The Ultimate Guide to Automating Value Investing

3 min read

Laptop Computer Showing C++ Application

I never dreamed to be a value investor.

To be honest, I dreamed of living a simple life with as minimal stress as possible.

However, things didn’t turn out the way I expected.

I got married.

Got a mortgage.

Had a kid.

Basically, I needed to find some money.

I stumbled across value investing not because I aspired to be like Warren Buffett but from another fame investor whose name I can’t remember.

He described value investing as the only way to invest where you don’t have to worry. As a matter of fact, you only need to check in once a year.

So, I was sold on value investing except when I first started it, value investing felt too slow.

Nothing was more boring than reading several annual reports.

I made it a personal mission to make value investing more automated and enjoyable, while maintaining the core of what value investing is.

Here’s my guide.

1. Use APIs

What I initially found difficult about reading financial statements is that companies only have 2 or 3 years’ worth of statements in a single annual report.

What further aggravated the issue was that certain financial rows were not lined up where I wanted them to be.

The pain was that I had to flip and forth between pdf pages to get the information I wanted.

I knew that financial APIs existed but my experience with them was only querying through the latest price.

However,I eventually landed on a particular Yahoo Finance API that met my needs.

Yes, it did report on financial statements but I was skeptical about its accuracy.

But, after some research, I found that the API did report on financial statements accurately enough.

In at least half of the cases, the numbers are the same as the annual report and were slightly different in other cases.

I was willing to take this risk to save time.

The takeaway point here is that you should use and trust financial APIs to some degree. APIs are time savers especially if you can wrangle the data to meet your reporting needs.

Here’s a how-to guide if you’d like to learn how.

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2. Have automated calculations

Automating calculations is easy if you’re doing it on a spreadsheet.

But, when you’re coding it then that’s a whole different ball park.

Simple calculations are easy.

Return on equity is simply EBIT divided by equity.

No dramas.

Calculating intrinsic value is difficult.

Using python to calculate intrinsic value is like spending your weekend preparing for a barbecue. A lot fo prep work but it pays off.

I believe the trick to calculating intrinsic value regardless of what model you use, is to create your own function rather than rely on packages out there.

I learned this after trying make an automated intrinsic value calculator with Yahoo Finance.

No matter how hard I looked, I just couldn’t find a package that modelled discounted cashflows to my specific needs.

So, I went back to thr drawing board and deigned an python API from the ground up to do this. It took a week but it paid off.

The takeaway point here is to have automated calculations but also be ready to build difficult calculations yourself.

If you wanted to know, how to build that intrinsic value calculator, then here’s the link.

3. Let someone read it to you

At least to me, what makes value investing special is that it completely ignores efficient market hypothesis.

Basically, value investing tells us that if a company has good finances and you understand the business, then you can have a good guess of its future in the next few years.

This was something I just couldn’t automate.

I could get APIs that provided data for all sorts of metrics but I really doubt I could make a machine learning algorithm that could predict the future.

I came to this conclusion after trying to do some NLP on Berkshire Hathaway letters. The data of 5 years’ worth of letters just didn’t really match the present situation.

How could I automate something so difficult?

I knew one thing.

If I couldn’t make a crystal ball, at least I could find ways to speed up my learning.

After much hunting for accelerated learning, I landed on just listening to annual reports and reading them if I feel like it. In particular, I spent most of my listening time on the footnotes.

Not exactly the most amazing way to accelerate learning.

But, what did I excited me the most about this was hunting for apps that could read pdfs out loud and without the need for a big subscription price tag.

This may surprise but there are not that many great apps out there.

Nevertheless, after much hunting, I landed on an app that suited my needs. It’s Prestigio eReader.

Not too sure if it exists on iOS but it does for Android.

And, to solidify the learning a further step, I put my analysis of companies online for the whole world to read and criticize if they wish to.

The takeaway point here is to avoid the temptation to build a machine learning model to predict the future of a company. Instead, use apps and methods to accelerate your learning.

If you want to know how to read annual reports like Warren Buffett Here’s a guide.

Conclusions: How to automate value investing

Automating the numerical aspect of value investing is easy. You can find APIs to call in financial summaries and make financial ratios out of them.

The hard part is developing a solid understanding of a company.

Even if you drew in all of the numbers from footnotes, you’re probably going to end up with an overfitting machine learning algorithm.

To understand a company quickly, the easiest way to do it is simply to listen to the annual report with an emphasis on the footnotes.

Admittedly, this isn’t groundbreaking stuff but it’s a place to start with your automated value investing.

Jason Huynh I'm a data analyst who enjoy reading annual reports. My hobbies include exercise, cooking and being a well rounded dad. I work as an analyst in the higher education sector in Australia but my passion is in investing. I used to believe that data could solve everything but it wasn't until I read Charlie Munger's "Poor Charlie's almanack" that I realised that I've been thinking in silos all this time and I really needed to expand my experiences and reading. What concerns me about life is making silly choices and following the trend aimlessly. I believe in critical thinking and serving others as I would like to be served.

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