The latest stock market bubble has burst. In the sobering-up period, we should examine timeless investment principles that investors forget while irrational exuberance reigns. Valuegrowth investment draws on fundamental investment principles. These are then combined with the insights provided by recent developments in the field of business strategy to provide a cogent investment philosophy.
Both value and growth components are needed for the rational assessment of the worth of a share. Valuegrowth investing describes what the ordinary investor should focus on and then provides tried and trusted evaluation techniques to identify underpriced shares. These techniques draw on experience of the greatest investors of the last 100 years and on modern investment theory and business strategy frameworks. To quote from Buffett again:
An investor needs some general understanding of business economics as
well as the ability to think independently to reach a well-founded positive
conclusion. But the investor does not need brilliance nor blinding insights.
Warren Buffett, Berkshire Hathaway Annual Report, 2001
Too often, investors forget that shares are not just counters in a gambling game. Investment is most intelligent when it is most business-like. To understand the value of a company's shares, you must inquire into the future profitability of the business. This is determined by the competitive structure of its industry, the possession or otherwise of sustainable competitive advantage and the honesty and competence of its managerial team. These are the issues that the investor must address for intelligent investing.
The stock market will present magnificent opportunities for those who know what to look for over the next 10 years. It will also be littered with the same old traps for those unaware of the vital principles for good investing. Those using an intellectually cheap and easy way to fortune will find their path strewn with dangerous temptations. Valuegrowth investing may help investors to step adeptly and to avoid being caught out.
Putting value and growth as one word is intended to signify that the value investment approach is not opposite to, nor inimical to, the growth approach. An investor selecting a share for qualities of value should, as part of the assessment, analyze its growth potential. On the other hand, an investor judging a so-called growth stock will not pay any price, so will look to purchase at a low price relative to its future prospects. It is ironic that it should be Warren Buffett, often regarded as the doyenne of value investors, who some years ago denounced the use of the phrase value investing:
We think the very term "value investing" is redundant.
Warren Buffett, letter to shareholders accompanying the Berkshire Hathaway report for 1992
Valuegrowth investing answers the key question for investors: "What are the crucial elements leading to the successful analysis of shares?" It provides a readily understandable and rational evaluation framework to identify underpriced shares. Valuegrowth investing not only identifies the key factors that an investor should consider in an investment decision, but also provides tools for analyzing what creates those factors. For example, earnings per share is widely considered a crucial factor; what the Valuegrowth analysis framework allows is the identification of the elements that determine the future earnings per share.
The tools and frameworks of modern resource-based strategic analysis enable the investor to gain insight into the average profitability of the firm's industry and the potential of a particular firm to produce rates of return greater than that for the industry as a whole. Its sustainable competitive advantage lifts it head and shoulders above its rivals.
Not only are the fundamental principles behind good investment practice covered, but the book goes the extra step of providing a practical techniques the order investor can use.
To be a successful investor, you have to be a good evaluator of businesses. There are too many so-called investors who occupy their time analyzing the stock market and where the next fad, fashion, or phase will take it; or examine momentum numbers, lines on a chart, or economic forecasts to divine the future. Valuegrowth investors understand the companies in which they buy stocks as living businesses.
Valuegrowth investing also provides defenses, in the form of principles, against the mood-swings of the market and against the superficial, the superfluous, and the temporary.
There are three parts to the Valuegrowth framework:
Release Time by Avoiding Expensive Distractions
Many investors do not have the time to become Valuegrowth investors because they have allocated what time they do have to studying matters of little importance. The newspapers are full of such distractions; for example, GDP and inflation predictions, stock tips, and chart signals. By ignoring all those elements that do not contribute to an understanding of a business and its future owner earnings, the Valuegrowth investor releases time and mental energy.