Good Stocks Cheap is authored by Kenneth Jeffrey Marshall. He is a lecturer of value investing at the Stockholm School of Economics in Sweden and Stanford University. Besides that, he also teaches business at the University of California, Berkeley. He splits his time between the United States and Sweden. This book is primarily for people managing their own money. He espouses a model used to vet stock investment ideas from a value investing perspective.
Layout of Good Stocks Cheap
This book is made up of 21 chapters. There is a preface and an introduction too. The chapters are divided into three parts.
Part I is Foundations and it contains four chapters. This part talks about the basics of value investing.
Part II is The Value Investing Model. There are 12 chapters. This part is about the investing model of the author and there are some valuation tools.
Part III is Maintenance. It consists of the last five chapters. This represents the final advice from the author.
Highlights
As Good Stocks Cheap is a value investing book, the bulk of its contents is about fundamental analysis. The author devotes Part II to explain how he filters companies. His value investing model involves three steps: 1) Do I understand it? 2) Is it good? 3) Is it inexpensive?. He discusses about performance metrics and explains his formulae to calculate these metrics. Furthermore, the author gives some real-life examples to show us his process.
Consistent with value investing, the author also emphasizes margin of safety. Buying companies inexpensively both increases return and lowers risk. The author also cautions about making money on what we do not understand as gains have a dangerous way of eclipsing this ignorance.
Cognitive biases cause misjudgement and leads to investing mistakes. There are 18 biases listed in the book. I personally identify with anchoring bias which is benchmarking against an insignificant baseline. For example, buying a stock just because its price drops from a high level or vice versa. Investing mistakes can also be caused by misaction which can be due to impetuosity and weakness. By being aware of misjudgement and misaction, it is hoped that we can reduce our mistakes.
A big dilemma for investors is when to sell the stocks. The author provides some guidance in this respect. According to the author, there are four conditions in which a stock should be sold. These are 1) When price flies past value, 2) When a company thought to be good turns out not to be, 3) In buyouts, or 4) When a clearly better opportunity emerges. He also points out some questionable reasons for selling which are rebalancing, memeriolizing success, and industry compensation.
Conclusion
Although the author has provided a blueprint for value investing in this book, he recognizes that his method may not be applicable everywhere and in every situation. Furthermore, his method may not suit everyone. So, we can select his ideas that appeal to us and apply them in our investing strategy.
Let me end with some quotes from Good Stocks Cheap.
“To the value investor, price says nothing about value. Only fundamental analysis speaks to value.”
“If a business looks bad, consider it no further. There are others more worthy of attention.”
“Instead of insisting that outperformance can happen in the face of lower risk, it says that outperformance happens because of lower risk.”
“The historic price of a stock does not determine the future price of that stock.”
“Good focused equity portfolios outperform diversified equity portfolios over the long term.”
“Thinking in percents encourages habits that work over a lifetime”
Recommended book
If you are interested in Good Stocks Cheap, you may get the book from Kinokuniya Malaysia through the link below*.
*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.
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