Sunday, September 22, 2013

Where this market stands – fixed income is the destroyer of wealth hidden below a mask of ‘low risk’

So we’re standing at the brink and looking out over an investment landscape of tapering and… rising interests. The world seems to move in giant cycles that stretch out over decades. Right now we’re are around a major turning point in the interest and inflation cycle – we’re moving from decades of falling interest rates and inflation to decades of rising inflation and interest rates. Will we peak again at 22% interest rates and 10% plus inflation 20 or 30 years from now?  I have no idea, I just think I am recognizing a change in trend.

I am not a fan of fixed interest instruments, and in this blog I have warned several times about investing in long term bonds. Fixed income is the destroyer of wealth hidden below the mask of ‘low risk’. So many fall for this questionable investment vehicle because they think that their capital is ‘save’. Nothing is farther from the truth. The only benefit that bonds and other fixed income instruments present is a low volatility instrument that during times of turmoil and uncertainty may rise in price against more volatile investments such as stocks. This has been illustrated many times during stock market crashes.
In fact, fixed income and gold have this characteristic in common. You may even go so far as stating that gold is acting like a coupon bond in that it does not pay interest but instead appreciates to its face value as the coupon approaches maturity. Gold does not mature but it is seen by many as a hedge against inflation. The coupon acts the same way as long as the coupon rate (interest rate) equals or exceeds the inflation rate. The logic behind all this is too intricate to discuss today but we’ll return to this topic in more detail in later blogs.
Let’s do some simple math to illustrate why fixed income instruments often destroy wealth. Say inflation is 4% (rather than today’s 1-2%) then for an investor to make real money the interest rate charged on borrowed money is a bit higher say 0.5 -1% for short term (6 month to 2 years) investments. The extra interest is called the ‘real interest rate’ or the rate at which the purchasing power of your money increases.  Increased uncertainty associated with lending money over longer and longer time intervals results in the real interest rates being higher for longer maturity loans.
Thus the interest rate charged on a loan equals the inflation rate plus the real interest rate. In our example that would be 4% inflation plus 1% real interest rate which equals 5%. Now comes the kicker: taxes! Let’s take Canada’s lowest marginal tax rate for a top bracket Canadian. That is Alberta’s marginal tax rate of 38.8%. An Albertan pays 38.8% tax over the 5% interest rate, thus on an after tax basis your return is 5% x (1-38.8%) = 3.06% Oops, but inflation is 4%, the lent money decreases in purchasing power or in real terms at a rate of 3.06-4 =- 0.96% per year. In today’s economy the numbers are worse. Because the interest rate is typically 1%, thus after tax you ‘earn’ money at a rate of 1%x (1-0.388) = 0.612% with inflation being 2% your real interest after tax is negative 1.39% Ouch!
The only place you can retain some profits on fixed income is not in your RRSP either, but in your TSFA.  Assuming tax rates will not change over the coming decades (I think they will increase) then unless you’re not saving a significant retirement fund, chances are that your current tax rate is lower than in your retirement. The advantage of a RRSP is that you do not pay income taxes over the money that you pay into the RRSP. The disadvantage is that you pay taxes when you take it out and you pay taxes over the investment gains you made. Thus you’re likely paying more taxes over the entire life of your investment than if you kept it outside the RRSP. Especially because you forego capital gains tax and dividend tax credits and you cannot deduct capital losses – and who makes only gains? Bottom line, you will pay the maximum tax rate over the interest you may have earned within your RRSP. Conclusion: You’re hoosed!
Thank the Conservative Government for introducing the Tax Free Savings Account because this is the only tax shelter where you can make at least a tiny bit of money on your interest income. But again, how would that compare with the typically much higher profits you’re making on real estate or stocks in that TSFA? You see the issue? I certainly hope so. At best, investing in fixed income is a preserver of capital and that is only true if you invest in a TSFA. There are better investments than fixed income that make a lot more profits on an after tax basis and that are even better within your TSFA.
Thus the three reasons we’re investing in fixed income is as a hedge against a stock market crash, for reduction of the overall volatility of your portfolio value and for temporarily parking cash (interest income is better than no income at all). You could try to increase your interest return by investing in junk bonds or in other lower grade debt, but that would often also increase the risk of default and losing your money.
There is another issue with lending money – appreciation and depreciation. If you lend someone, say the government of Canada using bonds, money ($100) that earns 5% you will earn $5.00 in interest per year. So now rates go up, say to 7% and a new bond of $100 would earn $7. How much would you pay for my $100 bond that earns only $5?  Right, less than $100, in fact a lot less, $71 to be precise. That means the 5% bond holder lost 29% of his money, unless… he doesn’t sell and waits until the bond expires and the government redeems the bond for its face value of $100.
When you buy bond ETFs, those bonds are often sold before they mature, i.e. they do not expire and are not repaid at face value. In a rising interest environment you are likely to lose money on such funds. If you want to hedge your portfolio against volatility or you want to temporarily park cash use 1 to 2 year Guaranteed Investment Certificates (GICs), short term treasury bills or plain savings accounts. You can buy bonds, say 1 to 2 year government, provincial or Canadian bank bonds at a rate you feel is good and hold on to expiry. Buying several bonds with different maturities say, 30 days, 6 months, 1 year and 2 years (i.e. a laddered approach) will reduce the risks resulting from rising interest even further.
Stock markets have risen significantly this year and we’re entering the last stage of a bull market. This stage may last a few months or another couple of years (wouldn’t that be nice). Therefor risk is increasing, the chance that the market will crash increases every day. Thus, we do not want to buy a lot more stocks (unless it is an extremely good deal) but rather let our profits run. Sometimes stock prices may go up so much that we may feel that they have reached their full value and some more. That is a time to consider the sale of those stocks; to build up cash and putting this cash in fixed income until the market crashes providing new investment opportunities.


