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

by Gad, Sham M.

• ISBN13: 9780470444481
• ISBN10: 0470444487
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-10-19
• Publisher: Wiley

Summary

Somewhat controversially, Gad makes the point that value and growth investing are much more similar than most investors think -- value investors look for growth in the companies in which they invest. He then walks readers through the pitfalls that most investors fall victim too -- most of which involve not really understanding the margin of safety and how it is applied. Gad sets the stage by presenting the core value framework for beginning to advanced investors and money managers. With the backdrop of evaluating businesses (and not stocks), The Business of Value Investing introduces a blueprint to successful value investing with a focus on six key Buffett strategies. These essential points are presented and backed up with real-world case studies.

Author Biography

Hesham M. Gad, an up-and-coming value investor, is the Managing Partner of the Gad Partners Funds. Prior to managing the Gad Partners Fund, he ran the Gad Investment Group from 2002 to 2005, a concentrated value fund that delivered annualized returns of 22 percent. He has written hundreds of investment articles and currently contributes to TheStreet.com and Investopedia.com. Gad holds an MBA in finance from the University of Georgia, during which time he met with Warren Buffett for lunch.

Table of Contents

Acknowledgments	p. xiii
Introduction	p. xvii
Invest in the Business, Buy the Stock	p. 1
Stock Prices Are More Noise Than Information	p. 4
A Businesslike Approach to Valuing the Business	p. 6
The Making of a Legend	p. 11
A Simple Idea, Really	p. 14
The Only Three Types of Investments You Need to Know	p. 15
Stocks Prices Aren't Always Rational	p. 16
The Business Side of Investing	p. 17
Three Buckets: Undervalued, Overvalued, and Fairly Valued	p. 21
Price Determines Value	p. 24
Key Takeaways	p. 31
The Six Elements of Intelligent Investing	p. 33
All Investing Is Value Investing	p. 35
Learn from the Masters	p. 38
The Sum of Its Parts: A Fundamental Framework	p. 39
A Mental Latticework	p. 42
Overview of the Six Elements	p. 43
Emphasize the Process, Not the Outcome	p. 46
Key Takeaways	p. 46
Establish a Sound Investment Philosophy: The First Element	p. 47
Preservation of Capital Is the Name of the Game	p. 49
Price Paid Determines Value Received	p. 52
The Starting Point Matters	p. 54
Avoid Using Margin	p. 61
Focus on Absolute Returns	p. 64
Key Takeaways	p. 66
Develop a Search Strategy: The Second Element	p. 67
Ignore the Media	p. 69
Imitation Is the Sincerest Form of Flattery	p. 72
Basic Search Strategies	p. 75
Advanced Search Strategy	p. 85
Key Takeaways	p. 89
Effective Business Valuation: The Third Element	p. 91
Value Investing 101: Margin of Safety	p. 92
Value Investing 201: Intrinsic Value	p. 95
Value Investing 301: Seek Businesses with a Wide Moat	p. 101
Value Investing 401: Calculating a True Intrinsic Value	p. 106
The Value of Management	p. 111
Understanding Return on Equity: Microsoft Corporation	p. 121
Key Takeaways	p. 124
Have the Discipline to Say No: The Fourth Element	p. 125
In Investing, Discipline is Everything	p. 126
Discipline Affects the Price Paid, Which Determines the Value You Get	p. 128
Be Prepared to Look Stupid	p. 132
Don't Split Hairs	p. 137
Unveiling Investor A: Warren Buffett	p. 139
Discipline Is Simple but Rarely Easy	p. 145
Key Takeaways	p. 146
Practicing the Art of Patience: The Fifth Element	p. 147
Swimming against the Current	p. 150
The Benefits of Waiting for a Good Pitch	p. 151
Ignorance Can Be Bliss	p. 158
The Benefits of a Buy-and-Hold Approach	p. 162
Conservative Tests of Safety a Must	p. 171
Key Takeaways	p. 172
Invest Significantly at the Maximum Point of Pessimism: The Sixth Element	p. 173
Putting It All Together	p. 174
Pessimism Leads to Value	p. 179
Avoid That Which Is Most Valuable	p. 181
Remain Flexible in the Approach	p. 186
All or Nothing	p. 192
Key Takeaways	p. 193
More Than One Way to Find Value Case Studies Showing the Approach at Work	p. 195
A Remainder: Process First, Outcome Second	p. 197
Case Study #1: Finding Value in an Unloved Industry: Sunrise Senior Living (SRZ)	p. 198
Case Study #2: Money Machine South of the Border: Ternium Steel	p. 205
Case Study #3: A Tale of Two Shares Mueller Water Products	p. 214
Fertile Hunting Ground	p. 216
Conclusion	p. 219
Key Takeaways	p. 220
Avoiding Common Stumbling Blocks	p. 221
Growth and Value: Two Sides of the Same Coin	p. 225
Book Value: More Than Meets the Eye	p. 232
What Matters Most	p. 240
Key Takeaways	p. 242
Starting an Investment Partnership	p. 243
Two Key Considerations	p. 244
Service Providers	p. 245
Quality Matters Most	p. 247
Notes	p. 249
About the Author	p. 253
Index	p. 255
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