3D Value Investing:

Triangulating the Best

Investment Targets

Value Investing Made Easy

 Designed & Compiled by STRIDE
Copyright © 2014 STRIDE. All Rights Reserved.
Content
Introduction 4 2nd Dimension: Valuation 20
- Determining the Consider Buy and 21
What is 3D value investing? 5 Consider Sell prices
- Fundamental Undervaluation and 22
How we got here 6 Forecasting Growth
- Think Like a Computer: Switch Off 23
The Principles of 3D Value Investing 8 Emotion
- Always Invest With a Margin of Safety 9
- Welcome Market Fluctuation 9 3rd Dimension: Timing 24
- Know What Type of Investor You Are 10 When to say ‘When’ 26
- Portfolio Distribution 10
The Point of Triangulation 27
Becoming a 3D Value Investor 11

The Three Dimensions of 3D VI 13

1st Dimension: Fundamental Analysis 15

- Strength 16
- Returns 16
- Intrinsic Value 16
- Dividend 17
- Earnings Predictability 17
- Economic Moat 18

3
Introduction
For the prospective investor, lack of choice is not a
problem.
Excluding over-the-counter stocks, there are currently
around 40,000 companies listed on stock markets
across the globe. In their quest to recognise nuggets
of value among mountains of what often transpires to
be fool’s gold, investors seek the counsel of advisers,
scrutinise analyst opinions, study patterns, waves and
trends.
Despite all the information laced around the constant
flux of the markets, investors frequently make the wrong
decisions, opting instead to follow the herd of others
buying when share prices are going up and selling when
they are going down. This emotional response to the
inevitable volatility of the stock market effectively turns
it into a roulette wheel.
3D Value Investing (3D VI) is the antithesis of stock
market speculation. Using specific principles and
processes, investors learn how to triangulate the best
possible targets for their investments.
No investment is totally risk-free. But by employing the
rules of 3D VI, prospective investors minimise risk by
understanding the true, fair value of a business through
fundamental analysis. We learn what the share price
should be and therefore only buy stock when it is being
sold at a discount. Finally, we sell the stock when trends
are driving the price up; the time when other investors
are being urged to buy.
3D Value Investors (3D VIs) are aware of the inevitable
waves of market activity. They observe trends and
patterns and still enjoy reading analyst opinion. But
they only select investment opportunities based on solid
financial fact, using an effective valuation methodology
and only act when the timing is right.
Introduction 4
What is 3D Value
Investing?

Value Investing Made Easy

Defining 3D Value Investing
3D Value Investing defines itself by first understanding
what it is not.
While we are fascinated by all theories regarding the
ebb and flow of the markets, 3D VIs do not invest based
on:
• Trends
• Patterns
• Analyst opinion
• Herd mentality
3D VI is all about hard facts. Using the three dimensions
of 3D VI, we triangulate the healthiest businesses for
investment, the fair value of those businesses and the
best times to buy in and sell out.
How We Got Here
Until the crash of 1929 investing in the stock market was
akin to gambling, with high returns generally meaning
high risk. The speculative boom that dominated the
20s was largely funded on borrowed dollars. Over $8.5
billion was loaned from brokers for margin trades, more
than the total currency in circulation across the USA at
the time. When over abundant wheat in the commodities
market finally broke the bull run in October 1929, panic
selling stripped $30 billion from the market in just two
days.
Benjamin Graham lost heavily in 1929. His experience
inspired him to look at businesses and the markets
in a different way. No longer would he follow the herd
that had already taken him once over a cliff. Instead he
decided to only buy shares he believed demonstrated a
deep discount to their intrinsic value; ideally, he would
buy stock at 50 cents in the dollar.
Warren Buffett, Graham’s student, employee and friend
is arguably the world’s most successful investor to
date. Their combined legacy was to introduce a new
way of selecting investments based on evidence of
sound financial health whilst aiming for low risk, long-
term returns. A key principle of 3D VI is Buffet’s idea
that investors should be fearful when others are greedy
and greedy when others are fearful. He has consistently
maintained that buying when everyone else is selling
and vice versa is the only logical way to approach the
stock market.
What is 3D Value Investing? 6
Defining 3D Value Investing
Graham had already invented the analogy of ‘Mr
Market’ to demonstrate the part emotion plays in share
price and the fear with which many investors react to
its fluctuations. Mr Market might feel excited about a
particular business on a particular day and quote a
high price for it, only to quote a low price for the same
business the next. Graham concluded that an investor
should never let Mr Market’s emotions dictate their own.
We have extensively studied traditional value investing
methodologies, developed them further and refined
them. Through our own experiences as investors
we have established new processes of fundamental
analysis, business valuation and timing, to create 3D VI.
Warren Buffett said: “It’s far better to buy a wonderful
company at a fair price than a fair company at a
wonderful price.”
3D VI expert says: “I disagree. Buffett has limited his
investment horizon, focusing on only specific sectors in
the USA and UK, which is perhaps why he holds this
view. The 3D VI universe is far more expansive. We
think you can buy any company at a fair price, as long
as you’re prepared to wait until the right time.”
What is 3D Value Investing? 7
3D Value Investing
Principles