Sunday, September 8, 2013

Thank you Mr. Obama for dithering on Keystone and for opening our eyes to opportunities in the rest of the world.

Dithering is bad politics, just ask Paul Martin. A major setback in life often spells an unexpected opportunity and a new start. Canadians are so used to selling their products to their Southern neighbours; they have become blind to opportunities in the rest of the world.

Stopping Keystone will hurt the U.S. more than Canada. Environmentalists have seen already some of the unintended consequences of their actions. Texas refineries are lacking supply as sovereign oil companies like Saudi Aramco, Petronas, PDVSA and Mexico’s Pemex all suffer declining exports. Oil production is falling off at these sovereign Companies because of a lack of entrepreneurship and innovation while local demand for subsidized petroleum products is sharply increasing.
To top it off, oil producers, being forced away from cheaper and probably safer oil transportation by pipeline are turning increasingly to transport by rail.  As a side effect of the switch these oil producers also realize that transport by rail makes them less dependent on large refining centres and oil hubs such as Cushing Oklahoma. Thus the much feared oil price differential that should force a stop to expanding oil mines is melting like snow in the sun.
This is in spite of the unconventional hydrocarbon revolution that has cranked up North American oil production to multi-year highs. Just wait until the North American economy and that of the world is recovered and expand full blast once again. It may push oil prices to new highs, thus capping economic growth in a much more natural way than by government or central bank intervention. It always amazes me how much we trust government above Adam Smith’s ‘Invisible Hand’. This certainly does not bode well for humans giving up driving control when switching to autonomous cars. But that is a different topic.
Canadians are becoming increasingly pee’d with American busybodies telling us how to run our affairs. And now these busybodies think they can even stoke the fires in BC’s pipeline debate. As if Canadians can’t think for themselves! If those U.S. boozos think that we Canadians don’t appreciate the beauty of our country, then they are even dumber than I think they are reactionary (they are the same kind of people that were fighting the first steam locomotives).
In the meantime, we’re learning that we can build pipelines within Canada. Vancouverites who dominate the B.C. political landscape may have lost touch with where their bread is buttered. Now they are confronted with putting in their own natural gas pipelines. Many BC people in the interior parts of that province know that you cannot live of a pretty country and tourism alone.  They know they have to live off their land through agriculture, mining and oil & gas. But, they also want to keep their house clean, i.e. they love their pristine nature, harsh as it may be to make a living.
Now B.C. has opportunity knocking on their doors. In addition to mining, the West Coast of Canada can become an even larger center of commerce – a veritable gateway to the rest of the world. Kitimat could become a major LNG port and an export center for oil to Asia. There is opportunity for a large population center such as Vancouver to develop a new petrochemical industry. Yes it should be done in a sustainable manner, but wouldn’t it be great to own the house you live in, rather than paying rent to overseas speculators?
NE BC has a spectacular wilderness but many people there know that to live there they need jobs. Many work for the oil industry, in forestry and in agriculture. With LNG ports potentially opening along the coast, this area is about to experience a jump in prosperity and growth.
