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Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance – Kenneth Jeffrey Marshall

12th November 2019
Good Stocks Cheap book cover

Introduction

Good Stocks Cheap is an investment book. I knew this book from a website recommending good books about investing (however, I could not recall which website). I am hoping to know more about value investing, especially to learn to identify quality stocks. Furthermore, I would like to compare my perspective on value investing with the author’s.



Author

Kenneth Jeffrey Marshall is an author, lecturer and investor. He teaches at the Stockholm School of Economics in Sweden, Stanford University and the University of California, Berkeley.



Contents

Good Stocks Cheap has a preface, an introduction and 21 chapters. The chapters are grouped into 3 parts.

Part I is Foundations. There are 4 chapters in this part. They are The Quiet Outperformer, Why Stocks?, Price and Value Are Different and Measuring Performance. The author is expounding the basics of value investing in Part I.

Part II is The Value Investing Model. It consists of 12 chapters: Understanding the Business, Accounting Is a Language, Capital Employed, Operating Income, Free Cash Flow, Book Values and Shares, Past Performance, Future Performance, Shareholder Friendliness, Inexpensiveness, Price Drives Risk and Misjudgment and Misaction. This part is mainly about the valuation of stocks.

Part III is Maintenance and contains 5 chapters. Its chapters are Portfolios and Selling, Endurance, Generating Ideas, Differences Among Value Investors and Preservation. This part is the final tips about value investing.



Review

The author begins with his investing mistakes in the preface. Who would do that in an investment book? But it is kind of what is expected of a contrarian.

The author writes this book primarily for people who manage their own money. He introduces a model to vet stock investment ideas from a value investing perspective. It is a simple 3-step process: 1) Do I understand it? 2) Is it good? 3) Is it inexpensive?

The author details the steps that he uses to make investment decision, down to the formulae that he employs to calculate performance metrics. However, he recognizes that his method might not apply everywhere and circumstances can change with time.

Some practical advice from this book:

1. Price and value are not the same.

2. Measuring performance is important because what gets measured gets improved.

3. Keep some spare cash to avoid misaction during market downturn and also to grab opportunities when they arise.

In the book, the author also introduces data sources for fundamental analysis. He also explains a number of accounting terms in plain language. In Part II, he even shows us some examples to demonstrate his screening process at the end of the chapters.

The author thinks that good focused equity portfolios outperform diversified equity portfolios over the long term. Besides that, early hits without understanding the companies will undermine our future performance as gains tend to mask this ignorance.

When should we sell a stock? The author gives 4 conditions: 1) When price flies past value, 2) When a company thought to be good turns out not to be, 3) In buyouts and 4) When a clearly better opportunity emerges.

The author also talks about 16 biases. My problem is clearly about anchoring. Anchoring is benchmarking against an insignificant baseline. By possessing this knowledge, I hope that I will be able to improve in this respect.

Summary is present at the end of each chapter and these summaries are concise. Furthermore, glossary provides the formulae for most of the performance metrics. This is the best place to revise these formulae.

Overall, Good Stocks Cheap is a very informative book. We do not need to follow exactly as what the author recommends but can pick his ideas to adjust our investing strategy. After all, everyone should have a strategy that he or she is comfortable with. But remember to measure its performance and improve the strategy if it is not returning the profits that you have set.



Quotes

  1. Stated differently, value investors know what’s going to happen, but they don’t know when.
  2. If a business looks bad, consider it no further. There are others more worthy of attention.
  3. Instead of insisting that outperformance can happen in the face of lower risk, it says that outperformance happens because of lower risk.
  4. The historic price of a stock does not determine the future price of that stock.
  5. Thinking in percents encourages habits that work over a lifetime.


Rating

3 out of 3 stars



Interested in Good Stocks Cheap?

You may get the book from Kinokuniya Malaysia through the link below*.

Get the book here

*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.

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