Value Investing Made Easy

The Four Principles of 3D VI
Principle 1: Always Invest With a Margin of Safety
Investing with a margin of safety means buying a share Buying stock at such a discount can bring 3D VIs
at a price that is below its fair market value. substantial profits, once the market inevitably revalues
the stock and raises the price to where it should be. It
We look at margin of safety in terms of depth, based on also protects the investment from potential losses if the
the outcome of our fundamental analysis of a business. business falters.
If the business proves to be strong, well run and
generates superior returns, we are happy to settle for a
shallower margin of safety. If our fundamental analysis
casts doubt over the financial health of the business,
the margin of safety must be much deeper.

Principle 2: Welcome Market Fluctuation

There are going to be times when the market is under
stress. Instead of selling out and heading for the hills
during a downturn, we recognise this time as one of
great opportunity.
3D VIs form their own opinions of business value
based on careful examination of financial facts. Once
we have targeted sound, currently undervalued
businesses, we buy. One day, the market will catch up
with the fair value of that business and the price will
swing up again to beyond our target exit point, a price
that we’ve determined represents a great return. That
is when we sell.

3D Value Investing Principles 9

The Four Principles of 3D VI

Principle 3: Know What Type of Investor You Are

Sticking to your investment philosophy will bring the businesses to buy into or sell out of, opinions that are
most consistent results. As 3D VIs, we would never formulated on fundamental analysis and valuation. We
invest in any business without first applying our methods also employ our specific investing principles to dictate
and processes to the financial facts. the timing of buying in or selling out.

We are not interested in following the market herd.

Instead, the principles of 3D VI allow us to cut our own
paths through the market based on opinions of which

Principle 4: Portfolio Distribution

Don’t put all your eggs in one basket. A broad selection
of intelligent investments across multiple sectors,
geographies and currencies will further buffer a
portfolio against risk.

3D Value Investing Principles 10

Becoming a 3D Value
Investor

Value Investing Made Easy

Becoming a 3D Value Investor
As stated in the third of the 3D VI principles, knowing
yourself as an investor is central to your success.
Becoming a 3D Value Investor is an active decision,
one that should be made with full clarity of what 3D VI
means and the mental approach needed to succeed.
Predominantly, being a 3D Value Investor means
adopting a calm, level headed view of the market. It is
about not acting impulsively or erratically when trends
take an unexpected turn, instead understanding that 3D
VI allows you to make your decisions independently of
market mayhem.
3D VIs seek long-term opportunities with businesses
built on strong financial bedrock. We are only interested
in investing in businesses that demonstrate consistent
strengths, either pay consistent, affordable dividends
or generate significantly superior returns and have the
means to withstand a severe economic downturn.
We are the antithesis of speculators or high-risk
gamblers. Geography, industry sector and currency do
not concern us or influence our investment choices.
Regardless of market rumour, current trends or the
panicked actions of others, we use specific processes
to seek out investments representing the most promising
prospects.
We reinvest our returns to maximise the positive effects
of compound interest. Equally important is to buy and
sell shares at the optimum times.
Becoming a 3D Value Investor places control over
your investments firmly in your own grasp. The three
dimensions of 3D VI ensure you target only the strongest
businesses, understand their fair value and act at the
right time to generate outstanding returns.
Become A 3D Value Investor 12
The Dimensions of
3D Value Investing

