A comprehensive guide on how to learn investing

Fundamentals 04-2: Step-by-step guide as well as selected URLs of value investment resources to start you off on how to learn investing from a value investing perspective. Revision date: 2 July 2023.

Baby step into the investing universe - Part 2 of 3

There are many asset classes and several investing styles. All successful investor focus on one combination of these. So should you. If you are a beginner, your first step is to chose one combination based on your interest, risk tolerance and other demographics.

You are here because you have chosen to invest in the stock market as a value investor. Your next step then is to learn how to invest from a value investment perspective.

I covered the following 3 topics in this guide:

How to learn investing from a value investor perspective.

What is valuing investing.

Where to find value investment resources.

There are many options to learn investing. While I am a self-taught value investor, others may prefer a more formal approach. I will share what to do if you want to go through the self-learning route. For those opting for a more formal course, I will also discuss how to choose the best value investing course.

You require several skills to be a successful value investor – how to analyze companies, how to value them, and how to mitigate risks. I will describe what is required for the first two items here. I will cover the risks in Part 3 of this series. You need an overview of each skill as you will also have to consider them when choosing your learning path.

Finally, I will provide the ULRs to value investment resources that you can access. I concentrate on the free ones. You will need them if you opt for the self-learning route. At the same time, these resources are also useful references for those who opt for a more formal course.

This post is about traditional stock-picking using fundamentals. As you can see from Chart 1, there is less interest in fundamental analysis than in technical analysis. I take it as a good sign. You will have less competition to make money once you have mastered value investing.

Interest over time - technical vs fundamentals

Chart 1: Interest over time.

To be a successful value investor, you need to developed 2 skillsets:

Analytical - how to analyze companies and value them.
Behavioural - how to minimize human errors and other causes of risks.

This article is Part 2 of the 3-parter series for beginners. It covers the analytical part.

Part 1 of 3 is a more beginners view of investing.

Part 3 of 3 covers the risk and behavioral aspects as well as lists the rest of the selected URL.

Summary

There are two main ways to learn investing: self-study and formal courses. Self-study allows for flexibility and a personalized learning experience but may require more time and discipline. Formal courses provide structured materials and the guidance of a teacher but may have fixed schedules and limitations.

When choosing a method to learn investing, consider factors such as your existing knowledge, time availability, and preferred learning style. Self-study can be effective with online resources, while formal courses offer curated materials and instructor support. Assess courses based on their coverage of concepts and skills, comprehensiveness of materials, and level of guidance provided.

What is value investing? It is an investment philosophy that involves buying undervalued stocks and holding them for the long term. It focuses on buying part ownership of businesses, buying bargains with a margin of safety, and mitigating risks.

To become a good value investor, you should learn the concepts of value investing and develop the necessary skills. You should also cultivate patient and contrarian attitudes, and establish your investment process. Additionally, company analysis and valuation are crucial skills for a value investor.

I have provided the links to free online value investment resources to guide your learning.

Some of the resources I used include well-known advisers such as Seeking Alpha.* Click the link for some free stock advice. They have free Investing 101 type of materials that I would recommend for any beginner. Furthermore, if you don't want to spend time doing your own analyses and valuation, I suggest that you subscribe to their services and access their library of fundamental analyses.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

How to learn investing

The self-taught route

How to learn investing
How to learn investing in stages
Learning objectives

The formal course route

Self-study or classroom setting?
General course vs formula course
What to assess
How to choose the best course?

What to learn

What is value investing
The value investment process
Behavioural requirements

Company analysis

My approach
What to analyze

Valuation

Relative valuation
Asset-based valuation
Earnings-based valuation
Margin of safety

Value investment resources

Chart 2: Learning options

How to learn investing

There are two main ways to learn investing:

Classroom setting. You join a group (can be online or physical room) that is led by a course leader (teacher, coach, or lecturer). He can provide immediate feedback on questions that the class may have. There is a fixed schedule for the classes.

Self-study. The main feature here is that you study on your own. You don’t join a group. There is still a list of subjects that you have to go through although most likely you decide on the pace.

Self-taught is part of self-study. In a self-taught programme, you chose the topics and compile all the learning materials yourself. You are the course leader and student all in one.

But in a formal course, the course materials and presentation format have been designed. There is a clear role between the student and the teacher.

I chose the self-taught route because 20 years ago, online courses and blogging were still in their infancy. It was tough looking for formal courses than in places like Malaysia.

Today, there are many online courses. There are also value investing bloggers offering a combination of free and paid courses.

Today there are more materials for a self-taught programme. At the same time, there are also many cost-effective self-study courses. The latter may outweigh the hassle of compiling your self-taught programme.

For someone who went through a self-taught programme, I will tell you that the learning process is not so smooth. There is a very good chance that you will hop from topic to topic that is not in the best sequence. But it is not impossible to learn. It will take a bit more time.

If you don’t have basic business knowledge or know how to read financial statements, a self-taught programme is not the best. It is better to follow a course where some expert has structured it with prepared the course materials.

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The self-taught route

I learned to invest by reading online materials, listening to podcasts, and watching videos, all available free online. I seldom buy books although I have read many that I have downloaded.

That was more than 20 years ago. Today there are vastly more resources available online so it should be easier to learn from online resources.

Is this correct? Not really because unless you learn to focus, you are likely to be overwhelmed.

Let me guide you on how to successfully learn to invest from freely available online resources.

How to learn investing

How did I learn value investing?

Gain some knowledge.
Practice to gain experience.
Repeat steps (1) and (2).
Only move on to the next level after you have mastered a particular level.
Repeat (1) to (4).
Start to invest with real money when you reach the Advanced level.

According to a study by technology giant Microsoft, the attention span of people has fallen from 12 seconds to 8 seconds — thanks to the mobile revolution and an increasingly digitized lifestyle.

