The Business of Value Investing: Six Essential Elements to Buying Companies Like Warren Buffett

Acknowledgments xiii

Introduction xvii

Chapter 1 Invest in the Business, Buy the Stock 1

Stock Prices are More Noise Than Information 4

A Businesslike Approach to Valuing the Business 6

The Making of a Legend 11

A Simple Idea, Really 14

Chapter 2 The Only Three Types of Investments You Need to Know 15

Stocks Prices aren’t Always Rational 16

The Business Side of Investing 17

Three Buckets: Undervalued, Overvalued, and Fairly Valued 21

Price Determines Value 24

Key Takeaways 31

Chapter 3 The Six Elements of Intelligent Investing 33

All Investing is Value Investing 35

Learn from the Masters 38

The Sum of Its Parts: A Fundamental Framework 39

A Mental Latticework 42

Overview of the Six Elements 43

Emphasize the Process, Not the Outcome 46

Key Takeaways 46

Chapter 4 Establish a Sound Investment Philosophy The First Element 47

Preservation of Capital is the Name of the Game 49

Price Paid Determines Value Received 52

The Starting Point Matters 54

Avoid Using Margin 61

Focus on Absolute Returns 64

Key Takeaways 66

Chapter 5 Develop a Search Strategy The Second Element 67

Ignore the Media 69

Imitation is the Sincerest Form of Flattery 72

Basic Search Strategies 75

Advanced Search Strategy 85

Key Takeaways 89

Chapter 6 Effective Business Valuation The Third Element 91

Value Investing 101: Margin of Safety 92

Value Investing 201: Intrinsic Value 95

Value Investing 301: Seek Businesses with a Wide Moat 101

Value Investing 401: Calculating a True Intrinsic Value 106

The Value of Management 111

Understanding Return on Equity: Microsoft Corporation 121

Key Takeaways 124

Chapter 7 Have the Discipline to Say No The Fourth Element 125

In Investing, Discipline is Everything 126

Discipline Affects the Price Paid, Which Determines the Value You Get 128

Be Prepared to Look Stupid 132

Don’t Split Hairs 137

Unveiling Investor A: Warren Buffett 139

Discipline is Simple but Rarely Easy 145

Key Takeaways 146

Chapter 8 Practicing the Art of Patience The Fifth Element 147

Swimming against the Current 150

The Benefits of Waiting for a Good Pitch 151

Ignorance Can Be Bliss 158

The Benefits of a Buy-and-Hold Approach 162

Conservative Tests of Safety a Must 171

Key Takeaways 172

Chapter 9 Invest Significantly at the Maximum Point of Pessimism The Sixth Element 173

Putting it All Together 174

Pessimism Leads to Value 179

Avoid That Which is Most Valuable 181

Remain Flexible in the Approach 186

All or Nothing 192

Key Takeaways 193

Chapter 10 More Than One Way to Find Value Case Studies Showing the Approach at Work 195

A Reminder: Process First, Outcome Second 197

Case Study #1: Finding Value in an Unloved Industry Sunrise Senior Living (SRZ) 198

Case Study #2: Money Machine South of the Border Ternium Steel 205

Case Study #3: A Tale of Two Shares Mueller Water Products 214

Fertile Hunting Ground 216

Conclusion 219

Key Takeaways 220

Chapter 11 Avoiding Common Stumbling Blocks 221

Growth and Value: Two Sides of the Same Coin 225

Book Value: More Than Meets the Eye 232

What Matters Most 240

Key Takeaways 242

Chapter 12 Starting an Investment Partnership 243

Two Key Considerations 244

Service Providers 245

Quality Matters Most 247

Notes 249

About the Author 253

Index 255