In Alberta, technology has opened up enormous additional reserves of oil and gas. Yes, not all the kinks are worked out, but we’re getting better at it every day. Building heavy oil mines is one thing, but increasingly we can access our bitumen in less environmentally dramatic approaches such as Steam Assisted Gravity Drainage (SAGD) techniques using all kinds of variations ranging from high frequency cyclical injection to slow soaking strategies. The result is that we’re now producing nearly as much bitumen from the subsurface than we do from open pit mines.
Even better, the higher oil prices now allow us to revisit older pools and increase our recovery by nearly 50 to 100% using horizontal wells and multistage frac’ing. The decline rates of new wells are high and drilling is expensive but we can do it with today’s economics and overtime we’ll get only better. Combined with natural gas combustion engines, electricity generation using natural gas that replaces coal and evermore efficient gasoline combustion engines we will have enough energy for a hundred years. Yet, over time we also use less energy per unit of production and thus everyone wins.
In Eastern Canada we have a large industrial base that trades intensely with the U.S. But the East with their heavy industries also provide lots of the consumer products and equipment needed in Alberta and for the construction of pipelines all through North America. Now, thanks to Obama’s dithering, we realize that the East can also get cheaper energy, rather than having to import expensive oil from overseas dictatorships.
There is an opportunity to construct and convert the energy infrastructure. Building new pipelines that feed refineries with cheaper Canadian oil and gas. Not only to refine oil for local consumption in Eastern Canada but also for export to Europe and other markets. This will give Canada a place of its own in the world rather than being a flunky of the U.S. The American Dream is to own your own house – Canada’s dream is to have our own place in the world!
Have you noticed what the energy revolution is doing for the U.S.? In the nineties when commodity prices were depressed, manufacturing was booming. We had the High Tech boom and under Bill Clinton the U.S. reversed its decline that became so clear under Jimmy Carter’s presidency and with the humiliations bestowed on the U.S. by OPEC and by Vietnam.
Now, Ontario and other Eastern provinces have the West as clients for their products, they have access to reliable and affordable energy for their manufacturing plants. They have the opportunity to become a major energy export hub to the rest of the world. The big weak spot in the West is the lack of labor, but there are plenty such resources in the East. Economic growth spurs economic growth and I am sure with a blossoming oil and gas industry that High Tech in Canada will also find a fertile soil for once again standing at the leading edge of the world. So, thank you Mr. Obama for dithering on Keystone and for opening our eyes to opportunities in the rest of the world.

Saturday, September 7, 2013

Intrinsic value of Intel

Many investors feel that they have no time or access to the right data, thus they invest based on recommendations from their brokers or worse, based on ‘hot tips’.  If you really don’t have time or knowledge to research your own individual stock investments, it may be better to invest in a stock market ETF rather than in an individual stock or in niche ETF’s that focus on green energy ,or high tech, or whatever other specific strategy.

I invest in both ETFs and individual stocks. The ETFs help me to invest in say the ‘Canadian Stock Market’. Also, in other markets, with which I am less familiar I tend to buy ETFs. Currently I am focussing on the U.S. and Europe. I also discussed on this blog the Moderate Dividend – Low P/E Stock Portfolio. The idea was to invest once a year in stocks screened for a low Price/Earnings ratio that paid dividends between 3 to 5% per year.