To learn successfully, it must be done in small chunks - bite-sized learning. This is the practice of delivering training in smaller, more focused chunks or bites that can be easily learned without committing large amounts of time.

The best analogy I can give is infographics – yes this is bite-sized learning.

Anyway, the point I am making is that you read one or two articles to gain some background knowledge. Then explore one or two case studies and repeat the learning cycle until you have completed everything at a particular level.

I will provide the links to the necessary free online value investment resources so that you can gain background knowledge for each level.

To gain experience you have to learn from case studies and try to answer all the questions that I posed in my case studies.

There are 4 levels to go through.

Level 1 – Foundation.

Level 2 – Intermediate.

Level 3 – Advanced.

Level 4 – Expert.

I am assuming that you start at the Foundation level and will provide some pointers on when you can move from one level to the next.

If you have been following my case studies posts eg Asia File you ought to be able to create a similar analysis and valuation by the time you finish the Advanced level.

How long will it take?

Realistically and assuming that you can spend at best an hour a day, I would think that you would need to spend about 4 to 6 months at the Foundation level and another 4 to 6 months at the Intermediate level.

I think it will take another 12 to 18 months at the Advanced level before you are ready to go to the Expert level.

A long time? Remember that you are here to learn how to invest for a lifetime.

The difference between self-learning online compared to a classroom setting where there is a teacher is that with self-learning you need the self-discipline to go through all the materials and to do the work examples and case studies.

The biggest challenge will be the “practice” part as you are not able to discuss with other students or a lecturer/teacher.

My advice if you are stuck - pose the questions online. What I did was skip the part and then come back after you have learned a bit more. It has worked most of the time.

Secondly, when you read the case studies online, they generally present the situation and analysis together. Effectively you get the "solution" as you read the case.

This is not as good as a case study in a classroom setting where the case study has been prepared in such a manner that the solution is not provided. You first read the case and then discuss the issues and solutions in class.

Unfortunately, you don't have this "discovery" dimension when covering case studies on your own.

One way to get around this predicament is to try to do the analysis yourself and then compare it with the one presented. Of course, to do this, the "solution" has to be presented separately.

You ought to be able to use the case studies in my blog in this manner. If you have the discipline to take this step, it will accelerate your learning.

Baby step into the investment universe : learn how to invest

Chart 3: Learn how to invest

How to learn investing in stages

From a value investing perspective, there are several levels to go through to reach a stage where you can confidently analyze and value companies

Foundation level where you focus on concepts.

The Intermediate level where you can start valuing companies using multiples.

The Advanced level where you seriously start number crunching and pick companies.

The Expert level.

Once you pass the Advanced level, I am sure you will know what to look for to progress further.

For each of the first 3 levels, I will provide you with a list of the online value investment resources for 3 mediums - reading materials, podcasts, and videos.

The reality is that each site may have lots of other articles so I will point to the key articles to cover for each of the listed sites.

What I suggest is that you initially focus on what I have recommended.

Once you have gone through all of them, by all means, go back to the various sites and go through all the other materials.

By then hopefully, you would have learned to identify whether the article is directly relevant or something nice to know only.

BTW I stop listing the value investment resources after the Advanced level since as an Expert you would have your niche and know where to go and what to look for.

Learning objectives

The learning objectives for the various levels are as follows

Chart 4: Foundation Level

Foundation level: mostly conceptual:

Intro to investing.

Intro to business analysis.

Understanding financial statements.

You can move to the Intermediate level when you can to go through Annual Reports and understand the financial statements. You then see whether the Chairman Statements and/or Management, Discussions, and Analysis is a public relations exercise or they provide information for you to analyze the company's performance.

Chart 5: Intermediate Level

Intermediate level: a bit of quantitative analysis:

Intro to value investing.

How to analyze business.

Intro to valuation.

You are ready to move to the Advanced level when you can identify undervalued companies using multiples as well as assess whether the company can sustain its performance over the next couple of years.

Chart 6: Advanced Level

Advanced level: – number crunching, more emphasis on case studies:

How to value companies.

Business strategies.

Value investing spectrum.

You can move to the Expert level when you can perform the analysis and valuation as presented in my case studies with equivalent details and depth. When you reach this stage, you can be assured that you have successfully learned to invest.

Chart 7: Expert Level

Expert level:

CAPM and Modern Portfolio Theory.

Options.

Other investment approaches – Technical, Smart Beta.

The formal course route.

If you opt for a formal course, you will have to choose the course to follow. The process of choosing the best value investment course for you involves several trade-offs;

Self-study vs classroom setting for a formal course.

A general value investing course vs a formula course.

The factors to be considered in choosing a course are:

Do they cover all the concepts and skills required?

How comprehensive is the course material?

How much hand-holding do they provide?

To effectively evaluate the course, you have to:

Go through all the course descriptions.

Check on the credibility of the course leader/teacher.

Review past student comments and ratings.

I suggest that you separate the qualitative assessment from the price assessment. Shortlist 3 to 5 courses and then only decide on the trade-off between content and price.

Chart 8: Self-taught or formal course

Self-study or classroom setting?

Now that you have decided to follow a formal course, there are two aspects to consider:

How to learn investing ie classroom vs self-study as per the discussions in the previous section.

Course focus i.e. whether you follow a “formula” or learn about value investing in general. A formula here refers to a specific technique that is being marketed. You can think of this as a “copy and paste” investing strategy. This is opposed to learning about value investing in general.

The chart below illustrates the 4 possible options formed by the combination of these 2 aspects.


Chart 9: Options for how to learn investing

I must admit that 2 decades ago, there were not that many online courses. Most of the courses were formal classroom types. These were not suitable for me as I had a very tight work schedule.

To a great extent, this influenced my decision to self-study rather than attend a formal class.

Today there are online courses that are self-study focussed. However, the issue of whether it is self-study or online class still boils down to whether you study on your own time or join a group based on a timetable.

