Seeking Wisdom: Thoughts on Value Investing

by Thomas G Macpherson

If value investing is so successful, why doesn't Wall Street and other investors use it in their investment strategy? In his "Seeking Wisdom", Thomas Macpherson helps investors think about the meaning of value investing and how to apply it. This is not your standard investing book. It will get you thinking differently about your investment approach.

338 pages, Paperback

Published November 13, 2016

Reviews

[Ross · Rating 4 out of 5]

Great distillation of value investing

I enjoyed learning MacPherson’s approach to investing, especially the screens he uses to ensure he only focuses on the businesses with good fundamentals. I think this book is great for folks who are looking for more than just parking their money in index funds.

[David · Rating 4 out of 5]

Good notes and ideas on value investing

[Liquidlasagna · Rating 5 out of 5]

Robert Abbott
Gurufocus

For a more pragmatic approach to risk control, we turn to Thomas Macpherson, a GuruFocus contributor and author of “Seeking Wisdom: Thoughts on Value Investing.” He uses a process he calls “breaking the investment case” to quantitatively assess a company’s risk. As the name suggests, he starts by developing a case for investing in a stock, but then deconstructs it using his own stress tests.

This starts with a series of potential black swan events that reduce revenue. He then applies revenue reductions of 10% to 70%. At some point in that series, the company will transition from surviving to expiring. In his words, it is “getting to zero.” He follows up by doing the same with free cash flow growth estimates, halving them and looking at the impact on valuation, financial strength and so on. After that, he halves it (free cash flow) again.

Macpherson explained, “Why do this? To me it’s a simple – and ruthlessly effective – tool in creating a scenario that tests the financial limits of a potential holding.” His example involved CBOE Holdings [CBOE]. It had been growing its free cash flow by an average of 14.3% annually over the previous five years. What would happen if its cash flow growth dropped to 7.1%? Halve it again to 3.5% and review the impact; would it have enough financial strength to handle such catastrophic events?

He added there is more to breaking an investment case than just the numbers, writing, “breaking an investment thesis is as important as building one. I’ve found that I am far more receptive to data for having taken both sides. Cognitive dissonance is less, ego and bias’ impacts are reduced, and I see the company’s actions in a far different light.”

Theoretically and practically, if I am not mistaken, buying a company at a discounted price should also make it more robust, more able to withstand the rigors of stress testing. The mathematics of the price-sales and price-cash flow ratios should be favorably affected in both cases.

Two gurus, two ways to control risk. For Marks, it involves buying at the right (discounted) price, while for Macpherson, it involves stress testing a company’s revenues and free cash flows. Ultimately, they get to the same place: recognizing and controlling their risks.

[Kurnia Angsana]

Recommended by Nintai Partners