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Charles S. Mizrahi is Managing Partner of CGM Partners LP. He is also Editor of Hidden Values Alert, a monthly newsletter focused on value investing. Mizrahi has more than twenty years of investment experience and is frequently quoted in the press. Many of his articles appear online at www.gurufocus.com as well as on other financial sites.

De la contraportada

"Beginning investors will find all the ABCs of success in Getting Started in Value Investing. Seasoned investors will want to keep it close by as their reference manual. You can't say enough about Charles Mizrahi's strategy of studying companies and buying them at good prices. It pays off handsomely."
?Timothy Vick, Senior Portfolio Manager, The Sanibel Captiva Trust Co., author, How to Pick Stocks Like Warren Buffett

"A marvelous introduction to value investing filled with anecdotes about the subject and the people behind the investment headlines. A delightful and practical read."
?Donald A. Yacktman, Portfolio Manager, The Yacktman Funds, Morningstar Portfolio Manager of the Year-1991

"Charles Mizrahi knows how to take the most boring stocks in the world, dress them up with his strategy, and turn them into stock market super stars."
?James Altucher, author, Trade Like a Hedge Fund, Managing Director, Formula Capital

While there are many ways to make money in today's markets, only one strategy has consistently proven itself over time?value investing.

Now, with Getting Started in Value Investing, author and veteran money manager Charles Mizrahi breaks down this successful strategy so that you can learn how to effectively incorporate it into your own investment activities.

Written in a straightforward and accessible style, Getting Started in Value Investing offers you clear insights on this profitable approach. Step by step, it will:

• Examine the importance of picking businesses that have an enduring competitive advantage

• Discuss the difference between price and value, and how to determine exactly what to pay for a stock

• Provide non-technical explanations of a company's financial statements and how to read them

Investing isn't hard, but it does take some work. With Getting Started in Value Investing as your guide, you'll quickly discover how to cut through the noise surrounding today's markets and enhance the overall performance of your portfolio.

De la solapa interior

Beginning investors will find all the ABCs of success in Getting Started in Value Investing. Seasoned investors will want to keep it close by as their reference manual. You can't say enough about Charles Mizrahi's strategy of studying companies and buying them at good prices. It pays off handsomely.
--Timothy Vick, Senior Portfolio Manager, The Sanibel Captiva Trust Co., author, How to Pick Stocks Like Warren Buffett

A marvelous introduction to value investing filled with anecdotes about the subject and the people behind the investment headlines. A delightful and practical read.
--Donald A. Yacktman, Portfolio Manager, The Yacktman Funds, Morningstar Portfolio Manager of the Year-1991

Charles Mizrahi knows how to take the most boring stocks in the world, dress them up with his strategy, and turn them into stock market super stars.
--James Altucher, author, Trade Like a Hedge Fund, Managing Director, Formula Capital

While there are many ways to make money in today's markets, only one strategy has consistently proven itself over time--value investing.

Now, with Getting Started in Value Investing, author and veteran money manager Charles Mizrahi breaks down this successful strategy so that you can learn how to effectively incorporate it into your own investment activities.

Written in a straightforward and accessible style, Getting Started in Value Investing offers you clear insights on this profitable approach. Step by step, it will:

• Examine the importance of picking businesses that have an enduring competitive advantage

• Discuss the difference between price and value, and how to determine exactly what to pay for a stock

• Provide non-technical explanations of a company's financial statements and how to read them

Investing isn't hard, but it does take some work. With Getting Started in Value Investing as your guide, you'll quickly discover how to cut through the noise surrounding today's markets and enhance the overall performance of your portfolio.

Fragmento. © Reproducción autorizada. Todos los derechos reservados.

Getting Started In Value Investing

John Wiley & Sons

Chapter One

We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children. -Warren Buffett

Whenever I go to a dinner party or social gathering, a friend or acquaintance usually asks my opinion on the economic news flash of the day. For example, if the media are talking about the DJIA making an all-time high or an unemployment report coming in better than expected, people who know that I manage a limited partnership and write an investment newsletter want to hear my take on current economic events. I usually respond the same way each time I am asked: "I really don't have a clue how it will affect the stock market or the economy." I'm not trying to brush them off, but I really don't know. In fact, I don't even take those factors into account when making a purchase.

Top-Down Approach vs. Bottom-Up Approach

Because I follow a value investing philosophy, I have the advantage of taking a bottom-up approach, which means identifying investment opportunities one at a time through analysis of financial statements. In contrast, most professional investors take a top-down approach, which carries with it greater risk of being wrong. Let's look at the way the top-down and bottom-up approaches differ, and you decide which approach carries with it a higher degree of uncertainty.

Top-Down Approach

The largest 100 money managers hold $6.8 trillion of stocks or 52 percent of the U.S. stock market's total market capitalization. Eighteen managers each supervise more than $100 billion of U.S. equities, including four managers who each hold some $400 billion or more.