I would still have chosen self-study as a fixed schedule would still be a problem for me.

I suspect that the majority of you are likely to be working. And then you may have other family and social commitments. If so, go for the self-study route.

This is because learning value investing is not something that you complete in one week or month. Be prepared for a least one year of learning. As such you want a course that gives you flexibility over your time.

You will of course lose the classroom cum teacher interaction with self-study. But there are ways to make up for this.

Chart 10: General Course vs Formal Course

General course vs formula course

Think of the following analogy when it comes to thinking about learning value investing in general or taking a formula course.

If you want to open up a burger restaurant, one option is to buy the kitchen equipment, tables, chairs, and utensils and develop your burger recipe. Alternatively, you could be a franchisee to a burger chain.

The former is learning value investing in general. You will have to compile your course material and even establish your investment process.

The latter is following a formula that the vendor has developed and tested. I call this a cut-and-paste approach.

Value investing requires a certain amount of knowledge about how to read financial statements and how business works. Some business experience would be helpful. You also need to be numerate as you need to value companies.

If these are challenges, you should start with a formula course. Usually, these are techniques that have been developed by the vendor. They target people who do not have quantitative and business skills. A common marketing point here is that you can quickly learn to invest.

After you have mastered the “cut-and-paste” course, you always have the option to learn about value investing in general. By then you don’t start from zero as the formula course would have covered most of the common value investing concepts.

But, if you have a business background and are numerate, you go for the general course.

From what I could see, the general courses are cheaper. At the same time, you could invest via indexing while learning. Then by the time you are ready to set up your investment process, you can switch over from indexing to your approach.

I opted to learn about value investing in general because I have a strong business background. Secondly, I am numerate and also able to read financial statements.

Thirdly (and this is with hindsight), you will come across free formulae when learning about value investing in general. For example, you will learn about Graham's Net-Net process. There is also the Magic Formula and Dogs of the Dow. So why pay for a formula when there are free ones?

My recommendation?

If you have fears about financial statements, business analysis, or quantitative techniques, go for the formula course. Your goal is to develop your investment skills and you want to start with something that you can learn and use.

But if you don’t have such fears, go for the general course. It is much cheaper and you have the indexing option to make money while learning. This indexing option will negate the advantage claimed by the formula course ie you can start to invest quickly.

What to assess

There are 4 steps to becoming a value investor.

Learn the concepts - knowledge acquisition.

Develop the skills - applying the knowledge.

Cultivate the right habits - behavioral/soft skills.

Establish your process - SOP.

Accordingly, the assessment of any value investing course should be based on how well it delivers these 4 items. You need to assess them on several criteria:

Do they cover all the concepts and skills required?

How comprehensive is the course material?

How much hand-holding do they provide?

These criteria apply to all the various combinations of courses shown in Chart 9.

The challenge with assessing any course is that before you sign up for a course, you only have access to the marketing materials. If you are lucky, you may find a sample podcast or video.

Effectively you are trying to compare courses based on limited information. The checklist I have provided has been developed with this constraint in mind.

Chart 11: Checklist for concepts/skills

Checklist for the basic concepts/skills that you need to develop.

You have to run through all the value investment resources presented by the course to be able to see whether the following are part of the course content. Be prepared to do some guesswork based on the course description.

Value investing - Margin of safety, Mr market, Buying at a discount.

Understanding financial statements (only for the general course) - Ratio analysis.

Business analysis - moats, risks, management performance.

Valuation - discount rates, free cash flows, DCF, relative valuation.

Portfolio - number of stocks, position sizing.

Risk mitigation - diversification, behavioural biases.

A general value investing course should cover all the above topics.

A formula course will leave out the part about understanding financial statements, business analysis, and portfolio part. They will substitute these with their “formula".

Chart 12: Checklist for course materials

Checklist for the course materials

The aim is to relate the way the course is presented to your learning preference. I am more of a textbook person while you may be better at watching videos. You gauge whether the course is text-based or more focused on podcasts or videos about your learning style.

This is not as critical today because most courses have a combination of reading materials, podcasts, and videos.

It is more important to see how the course delivers the numerical analysis part of the course. As a beginner, you want to see worked examples and ready spreadsheet templates. This is especially if it is a self-study course.

Do you remember how you learned your arithmetic in school? The teacher showed the example on the board and then you learn by doing the exercises. When it comes to the quantitative part, check that the course has a similar approach.

Learning to invest is like learning how to drive. While there are concepts to learn, the key is practice. You become a good driver by spending more time driving than learning traffic codes. This applies to investing. You want to spend most of the time analyzing and valuing companies.

So, you want value investment resources that can help you analyze and value companies. They should have worked examples, case studies, and spreadsheet templates.

Finally, besides the value investment resources, you should see whether there is a library of resources that you can access as a student. Yet, today this is not critical as there are many free online materials on value investing.

Checklist for hand-holding

I have already emphasized the importance of practice. This is where hand-holding is helpful. There are 2 sources of guidance here:

Coaching by the teacher/lecturer.

Peer interaction.

When I first started to learn, only classroom settings can provide both. However today with social media, this no longer applies. I have seen self-study courses where there is some mechanism to connect students so that they can benefit from peer interaction.

So, you can still have a self-study course where there is some access to coaching and peer interaction.

But the challenge is not whether these are available. The difficulty is assessing the quality of the help.

If you attend a Business School MBA course, not only will you have good lecturers, but you will interact with more experienced students. This is different from attending an investment course full of teenagers.

Unfortunately, you cannot assess the quality of the hand-holding at the pre-buying stage. One way to assess the quality is to look at past student comments and ratings if these are available.

I would also check the credentials of the person presenting the course. Look at his qualifications and experience and judge whether he can provide practical answers to questions you may have.

Chart 13: Checking the validity of a formal course

How to assess the validity of the formula course

When it comes to formula courses, there are two selling points:

It is a successful formula that will enable you to make money.

