bad luck", I have to say it was pure co-incidence that i chose my eg of QIN. I guess there might have been some subliminal prompting given that the tread on QIN was in the recent posts list, but I have never looked at the financials of QIN nor had any interest in the business.




If you get a spare hour its worth reading through the last six months of reports etc.

I remember reading through the Harris Scarfe (HSL), Onetel(ONE) and HIH Insurance reports etc that were published prior to their demise and as one administrator I think it was said "the HIH collapse related more to vanity and inflated egos, poor systems and lack of monitoring rather than systemic fraud".

This seems to be the common pattern, but nothing that a good stop loss point won't fix.


----------



## Quant (15 May 2017)

Boggo said:


> This seems to be the common pattern, but nothing that a good stop loss point won't fix.



" The News is in the Price "


----------



## skc (15 May 2017)

Quant said:


> " The News is in the Price "




Kindly refer to this thread where the price didn't know the news.

https://www.aussiestockforums.com/threads/asx-shockers.31661/

You hear this a lot and it is true that every trader should ask if the news is "priced in".... and the correct answer in most often is "not priced in enough".


----------



## Quant (16 May 2017)

skc said:


> Kindly refer to this thread where the price didn't know the news.
> 
> https://www.aussiestockforums.com/threads/asx-shockers.31661/
> 
> You hear this a lot and it is true that every trader should ask if the news is "priced in".... and the correct answer in most often is "not priced in enough".





I'm not about to chart all the stocks in that thread but i'd be surprised if most of them didn't have some  news in the price  , naturally we can always find an anecdote of where it is " unexpected " but the majority will likely have the insider footprint in them  . The very subject of that thread is why I am very very selective about what stocks and prices I participate in . Gaps are a painful thing to be on wrong side of , no control  ....


----------



## Boggo (16 May 2017)

Quant said:


> I'm not about to chart all the stocks in that thread but i'd be surprised if most of them didn't have some  news in the price  , naturally we can always find an anecdote of where it is " unexpected " but the majority will likely have the insider footprint in them  ....




Two reported today where there have been signs of presumption recently, AST (I hold) and SSM.


----------



## RandomInvestor (17 May 2017)

Hey guys I have a question I am reading a book called its earnings that count as it talks about making a defensive income statement and a enterprising income statement and it says this:

In 2002 Wrigley spent $216.9 million on additions to property, plant, and equipment. Its depreciation charge, meanwhile, was $85.6 million. Thus, Wrigley made a $131.3 million investment in fixed capital. This use of cash is an expense in the defensive income statement.

For a2milk is the correct steps to getting this data?

First this part "216.9 million on additions to property, plant, and equipment" is that this part in a2milk cash flow statement? "Payment for property, plant & equipment"  then it says"Its depreciation charge, meanwhile, was $85.6 million" does this relate to this item on the balance sheet? "Depreciation/amortisation" But its confusing because page 39 on the 2016 annual report here: https://thea2milkcompany.com/wp-content/uploads/A2ML0029-a2-2016-AR_Spreads.pdf there are 2 depreciation values. One of left and right. Then for the final part "Wrigley made a $131.3 million investment in fixed capital" I can't find anything relating to fixed capital except for this "Other intangible assets" this is all I could find.

Sorry I think I got it wrong for investment in fixed capital that is Cap spending -  Depreciation.


----------



## RandomInvestor (17 May 2017)

Oh posted this on wrong topic please ignore.


----------



## webbrowan (1 June 2017)

I think it really depends on whether information for the company is readily available and what kind of industry the business deals in. If it's something that you're absolutely clueless about then obviously investing in it is going to be a rather risky financial decision for you! The more you know about the business and how it works, in the finance sense, or with its own buyers and suppliers, the easier it is for you to make a decision whether to invest in it or not! And of course if you can see ledgers and accounts then that helps too!


----------

