The Intelligent Investor on How to Pick Stocks [3 Winning Strategies]


I’m breaking down the most valuable book
in investing, from the guy that taught Warren Buffett how to invest, to reveal three stock
picking strategies that really work. By the end of this video, you’ll have those
three ways to pick stocks from the intelligent investor, why they work and how to put them
in action. We’re talking how to pick stocks today on
Let’s Talk Money. Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s talk money. Joseph Hogue with the Let’s Talk Money channel
here on YouTube. I want to send a special shout out to everyone
in the community, thank you for taking a little of your time to be here today. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. Today’s video is a great one, a review of
one the most best investing books ever written. In fact, Warren Buffett learned from the author
and said exactly that, that it is by far the best book on investing ever written. We’re talking about The Intelligent Investor
by Benjamin Graham. Graham is credited as the father of value
investing, using fundamental analysis to value stocks. He also pushed for the creation of the Chartered
Financial Analyst designation of which I’m a charterholder. Buffett picked up the book in 1949 and then
studied under Graham at Columbia Business School in 1951. The ideas in this book have guided his investing
strategy ever since and has helped him nearly double the return of the stock market with
his Berkshire portfolio. So these three stock picking strategies I’ll
be talking about come straight from the book. I’ve used these strategies working for wealth
managers and as an equity analyst. I also use them to pick stocks for my own
portfolio. Before we get to those three strategies, I
want to share two tests Graham points out for any stock picking strategy. These are two questions you need to ask for
any strategy you use. First, does the strategy make sense rationally? There should be some fundamental reason why
the investment will succeed, usually some advantage the company has against competitors. Second here, is the strategy different and
not overly used by the rest of the market? If everyone piles into the same stocks by
using a particular strategy, then the price is going to be bid up and eat away any potential
profit. So we’ll be asking each of these questions
with each of these three strategies and walking you through how to get started and our first
is investing as the contrarian in large, unpopular companies. A contrarian investor is someone betting against
the prevailing direction of the market or in a particular stock. If a stock is being beaten down and most are
pessimistic on the outlook, the contrarian might find a reason to be bullish and buy
the shares. Now this doesn’t mean a contrarian investor
just jumps into any stock that other investors hate. You still have to have that fundamental, rational
reason for investing. That list of unloved stocks just gives you
a narrower list from which to start looking for good stocks to buy. The reason he suggests sticking with large
companies here is because those are the ones with the financial flexibility to survive
a year or more of poor investor sentiment. You can invest in these companies and trust
that good assets and a strong brand can rebound eventually. When the company turns around, not only will
profits push the shares higher but investors will rush back into the stock and drive the
price even higher still. Graham doesn’t offer many clear signals
for when to start looking at a stock as a contrarian investment. He talks about following the price-earnings
ratio but doesn’t go into specifics. The investing website Morningstar provides
some helpful information on the current P/E and five-year average P/E of each stock for
comparison. Go to a stock listing, we’ll use Microsoft
here, and click the ‘Valuation’ tab for comparisons on different valuation measures. You’ll find here the current price-earnings
ratio as well as the five-year average and the average for stocks in the company’s
index. There is a warning here when it comes to playing
contrarian as a stock-picking strategy. Some of the largest and strongest companies
have made fools of investors. BlackBerry Limited, formerly Research in Motion,
once ruled as the undisputed leader in mobile phones. Shares reached an adjusted $138 each in 2008
before starting a painful descent as Apple chipped away at its market control. Contrarian investors were there all the way
saying Blackberry could reinvent itself. More than a decade later, the stock is down
over 90% has changed its name and is unlikely to ever reach old highs. There are two rules you can use to play the
contrarian investor and be successful. First is just go back to that reason for investing
in the company through careful analysis of the business. This means looking at the financials and at
the competitive position of the company. Second is never chase a stock too far. Buy once and then have a couple of pre-determined
prices you’ll buy more if the price falls further but never hold more than 5% of your
portfolio in a single stock. It’s just too easy to keep buying in, hoping
that the stock will eventually rebound and pretty soon you’ve got half your wealth
in this company. Graham’s next stock-picking strategy is
to look for ‘bargain’ stocks. These are stocks trading at prices well under
some measure of fair value. He’s again light on details but does talk
about using two ways to find a company’s true value. First is called fundamental analysis and this
is really the backbone of investing, looking at the financial statements and the qualitative
side of the company to come to a fair value. He also suggests M&A analysis and this is
where a lot of my experience is working with venture capital firms. In mergers and acquisition analysis, you’re
looking at what other companies are paying for similar companies to your target. For example, here’s part of an analysis
I did for investors in 2016 for startup investors on an investment in Pinterest. Even though Pinterest was a private company,
I could look at public acquisitions to value the social media site. So I took seven social media acquisitions
and found price multiples on revenue and users. Then I could use the averages against Pinterest
numbers to find a fair value for the company. Now Graham doesn’t say at what point you
should buy a stock once you’ve estimated a fair value. He does say it’s hard to go wrong buying
something for a 50% discount to fair value…and yeah, I’d have to agree there, but it’s
not often you’re going to find shares for half off what they should be worth. He does point out one good signal though it’s
also extremely rare. This is when a company’s stock trades for
less than its current assets minus the liabilities, something often referred to as the net current
asset value. For this we go to the balance sheet of any
publicly-traded company. The current assets include cash, inventory
and sales booked but not collected on. These are all fairly liquid and assured so
this is like money in the bank for the company. Liabilities are the sum of the company’s
debts and other obligations like taxes and wages payable. In this example we see that ClearOne has current
assets of $26 million and total liabilities of only $6 million, for a net current asset
value of $20 million. Now this is already a good sign that a company’s
current assets are more than it’s liabilities but then we look at the market capitalization
of the shares or how much the company is valued at in the market. Here we see that the company is trading for
$11.6 million so indeed less than that net current asset value. Again, this net current asset value measure
shouldn’t be your only reason to buy a stock. It’s another qualifier you can use when
you find a company that has a good business model, a competitive advantage over peers
and some solid financials. Graham’s last stock picking strategy we’ll
look at are special situations. This is going to include companies that might
be acquisition targets, bonds of bankrupt companies, monopoly breakups like those in
utilities and telecom and companies hit with lawsuits. There are armies of analysts that focus specifically
on one of these four stock-picking strategies. All four can help you finds some great investments
but there is a lot of research involved. For acquisition targets, you need to be able
to see the fit between two companies and whether a deal can even happen against the potential
for regulatory oversight. Often when one deal is announced, all the
stocks in the industry will move higher on the idea that it will start a trend in M&A
activity. I would avoid bonds of bankrupting companies. This is a whole different universe of investing. You run the risk that the company isn’t
able to restructure and pays little or nothing to bondholders. Monopoly breakups are rare these days as most
sectors have been privatized and deregulated. You could look for companies spinning off
different segments into new shares but this means researching the benefit to each side
being able to focus on one specific part of the business. Investing in companies after the stock has
fallen due to an announced lawsuit is probably the easiest strategy of the four here but
by no means easy if you do it right. Rather than just jump in to every lawsuit
target, you have to have a good reason to believe that the lawsuit is without merit
or that the market has overestimated the consequences. One point here is that just because the book
presents these three strategies separately doesn’t mean you can’t use them together
as one inclusive way to find great stocks. You can use that contrarian approach to find
stocks beaten down by investors, maybe because of a lawsuit, and then look at the financials
to find those deep discount stocks to fair value. Understand that this is just one of the chapters
in Benjamin Graham’s The Intelligent Investor so I’d highly recommend picking up the copy
to get everything he’s talking about. I’ll leave a link in the video description
below to get the book on Amazon. It’s an amazing investing book and really
going to help put these strategies in perspective. We’re here Mondays, Wednesdays and Fridays
with the best videos on beating debt, making more money and making your money work for
you. If you’ve got a question about money, just
scroll down and ask it in the comments and we’ll answer it in a video.