A large percentage of these money managers employ a top-down approach when making an investment in stocks. This involves three steps:

1. Making a prediction about the future.

2. Discerning its effect on the investment.

3. Making the trade.

This approach is a very risky way to go because each step of the way is subject to error. Money managers who take this path are basically making a big picture or macro bet on the future. Once they pass that hurdle, they are faced with interpreting the impact of their decision on the sector, industry, and then company in order to maximize the value of their prediction. If that weren't hard enough, they then have to act quickly before the rest of Wall Street makes the same trade, causing prices to rise and minimizing any profit potential they would have had.

Now consider an example of all the steps that a top-down investor has to get right to make a profitable decision. Table 1.1 shows how a weak U.S. economy has to be called right.

The top-down investor is faced with many unknowns, and also has to play beat the clock. For example, even if the top-down investor is correct on the big-picture prediction, the conclusion from that prediction and the area of investment (i.e., a weak U.S. economy will cause the dollar to decline, making companies that have large foreign-currency exposure show higher earnings because of currency gains), they can still drop the ball and pick the wrong specific investment (bought Coca-Cola instead of IBM) and even lose money on the trade. Then they have to make the correct specific investment (i.e., Coca-Cola, IBM, Pfizer, etc.) ahead of the other thousands of money managers who are all looking at the same big-picture prediction.

When they are buying the specific investment, what kind of margin of safety will they have? They are buying based not on value but on which company, regardless of stock price, will move higher the fastest. And one last hurdle: Top-down investors have to know when the trend has run its course. How much of the recent stock move is already factored into the price? For me, the top down approach is fraught with risks each step of the game and does not offer any margin of safety that would satisfy me.

Bottom-Up Approach

The bottom-up approach used by investors employing a value investing philosophy is much easier to execute and doesn't require making predictions of events that are unknowable. Bottom-up investors look at stocks one at a time and use good, old-fashioned analysis such as reading the company's annual report and SEC Form 10-Ks. After evaluating the company and determining an appropriate price to pay (which includes a margin of safety), they then check the price the stock is trading.

If the stock is currently trading below the price they used to determine the underlying worth of the business, they will buy the stock and wait patiently for it to rise. That's it. In the short term, it really doesn't matter much what the economy, the stock market, or the U.S. dollar will do, as long as the bottom-up investor was able to buy $1 worth of value for 70. In other words, this whole approach can be described as "buy it cheap and forget it."

The hard part for bottom-up investors is the lack of activity; but keep in mind, the market rewards patience. It could take months or even years for the stock market to reward you for your patience. But if you have the correct temperament and are not swayed by the daily gyrations of the stock market, you will be rewarded when the underlying value of the business catches up with the price you paid for the stock.

If you act as a bottom-up investor, the unknown factors are mostly within your control. You only have to be right regarding the valuation of the company at the time you bought the stock. If you take the time to figure out the underlying worth of the business and make sure there is a wide gap between valuation and price (the wider the gap, the greater the margin of safety), you will be able to figure out the potential risk and reward on your investment.

For example, if your analysis concludes that Coca-Cola is worth $50 a share, and the stock is currently trading at $35 per share, or 30 percent lower than the current price, you already know you have the potential to make a 43 percent on your investment. Even if you are wrong on the valuation and it really should have been valued at $45 a share, (or $10 higher than your initial valuation), you can still walk away with a 29 percent return. (Value is $45; you buy it at $35: The difference of $10 is a 29 percent profit.)

The Easier Game

The examples just mentioned make the point and tell you which approach allows you to sleep better at night. When you follow a bottom-up approach, the chance for errors and mistakes along the way will be much lower than the chance of trying to predict the future of the U.S. economy or what inflation will be over the next five years. Legendary fund manager Peter Lynch offered very sound advice about making predictions:

Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested.

It's much easier to stick to what you can know rather than trying to figure out the unknowable.

The biggest problem I see for top-down investors is in determining when the investment no longer makes sense or simply knowing when they are wrong. They also have to speculate on the magnitude of their prediction. If they predict that the U.S. dollar will fall, they then have to predict by how much so they can capitalize on their prediction.

That is something the bottom-up investor doesn't have to waste time worrying about. If the company undergoes new management, or a supplier or sales channel suddenly closes up, the bottom-up investor would then be able to assess and reevaluate the situation. For top-down investors, there is no clear answer; the best they can do is to make a judgment call. Judgment calls made in the heat of the moment are usually wrong. In addition to the logic and simple steps used by a bottom-up investor, I promise you will sleep better at night. And to me, that is worth all the tea in China.

Common Misconceptions about Value Investing

Before we go on, I want to take a moment and share with you five of the most common misconceptions people have about applying a value approach to stock investing. Value investors do not let others make up their mind for them; they absorb the facts and then come to a decision. Independent thinking is a trademark of value investors. Benjamin Graham said: "If you formed a conclusion from the facts and if you know your judgment is sound, act on it-even though others may hesitate or differ. You're neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

1. Much of the information needed to research a stock is too costly, hard to get and difficult to understand. I am not a big fan of any government agency but I do have to take my hat off to the Securities and Exchange Commission (SEC). Many of the SEC statutes are designed to promote full public disclosure and protect investors from fraud. Because of the SEC, there is an enormous amount of information that publicly traded companies need to disclose.

