The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments is largely about the first step—finding wonderful businesses with long-term potential. If you can do this, you’ll already be ahead of most investors. Later in the book, I’ll give you some tips on valuing stocks, as well as some guidance on when you want to sell a stock and move on to the next opportunity.
Introductions:
THERE ARE LOTS OF WAYS to make money in the stock market. You can play the Wall Street game, keep a sharp eye on trends, and try to guess which companies will beat earnings estimates each quarter, but you’ll face quite a lot of competition.
You can buy strong stocks with bullish chart patterns or superfast growth, but you’ll run the risk that no buyers will emerge to take the shares off your hands at a higher price. You can buy dirt-cheap stocks with little regard for the quality of the underlying business, but you’ll have to balance the outsize returns in the stocks that bounce back with the losses in those that fade from existence. Or you can simply buy wonderful companies at reasonable prices, and let those companies compound cash over long periods of time.
Surprisingly, there aren’t all that many money managers who follow this strategy, even though it’s the one used by some of the world’s most successful investors. (Warren Buffett is the best-known.) The game plan you need to follow to implement this strategy is simple:
- 1. Identify businesses that can generate above-average profits for many years.
- 2. Wait until the shares of those businesses trade for less than their intrinsic value, and then buy.
- 3. Hold those shares until either the business deteriorates, the shares become overvalued, or you find a better investment. This holding period should be measured in years, not months.
- 4. Repeat as necessary.
Contents:
- The Game Plan
- Economic Moats
- Mistaken Moats
- Intangible Assets
- Switching Costs
- The Network Effect
- Cost Advantages
- The Size Advantage
- Eroding Moats
- Finding Moats
- The Big Boss
- Where the Rubber Meets the Road
- What’s a Moat Worth?
- Tools for Valuation
- When to Sell