15 Replies to “The Intelligent Investor on How to Pick Stocks [3 Winning Strategies]”

  1. Must Watch 😲 This 2019 dividend portfolio is at an 18% return, double the stock market return, and going higher! Check out the March update here https://youtu.be/WHaKQW6PAtk

  2. I agree. That is a great book! So many stock investors have mentioned that book on numerous occasions.

  3. The intelligent investor has to be one of the greatest of all times! Common sense investing is also a great read. 📕

  4. Thank-you for an overview of the strategies. I reread this book every year and with more experience I gain new insights from it. The concepts are timeless, but connecting them with actual metrics and analytical processes takes practice and reflection. Perhaps, someday, I can start to understand Security Analysis. Another book I revisit often is Block's Investing in REITs.

  5. The intelligent investor was so important to me I made it the first series I covered. Lots to learn which was covered in the video, great job!

  6. Another information again, Joseph. Over the next few days going to re watch the video as to write down the knowledge shared. I kept on thinking FB when watching this video as I bought a lot of share when it dropped to approx $141.00/share. Fear did not change the Intrinsic of the company of $208.00.

  7. Better buy the same shares in pieces ( not all at once ) and sell them parts after parts ( not all at once ) because the market can not be timed . Leave some cash to buy another shares of the same companies in case the shares drop further to lower average buying prices …

  8. Hi, new subscriber here, loving your videos. I’m in high school and have got $1500 saved. any tips or ideas for a novice like myself? Thanks man

  9. Are you a Marine? Thank you for your service, shipmate.
    New subscriber here. I’ve seen about 10 videos so far and looking forward to digging further into your channel. I wonder if you have an opinion of Citizens Financial Group (CFG). I thought they had a good solid report this week although it’s not a smoking hot rocket to the moon. * Citizens Financial Group's net debt is 76% of its market cap.
    I think it is a good company with a fair price. The share price is falling on the latest earnings report and that confuses me. More analysts have recommended a BUY up from HOLD and the company is growing earnings. No insider trading to be concerned with and nothing in the news. To my pea brain, this looks like a buying opportunity. Is the %76 debt to cap ratio dragging the price down? Is buying more shares throwing good money after bad?
    If you have any opinions about this I’d be very interested.

Leave a Reply

Your email address will not be published. Required fields are marked *