Choose Stocks Wisely: A Formula That Produced Amazing Returns

A great book that identifies how to use the balance sheet as a floor/backstop for managing risk at the individual stock investment level. This book and author's investing style is reminiscent of the famous balance sheet investors (Graham, Schloss, Whitman, etc.) and strongly reflects the liquidating asset concept of Ben Graham in his 1940 edition of Security Analysis. The liquidity/solvency considerations are a real nice emphasis on this perspective and adding other factors mentioned towards the end helps to round out a strategy that could very well achieve the performance Dr. Allen observed for small/mid-cap investing.A couple of ideas that serve as food for thought.....maybe not for the individual investor, but for the institutional investor, finding stocks that meet the formula requirements will become increasingly problematic as the portfolio being managed becomes larger. Yes, you could probably eventually get to $1 million but are their enough of those bargains to achieve $10, $50 or $100 million? I think Warren Buffett ran into this problem as his portfolio reached such levels and ultimately he transcended beyond what he was taught about balance sheet valuation to find true intrinsic value of intangibles that took him to the next level and solidified his genius and uniqueness in value investing. Nonetheless, the balance sheet is a great place to start and a foundation for intrinsic value.Second idea is that some of the truly great balance sheet oriented investment plays could come from moving beyond a formulaic analysis that employs a one-size-fits-all strategy to a more granular analysis of the balance sheet. Think how a Bruce Flatt or Michael Price may have seen the true value in forest acreage that had been purchased over a hundred years ago by a company with the asset being listed on the balance sheet at cost. Other capital-intense assets may fluctuate wildly in value depending upon the supply/demand imbalances in the services they provide (tankers for example) or even the price of the commodity they manage (oil, corn, natural gas, etc.). In many cases, a lot of value can be extracted by digging deeper and going beyond the one-formula-fits-all strategy for assets on the balance sheet.Still, I feel this book points towards what is important and gets us on the right track. It also provides a great distinction between investing and gambling, as well as gives a unique and very powerful perspective on risk management. Take home points are well taken and insights are invaluable and presented in an easy-to-understand fashion. A Great compass for those interested in value investing.

This book is nearly a complete strategy for stock investing, written by a CPA who seems to have stumbled on a particular variant of deep value investing on his own, through hard knocks. Were Ben Graham alive today, he would unequivocally approve. At least I think he would: the strategy described is logical, reasonably easy to implement and has an excellent supporting record, as described by the author. Such are the essential ingredients of a Ben Graham style deep value approach.A carefully articulated method, indeed a formula, is offered (I won't give it away in this review) for selecting cheap stocks. What the author offers is sufficiently --indeed exceedingly generously-- presented so that anyone with a modicum of gumption can begin using the approach at once. As is the case with many other deep value strategies, of course, it will be more difficult to implement the strategy when stocks are trading at generally high multiples.Some reviewers have commented on the dry and somewhat repetitive presentation. While that's true, the author seems honest and I give the book high marks for his obvious desire give the reader the necessary resources to make his recommended strategy viable with careful, reliable instructions. All the requisite tools for stock selection are essentially handed to the reader.Alas, as acknowledged by the author, the book does not really describe a selling methodology. While many readers will likely come up with their own viable selling strategy, and a stock well bought is half sold, it is a bit of a let-down the author fails to include his recommended approach to selling. After all, his claimed returns are contingent on his selling the stocks he purchased. But there is enough here to still highly recommend the book.

This is a superb book. Allen rightly points out that most discussions of stock valuation these days are centered around earnings. He focuses on the balance sheet. The balance sheet is a snapshot of the company's value at a point in time. If you buy then you are expending money now. So right now exactly what are you paying for?Valuing a stock is inherently a nearly impossible task. The stock certificate says nothing about how much you will be paid, when you will be paid, or even if you will be paid. Stock valuation is determining how much that piece of paper is worth. There is virtually nothing to grab on to. This is why analysts often try to come at valuation from multiple perspectives -- dividend valuation, free cash valuation, residual earnings, price multiples, etc. Allen provides another way to address valuation -- through the balance sheet.His calculations are simple, but based on sound logic. The quick ratio has always bothered me -- why discount inventory at 100% (surely that is too pessimistic), but not discount receivables at all (surely that is too optimistic)? Allen proposes "an adjusted current ratio" that values cash and equivalents at 100%, but both inventory and receivables at 80%. This makes good sense.The book is a short easy read. I could not put it down and finished it easily in an evening. Some books that discuss valuation don't give you a concrete method of obtaining the inputs to the valuation model being described. Allen does. He provides very specific advice telling where to get the inputs to his calculations from readily available free public sources. He also provides specific instructions as to how to do some stock screening (again using a readily available free tool).The screening method he describes produces a small list that can be analyzed further using his formulas. His formulas give you a maximum price to pay for the stock. This is a super-conservative approach. His method leads to stocks that you can buy with a large margin of safety. You may have to hold them for a while for the market to catch up, but the downside risk is limited.This book is very Ben Graham-ish. I think Graham would have really liked it.I have a Ph.D. in Finance and am both a CFA and CMT. I have read many books on investing, especially value investing. This is one of the best in terms of giving you a simple, solid alternative to earnings-focused valuation. With its low price I think this book is a true value investing bargain.

The book is very practical. It gives the reader all the elements necessary to clone the successful deep value strategy of the author. A great book, which I liked a lot.

really great book!! Simple and make sense

Excellent book, wise words indeed.

As other reviewers on amazon.com suggested this could have been an article or a paper - one has to read through 80 pages (basically half of the book) before getting to something tangible; somewhat diminishes author's credibility. I'm tempted to say the book is overpriced for what it offers but I'm yet to test author's methodology.