You can start value investing immediately.

The issue is then assessing the validity of the formula.

This is a tough one because the vendors would have done their best to convince you that they have a secret formula that has been tested. I am sure that the vendor would be presenting his track record and you can only take his word for this.

You can only check his authority indirectly:

At the pre-buying stage, you only have the past student comments and ratings to work on. One metric that I used was to look at the number of past students. Unfortunately, not all sites provide this information.

Another metric is to look at how long the course has been offered. The older courses could mean that they had enough interest to continue with the course. I know this is not ideal.

You could also look at market share ie the comparative number of past students. You are of course equating popularity with the validity of the formula.

Chart 14: How to choose the best course

How to choose the best course?

The most important thing to remember is not to do the assessment mechanically. Only compare the course characteristics with the checklist after understanding the checklist criteria.

It may sound ironic, but before you assess any course, do get some overview of what is value investing. Many value investing sites offer free valuing investing 101 materials. Examples are:

The Motley Fool.

Morningstar.

The Street

Once you have an overview, then visit the site that focuses on comparing investing courses.

Some of them may not list their criteria for recommending the courses. The idea is not so much to understand the criteria, but rather to get a sense of how others are evaluating courses.

Proceed only when you have some understanding of what value investing is all about and have seen how others have assessed the course.

Remember my analogy? You are a primary student trying to choose the best teacher and/or school. Getting a bit of knowledge first and seeing how others have chosen will help to move beyond this primary student level.

Furthermore, separate the qualitative analysis from the pricing. What you want is to identify the top 3 to 5 courses based on your qualitative assessment.

Only after then do you compare prices. By then you would have a workable number of courses to analyze the trade-off between price and assessment factors.

In terms of the qualitative assessment, you are comparing:

Course content. Check that it covers all the basic concepts and skills.

Learning style. Look at the course materials and whether the presentation format fits your learning style.

Support provided. Look at hold-holding as well as access to resources.

You will realize that the various trade-offs are not sequential choices. You may start by choosing a self-study instead of a classroom programme. But, when you look at what is offered in a formula course vs a general one, you may opt for a classroom course.

I went through the iterative process. I only decided to be a self-taught value investor after going through the whole assessment process as described.

I would not be surprised if you have to go through the same iterative process before you come to a final decision.

Chart 15: Summary for choosing the best course

What to learn

There are two aspects to this question:

What is value investing?

What are the skills required to be a good value investor?

“What is value investing” covers various value investing concepts. The latter is about fundamental analysis and risk mitigation. Fundamental analysis in turn can be broken down into company analysis and valuation.

To learn how to be a value investor, you should follow these steps:

Learn the concepts.

Develop the skills.

Cultivate the right habits.

Establish your process.

The last 2 bullet points are related to the behavioural aspects and I will cover them in Part 3.

What is value investing

Chart 16: What is value investing

Value investing is an investment philosophy. It is about how you approach investing. I would like to distill value investing into 5 key concepts as follows:

Buy part ownership of businesses. There is a business behind every stock and you become part-owner of the company you invest in. This is opposed to the other investment approach of buying and selling pieces of paper and ignoring the value of the underlying business.

Buy a bargain. Value investing is about buying when the price is trading at a discount to the value of the business as determined by its fundamentals. You believe that the market price will eventually reflect the business fundamentals enabling you to make money.

Buy with a margin of safety. All valuations are based on assumptions. To protect yourself against error or bad luck, you have a margin of safety when estimating the value of the business.

Invest for the long term. Stock prices are volatile in the short run. You want to hold long-term so that the market price reflects the business fundamentals rather than just market sentiments.

Worry about the downside and let the upside take care of itself. While there will always be investment risks, you can adopt measures to mitigate them.

Chart 17: Value investing process

The value investment process

You have to answer 3 main questions whenever you invest:

What to buy. You hunt for what to buy based on companies that you understand.

How much to buy? Have a stock portfolio with about 30 companies in the portfolio. This will provide diversification benefits without spreading your investments too thinly. This will determine how much you buy for each stock.

When to buy or sell. You should ignore the market most of the time except when you want to enter or exit a position.

The value investment process to answer these questions involved:

Screening for companies for in-depth study. Analysis and valuation are time-consuming activities. Screening helps you to focus on those that are likely to lead to actual investments.

Analyzing the screened companies. There are two objectives here.

To make a case of why you should invest in them that is independent of the pricing vs value part. You want to know whether this is a “good” company to invest in.

To ensure that the assumptions you use in your valuation are grounded in reality.

Valuing the companies. All valuations are based on assumptions and different techniques will lead to different values. You want to triangulate a value with a margin of safety.

Comparing the price with value. The goal is to assess whether this is a good investment ie can you make money? The analysis and valuation also help ensure that you are not buying a value trap.

Mitigating risks. Warren Buffet has 2 rules for investing:

Rule 1 - never lose money.

Rule 2 - never forget rule 1.

The following articles in the blog provide details of the above.

An Effective Way To Screen For Value Traps.

Can we learn anything from investment case studies?

The Basics Of Valuation - Picking out Value Traps

Chart 18: Behavioural requirements

Behavioural requirements

There are certain mindsets required to be able to follow the value investing approach. These are more than tackling behavioral biases.

You have to also cultivate the following attitudes as they are part and parcel of the value investing approach.

Be patient. You are relying on the success of the underlying business to make money. Company performance changes slowly and you may have to wait years for the market to re-rate the company.

Be a contrarian. You are buying bargains. The nature of investing is such that a stock is only selling at a bargain if there is low demand. This will happen only if the crowd is not interested in the stock.

Be the tortoise rather than the hare. You should not seek excitement from your investments. Fundamental analysis takes time and it takes more time for the market to come around.

Have confidence in yourself. If you are going to be a contrarian, you need to be confident that your analysis is correct and that the market is wrong. You are a contrarian based on analysis.

