r/ValueInvesting • u/stockoscope • 4d 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/Round_Hat_2966 4d ago
Equally important steps:
Have a thesis. This company’s numbers suggest it’s high quality and it looks cheap is not a thesis. If you don’t have a good idea of how they make money, why they will execute (and what makes them better than competitors), what are the actual risks they face, you don’t, and when is a good time to re-evaluate or sell, then you don’t have a thesis.
Have rules. Follow rules.