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Wisdom on Value Investing by Gabriel Wisdom

Posted By Jim On 01/17/2010 @ 12:02 pm In Reviews | 9 Comments

Wisdom on Value Investing by Gabriel Wisdom [3] is based on Wisdom’s professional experience and his Fallen Angels investment strategy, a way to identify good companies that have been punished by the stock market.

Value investing is an investment strategy made popular by Benjamin Graham and brought to the forefront with the successes of Warren Buffett. The idea is that you want to buy a great company at a great price, when it’s been discounted by an emotional stock market.

The book does more than give you a framework for analyzing companies and discusses the important tenets of value investing. Wisdom writes about the ten traits of the world’s most successful value investors, how to tell the difference between a falling vs. a fallen company, establishing your exit strategy and and a clever point called time arbitrage (which he says he learned from Joel Greenblatt’s The Little Book That Beats the Market [4]).

But all those ideas, while valuable, aren’t specifically called out on the cover. I want to know how I can idenfity Fallen Angels and I find that in chapter 10. Wisdom does a detailed job walking you through two stock screens – one that looks for business quality and the other on buying at the right price. For business quality, the screen looks at:

  • Revenue growth: Compound annual growth rate of 10% or more for the last five years.
  • Earnings growth: 10% compound annual growth rate, erratic earnings and revenues companies should be discarded.
  • Return on equity: At least 15% ROE for the last five years.
  • EBITDA margin: EBITDA stands for earnings before interest, taxes, depreciation or amortization and for this you want an EBITDA that exceeds that company’s industry peers.
  • Debt-to-equity ratio: 40% or less.

Notice that none of those metrics, which are common value investing metrics, talk about the price of the stock itself. From there you’ll want to analyze them for earnings yield, prices to sales ratio, PEG ratio, and a few other metrics.

The book is far more than the chapter on Fallen Angels (which is a lot more than the two screens I just mentioned!) and overall, I liked this book because it presented value investing in a way that wasn’t intimidating. It touched on a lot of investing topics, such as portfolio management and categorizing Fallen Angels, and subjects I haven’t even mentioned and does so in a very casual and conversational way.

If you think this book might be for you, you can get a preview on Google Books [5]. You don’t get every page in the book but you can get a sense of the writing style and some of the content so you can decide whether it’s right for you.


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[3] Wisdom on Value Investing by Gabriel Wisdom: http://www.bargaineering.com/articles/r/amazon.php?asin=0470457309

[4] Joel Greenblatt’s The Little Book That Beats the Market: http://www.bargaineering.com/articles/r/amazon.php?asin=0471733067

[5] preview on Google Books: http://books.google.com/books?id=d3iTa7sW5ekC&printsec=frontcover&source=gbs_navlinks_s#v=onepage&q=&f=false

Thank you for reading!