“If there is one point that you should get from this book, it is, 'Buy only good companies!' Stick with good companies, buy them at reasonable prices, and keep learning. You can indeed invest like a Guru.” --Charlie Tian
Charlie Tian, Ph.D., has become a guru among the gurus. He is both the proprietor and developer of the GuruFocus website and the author of an investing book, which will be reviewed here (Disclosure: I am a paid freelance contributor to GuruFocus; however, I could sell my articles to several other financial sites, so I do not depend on Tian and/or GuruFocus).
His book, “Invest Like a Guru: How to Generate Higher Returns At Reduced Risk With Value Investing,” was published in April 2017. He explains why he wrote the book: “I feel that I have many lessons and much experience to share with my children; I hope that they don't make similar mistakes. Though they may not work in the investing field in the future, I want to guide them in the right direction when managing their own money— which is why I wrote this book.”
Tian began his academic and working life at Peking University in China. During his time there, he earned a doctorate in physics. Then it was emigration to America, where he became a specialist in fiber optics and lasers, first in academia, then in private businesses. It was 1998, when the fiber optic industry was building a stock market bubble.
The author says he got caught up in the frenzy himself, invested heavily in fiber stocks and was hammered when the bubble burst. Picking himself up, he began reading “Beating the Street” and “One Up on Wall Street” by Peter Lynch, the legendary fund manager who had generated average annual returns of 29% for 13 years. He continued to read voraciously, following up Lynch with 40 years worth of annual reports by Warren Buffett (Trades, Portfolio).
In late 2004, Tian first launched the GuruFocus website. Three years later, he quit his day job to dedicate himself to it full time and in succeeding years added staff and new functions. At the time of the book’s publication, early 2017, he reported the site was used by more than a half-million investors monthly, as well as professors and students at more than 100 universities worldwide.
One of the distinguishing features of his website is its emphasis on learning from the gurus, rather than learning the hard way. In his book, Tian says the gurus from whom he learned the most were Lynch, Buffett, Donald Yacktman (Trades, Portfolio) and Howard Marks (Trades, Portfolio):
- From Lynch, he learned the importance of earnings and the relationship between stock prices and earnings. In the wake of reading Lynch, Tian says he realized at least one of the fiber companies in which he had invested, Oplink, had been losing money all along and was expected to lose more in coming years. This stock was almost certain never to do well. Also from Lynch, the most important measure of financial strength is debt level; the lower, the better. And there is Lynch's memorable saying about management: "Go for a business that any idiot can run—because sooner or later any idiot is probably going to be running it."
- Buffett, he says, "completely changed the way I think about business and the philosophy of investing." Because of that, he only looks for great companies, which are companies that have broad and durable moats, low capital investment needs (along with high ROIC) and profitable growth. Those are the characteristics of great companies. These are the characteristics of great prices: less than "intrinsic value," which means less than the discounted cash flow value in coming years. To find such valuations, look for companies that have profitable growth. From Buffett, Tian also learned about the importance of holding a focused portfolio, or sticking to your best ideas, and the importance of holding for the long term.
- Yacktman taught Tian to think of rates of return from stocks (as bonds are evaluated). Beyond that, Yacktman likes businesses built on products that are consumed daily, such as those found in grocery and drug stores (his current portfolio includes names such as Proctor & Gamble (PG, Financial), PepsiCo (PEP, Financial) and Johnson & Johnson (JNJ, Financial)). The guru also embraces management that can allocate capital well. In addition, he sets a hurdle rate for potential purchases. It is based on the "forward rate of return," the average annual rate of return expected in the following seven to 10 years.
- From Marks, Tian learned more about the cyclicality of stocks. He compares the constant swing between undervalued and overvalued to a physical pendulum. Such cycles cannot be avoided because markets are driven by human behavior. For companies, Tian says that means cycles of margin expansion and contraction. Since the end of World War II, the U.S. economy has experienced 11 recessions and almost all set off bull markets. And all eventually recover. Value investors start investing when the market is bearish; the more bearish, the better.
The book has three main thrusts. The first section aims to help readers find companies with potential to deliver higher returns with lower risk. The second explains how to evaluate these companies and the third discusses their valuations as well as general market valuations and returns.
Do not let the significance of that previous paragraph pass you by, especially if you are new to value investing. Tian is offering a map or three-step list for starting, or becoming, a more effective investor:
- Identify quality companies that meet value criteria.
- Assess those companies.
- Put a value on them.
Each of those three steps has substeps, of course, but Tian has given us a starting point and we can visualize where the journey takes us.
To build out on the first step, for example, Tian rhetorically asks “What is a good company?” These are his answers:
- A good company can keep growing value through its operations, and time is its friend thanks to compounding. On the other hand, a mediocre company will erode value over time, so time is its enemy.
- More specifically, growing value, with time on your side, means you can make minor valuation errors and still survive.
- They have strong balance sheets with little or no debt. Tian cites Lynch’s famous saying: "Companies that have no debt can't go bankrupt."
- They will be tax efficient, which is to say if you can hold stocks for the long term, rather than turn them over rapidly, you will contribute to the tax man less frequently.
- Tian often makes a distinction between asset-light and asset-heavy companies. At Moody's Corp. (MC), for example, they can expand by adding a desk. At Apple Inc. (AAPL, Financial) or Alphabet Inc. (GOOG, Financial), they need to invest heavily in software. The result is Moody's has been able to deliver higher returns on invested capital.
Another important theme that flows through the book is Tian’s belief investors are made, not born: “there is no trick to becoming a better investor. You simply need to learn”. To help us learn, he offers many anecdotes, including tales of his own missteps as well as those of Buffett and other investing gurus.
Overall, this is a very useful book for all investors, but especially for value investors. It is well-written and organized, serving up ideas and how-to tips in a methodical fashion.
To get the most out of it, I would recommend an initial quick reading to get the essence of the content, then dive back in to the chapters that most interest you. If you agree with the proposition you can learn to be a better investor, this is an excellent place to start.
And if you agree all your investments should be inexpensive, you can buy the Kindle edition of “Invest Like a Guru: How to Generate Higher Returns At Reduced Risk With Value Investing” at Amazon.com for just $16.99.
Know any other GuruFocus contributors or value investors who have written books that would help other investors? Please let me know in the comments section below or by private message. Thanks in advance!
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
