I nearly completed the book, Financial Statement Analysis and Security Valuation by Stephen Penman in October 2006

By October 2006, I completed 3 out of 5 parts of the book, namely, Financial Statements and Valuation; The Analysis of Financial Statements; Forecasting and Valuation Analysis.

There are 4 key guiding principles that I learnt:

1. Price is what you pay, but value is what you get.
2. One does not buy a stock, one buys a business.
3. If you are going to buy a business, know the business.
4. Stick to your beliefs and be patient, prices gravitate to fundamentals but can take some time.
   

I already understood the importance of intrinsic value and margin of safety after reading The intelligent investor by Benjamin Graham. Thus the main concept I learnt from the book was how to determine the intrinsic value. In investing, investments add value only if they earn above their required rate of return. An equity should sell at a premium if its ROE is forecasted to exceed the cost of capital (required rate of return). Likewise, it should sell at a discount if its ROE is to be less than the cost of capital. Thus, the intrinsic value of an equity was a function of its NAV and ROE.

In order to determine the intrinsic value the business, I need to uncover the drivers of its ROE, growth and their sustainability. One way was to reformulate the various financial statements. Reformulation is the lens that helps to bring the business activities into sharper focus and help me discover the drivers of ROE, growth and ultimately arrive at the intrinsic value of the company. My investment decisions will then be based upon whether I can purchase the equity at a discount to the intrinsic value, essentially the margin of safety I require.

Thus, my investment philosophy was refined to seek and purchase good business at a reasonable price. In order to do that, I go through at least 5 years of company financial reports and reformulate the various financial statements in a way helpful for equity analysis.