[A Sip of Books] "Invest in Easy-to-Understand Quality Companies Rather Than Leading Firms in Difficult Industries"

Some sentences encapsulate the entire content of the book itself, while others instantly reach the reader's heart, creating a connection with the book. Here, we excerpt and introduce such meaningful sentences from the book. - Editor's note

This book shows how to survive healthily in the ruthless world of investing. Rather than personal success stories, it details the author's worries and trial-and-error experiences as an investor. The author does not invest much in stocks that everyone knows about. He gains returns by preemptively investing before they become famous. His criteria for selecting stocks are simple: the company must have consistently performed well, possess an economic moat, have market dominance, and be unlikely to suffer major failures. It is even better if the company operates mainly in consumer goods. To summarize in one sentence: “Invest in solid companies that are easy to understand rather than leading companies in difficult industries.” He shares the secret to achieving a cumulative return of 963% over 12 years.

More precisely, to invest, you need to verify investment ideas rather than analyze companies. To verify investment ideas, you obviously need to have investment ideas. For example, if you think POSCO’s costs are low thanks to the FINEX process, you must logically explain why that leads to stock price increases. If the FINEX process is gradually applied to all blast furnaces to improve profit margins, or if cost advantages are used to expand steel sales channels, profits will increase. Companies with increasing profits generally see their stock prices rise. Stock prices can be explained as the product of profits and PER, where PER reflects the expectations of market participants. It is hard to know the minds of many market participants, as the saying goes, “You can’t know a person’s heart.” Unless it is an asset class everyone is enthusiastic about, like current metaverse-related stocks or NFTs, assume expectations are constant (for more on this, refer to my book Rich People Buy These Stocks (Wisdom House, 2020)). This is a kind of investment idea. Simply saying “there is a cost advantage, which is one of the economic moats,” or “the FINEX process is excellent technology” is not an investment idea. (pp. 27?28)

If it were now, even if it were not a book directly written by Warren Buffett, I would try to infer his intentions indirectly by reading Berkshire Hathaway’s shareholder letters. Isn’t it the same with the provocative thumbnails that financial YouTubers create to increase views? Alongside questions like “What is your forecast for the composite stock index this year?” and “Is it okay to buy Samsung Electronics now?” a frequent question is “If you had to look at only one investment indicator?” The guests give quick model answers such as “A company with an operating profit margin above 20% is a good company,” or “You should buy when PER is below 7.” Then viewers get caught by those words and wander for months or even years. They wonder, “Why is the stock price falling even though the operating profit margin is above 20%?” or “This company’s PER is over 30, yet the price keeps rising.” There is no easy way. How could answers be found so easily in the subtle and complex world of investing? (p. 55)

Looking carefully before and after the financial crisis, the problem was this: broadly speaking, the damage was caused because true value investing as preached by Warren Buffett was not practiced. If you had invested in companies with excellent business models and sufficient economic moats, stock prices would not have fallen so much, and even if they did, you could have comfortably and happily bought more shares. However, focusing on superficial valuation indicators like PER and PBR led to stock prices falling more sharply as corporate profitability deteriorated during the economic downturn, and fear peaked as doubts about recovery potential arose. (pp. 97?98)

Able | Written by Kim Hyunjun | Wisdom House | 408 pages | 16,800 KRW

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