I reported the results on this blog. I noticed that the portfolio seemed to take off with a vengeance in the first 4 months of each year and then, in the second half of the year, it gave back a significant portion of the profits. By year’s end you sell off the stocks and select a new set of stocks that makes the screening criteria. The end result was that I performed nearly as well as the TSX60 iShares fund XIU in the first year.  I restarted the portfolio again this January and the stocks took off big time in the first 4 months or so plus I received of course the dividends. But when the market again started to sag during the summer, I decided to take the profits which were close to 20% rather than handing them back to the market in the 2nd half of the year. Near year-end we may repeat this strategy.  Thus, with a 6 months’ time horizon the moderate dividend and low P/E portfolio works fine, but we’re trying to be long term investors.
Apart from owning market ETFs we’re also trying to build a solid ‘Buy & Hold’ portfolio with dividend income and that we can use to write covered call and naked put options to augment cash flow. I am quite enthusiastic about the performance of this strategy to date with an emphasis on solid U.S. manufacturing and high tech companies that pay a decent dividend yield and with predictable earnings performance. That is where our discussion of intrinsic value comes in. 
Rather than worrying about short term market gyrations we’ll be focussing on companies that are dominating their field of business. Stocks such as Wells Fargo, Johnson & Johnson, Apple and Microsoft.  Although enormous in size, these companies are relatively easy to understand in GAAP conforming annual statements such as the balance sheet, Income and Cash flow statements. You can treat the stocks of these companies nearly as a government bond except instead of interest you receive a portion of the company’s profits. We have written about buying a company at the ‘right price’ but when we had to evaluate what those companies were actually worth, we stumbled. The market gyrates without much reason and often seems to be more psychotic than rational. Well, ‘seems’ is too soft a word. The market IS psychotic and it overvalues a stock one day and the following day it becomes utterly depressed and severely undervalues that same stock. This is what Warren B calls ‘mispricing’ and he loves to buy mispriced cheap stocks. He likes to hold such stocks forever if possible.
Cheap means the stock price is trading below its ‘intrinsic value’. The intrinsic value is nothing more than adding up all of a company’s future earnings when expressed in today’s dollars. That is what we have done in our earlier Microsoft example. We calculated that Microsoft’s intrinsic value today is: US $58.92 and it trades at around $30 per share. So, would you like something such as Microsoft for 50 cents on the dollar while still earning 10% per year?  Ten (10) percent is the discount rate we applied to Microsoft’s earnings rather than the rate of inflation. “

I was so excited, I bought the company!’ Remember that commercial by the Remington Electric Shavers company?  Viktor Kiam, another legendary investor, appeared in the Remington commercial’s stating: "When my wife bought me a Remington shaver, I was so impressed I bought the company".  That reminds me of Peter Lynch’s Fidelity’s Magellan Fund. Peter bought Hanes because his wife loved Hanes’ L’eggs stockings at the time and made a ‘six bagger’ (600% profit).
I digress (as usual). So can we find more stocks with tremendous intrinsic value that we can buy on the cheap? Well, here is my intrinsic value spreadsheet with numbers that I collected form in under five minutes. The numbers are exiting, but don’t forget to do your own fact checking. This is just an example… and not a recommendation. So, if it takes not much more than copying a few numbers from GlobeInvestorGold and pasting it into the intrinsic value spreadsheet do you think you can do that, rather than following yet another ‘hot tip’ on which you lose money?

Click on figure to magnify



Sunday, September 1, 2013


Like many investors, this blog writer has struggled how to best evaluate a company and its share price. There are so many ways of doing so and to make matters worse, not all businesses are to be evaluated the same way. Earlier this year we attempted to calculate intrinsic value of a company (or its stock) using investor cash flow (money returned to investors through dividends and share buy-backs/earnings). Companies that return a significant portion of their earnings to shareholders and that require only modest capital investments to stay competitive and to even grow are ‘capital efficient’, shareholder friendly and often stable and profitable. Yet this approach is somewhat contorted and with to many assumptions on future stock pricing.
Today, I will discuss an easier and less interpretive definition of calculating a company’s intrinsic value. Note that both methods are referring to ‘intrinsic value’ but that those values are NOT really the same. Today’s intrinsic value is entirely based on net earnings.  Mind you, not all earnings and companies are the same. Today’s method focusses mostly on manufacturing and service companies, rather than on financials or mining or oil producers.
Take our perpetual example Microsoft.  It makes products and sells them at a profit. So how much is the sold (Revenue) and how much does it cost to make the product (Cost of Goods)?  How much equipment and how many buildings (Capital Expenses) are needed to manufacture these products? What is the wear and tear on the equipment (Depreciation).  Strangely enough, the cost of research is often not included and is treated as a part of production costs rather than as a long term asset.  Rather than reporting the market value of the buildings (real estate) the company owns, these buildings are reported as purchase or construction value.  So accounting does have its idiosyncrasies that makes things less straight forward.
But basically in a manufacturing company one should ask how much profit does the company make and how much capital (debt plus shareholder equity) is required to be able to produce these products.  The value of corporate patents and real estate is often more of a side-show.