Be resilient. In looking for the value stocks to invest in, the process eliminates far more stocks than it uncovers. It can be a frustrating way to invest during a bull market. Many stocks that you dismiss during your search will keep rising in value in bull markets. This is even though at first, you found them too expensive.

Chart 19: How to be a value investor

Company analysis

Company analysis involves collecting info related to the company’s profile and performance. It incorporates basic info about the company. This could be its history focusing on events that have contributed to shaping the company.

Apart from specific information about the company, the analysis will also cover external data. Examples are the industry performance, threats, and opportunities affecting the company's prospects. You are looking beyond the company to its competitors and industry.

Company analysis generally involves both qualitative and quantitative information.

The quantitative side involves looking at factors that can be measured, such as the company’s assets and profits. The limitation here is that it does not capture the company’s performance that cannot be measured by a number. A good example is the R&D efforts or the quality of management.

Financial statement analysis is an important aspect of numerical analysis. By analyzing reported financial info, you can get a picture of the profitability and risks of a company. This generally involves studying the accounting ratios. These include asset utilization, profitability, leverage, liquidity, and valuation ratios.

The analysis of the non-numerical items is the other side of company analysis - the qualitative side. The qualitative analysis involves studying the other part of the annual reports. This generally covers the Chairman's statements and the Management Discussion and Analysis. It covers even Corporate Governance and Sustainability reports. I also look at market research reports, trade journals, and government reports.

Techniques used here include the various MBA type of analysis. Examples are the SWOT analysis, Porter 5 Forces, PESTLE Analysis, Value-Chain, and Ansoff-Matrix.

Chart 20: Company analysis

Given that a company analysis can vary in terms of depth and breadth, how do you decide what is enough?

Before you perform any analysis, you have first to figure out the purpose of the analysis. Analyzing companies for investments is different from analyzing them to determine their creditworthiness.

Analyzing companies for takeover also looks at different things. It also differs if you are an insider trying to figure out the business direction of the company.

In the context of value investing, you are trying to determine the prospects of the company to determine its intrinsic value. The focus is not on what the company had achieved but rather on what it will achieve.

You should not be surprised by this perspective. When you value a company, you are looking at its future earnings. An assessment of its prospects will go a long way to establishing its future earnings.

Chart 21: My fundamental analysis approach

My approach

I have 2 decades of experience running public companies. These companies produce 5 years plan which involves projecting the business performances over the next 5 years. I would say that I have been involved in developing several 5 years plans in several sectors.

Despite the experience and knowledge, it is very challenging to forecast business performance. When I look back at the actual results and compare them against the various 5 years projections, the track record is nothing to shout about.

I would say that the best was achieving about 70 % to 80 % of the next 1 to 2 years’ forecast. This is because there are many factors affecting performance such as:

Competitors' actions.

Uncertainty in the company product development timeline and the market reception of the new products.

Changes in government policies and unforeseen economic situations.

The list could go on. The reality is that I have doubts about the accuracy of any forecast beyond the next 2 to 3 years.

The worst part is that these projections were for established businesses. They were not start-ups.

Management as insiders have problems forecasting the company’s performance. What makes you think that an outsider would be able to do better?

That is why it is not realistic to have financial models that extrapolated business performance decades into the future.

Don’t be too clever

Because of my experiences, when it comes to company analysis and valuation, I try not to be too clever.

Rather I frame my analysis and the corresponding valuation in the following context:

I know the historical performance. The depth and breadth of the analysis will determine the accuracy of the assessment as an outsider.

I use the historical performance as the base. I then judge the business prospects relative to the historical performance. I categorize the future performance into 3 - same, better, or worse than the past.

The focus of the company analysis is the future. You are trying to understand the prospects and it is easier to do this in a relative sense.

This presupposes that you have analyzed the current and/or historical performance. It is much easier to analyze the current and historical situation because all the data are available.

Once you have a bearing on the current situation, it is much easier to assess the future relatively.

In analyzing the current/historical performance, I look at several areas:

Operations. I focus on profitability and growth.

Capital allocation. The focus is on those elements that impact shareholders' value creation. This covers reinvestments, dividends, and capital structure.

Financial strengths. This impacts both financial risks and the cost of funds which in turn affects the valuation.

Market potential. I looked at projected industry growth, whether it is in a sunset sector or the likelihood of the business being disrupted.

Management. Comparing the company's performance with its peers will provide a good picture of how well management performed. I also look at the continuity of staff.

The real challenge is how you decide whether the historical performance is good, bad, or average.

One way is to compare it with peers on several metrics - returns, growth, and market share.

For a more objective measure, I compared the returns with the cost of funds. In a competitive environment, returns would be equal to the cost of funds. Poor performance is when the returns are lower than the cost of funds. The best is for returns to exceed the cost of funds.

If the company has laid out some business plans or directions, I also compared its performance relative to the plans.

Chart 22: Focus on desk research

Scuttlebutt

Scuttlebutt is a term associated with Fisher. He referred to this as fieldwork to gather information about the company.

The goal of the scuttlebutt approach is to get a better understanding of a particular industry/company beyond desk research.

If you are already knowledgeable eg you spent many decades working in the industry, then the scuttlebutt may not add any value.

For an individual investor, I would think that your first step is to read the past decade of the company’s annual reports. And if you are not familiar with the industry, there are lots of info that you can get online.

I am sure this would be a more cost and time-effective way to get a good understanding than the scuttlebutt approach involving fieldwork.

Think in terms of the cost-benefit. Besides, unless you are a trained investigator, you may not be seeing the correct things with fieldwork.

The moral of the story - you are better off with desk research as an individual investor.

Link to valuation

The rationale of my approach to company analysis applies to valuation.

I know with certainty what has transpired. If I value the company based on its historical performance, I am very certain that it is a realistic picture of its historical value.

