Brian Nichols - Taking Charge with Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio

Copyright 2013 by Brian Nichols. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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I dedicate this book to my wife Nataliefor her patience, compassion, and loyalty. She truly is my rock and my much better half. I would also like to dedicate this book to my mother Teresa, my grandmother Deborah, my father Randy, and my mother-in-law Sherrie. But most importantly to my readerswithout you none of this would have been possible.

Jeannie Stone who performed the initial read through and helped with the first-line of edits.

Chris Morgan of Morgandesigned.com, continues to show he is one of the best in the industry, designed the cover and all other illustrations.

You never realize the moments that change your outlook on life when they occur. Looking back in my life, there have been many of these moments, but one in particular has really stood out. It occurred when I was a freshman, in a high school economics class, with Mr. Causey, and it really affected my investment strategy and created an intense interest on my part in the industry. Looking back, it was probably my favorite class at any level of education because I found it more useful than any other financial class that I ever took. There were countless lessons and exercises that taught material that I still use today. The class was so instrumental that it helped me find a direction in life. I can recall riding home one day after school and telling my Aunt Becky that I knew what I wanted to do when I finished schoolI wanted to work in finance and in the market.

I remember one exercise in particular that allowed me to visualize and understand the basics of a public company. It was the first time that I truly began to understand what drove a public company. The exercise involved our class building its own public company, which included stocks, costs, profits, and real-life operations. In our class, 100 total shares were issued. Each share cost $1, and everyone had to buy at least one share.

As a whole, our class decided to build a company based on candy. We spent $100, which was raised from selling shares, to buy as much candy as possible, leaving some additional cash for unexpected expenses. Over a period of several weeks, the candy was sold at football games, outside events, pageants, and so on, and our goal was to turn our investment into a profit. I cant recall the exact amount of money we earned, but I believe it was near $400. As a result, we divided the $400 into 100 based on the total number of issued shares, which brought our return on investment to $4 on the original $1 we spent for each share. Therefore, in the end, if you purchased 20 shares, your return was $80.

Now heres the catch: When you think of a company or a stock, you need to view it like you would my ninth grade economics project. A stock is a reflection of a companys sales and profits. If a companys earnings increase, its stock should follow suit. There are a lot of factors at play that determine the worth of a company, but when you sort through all the jargon and the various opinions, youll find that a stock is a reflection of the companys growth, and companies with explosive growth (such as our candy-selling business) might see a higher valuation for growth that exceeds the rate of growth for the industryall of which will be discussed throughout this book.

We closed the doors of our business after only a few weeks and cashed in our stock to live the good life. However, what if we would have continued to operate and reinvested the money into the business? The valuation at the time we cashed in was $4 a share, but if we had kept going, how much would you have paid for such a stock? How large could the valuation have become? If we could turn $100 into $400, then how long do we keep this stock, and could we have turned $400 into $1,600? If so, the stock would have been worth $16 a share, and it would have made for a great investment. But would you as an investor maybe have paid a premium for the stock when it was $4 if we would have decided to continue operations? Perhaps an investor, or in this case a 14-year-old student, would have decided that it was worth it to purchase someone elses shares for $6 based on future earnings growth.