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

[RandomInvestor]

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]

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]

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]

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]

Your two components of successful value investing

 

[RandomInvestor]

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]

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.

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

 

[tech/a]

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

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]

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



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.

View attachment 71070

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

 

[tech/a]

That's ok
Carry on

 

[Klogg]

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



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.

View attachment 71070

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

 

[galumay]

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]

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.

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

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]

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]

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]

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]

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]

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

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]

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.

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]

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.

Interesting.