But for investing, we are looking at the prospects. I believe that if I have a realistic value of this past, I can use this to judge the future value.

I can determine based on my company analysis whether:

The future is better and correspondingly, the future value is better than the historical value.

If the future performance is expected to be similar, then it is safe to assume that the future value would be the same as the historical value.

If the future is worse, then you can expect a lower value for the future.

Chart 23: What to analyze

What to analyze

I have been involved at the senior management level in running companies. I have also done a few hundred analyses and valuations over the past 2 decades.

I realized that there is not much difference in analyzing the business in the context of running it compared to investment analyses.

But, the focus is different. When investing, you are trying to formulate your investment thesis. You want the outlook of the business and its valuation assumptions to be realistic.

The basic steps involved in a company analysis can be summarized as:

Identifying the company and industry’s economic characteristics.

Identifying the products and/or services.

Assessing management.

Understanding the risks and concerns of the company.

Accordingly, I frame my analysis to answer the following:

Where is it now?

How did it get here?

How does it make money?

Where is it heading?

Financial statement analysis

The investment industry is today very competitive. Many platforms provide both financial statements and standard analyses of companies. These typically included liquidity, profitability, activity, leverage, and DuPont ratios.

Many investment sites provide detailed descriptions of the use of each of these ratios. They would do a much better job than I would so please refer to them if you are not familiar with these ratios. Investopedia is a good place to start.

For my financial statement analysis, I refer to the following sources (in alphabetical order). You can use them or subscribe to other services.

Finbox

Macrotrends

TIKR.com

Yahoo Finance

Management

While knowing the importance of management in driving the business, the challenge is how to evaluate them. This is because you are not able to meet with them as a retail investor.

I try to get a picture of management by looking at the following;

Are they owner-managers?

How long have they been with the company?

How have they performed relative to their peers?

How have they allocated capital?

The goal is to ensure that management does not do things that benefit them rather than the company or shareholders. Examples of red flags are giving themselves bonuses even though the company is making a loss, or using company assets for their benefits.

Secondly, business performance needs a long-term perspective. You do not want management to forgo investments that only show results after several years.

How can you achieve this?

The best way is for the major shareholders to be part of management. This is common in family-controlled companies.

The second is to tie performance bonuses to long-term returns on capital with clawbacks for losses. Performance payment should be made years later and even after the person has retired to send the message that the company wants long-term results.

Risk

When it comes to risk, my analyses and valuation are based on a long-term view of the business. I try to identify and assess those factors that will affect the long-term prospects of the business. You can consider these as strategic risks.

My view is that as a minority shareholder, you are not management. Hence you leave all the operational and other short-term risks to management to resolve. You focus on those risks that will change the nature of the business.

I cover risks in more detail in other articles. Refer to

How to mitigate risk when value investing.

The best way to reduce investment risk.

At this stage, remember that looking at the business risk is only one component of the risks you face in investing.

Valuation

There are 3 general valuation approaches.

Relative valuation.

Asset-based valuation.

Earnings-based valuation.

The simple way to understand stock valuation is to use the analogy of how houses are valued. Refer to the chart below.

Chart 24: Valuation analogy

When it comes to determining the fundamental value of a company, you are looking at business prospects. Many would rely on either asset-based or earnings-based methods as they reflect the business prospects.

But from the business prospects’ angle, the relative valuation may not always show a realistic picture. Imagine a situation where the prospects for a sector are bad. But since you are comparing with the sector, a company may do well relative to the sector. Relative valuation will show that this is a good stock when in reality the prospects are dim.

But many people use relative valuation because it seemed so easy to value companies with this approach.

Relative valuation

If you are thinking of selling your house, one way to get the value of the property is to look for the comparable value of houses in the neighborhood. You might scale it to account for some of the differences in the properties.

For example, if your neighbour’s house is worth $ X on 2,000 sq ft of land, you may conclude that since your house is on 3,000 sq ft of land, it is worth $ 1.5 X.

When it comes to valuing companies, there are several common bases for comparison such as Earnings, Book Value, or Revenue. And a common way to account for the different sizes of the companies is to consider the metrics on a per-share basis.

Once you have the Earnings or Book Value per share, you then compare it with its market price. You then have for example the Price to Earnings ratio commonly known as the PE multiple. You can also have the Price Book Value ratio or the PBV multiple. You can imagine having various types of multiples such as the Price to Sales or Price to Cash Flow.

How then do you determine whether the stock is cheap or expensive? There are 2 common approaches:

Compare it with the historical multiples of the company.

Compare it with the multiples of comparable companies.

Chart 25: Three Valuation Methods

Asset-based valuation

This is valuing your house based on what it cost to buy the land and build the house with an adjustment for loss in usage or depreciation. You might use the historical cost to serve as the floor value or you might use the current cost.

In the context of valuing your house, this is referred to as the cost approach. According to Investopedia, this is a method where the price for a property is equal to the cost to build an equivalent building. In the cost approach, the property's value is equal to the cost of land, plus the total costs of construction, less depreciation. It yields the most accurate market value for when a property is new than through alternative methods.

For example, if the market value of the land is RM 500,000 and the cost to construct a duplicate of the house is RM 150,000, the total cost is then RM 650,000. If the house is 10 years old, you would then have to deduct an amount for depreciation. Let’s say this is RM 50,000. Then the value of your house based on the cost method is RM 600,000.

There are several ways to determine the value of companies when using the Asset-based approach. For example, we could use the Book Value, the Reproduction Value, and even the Revised Net Asset Value (RNAV).

Asset-based valuation focuses on the value of the company’s assets. In its most basic form, the Asset Value is equal to the company’s Book Value or shareholders’ Equity. The Asset Value is obtained by subtracting liabilities from assets.

The PBV multiple then gives a simple way to assess whether a stock is trading below its intrinsic value. If you have a situation where the PBV multiple is less than 1, you can conclude that the stock is cheap relative to its intrinsic value.

