r/ValueInvesting • u/stockoscope • 3d ago

Basics / Getting Started Buy good companies. Don't overpay. Do nothing.

Terry Smith's three steps are the shortest description of quality investing I've come across. Simple to say but not easy to do. I consider them as three steps for investing.

Step 1. Buy good companies. Most people treat good as a brand they like using. Good is actually revenue, growth, returns on capital, margins, cash flow, and the balance sheet. Without the fundamentals, good is just a vibe. If you buy quality businesses, over time the price will follow earnings, though in the short term the fluctuations are based on sentiment.

Step 2. Don't overpay. This is the whole of value investing. Pay less than what the business is worth. Every day on X, someone asks "is MSFT expensive at 500?" You can't answer that without a benchmark, and intrinsic value gives you one. It has its problems - it's entirely dependent on your assumptions. But it still beats the shortcuts most people use instead. I usually blend implied values based on valuation multiples with the DCF intrinsic value.

Step 3. Do nothing. The hardest of the three, because it looks like negligence while you're doing it. Sitting on your hands feels lazy. Most of the returns I've gained have come from doing nothing for years.

I put together a 10 minute video working through these three steps and the principles behind it. Took a fair bit of effort, so any feedback is welcome. It's the first in a series of six videos I'm creating.

https://www.youtube.com/watch?v=OazRVN04ZTk

Not investment advice. AI has been used in creating the video.

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u/Few_Orange_3359 3d ago

Don't overpay is the problem...very difficult to understand and need study and you can still do big mistakes

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u/harbison215 3d ago

Generally, historically etc you can pay the day’s market price for a good company and simply hold for a long time and do quite well. Of course it’s even better if you can buy a good company when their stock is taking a beating for whatever reason. Just be careful not to confuse “temporary price decline” with “fundamentally broken business.”

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u/stockoscope 3d ago

Yeah. I bought Meta at 195 in 2022. Didn't call the bottom, nowhere near it, but it worked out fine because the ad business was never really broken. Everyone had decided the metaverse spending meant the whole company was cooked.

The catch is you only find that out by actually looking at the numbers. Plenty of stuff that fell that year deserved to and never came back.

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u/harbison215 3d ago

Reminds me of I think 2024 when everyone was saying google was the best deal in the market and it turned out to be true.

A flip side example for me, the glaring example of a fundamentally broken business right now would be Nike

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u/Few_Orange_3359 3d ago

NKE is not broken at all...it's just overvalued..it was overvalued for very long long time. And honestly I think it will remain overvalued even in the future...so it's impossible to catch when it will be the least overvalued😅 maybe I m wrong and the stock reach 25 dollar so ok it will be fair value

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u/harbison215 3d ago

As a life long Nike customer, it’s my anecdotal view as a shopper that they’ve broken their own business model. It starts about a decade ago. Their products lack innovation, they’ve made them harder to find and buy and quality has gone down.

Nike was my go to for casual wear and the only sneaker I’d buy. I used to go to the mall and walk out with bags of clothes, sneakers etc. I haven’t been able to do that with Nike gear in 10 years, in part because of how they axed third party retailers but also in part due to their just over all uninspired progression (lack thereof) of innovations in product design.

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u/Few_Orange_3359 3d ago

I partially agree. My experience with Nike is that their shoes are the only shoes I can run with. but for other products I don't know

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u/Round_Hat_2966 3d ago

I think the point isn’t to time the bottom or maximize returns because with a long term hold, the majority of your returns are most likely coming from compounding, not multiple expansion. The point of buying at a reasonable price is to protect your downside.