Most if not all of your research can be had by reading a company's annual report. At the end of a company's fiscal year they send out to all shareholders a report informing them how the company did the past year, what they are planning to do, and the challenges the company will face. The letter is written by the chairman of the board or CEO. Once you get past the charts, graphs, and glossy pictures of smiling employees, you find a wealth of financial information tucked away in the back of the report. This is where you can find the real meat and potatoes of how the company is doing.

Many successful investors recommend you read the past four to five years of a company's annual report as part of your research. You will then be able to see if they kept promises made in previous years, admit to mistakes, and have a consistent message. In other words, since you are a shareholder, you are the real owner of the company and the annual report is the company's way of reporting back to you how well they've done over the past year.

Most annual reports are written in a very friendly and relaxed manner and are not difficult to understand. The great part about annual reports is that they are free. All you need to do is call the company and request it or go to their web site and download or read it. A large percentage of your research can be found by just reading the annual reports. You will be amazed at how few investors read them. In addition to calling the company, there are many free sites on the Web that not only have financial data on a company, but with one click you can compare how a company is performing against its competitors. Today, in only a few hours you can learn more about a company from the comfort of your favorite arm chair that only a decade ago would've cost you thousand of dollars and have taken weeks to gather. Thank the SEC and the Internet for helping create a level playing field for investors allowing them to access information for no cost.

2. You can't beat the stock market. Like everything else in life, this statement is both a reality and misconception for different types of investors. If you love hearing hot tips from your doorman who has a son who has a friend who works in the mailroom of ACME Industries, and is certain that they are coming out with a product that will set the world on fire, you don't stand a chance of beating the market. After hearing some analyst from Big Brokerage, Inc. talk up 5 different stocks in fewer than 30 seconds and you can't wait to buy them all, you will have a slim chance of outperforming a money market fund, and you can forget about outperforming the stock market.

If, however, you begin to view stocks as pieces of businesses, purchase quality companies when they are selling for fair prices, ignore the daily gyrations of the stock market, and hold stocks for the long term, then you have a very good chance of beating the market. Fortunes have been made by investors with modest means, who bought quality companies and held on to them for years. Imagine you have invested $1,000 and have divided it equally among the following three companies: Procter & Gamble (makers of Crest toothpaste and dozens of other consumer products), McDonald's (home of the Big Mac), and Pepsico, (maker of Pepsi, Mountain Dew, and other beverage and snack products) on the last day of 1976.

You picked these three companies because they have been in business for years, are market leaders, and you are very familiar with their products. Right after you buy shares in these three companies, you go on a 30-year mission for NASA to explore the planet Saturn and will not be able to change your stock positions or find out how the companies are doing for the next three decades. Upon arriving back on Earth on the last day of 2006, you open up your brokerage statement to find out that your $1,000 is now worth $63,000, easily outperforming the S&P 500 index, which would have grown to only $13,000. You were amply rewarded for investing in companies that you understood and held for the long term, while ignoring the stock market. You can beat the market if you stick to a few of the principles I share with you in this book. See Figure 1.1.

3. Value investing is all about buying stocks trading at low prices. Trying to determine if a stock is selling at a good value based on a single number is a mistake most investors and professionals have in common. That's almost like being asked to determine if someone is over or under weight without ever seeing or knowing anything about them. If I told you that my friend Joe weighs 200 pounds and asked you to tell me if he is over or underweight, you would probably ask me a few questions about him. You might ask his age, height, body frame, occupation, how often he exercises, and so on. If you found out that Joe is six feet tall and plays tight end for the New York Jets, you would say he is underweight (average weight for tight ends 2006 NFL draft: 257 lbs.). On the other hand if I told you Joe plays center field for the Boston Red Sox you might conclude that he is the proper weight for his position.

If you try to buy a stock based on the level of the stock price, most likely you will be buying a lot of terrible companies and you will be missing out on great ones. Berkshire Hathaway Class A (BRKA) shares trade at about $108,000 per share, the most expensive shares traded on U.S. stock exchanges. Yet there are many excellent value investors who are scooping up shares at this price because they determined that the shares are cheap and are really worth between $125,000 and $150,000 per share. According to them, the stock price is not properly valuing the earnings of the company and the stock is trading at a discount to its underlying value.

On the flip side, Bombay Company's (BBA) stock at $1.00 per share may be too high a price for this ailing furniture retailer. Soft sales, terrible earnings, and immense competition might force this company to close its doors as it recently needed to borrow money to pay bills. Simply because it is trading at a low price doesn't make it a value investment. A value investor is never concerned with the price level of a stock. As you have seen, a company can be a great value at $108,000 per share and a terrible value at $1.00. The price of the stock always has to be measured against the worth of the underlying business. It doesn't matter what price the stock is trading for as long as you are getting more in value than what you paid for the stock.

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Excerpted from Getting Started In Value Investingby Charles Mizrahi Copyright © 2008 by Charles Mizrahi . Excerpted by permission.
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