CHAPTER 8Investing in Stocks (II): Opportunities, Valuation, Management


Finding outstanding companies at a reasonable price is no easy job, but with time and patience the gems will gradually begin to surface.

Typically, we are looking for temporary problems which lower their share price to accessible levels. For example, an unfavourable currency movement which temporarily disrupts exports (for example, BMW or Thales were affected by a strong euro). Or digital migration, which can camouflage underlying business growth (Wolters Kluwer). This is a helpful starting point, but there will always be an element of doubt as to whether the fall is justified or not. And this can only be resolved after a major effort to get to the bottom of any issues raised in the analysis.

Our job is to sniff out these companies while minimising the risk of error, meaning it's important to find ways to reach them without calling into question their quality or sustainability. There are various ways of going about this, but initially we should look to work on familiar terrain, within our circle of competence. We may be in a position where we have developed better knowledge than the average investor; for example, if we have a passion for, say, technology or professional experience, such as working as an energy-saving engineer. We should try to capitalise as much as possible on any such advantages. Perhaps we are familiar with a company with a strong position in a new niche, ...

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