Monday, January 11, 2021

Build Wealth with Common Stocks

David Waldron is a writer and investor who has managed to beat the market over a long period. In Build Wealth with Common Stocks, he shares his strategy with retail investors, allowing them to replicate his returns.

Waldron is clearly a value investor. The principles he espouses will be familiar to readers of this site: there's a focus on earnings yield, margin of safety, circle of competence, and staying rational while the sentiment around you fluctuates.

There are many flavours within value investing, and I would classify Waldron as being in the Buffett-coined bucket of "buying wonderful companies at fair prices". I was floored with the transparency Waldron offers. His stock portfolio is published on his website (free subscription, e-mail required).

I didn't always agree with his assertions; for example, he believes buying cigar-butts is speculative. I'm much more willing to wade into muckier territory with cigar-butts, small-caps and other companies with little to no moats than he is, and I don't consider it speculative. There is a whole list of assertions like this in the book that I disagree with, but it's worth keeping in mind Waldron's audience is not me, it's beginners who don't have a ton of time to devote to investing. From that perspective, his recommendations of buying quality companies when they are cheap is hard to argue with.

To an extent, however, I think this method of investing has really benefited from multiple expansion over the last couple of decades. It's not clear to me that this flavour of investing will look as good going forward. Were interest rates to rise from their extremely low levels, multiples would probably fall, which would act as a headwind on the returns of high quality stocks.

Regardless of the macro environment, however, if you buy companies with moats at good prices you are likely to do well. But that brings up another question: how is a retail investor to evaluate whether and how big a moat is? There was no discussion about what leads to competitive advantages; instead, the reader is encouraged to consult sources like Morningstar to ascertain a company's moat levels. But this is one of the most important factors in determining whether a margin of safety exists, and when a company with high returns' stock falls, the moat is always called into question; to outsource the thinking leaves the investor vulnerable to losses of capital in my opinion.

For example, I'd be curious to get Waldron's thoughts on Intel. It has had a competitive advantage for years, but the stock is now behaving as if that competitive advantage is gone. If the moat is still there, it looks like a good fit for this type of portfolio. But is the moat still there? Relying on what Morningstar says about Intel's complex moat situation would make it difficult for an investor to have the conviction to hold a stock like this through thick and thin, which is essential for this kind of investing.

However, Waldron does emphasize the Peter Lynch style of investing where you focus on the areas you know, which hopefully keeps the investor from straying into industries he doesn't understand.

Overall, I recommend the book to beginners and amateur investors who are looking to get good long-term returns on their savings.

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