When dealing with an oil company, earnings are from production operations. Thus again how much revenue was made (barrels of oil equivalent times the price of oil) and how much did it cost to produce the oil including well operating costs and royalties? Sometimes we call the difference of the revenue per barrel minus the operating costs and royalties the ‘Net back price’ per barrel.
But you know what?  Every time a profit is made assets are used up – the oil company’s main assets are its hydrocarbon reserves that are depleted. If those reserves are not being replaced then the company will run out of ‘assets’. In manufacturing equipment is worn out; this is called ‘Depreciation’. However in the oil industry, we also use up the oil and gas reserves of the company (Depletion). Now here comes the big difference: Oil companies spend capital first to replace its production but secondly to grow. By spending capital on new drilling (Cap-Ex), reserves are replaced and often they are also increased. This is where the ‘finding costs per barrel’ comes in – some companies are replacing and augmenting their reserves much cheaper than others – their ‘finding costs per barrel’ are a lot less than that of their competitors.
Thus an oil company not only makes profits from selling its oil by operating its production facilities efficiently as reported on the income statement; it also makes money (appreciates) by adding to its reserves and thus to the value of its assets on the balance sheet.  This requires an investor to look at an oil company quite differently than at a software maker or service company. 
Banks and insurance companies differ yet again from the two earlier mentioned industry sectors. These companies work with other people’s money: insurance float (which made Warren Buffett so wealthy) or depositor’s money or plain borrowed money.  These financials have typically a very high level of leverage – “other peoples’ money” is sometimes 10 or even 100 times (as in 2008) their shareholder equity.
In our new intrinsic value calculation, we will focus on a classic manufacturer such as Coca Cola, Hershey or for that matter Microsoft. The typical blue-chip company has often a ‘simple’ straight-forward and predictable income statement and balance sheet. Valuing such a company focusses on earnings, asset value and debt. That is the kind of company that Warren Buffett says ‘he can understand’ and whose earnings can be extrapolated with some confidence far into the future. These companies are nearly like government bonds but rather than getting paid interest you’re getting the – hopefully – ever increasing profits.


The intrinsic value of a company can be expressed as the NPV (Net Present Value) of its net earnings. Net Present Value is a variable used when calculating the ‘time value of money’.  It is a bit like inflation – a dollar earned today is only worth 50 cents 15 years from now (depending on the inflation rate). If the inflation is 10% a dollar may only be worth 50 cents in less than seven (7) years.

You can also look at it another way – rather than putting money into a new investment opportunity, you have already a 100% safe investment that brings you 10% return. For you to switch into another, possibly riskier investment you want to make a higher return rate than 10%. The 10% is considered to be the (opportunity) costs of your money - all other investments have to make at least 10% for you to break even with the opportunity you already own. We say then that the new opportunity has to be discounted at a rate of 10%. If the discounted investment has a value of zero (Net Present Value) then it is equivalent to the investment you already have.
Thus, with a discount rate of 10% (a rate that many businesses also use) $1 earnings seven (7) years from now are worth $0.50 today. Earnings 100 years from now discounted at 10% are worth nothing. The longer it takes to get your money the less it is worth. Thus the net present value of net earnings of say $12 some 100 years from now are worth zero today.

By adding up the net present value of all earnings from an investment until the time that the net present value of the earnings is (approximately) zero you’ll get the intrinsic value of that investment. Let’s illustrate that on the spreadsheet(s) below.
Fig 1 - Microsoft Earnings 2009-2012  (as EBIT and Net Earnings). Linear regression was used to determine the slope and intercept of the resulting line. Slope and intercept are used to extrapolate earnings until year 100 in figure 2.

We’re taking Microsoft’s net earnings for the past five (5) years (Fig. 1) and plot it on a graph. Lo and behold, it forms a nearly perfect linear trend that increases over time. If nothing goes wrong, you’d be able to extrapolate those earnings over the next 100 years. That is exactly what Excel spreadsheet below does in the Net Earnings column using ‘Linear Regression’. The more predictable Microsoft’s earnings are the more confidence we will have in the reliability of this ‘earnings forecast’(Fig. 2).
Fig 2. Microsoft Earnings extrapolated to Year 100, The far right column converts the nominal Net Earnings into Net Present Value earnings discounted at 10%

In the column on the far right, we have calculated the NPV for each year’s earnings in ‘Year 5 dollars’ (the year when we make our share purchase). Next we calculated the NPV until year 100 around which time the NPV is close to zero.  If you use a higher discount rate the number of years it takes to reach a NPV of zero is less, while if you use a lower discount rate it will take a longer.
Thus, now you the investor are in charge. You determine the minimum rate of return you want (say 10%) and then using it as the discount rate in your NPV calculations, the intrinsic value will give you the maximum price you should pay for a share. In our example the sum of all NPVs for 100 years (minus the first five for which we have the real earnings) adds up to an intrinsic value of $58.92.  Now you know that when you buy Microsoft shares at the spreadsheet’s current price of $28.04 you will receive earnings worth $58.92 and based on a purchase price of $58.92 you’d still collect earnings at a compound rate of return of 10%.