Earnings-based valuation

When valuing properties that are generating rental income, valuers use the income approach. This is sometimes referred to as the income capitalization approach.

According to Investopedia, the income approach estimates the value of a property by taking the net operating income of the rent collected and dividing it by the capitalization rate.

For example, if the annual rental for a house is RM 45,000 but you have to spend about RM 5,000 per year on assessment, quit rent, and repairs, then the annual net income is RM 40,000. If the capitalization rate is 8 %, the value of the house is then RM 40,000 / 0.08 = RM 500,000.

The income approach for real estate valuation is akin to the discounted cash flow (DCF) for valuing companies. The capitalization rate is similar to the discount rate used in the DCF method.

For valuing companies, the variables to consider are then what to use as the cash flows, the discount rate, and how to account for the life of the business.

There are two options when using Earnings-based approaches. The first is to ignore growth and determine what is known as the Earnings Power Value (EPV). The other way is to incorporate growth into the projections to determine the Earnings Value with growth.

There are of course many valuation models. For this article, I will cover 2 simple ones assuming that there is no growth.

EPV = Book Value X (ROE / Discount rate). Note that this formula takes into account the Book Value as well as the returns generated.

EPV = PAT / Discount rate. This model looks at earnings.

There are then two issues to consider. What to use as for the numerator (ie ROE or PAT as the case may be) and the discount rate. The parameters used will affect the value.

As for the discount rate, it is meant to account for the time value of money as well as the risks associated with the cash flows. I will use the cost of equity as the discount rate as this represents the returns that investors expect.

To then determine whether the stock is cheap I compared the price with the computed intrinsic value.

Chart 26: Earnings-based valuation

Margin of safety

There are several ways to estimate the intrinsic value of a company. All valuations are based on assumptions and the different methods will result in different values because of these. That is why valuation is considered both an art and a science. The values are imprecise estimates.

To get around these “imprecise results”, many fundamental investors adopt the margin of safety concept. Instead of using the full computed value, they will reduce the computed value by a margin of safety. 30 % is commonly used.

In practice, this meant that if the computed value is RM 10 per share, you would consider the intrinsic value to be RM 7 per share. In other words, you would only consider buying the stock if the market price is lower than RM 7 per share. If the market price is RM 8 per share, you would not consider this cheap.

The other way around the “impreciseness” is not to rely on one valuation method, but to use a variety of approaches. The goal is for all the computed values to be pointing in the same margin of safety direction. This is following Warren Buffett’s famous saying:

“It is better to be approximately right than precisely wrong.”

If you want to know more about valuation refer to the following articles:

The Basics Of Valuation - Picking out Value Traps.

How to overcome issues when valuing cyclical companies.

Focusing on the assumptions of the perpetual growth model.

How to value high-growth companies.

Value investment resources

There are tons of material on the web. It is like going to school. There are lots of textbooks on the same subject for a particular school level. This gets worst the higher up the education level you go.

But the schools don’t make you buy all of them. There is a booklist that specifies what you ought to read.

Along the same lines, I have narrowed down the resource list for each level to the extent that for some sites I list specific articles, podcasts, or videos.

The analogy is that you don’t read all the books in the library.

For each level, I have attempted to narrow the choices to the top 5 for each of the media so that you can be focused on getting the appropriate background knowledge.

I would expect you to go through all the recommended material in the top 5 lists.

Of course, not all at once. Maybe one or two articles, podcasts, or videos a day.

I would suggest that for each medium, you start from the top of the respective list. However, you should cover the reading material, podcasts, and videos for each level concurrently as they can help to reinforce the learning.

How did I select my list?

Firstly, I am recommending those that I have read, listened or watched over the past 20 years.

Then if there are not sufficient sites to fill up the respective resource list, I did a Google search.

For each search criteria, I run through what Google has identified.

I don’t select them based on Google page ranking. Rather I try to identify those that complement my historical lists.

For transparency, there are annotations in the resource list on whether these were materials I used or found through Google search.

In this post, I have provided the URLs for Foundation and Intermediate levels. Links for the Advanced level are provided in Part 3 of this series.