Value Investing Made Easy

The Dimensions of 3D Value Investing
The concept of 3D VI has been determined through
observation, investigation, trial, error and revision. This
process has revealed to us the three dimensions that
give this method its name. Using all three dimensions
together is crucial in our selection of investment
opportunities:
• Fundamental analysis
• Valuation
• Timing
Considering any one of these elements alone will
not provide the necessary framework for accurate
investment forecasting. Use them together, however,
and long term investments start to perform better than
ever before.
There will always be an element of risk in investing. But
we can reduce the risk of losing money by only targeting
businesses that meet specific criteria to demonstrate
their strength.
Great long-term investment opportunities come from
businesses with a robust financial heartbeat that are
currently undervalued. A low market price is what we
want when we buy into an investment because the
market will, in time, swing in the opposite direction.
When we see the inevitable over-valuation of the same
share price, that’s when we sell.
Ultimately, 3D VI is about transparency and truth. Its
three dimensions act as lenses, each one bringing the
strengths or weaknesses of any investment potential
into clear focus. Together, they show 3D VIs exactly
what they need to know to make the best, most lucrative
investment choices.
The Dimensions of 3D Value Investing 14
1 Dimension:
st

Fundamental Analysis

Value Investing Made Easy

Fundamental Analysis
Strength
To determine how well a business operates in its sector.
We need to know how it manages its cash, organises its
balance sheet and how well it is run. Understanding the
sector or sectors in which a company operates is key to
determining strength.
Returns
A strong business works its cash reserves / capital
and equity as hard as possible to maximize value. An
investor should expect investments to generate returns
that significantly beat the rate of interest offered by the
bank.
Intrinsic Value
We take a very unique view of balance sheets. We strip
away anything intangible or shady, such as accruals,
and add charges that we believe are missing, such as
amortization, writing down intangible assets. Soft assets
such as patents and goodwill are discounted.
The balance sheet of a manufacturer, for example,
is completely different from that of a bank. Gaining
this industry insight is difficult and requires detailed
understanding of capital structure requirements.
If the management team has borrowed money, this
should generate sufficient returns to cover debts and
repayments – as well as reasonable returns for the
business itself – of around 25% ideally.
This is not the whole story in how we value a business
for 3D VI but it’s a key part of the fundamental stage of
our analysis. We also look at the current share price to
help us understand how the business is currently valued
in comparison with our calculation of its intrinsic value.
1st Dimension of 3D VI 16
Fundamental Analysis
Dividend
If the business pays a dividend, what percentage of your
investment can you expect to receive in terms of yield?
3D VIs look specifically for companies that can afford
the dividends they pay. A strong business will pay its
dividends from free cash flows rather than incur debts
to ensure shareholders get paid.
We are not interested in businesses weaving an image
of strength whilst undermining their own value.
A perfectly healthy business might stop paying dividends
for great reasons, for a long-term investment of its own,
for example. Under such circumstances shareholders
can expect to receive an increased dividend or superior
returns later; this is why it’s vital to research the dividend
history of a business to get the full picture.
Earnings Predictability
This blended metric considers how the management
team values growth. It is a historical look at growth
across revenue, gross profit, overheads, EBIT and net
income.
Through dividend status analysis we want to see
evidence of:
Affordability - evidence that the business can fund
dividends out of free cash flows.
Consistency - are they paid regularly?
Growth - do the dividends increase year-on-year?
A company’s attitude to its dividends offers a valuable
insight into its attitude towards shareholders. However,
we believe it is better to buy a business that pays no
dividend and delivers superior returns, than to buy
a business with a healthy dividend yield that it can ill
afford.
Ideally, we want to see a long-term upward trend across
all areas of the business because this demonstrates a
management team that understands the importance of
growth at all levels.
1st Dimension of 3D VI 17
Fundamental Analysis

