I think each method has its place in value investing. And most value investors are likely doing both. Even Buffett admitted he is 85% Graham and 15% Fisher. I think he is probably part of the two plus Munger.
Apple has one of the strongest competitive advantage now and if you have spotted that 20 years ago, you would have been rewarded handsomely by holding its stock to now. Same as Microsoft, Amazon, Berkshire, Disney etc. So, not sure why the article is saying that "profit margins have no predictive power in the stock market". But moats are not easy to detect before they become moats. And when they become apparent, the price is not cheap, which I think has trapped many into buying high.
Net-Net investing is easier but it is not risk free either. Often there are real reasons behind why some stocks are trading at such low levels, which you might not know just from reading the annual reports. It also doesn't go well during market turmoil. Holding a bunch of cigar butts can be quite nerve-racking when market is free falling.
I would ask why not include both when selecting stocks?
Reply to @theintelligentinvestor : I feel better to hold MSFT than Apple. Apple is slowing losing out its innovation despite raising its revenue and dividend as cash cow company.
When I came across Michael Porter's work Competitive Advantage, I can see where he was coming from when he described the Five Forces he thought about which affect the competitive advantage of players in an industry. I finally seen enlightenment that there was a more concrete way we could look at competitive advantage. I was reflecting too that there were other ways of looking at a company such as doing a SWOT analysis which may not be exhaustive but provides some analysis to what one views as strengths, weaknesses, opportunities and threats. I can see that no matter how one looks at the industry that a business operates in and the business itself and compares it against other competition in finding out how strong a moat or competitive advantage it has, one will never be perfectly complete and perfectly confident how the future may hold for the business. This is simply because there are so many factors which affect the future of a business, it's competitive advantage. Or should I also drop in there are also unforeseen factors and circumstances which could affect the future fate of a business and also it's share price.
As such, I will put it as Michael Porter's work on Competitive Advantage has it's place as a useful framework of thinking on assessing competitive advantage of various players in an industry, bargaining power of sellers, bargaining power of buyers, threat of new entrants, intense rivalry among competitors, potential substitute of existing products or services. But, it is not the end all or holy grail to assessing competitive advantage as the business world is far more complex than being able to box it up into any framework.
Therefore, his work provides a foundational framework and certainly one does not end there but should apply what works from there and integrate with new knowledge and observation. SWOT analysis also is not the end all best exhaustive way to go about analysing the competitive advantage of a business. There is also no single holy grail way of doing successful investing. Some people love cigar butts while others love growth compounders irregardless of whether which types is easier to catch than the other.
I believe the only holy grail which makes sound investing which can provide reasonable long term returns is constant good money management and good portfolio construction and diversification (which include position sizings). Whether one is a good stock picker at identifying good cigar butts or compounders is not the most important factor. Good money management and good portfolio construction and diversification will help to protect against the unforeseen (and we got to admit no one is a prophet when it comes to investing) when it comes to placing an opinion on the future fate of stocks one has picked. Thus, this will help to protect against price volatility risk due to market trading sentiments, systematic risk due to changing macroeconomic trends and also systemic risk due to company specific risks all of which can affect the value of one's investment portfolio.
Reply to @jeremyowtaip : Thanks for sharing your thoughts, I'll have to spend some time reflecting to see if I can find some way to improve my investment from all these points.
@losemoneyinvestor: one of your fav prof and book leh
Reply to @losemoneyinvestor : notwithstanding what I said there are more than one methods to investing. So everyone is different lah. haha
I think each method has its place in value investing. And most value investors are likely doing both. Even Buffett admitted he is 85% Graham and 15% Fisher. I think he is probably part of the two plus Munger.
Apple has one of the strongest competitive advantage now and if you have spotted that 20 years ago, you would have been rewarded handsomely by holding its stock to now. Same as Microsoft, Amazon, Berkshire, Disney etc. So, not sure why the article is saying that "profit margins have no predictive power in the stock market". But moats are not easy to detect before they become moats. And when they become apparent, the price is not cheap, which I think has trapped many into buying high.
Net-Net investing is easier but it is not risk free either. Often there are real reasons behind why some stocks are trading at such low levels, which you might not know just from reading the annual reports. It also doesn't go well during market turmoil. Holding a bunch of cigar butts can be quite nerve-racking when market is free falling.
I would ask why not include both when selecting stocks?
Reply to @theintelligentinvestor : I feel better to hold MSFT than Apple. Apple is slowing losing out its innovation despite raising its revenue and dividend as cash cow company.
When I came across Michael Porter's work Competitive Advantage, I can see where he was coming from when he described the Five Forces he thought about which affect the competitive advantage of players in an industry. I finally seen enlightenment that there was a more concrete way we could look at competitive advantage. I was reflecting too that there were other ways of looking at a company such as doing a SWOT analysis which may not be exhaustive but provides some analysis to what one views as strengths, weaknesses, opportunities and threats. I can see that no matter how one looks at the industry that a business operates in and the business itself and compares it against other competition in finding out how strong a moat or competitive advantage it has, one will never be perfectly complete and perfectly confident how the future may hold for the business. This is simply because there are so many factors which affect the future of a business, it's competitive advantage. Or should I also drop in there are also unforeseen factors and circumstances which could affect the future fate of a business and also it's share price.
As such, I will put it as Michael Porter's work on Competitive Advantage has it's place as a useful framework of thinking on assessing competitive advantage of various players in an industry, bargaining power of sellers, bargaining power of buyers, threat of new entrants, intense rivalry among competitors, potential substitute of existing products or services. But, it is not the end all or holy grail to assessing competitive advantage as the business world is far more complex than being able to box it up into any framework.
Therefore, his work provides a foundational framework and certainly one does not end there but should apply what works from there and integrate with new knowledge and observation. SWOT analysis also is not the end all best exhaustive way to go about analysing the competitive advantage of a business. There is also no single holy grail way of doing successful investing. Some people love cigar butts while others love growth compounders irregardless of whether which types is easier to catch than the other.
I believe the only holy grail which makes sound investing which can provide reasonable long term returns is constant good money management and good portfolio construction and diversification (which include position sizings). Whether one is a good stock picker at identifying good cigar butts or compounders is not the most important factor. Good money management and good portfolio construction and diversification will help to protect against the unforeseen (and we got to admit no one is a prophet when it comes to investing) when it comes to placing an opinion on the future fate of stocks one has picked. Thus, this will help to protect against price volatility risk due to market trading sentiments, systematic risk due to changing macroeconomic trends and also systemic risk due to company specific risks all of which can affect the value of one's investment portfolio.
Reply to @jeremyowtaip : Thanks for sharing your thoughts, I'll have to spend some time reflecting to see if I can find some way to improve my investment from all these points.