A Reader Seeks Guidance

I appreciate your feedback and willingness to guide me in the right direction. I wanted to go over my current situation and get your feedback.

By trade, I’m a computer engineer. But it seems my passion now lies in investing and creating a more balanced and comfortable life for myself where I can control my outcome, not some company where my best interests aren’t exactly aligned.

I consider myself a buy and hold investor. I don’t try to beat the market in the short term. Most of my holdings are aligned with the motley’s fool’s picks (stock advisor, rule breaker) and I have had very good success with them (high fliers such as chipotle, netflix, but also steady picks such as berkshire b shares, costco, etc). But I also want to learn to do better and be able to pick from the right ones and ultimately be able to do my own research. I enjoy the gardner brother’s research and can align with their philosophies but I also try to learn about Buffet’s and Pabrai’s philosophies.

I’m currently diversified into a basket of 50 picks in my IRA and about 20 picks in my regular account. I would like to learn to concentrate more into the better picks and have a portfolio of only 20 picks each. Throughout the past 10 years, I have seen returns upwards of 15% compounded annually in each account so I’m very happy with the results as they also include the 2008-09 recession and of course the subsequent runup. I would be very happy maintaining above 15% returns but aspire to hit 20% some day with better knowledge and understanding the business, financials, and the competitive advantage you mentioned. I’m in search for my first 10 bagger, I’m close with Chipotle around 8 bagger. I aspire to hold companies for decades.

I don’t know much about valuing companies or reading the balance sheets / cash flows / income statements so I use the motley fool’s picks to vet the financial side and then try to align my understanding of the industry to pick the stocks I’m comfortable with and can relate to. For instance, I shop at costco, use linked in, buy apple products due to their convenience and reliability compared to previously owner android and windows products, etc.

What advice would you have for a person like me? I’ve read through all of the buffet’s letter to shareholders, and have just recently started going through Pabrai’s.

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My Response
Why don’t you take an accounting course online or at a school near you or get a programmed text with problem sets and the solutions. Then take Graham’s book on reading financial statements found in book folder (Use Search Box on this blog). Then go through Chipotle and find out what owner earnings are, how much they invest to grow and try to value the company based on different growth assumptions. Be conservative.

Look for companies with fairly consistent and moderately high return on capital or a return on assets over 12%. Look for strong companies and set up a watch list.

Google: Merrill Lynch’s How to Read a Financial Report.

Study how companies develop competitive advantages–read Strategic Logic (Search Blog)

Keep your expectations reasonable. Wait for my Analyst Handbook which will take you from beginning to end.  Many investors will be lucky to SURVIVE the next five years.   Red lights are flashing–Klarman returning cash, Tesla, Netflix roaring, IPOs on fire, and the belief that markets will never decline due to perpetual non-taper.

Good luck