Economic Moat
The strength of a business is also determined by its
ability to withstand external market forces and how
protected it is from competition. Michael Porter, Harvard
University Professor and corporate strategy expert,
devised his five forces in 1979 as a means of measuring
the competitive intensity of a market.

Porter categorised his competitive

forces as three horizontals: the threat
of emerging rivals, the threat of
established rivals and the threat of
substitutes; and two verticals: the bargaining
power of suppliers and the bargaining power of
customers.

1st Dimension of 3D VI 18
Economic Moat Continued

In determining the economic moat of a business, we
look for evidence of how it is combating these external
threats or whether it has succeeded in eliminating them
altogether.
We conduct deep analysis of how the business deploys
its capital and how it generates cash flows to determine
whether it has a moat at all. If we find there is a moat,
we need to understand its size and depth and whether
it is growing or shrinking.
To do this we ask the following questions:
• How real are the threats of substitute products or
services in the market? Does this company stand
alone? Are its customers, ‘happily trapped’?
• Is the business specialised? How likely is it that
another, similar business could appear to threaten
its market share?
By analysing these criteria, the 3D VI determines the
width and depth of a business’s economic moat and
therefore its long-term prospects in terms of market
strength.

• How difficult would it be for a rival company to

compete with this business? This barrier could
constitute financial outlay, knowledge or time until a
product is market ready.

• How indispensible is this business to its customers?

Who needs whom more?

• Could this business affect other suppliers’

competitiveness in the market place? Does it have
control?

1st Dimension of 3D VI 19
2 Dimension:
nd

Valuation

Value Investing Made Easy

Valuation
As 3D VIs we want to know the fair value of a business; Determining the Consider Buy and Consider Sell
what it is actually worth, rather than what the market prices
tells us it’s worth. The key question we seek to answer
is: What price should the shares really be? We want to know how much we should pay to buy into
a business and how much we should sell our shares for
Determining the intrinsic value of a business has always in order to make the best possible return. Calculating
been central to the principles of value investing. For 3D fair value allows us to pinpoint two very important prices
VI however, intrinsic value, or true book value, is only in this process: the consider buy and the consider sell.
one of the factors we analyse in order to reveal the fair
overall value of a business. Once the fair value of the business has been established,
we can then blend in the other factors already determined;
By combining future growth forecasting, cash per share, strength, returns, dividend, earnings predictability and
terminal value and net present value for example, 3D depth of economic moat.
VIs are able to see a far more rounded view of business
value. This is why we call it fair value. Finally, this stage of analysis closes the loop in our
calculations of the margin of safety, by revealing to us
The down side of using only the intrinsic value of a the percentage by which a share is under or over valued.
business to determine whether its current share price
is accurate, is that it does not take into account the
trajectory that the business is likely to take. While we
are interested in the snapshot of where a business
currently stands, we also need to get a good idea of
where it is heading.