URLs to value investment resources

Foundation

No	Site	Guide and comments
Reading materials
1	Morningstar Investing Classroom	· You have to sign up (free) and go to Learn · Read all articles under Investing Basics · Read all articles under Stock under Investing Classroom · I found this site after a year of trying to learn about investing and with hindsight, I should have started with this site.
2	Motley Fool	· Read all articles under Investing 101 and Stock Market Basics, both under Investing Basics · There are also podcasts under the above two topics and you should listen to them. · I go to the Motley Fool whenever I want to start learning about a new topic as I find it simple to digest. But the real value is their case studies.
3	The Balance	· Go to Beginner's Guide to Investing in Stocks and read all the articles. · To be transparent I did not use the material here when I was learning. But on looking thru them, I think there are useful for beginners.
4	Yahoo Finance	· Go to Personal Finance, look under Articles and Tutorials read all articles under Stocks and Explainers under Investing. · By the time I found Yahoo Finance, I was already into Level 2 so I skimped through many of the material that I am recommending
5	The Street	· This is a site with many sections so you should go to the specific URL as provided to get to the recommended reading list. Alternatively, is to Google search under “The Street How to Invest in Stocks” etc · Read all articles under the following 2 URL o How to Invest in Stocks, Stock Investing 101, A Beginners Guide to Stock Investing. o How to Invest Your Money and read Stock Market Basics - Stock 101 and Investing Basics - Investing 101 · I watch Cramer more for entertainment and was surprised that his site had some good educational material.
Podcasts
6	Investing for Beginners	Go to Investing Podcast and search for · Investing Basics or Back to Basics and listen to all those relating to investing · Value Investing - there are blogs and podcasts you should read/listen · Investing for Dummies – listen to this · If you don't have an accounting background, the site has good articles on the various finance and accounting terms · When I started, there were really not many investment podcasts so my learning was more from reading materials. But I think podcasts can help as a refresher.
7	Stock Stories	· This is a podcast of case studies of companies · I would start with episode 100 Stock Investing Lessons · Listen to as many case studies as you can · I listen to them to get ideas on where to look for new investments
8	Financial Statement Story	· For those without a finance or accounting background, this is a good podcast about understanding financial statements · Start with Episode 1 and go through all of them as you will need to be able to read the financial statements · I did not go through any finance/accounting material as I was already familiar with them when I started to learn to invest
9	Popcorn Finance	· Go to Episode, under Podcast series, select Investing 101, and listen to all the podcasts here. · This is a site I found through a Google search.
10	Investors Field Guide – Invest Like the Best	· I would start with Episode 51 on Buying Companies With Economic Moats, Pat Dorsey · This podcast applies to all the 3 levels of study. · One of the podcasts I currently listen to regularly.
Videos
11	Smart Investing Trends	· They have 2 videos under the Investing 101 title. Watch both · I found this through a Google search.
12	Business explained	· This is more like an audiobook than a video. · Watch/listen to Business Management 101. · An important aspect of an investment is assessing management. This gives an overview of what management does. · When I started to learn to invest, I was already familiar with management issues.
13	selfLearn-en	· This is another audiobook. · Watch/listen to Business 101. · This is for those without any business background. · I found this through a Google search and I thought it gave a good intro for those without any business background.
14	Cooper Academy	· There are a couple of videos but focus on Warren Buffett: How to Invest for Beginners and Stock Market for Beginners 2020. · I found this through a Google search.
15	Ivy Business School	· Ben Graham Centre for Value Investing. · This a series of value investing presentations by industry players. · Watch all of them. · I still watch this series.

Intermediate

No	Site	Guide and comments
Reading materials
1	Dummies	· This is a good intro to business strategies. · I suggest that you read all the articles under Business Strategy. · There are two interpretations of “Business analysis”. In my context, I refer to understanding the business for investment purposes. The other interpretation is in software system development where you are determining the business needs in terms of the processes. Skip all the articles relating to this latter definition. · I have read several “Dummies” books over the years and found them to be a good way to start learning about a new topic.
2	Centre for Learning and Performance Technologies	· This contains a list of websites for learning all aspects of the business. · I am recommending that you go to the various business and investing simulation sites and play those games as part of the case learning experience eg BricksorClicks, Energee Incorporated, How the market works. · I used to be the Director of Studies of a renowned MBA programme and I understand the value of business games and simulation.
3	Value Spreadsheet	· This is a blog with articles, podcasts, and videos about value investing. · It is a good intro to value investing and I would recommend that you go through all the material (blogs, podcasts, and videos) that is available for free. · I found this through Google search and I think it is very comprehensive.
4	Fundamental Finance Playbook	· The site has articles about investing basics and some case studies, and investors' histories. · You should go through all of them. · I found this on Google search. I have read lots of investing books and I thought this website give a good intro.
5	Merger and Inquisitions	· This is a site with articles and videos. · Focus on valuation and modeling videos. · At some stage, you will have to start building your financial models. This site gives you the background info and practice in model building. · I am a numerical person so working with modeling using spreadsheets was not something unusual.
Podcasts
6	Giovanni Rigters	· This is actually an audiobook on Stock Market Investing for Beginners & Dummies. · I found this through a Google search.
7	Value Investing in your Car	· This has a series of short podcasts on value investing topics. · Start with this episode on 6 Skills You MUST Know Or Learn To Make Money. · Listen to as much as possible. · I found this on a Google search and would have loved to have had this when I started to learn about investing.
8	Inside the Strategy Room	· This is a series of talks by McKinsey partners and executives on strategies. · This will give you insights when analyzing a business. · Start with the episode on What sets the world’s best CEOs apart as assessing management is an important aspect of your analysis · Listen to as much as possible. You want to understand strategy from the investor’s perspective. · I have a consulting background so I did not have to learn this skill.
9	Motley Fool – Industry Focus	· Motley Fool analysis of specific industries · You will need an understanding of the industry in which a company operates as part of the business analysis · I suggest that you listen to this as general knowledge and when you analyze a company go and look for the specific industry to listen to · One of my favorite sites for industry knowledge.
10	Strategy Skills	· This podcast is about the skills and analysis required by McKinsey and BCG consultants. · I think it would help you analyze companies. · There are 2 categories in the podcast – case studies and consulting skills. Focus on the case studies. · But start with episode 91 on corporate strategy. · I was lucky to be working at the C suite level when I started to learn about investing so I focussed my time on the valuation aspects.
Videos
11	Big Think	· Everything You Need to Know About Finance and Investing in Under an Hour by William Ackman. · A good intro for those without any finance or investing background. · I found this years after I passed Level 2. I would have loved to have started with this.
12	Valuation by Damodaran	· These are an intro series without the quantitative aspect of valuation and you should watch all of them. · I only found these videos after I have read his book. The best is to watch the videos first.
13	Kase Learning, Empire Financial Research	· Kase Learning is created by value investor Whitney Tilson and you should watch the Introduction to Value Investing episode. · For those without a finance or accounting background, you should also watch the Understanding Financial Statements episode. · I first saw Whitney in one of the value investment seminar’s videos and have been following him since · I have also listed Kase Learning for the Advanced Level as I think it is worth following him for everything on his site.
14	Texas Lutheran University	· The University has a series of investment talks. · You should track and watch all of them. Start by watching the Pat Dorsey - Investment Strategies. · I still follow these talks.
15	Tutor2U	· Business Models and Theories. · This site has short (generally < 15 minutes) videos on various business concepts. · For those without any business background, you should watch all of them. · I found this through a Google search and think that it gives a good summary of business concepts.

End of Part of 2 of 3

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