Is that good or what?


In short, intrinsic value is the value you’d assign to a business if you bought it privately without the emotions of the schizophrenic stock market.  Net Earnings are basically the earnings a business makes after you, the business owner takes your salary. The net earnings are the return on your investment. You also have paid your taxes and expensed the ‘wear and tear’ of your facilities during the operating year. So, what are you going to do with the loot?

Well, you could pay all this net earnings money out to yourself as a dividend. But heck, business is so profitable and with plenty of room for growth, why not re-invest at a similar return or better than last year? So now comes the judgment: pay the money to yourself as dividend and/or grow the company? If you had a partner, you could buy her out – in the public market we call that a ‘share buyback’ program and the result is that after paying out your partner, you can keep the entire company’s profit to yourself. Gosh!
So, really if you see your stock market investment as ownership of a company, rather than a miraculous thing that goes up and down in markets for no clear rhyme nor reason, then owning stock becomes a lot easier. And… if there is a bear market then you’d have the ‘guts’ to buy more of the company at prices far below intrinsic value. But you know that comes rain or shine, the company itself will make more or less its earnings and grow overtime. What do you care if some nut case in the market tells you that he won’t buy your shares for more than 50% of you have paid for You know what the intrinsic value is and that that value is a lot higher than the nut case wants. Really, just because the nut case says he’ll pay 50% of your purchase price doesn’t mean that that is the value of your shares!
That house you bought 5 years ago for $300K and where you and your family live happily, are you going to sell that as soon as some realtor knocks on your door and offers $200K? Of course not, you are happy with your house, why would you sell? Besides, after all the renovations you did, you know the place is worth at least twice that!
But with a company you have always that nagging question, yes there will be good and bad quarters but are those forecasted earnings as reliable as you think? What is the quality of those earnings?
How good is management? Did they play with the earnings numbers? You check the return on assets and it is 5%; next you check the return on your equity and it is 10%. How is that possible? My assets earn 5%, but I make 10% on my investment? Oh, management took out loans at a 3% interest rate. So they borrowed money to buy assets that return 5% at an interest rate of 3% and the remaining 2% goes towards your net earnings and thus increases your return on equity. Smart eh? But….
How much did management borrow to do that?  Oh, you check the balance sheet and find that they borrowed nearly double of what you invested – i.e. they borrowed twice as much as you the owner has invested in the company. What will happen if interest rates rise to 5%? Oops, interest payments would nearly double and the assets won’t earn a dime more than the aforementioned return on assets equaling 5%. That means that you the owner will have a lot less net earnings to show for or worse, you could end up with no earnings and then what would your equity be worth?  Yes it would be worth nothing!
What if you owned Blackberry and the competition, say Apple, Samsung and Microsoft, would be snapping at your heels. Would that give you confidence that your net earnings are save and predictable?

What if the government comes up with a load of new regulations that you have to adhere to at your expense?

These are important issues. Some of these issues you can learn from accounting ratios – especially where it involves debt. Debt/equity ratio and current ratio come to mind. Then you could look at return on assets versus return on equity – with low debt they are virtually the same, while high debt is indicated by a much higher return on equity compared to the return on assets. If two companies have equal amounts of assets and debt but company 1 earns $2 dollars per share and company 2 earns $0.50 per share which one would you prefer? Right company 1 is much more profitable and would be my choice.
We’re talking earnings quality and business model. We’re talking Warren Buffett’s moat. And we need to learn about that too prior to investing. Oh… but that is so much research, I don’t have time for that!  Well, then stick to index investing. BTW I know a basket of 30 stocks that are the best companies in the world why don’t you buy those? I am of course talking about exchange traded funds that own the 30 Dow Jones Industrial Index stocks.
But really, if you do the research as suggested above and you invest in 10 or 20 companies that you really know well and you buy below intrinsic value, chances are you do at least as good if not a lot better than the aforementioned index fund. After all that is basically the way Warren Buffett invests!