2nd Dimension of 3D VI 21
Valuation
Fundamental Undervaluation and Forecasting
Growth
A forecast for shrinkage or negative growth can still
mean growth in the share price. A business might be
so fundamentally undervalued today that it would have
to shrink for several years before its value reaches its
current market price. Such a business is a victim of
extreme market over-reaction – and presents a great
opportunity for a 3D VI.
Future growth forecasting is notoriously tricky and
nobody can claim accuracy here. The difference for
3D VIs is in the standpoint from which we look forward.
Once again, in order to understand and estimate what
we don’t yet know, we look back at all the things we
know for sure.
Our refined process of fundamental analysis is once
again key here. Yes, it allows us to identify shares for
sale at prices far below what we calculate they should
be worth, but so does traditional fundamental analysis.
Using our 3D VI techniques, we are able to go much
further.
By looking at the path we believe a business is going to
take and how well it is run we can calculate the prices
at which we would buy into, and later sell out of, our
investments. Once we have these target prices, we
know it is only a matter of waiting until the time is right
for action.
Many investors are put off an opportunity if the business
in question appears to be shrinking rather than growing.
But shrinkage does not automatically mean the value
of the business is in decline. Sometimes a business
must reinvest in order to grow so a diminished profit
margin does not necessarily accurately reflect negative
growth. In fact, this increased reinvestment rate is often
a precursor to stunning positive growth, especially if
the investment is made by a motivated and talented
management team.
As most analysts are primarily focused on quarterly
financial announcements, businesses are regularly
given inaccurate growth forecasts based solely on
a three-month view. This quarterly snapshot really
is a very blinkered outlook when compared with the
panorama presented by 3D VI fundamental analysis,
growth forecasting and valuation together.
2nd Dimension of 3D VI 22
Valuation
Think Like a Computer: Switch Off Emotion
Gut instinct, personal opinion and market fashions have
no place in the selection of 3D VI opportunities. We have
to remove our emotional response to the branding, what
they sell or where they are based and look instead at
cold, hard facts.
Branding and marketing gives businesses an identity,
a flavor, a face and a character. It clarifies the target
market, is designed to make the business appealing to
potential customers and can prove extremely detrimental
to investors.
We are genetically programmed to formulate opinions
about what we see and corporate branding taps into that
primal sway. Marketers want to generate an emotional
response in all of us, hoping to grab our attention; ideally
instilling proprietary loyalty, the branding Holy Grail.
In order to make sound decisions, we must ignore
everything the branders have spent so much time
and energy devising to turn our heads. We must
also recognise that a strong aversion to a company’s
branding is just as dangerous as a strong attraction.
A business isn’t valuable because you love it, have
always been loyal to it, or your dad swore by it. On the
flip side, a TV ad might make you want to tear out your
eyes, yet look past this and the company behind it might
represent a great investment opportunity.
It’s not just branding that turns us towards or away from
a company. Our opinions of their products or services,
industry sector, or a personal like or dislike of the
management style / team; it could be any mixture of
elements. With 3D VI, it doesn’t matter if you have no
clue about a particular sector - you don’t need to know.
Our experience has taught us if we adhere to our
investment principles and analyse opportunities using
the three dimensions, we achieve great results. 3D VI
translates into consistent, long-term returns regardless
of market, geography or currency.
2nd Dimension of 3D VI 23
3 Dimension:
rd

