WHAT'S THE BOOK ABOUT?
In this first edition of Invest Like A Guru: How to generate higher returns at reduced risk with value investing, Dr Charlie Tian draws insights from gurus like Warren Buffett and Peter Lynch on how to buy good companies at a fair price.
Dr Tian is the founder and chief executive of the value investing website GuruFocus.com, whose value screeners, strategies and research tools are used by many investors and professors.
The book is reader-friendly with straightforward explanations and illustrated examples. It offers a 20- point checklist for buying good companies at reasonable prices.
The book also devoted a chapter - "Failures, errors and value traps" - on why investors should avoid the "wrong" companies.
EIGHT KEY TAKEAWAYS
1. One common mistake investors make is to sell winners for a quick profit and hang onto the ones that did poorly. Instead, investors should hang onto winners as long as the fundamentals hold and the valuation is reasonable.
2. Invest only in good businesses that are not cyclical and invest only in companies whose products have a short customer repurchase cycle and long product cycles. Examples of these are mostly consumer staples like toothpaste, baking soda, condoms and drinks such as Coca-Cola. This is because the products are consumed daily by customers and will need to be purchased again quickly, no matter how the economy is doing.
3. Some gurus prefer companies with a low capital requirement for growth while they generate cash. As such, there is no need for borrowing and the overall business risk becomes much lower.
4. Look for honest and capable management in the companies that you are thinking of investing in. The capability of management is a key factor for the long-term success of a company. An associated factor is to find out how the management spend the cash earned by the company: Do they reinvest, acquire, buy back stocks, reduce debt and/or pay more dividends?
5. A good firm is one that continuously grows value through its operations, and is worth more tomorrow than it is today. The stock price will follow the value and move higher.
6. Dr Tian discusses the various ways to evaluate businesses. The two most common methods are the discounted cash flow model and price/earnings (P/E) ratio. Though both have limitations and cannot be applied to every situation, they work well for assessing the fair values of businesses.
7. Understand the nature of the business you want to buy and know the price you want to pay. Build enough confidence in your research and have enough conviction to act when opportunities arise.
8. Understand these principles: Over the long term, the stock market always goes up; the stock market has cycles; and higher current market valuation results in lower returns in the future and vice versa.