There are countless strategies to consider when investing in stocks. Personally, I follow a value investing approach. This means I focus on identifying great companies and investing in them when they are available at a good price based on their intrinsic value. Rather than delving into the entire history of value investing, I’ll share the key aspects of my approach, which you can use as a guideline when reading my blog.

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My Inspiration

I draw much of my inspiration from Phil Town’s Rule #1 Investing. His books and tools have shaped my understanding of how to evaluate companies. If you’re interested in diving deeper, I highly recommend exploring his work.

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Key Concepts

When you read my blog posts, you’ll notice I refer to terms like "moats" and various financial metrics. Here’s a brief overview of these concepts:

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Moats

A moat represents a company’s competitive advantage that protects it from competitors. There are several types:

1. Brand Moat: The trust and loyalty associated with a company’s brand (e.g., Coca-Cola).

2. Secret Moat: Patents or proprietary technologies that shield a company.

3. Toll Moat: Exclusive control over a market or infrastructure (e.g., utility companies).

4. Switching Moat: Products or services that are so integral to consumers that switching would be inconvenient.

5. Price Moat: The ability to consistently offer products at a lower cost than competitors.

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Key Metrics

Here are the main metrics I evaluate when valuing a company:

1. Return on Invested Capital (ROIC): A strong company should have an ROIC of over 10% on average over the past 10 years.

2. Equity Growth Rate: This measures how consistently a company grows its equity (book value + dividends). Ideally, it should exceed 10% annually, with minimal volatility.

3. Free Cash Flow Metrics: Free cash flow is the cash left after a company covers its operating expenses and investments. I look at:

   • Levered Free Cash Flow Margin

   • Free Cash Flow Yield (free cash flow relative to market value)

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Management Assessment

Great numbers mean little without great management. While there aren’t metrics for this, I look for CEOs who:

• Prioritize long-term value over short-term popularity.

• Make decisions that benefit shareholders.

• Align their incentives with the company’s success.

For deeper insights into exceptional management, I recommend William Thorndike’s The Outsiders.

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Valuation Methods​​

Once I identify a company worth investing in, the next step is determining the right price. I use three methods:

1. Fair Value with Margin of Safety:

   • Calculate the company’s fair value (sticker price) and aim to buy it at 50% of that value for a margin of safety.

   • Formula:

     • Future Stock Price = (Estimated Future EPS Growth Rate × Estimated Future P/E Ratio) ÷ 4 ÷ 2.

2. Ten Cap:

   • This is the annual return ("owner earnings") a company generates relative to its price.

   • Formula:
     (NetIncome−MaintenanceCapEx+IncomeTax)÷OutstandingShares×10(Net Income - Maintenance CapEx + Income Tax) ÷ Outstanding Shares × 10(NetIncome−MaintenanceCapEx+IncomeTax)÷OutstandingShares×10

3. Payback Time:

   • This calculates how long it takes to recoup your investment through compounded free cash flow growth.

   • Aim for a payback period of 8 years or less.

   • Formula: Multiply each year’s free cash flow by (1 + Growth Rate) for 8 years, then divide the total by outstanding shares.

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Tools for Simplification

If you’d rather not perform these calculations manually, you can use the Tools section of this website, where I’ve created calculators to make the process easier.

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Final Thoughts

This is an overview of the process I use to find, value, and determine the right price for companies. By applying these principles, I aim to invest in companies that offer long-term value and growth potential while minimizing risk. I hope my strategy inspires you to develop your own approach to investing.

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