- Release Time by Avoiding Expensive Distractions
- The Valuegrowth Model
- Character Traits and Personal Qualities
This chapter is from the book
This chapter is from the book
This chapter is from the book
The Valuegrowth Model
The Valuegrowth model is focused on the underlying business rather than the stock market. You should only invest in a business you understand. The business should have a strong economic franchise, be operated by honest and competent managers, and have financial strength. The analysis of the strength of the franchise, the management, and finances should permit the estimation of owner earnings. The discounted value of all the future owner earnings is the intrinsic value of the firm. If this calculated value is significantly above the current price, there is a margin of safety and the shares should be bought.
There are two other crucial elements for successful Valuegrowth investing. The first is to restrict the size of the portfolio to a mere handful of stocks. To go beyond this would be to invite disaster because you are unlikely to be able to understand and monitor more than a few companies. Also, you would be moving too far down of the diminishing marginal attractiveness curve.
The second is to invest for the very long term. The Valuegrowth investor thus has a different attitude when buying stock than somebody who buys for short-term gain. He will be looking for different attributes, and won't invest unless sure that the company is likely to be dominating its market years from now. Once purchased, he will have a different attitude to that of the investor who is concerned about short-term market vicissitudes. He won't be panicked, and will avoid high transaction costs.