Timing

Value Investing Made Easy

Timing
Fundamental analysis has shown us the business is
healthy, valuation has helped to determine our margin
of safety and allowed us to calculate the consider buy
and consider sell prices. Now we need timing to tell us
when to get in and when to get out.
The removal of emotion is particularly important when it
comes to the actual moment of investing or selling out.
The moments of when to buy or sell are those when
the investor feels the most pressure and, therefore,
they are the easiest to get wrong. How can the simple
logic of ‘buy low, sell high’ abandon the most intelligent
investors? The answer is panic.
Panic urges people to make silly decisions. We know
the market can quickly decline. It can also quickly
recover. If something happens that we don’t expect,
especially if the investor is inexperienced, panic can
see all principles fly out of the window as he jumps in
with the herd.
Act in haste at the wrong time and what could have
been a highly lucrative investment becomes a loss. The
stock market can undoubtedly be very cruel to investors
whose timing is completely out and 3D VIs are not
interested in taking unnecessary risks.
In Berkshire Hathaway’s 1985 Annual Report, nine
years after Graham’s death, Buffett shared this story
that Graham had told him to illustrate the persistent
herd mentality of the market crowd and why it should be
ignored. He wrote:
“Let me tell you the story of the oil prospector who met
St. Peter at the Pearly Gates. When told his occupation,
St. Peter said, “Oh, I’m really sorry. You seem to meet
all the tests to get into heaven. But we’ve got a terrible
problem. See that pen over there? That’s where we
keep the oil prospectors waiting to get into heaven. And
it’s filled - we haven’t got room for even one more.” The
oil prospector thought for a minute and said, “Would you
mind if I just said four words to those folks?” “I can’t
see any harm in that,” said St. Pete. So the old-timer
cupped his hands and yelled out, “Oil discovered in
hell!” Immediately, the oil prospectors wrenched the lock
off the door of the pen and out they flew, flapping their
wings as hard as they could for the lower regions. “You
know, that’s a pretty good trick,” St. Pete said. “Move
in. The place is yours. You’ve got plenty of room.” The
old fellow scratched his head and said, “No. If you don’t
mind, I think I’ll go along with the rest of ’em. There may
be some truth to that rumor after all.”
3rd Dimension of 3D VI 25
Timing
This is a great analogy of how investors can get swept
up in an accidental sell off fuelled by nothing more than
market hype, rumour or trend.
Share prices so often reflect these groundless
fluctuations rather than the fair value of businesses
concerned. The crowd is attracted to perceived success
and will flock to stocks on the rise. By the same token, it
deserts stocks whose share price is on the decline. As
3D VIs, we recognise the flaws in this mentality and aim
to do exactly the opposite. The market will eventually
correct itself to reflect our calculated fair value of a
business; we just have to be patient.
Yet while we don’t care about trends, the fluctuations
in share price are very real. They may not bear
any relevance to the fair value of businesses we’ve
recognised as good investment opportunities, but
they do influence share prices across the board and
therefore, we definitely want to understand them.
When to say ‘When’
To comprehend market trends for our purposes as
3D VIs, we turn to technical analysis. If fundamental
analysts study the shop itself; its product, cash flow and
profits, technical analysts study the people going in and
out of the shop, looking for patterns in the density or
paucity of the footfall.
On its own, the analysis of market trend behaviour is
abstract. Central to technical analysis is the principle
that price action tends to repeat itself purely because
of the collective patterned behaviour of investors.
Technical analysts focus on discernible trends and
market conditions and are therefore very good at
identifying them as they happen.
Unlike technical analysts, 3D VIs don’t believe current
patterns will exactly repeat those that happened in the
past. But used very specifically as part of our timing
dimension, technical analysis helps ensure we buy
low and sell high. This is only useful when used in
conjunction with all the other elements of our strategy
dimensions. We simply use methods of technical
analysis to determine when we should enter or exit the
market.
3rd Dimension of 3D VI 26
The Point of
Triangulation

Value Investing Made Easy

The Point of Triangulation
3D VI brings together fundamental analysis, valuation
and timing in a way that has never been conceived of
before. We have refined and developed each separate
dimension and applied them as one to market data,
achieving consistently outstanding results.
During our research we have found that using all three
dimensions together hands the investor a more honest,
transparent view of the markets than any methodology
to have gone before.
3D VI sees the financial truth at the heart of an
undervalued business that will prevail once the market
catches up; it disregards the market hype around value,
seeking only solid evidence of what exists underneath.
It determines its own valuations and times the buy and
sell to maximise returns.
Through the lens of 3D VI investment opportunities
have never been clearer.

These three dimensions examine crucial areas of

businesses and the market at large. They triangulate
investment opportunities based on fundamental
strengths, independent fair valuation and buy low, sell
high timing.

In devising 3D VI techniques we’ve seen that only by

using all three dimensions of this strategy together will
the best results be achieved. This is because knowing
the best time to act is only worthwhile if we have
identified valuable targets that present great opportunity
with minimal risk.

28
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Copyright © 2014 STRIDE. All Rights Reserved.