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So I completed reading the "Security Analysis 6th Edition" in immense depth [cover to cover including all footnotes & appendix references].

*That I read intelligent investor cover to cover goes without saying.

To confess I am a starter when it comes to investing and I largely operate alone (not a professional trader). Here's my strategy on exploiting market at a very high level.

Algorithm:

  1. Get leads on publicly traded corporations through various channels: a. WSJ, b. CNBC, c. Online Forums

  2. Scrutinize 10K, 10Q forms and S&P Report

  3. Ascertain satisfactory exhibit of income and balance sheet. Ascertain satisfactory capitalization structure. (credit ratings liabilities etc...) Ascertain investability of the security i.e. Undervaluation & low P/E
  4. Estimate cash flow & market prospects. (Questions remain here)
  5. If showing is well, then submit the security to internet criticism. (Online forums, perhaps make connections with fellow investors).
  6. If ALL is good, then invest.

How does the above steps sound? Remember I am an individual investor who operate alone. I do not have great resources to work on accurately estimating cash flows or make through market analysis or predict economic prospects.

Are there better guide/books on understanding 10K/10Q statements? Is there any such similar SEC filings that will help me analyze the opportunities?

Note:Despite my great enhancement in understanding security analysis due to Mr. Graham, I am aware that it requires one or two more reads to completely absorb the material in this work. So I am in no way getting overconfident.

  • Why is this a strategy on exploiting the market? It sounds more like a process for evaluating a buy. – emican Sep 17 '15 at 17:56
  • @user14218 Yes it is indeed evaluating a buy and not exploiting the market. Exploiting the market comes into picture only during undervaluation analysis which is when all investors make money in entrenched stocks? – Ace Sep 17 '15 at 18:59
  • If you are investing then this sounds look a good strategy. If you are talking about trading then this is a terrible strategy. – Ross Sep 17 '15 at 19:22
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The steps you outlined are fine by themselves. Step 5, seeking criticism can be less helpful than one may think. See stocktwits.com There are a lot of opposing opinions all of which can be correct over different time-frames. Try and quantify your confidence and develop different strategies for different confidence levels.

I was never smart enough or patient with follow through to be a successful value investor. It was very frustrating to watch stocks trade sideways for years before the company's intrinsic value was better reflected in the market. Also, you could make an excellent pick, but a macro change and slump could set you back a year and raise doubts. In my experience portfolio management techniques like asset allocation and dollar-cost-averaging is what made my version of value investing work.

Your interest in 10k/10q is something to applaud. Is there something specific about 10k/10q that you do not understand? Context is key, these types of reports are more relevant and understandable when compared to competitors in the same sector.

It is good to assess over confidence! It is also good to diversify your knowledge and the effort put into Securities Analysis 6th edition will help with other books in the field. I see a bit of myself in your post, and if you are like me, than subsequent readings, and full mastery of the concepts in 'Securities & Analysis 6th ed.' will lead to over confidence, or a false understanding as there are many factors at play in the market. So many, that even the most scientific approaches to investing can just as equally be described as an 'art'.

I'm not aware of the details of your situation, but in general, for you to fully realize the benefits from applying the principals of value investing shared by Graham and more recently Warren Buffett, you must invest on the level that requires use of the consolidation or equity method of accounting, e.g. > 20% ownership.

Sure, the same principals used by Buffett can work on a smaller scale, but a small scale investor is best served by wealth accumulation, which can take many forms. Not the addition of instant equity via acquisitions to their consolidated financials.

Lastly, to test what you have learned about value investing, and order execution, try the inverse. At least on paper. Short a stock with low value and a high P/E. TWTR may be a good example? Learn what it is like to have your resources at stake, and the anguish of market and security volatility. It would be a lot easier to wait it out as a long-term value investor from a beach house in Santa Barbara :)

  • Thanks for the response. The problem is I have been observing market for the last two years (I admit I am a complete novice). No approach seem to make my brokerage approach prettier than that of Mr. Grahams. I have observed lot of growth stocks and have tried to apply whatever theory I could cook up by observing similar fellow growth stocks. But then again it shows mixed results 50-50% of success. Value investing decouples you from market frenzies to a large extent, while analyzing the growth potential. For some reason only that seem to work for me. – Ace Sep 21 '15 at 2:20

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