Value Investing Done Right

The Task

If you want to succeed in investments like Warren Buffett, you need to follow his investment principles. These principles can be succinctly captured as:

1 Business Understandability: Commit only to transparent businesses you comprehend.

2 Durable Competitive Advantage (Moat): Target companies boasting a distinctive, enduring competitive edge.

3 Value at a Fair Price: Ensure you're securing a commendable business at a justifiable price.

4 Long-term Perspective: Seek out businesses with a clear vision for the future and an intention to foster long-term holdings.

5 Margin of Safety: Always account for a cushion between the acquisition price and the asset's intrinsic value.

The Problem

The problem is that most investors tend to focus purely on quantitative value metrics. Others - a minority, do deep-dives into the qualitative aspects of a company, but very rarely do so in a systematic way to produce definite company rankings. I propose a third way - to develop a number of qualitative measures of the company based on Buffett's principles, and derived from 10-Q, 10-K, or even DEF 14A. The measure will be systematically extracted from text data using current NLP / machine learning methods, and systematically converted to qualitative indexes. For example -

Revenue stream stability index:

• Examines trends and changes in revenue sources, including any noted shifts in customer demographics, market expansions or contractions.

• Alterations in product or service lines that could signify strategic redirections or adaptations.

• Strategic pivots, operational changes, or market dynamics that management believes could impact revenue stability and predictability.

• Any other qualitative information that could impact revenue stability and predictability.

Obviously developing just one systematic index like that takes a lot of work and would be impossible without modern AI tools. There will be a number of such qualitative indexes, and in combination with existing quantitative measures they together will provide more robust measure of value to investors.

The Solutions

I will develop the software and run the experiments, including investing my own money ( dogfooding, so to say ) and sharing the results with the value investing community. Please follow and subscribe for the updates.