Book Review: Good Stocks Cheap By Kenneth Jeffrey Marshall

Book Review: Good Stocks Cheap By Kenneth Jeffrey Marshall

I recently finished reading Good Stocks Cheap by Kenneth Jeffrey Marshall. Kenneth Jeffrey Marshall is a very smart guy who has an MBA from Harvard Business School and teaches value investing at Stanford University and the Stockholm School of Economics. He also teaches asset management at the University of California, Berkeley.

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In short, I thought this was one of the best modern books on investing that I’ve ever read.

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The book doesn’t really set forth any new concepts or ways to think about investing (although some of the specific formulas that Marshall uses were new to me). But rather, the book draws from all the various value investing material out there – from Security Analysis to The Intelligent Investor to Common Stocks and Uncommon Profits to Warren Buffett’s Shareholder Letters. Marshall very effectively draws together all of these various concepts that have been hanging out there and summarizes them in his “Value Investing Model”.

Marshall stood on the shoulders of giants to write Good Stocks Cheap. The end product is a book that should be one of the first books for new value investors. The book is also a great read for experienced value investors, who will likely gain a clearer understanding of investing just from the way that Marshall has organized all of these various value investing concepts.

Read on for my own personal notes and takeaways from Good Stocks Cheap.


Marshall defines speculating as “the purchase of something now in the hope that it can be sold at a higher price later.” He defines value investing as “acting on the observation of a clear difference between price and worth.

Marshall has written this book for people who manage their own money and he presents investing as a trade, like plumbing or barbering, that’s only useful when it works. To that end, Marshall discusses investing in a very simple, straightforward manner – without oversimplifying any concepts. He also provides helpful real-world “case studies” throughout the book, bringing the concepts he is talking about to life.

The Value Investing Model

The book is centered around Marshall’s “Value Investing Model”, a framework that he use to make investments. The model does three things:

  • First, it makes it likely to make investments that will produce above-market rates of returns.
  • Second, it makes it unlikely to make investments that will produce below-market rates of returns.
  • Lastly, it makes it possible that you might miss out on some investments that would have produced above-market rates of return.

The model begins with three questions that you must ask of any investment, in order:

  1. Do I understand it?
  2. Is it good?
  3. Is it inexpensive?

Then the model makes sure that you don’t do anything BUT ask and answer those three questions by making sure you’re aware of the cognitive biases that could thwart the process.

Overall, the model draws from three disparate disciplines: Finance, Strategy, and Psychology.

Part I: Foundations

Chapters 1-4:

  • Why don’t we hear more about value investing?
  • Why stocks?
  • What is the difference between price and value?
  • How to measure your own investment performance?

Part II: The Value Investing Model

Do I understand it?

Chapter 5:

  • Understanding the Business

Define the business along 6 parameters:

  1. What are the products or services?
  2. Who are the customers?
  3. What is the industry?
  4. What is the form/structure/business model?
  5. What is the geography of operations?
  6. What is the company’s status (market leader, declining, etc.)?

Don’t be misled by product familiarity, marketing messages, mission statements, company aspirations.

Is it good?

Chapters 6-13:

  • Introduction to Accounting
  • Capital Employed, Operating Income, Free Cash Flow, Book Values and Shares
  • Past Performance

In this chapter, Marshall introduces 7 ratios he uses to analyze companies.

  • Future Performance

This was my favorite chapter. If a business has been good in the past, then the next step is to see if it’s likely to remain so. We can’t use accounting ratios in this case – instead we have to turn to strategic analysis.

Marshall discusses four qualitative tools that you should use to assess a firm’s prospects.

The first is “breadth analysis”: Are the company’s customers concentrated (i.e. only a few large customers) and are the company’s suppliers concentrated (or do they have the power to become more consolidated). The business isn’t good unless the answer to BOTH questions is “no”.

The second tool is “forces analysis” or Porter’s 5 forces:

  1. Bargaining power of customers
  2. Bargaining power of suppliers
  3. Threat of substitutes
  4. Threat of new entrants
  5. Competition

The third tool is “moat identification” A moat is a barrier that protects a business from competition. If a company has a moat (moats are rare), then that moat has a source. There are six potential sources (a company only needs to have one source of a moat):

  1. Government
  2. Cost
  3. Brand
  4. Network
  5. Switching costs
  6. Ingrainedness (into the supply chain or channel)

The fourth tool is “market growth assessment”. This is pretty much straightforward: Is the company’s market growing or not?

  • Shareholder-Friendliness
Is it inexpensive?

Chapters 14-15:

  • Inexpensiveness

Marshall defines four price metrics that should be used to determine whether a stock is inexpensive or not, which basically compare price to FCF, operating income, book value, and tangible net asset value.

If a company is understandable and good – but it’s not inexpensive, then you must wait for it to become inexpensive. The waiting is made easier once you realize the difference between action and progress and the option value of cash (if you carry enough cash in your portfolio, you have the option to take advantage of opportunities when they come your way.

  • Risk is Driven by the Price You Pay

Here Marshall introduced the concept of margin of safety.

Don’t do anything else besides answer those 3 questions.

Chapter 16:

  • Behavioral Finance Concepts

In this chapter, Marshall defines 20 different cognitive biases that could cause investor misjudgment or misaction (e.g. anchoring, confirmation bias, impetuosity, etc.).

Part III: Maintaining Your Portfolio

Finally, Marshall concludes the book with several chapters on portfolio construction (he prefers a concentrated portfolio of good stocks over a diversified portfolio of mediocre ones), when to sell, how to generate ideas, how to match your investments to your values, and reminds you of Warren Buffetts two rules: Rule #1: Never lose money; Rule #2: Never forget Rule #1.

Chapters 17-21:

  • Portfolio Construction and Selling
  • Generating Ideas
  • Morality in Investing
  • Capital Preservation


As I mentioned in the introduction to this article, this was one of the best books on value investing that I’ve read. Whether your a new investor or an experienced value investor, you should definitely give this book a read. It will certainly help you learn everything you need to know about value investing and will help you make a lifetime of smart investment choices.

I want to leave you with some parting thoughts from Marshall on value investing and investing in general, which I thought were very powerful.

According to Marshall, value investing is more about money. He’s seen that value investing has other benefits as well.

  1. For one, it keeps him engaged with the world. Suddenly, shopping, the news, traffic, all the little things of life become relevant to making investing decisions and have deeper meaning.
  2. Second, value investing is truth seeking. It takes inherently hazy situations and chases the facts. Marshall seas a realness in that.
  3. Third, it rewards a long-term perspective. It compels investors to consider how enterprises – and therefor how civilization itself – will develop over time.

Finally, Marshall says (I added the bold for emphasis):

“Money just doesn’t produce life’s great joys. Those come from loved ones, from health, and from other sources that don’t care much about geometric means, depreciation schedules, or enterprise values.

But an absence of money can keep one from the great joys. And therein lies value investing’s promise. It gives one the freedom to fully embrace what really matters…

That, I think, is what rich is.”

If you haven’t done so already, head on over to Amazon and check out a copy of Kenneth Jeffrey Marshall’s great new book Good Stocks Cheap. You won’t be disappointed!

And to learn even more about value investing, subscribe to Vintage Value Investing’s weekly newsletter to learn about value investing concepts, get stock ideas, get in depth analysis about the stock market and the economy, and gain the wisdom of value investing legends like Warren Buffett, Ben Graham, and Charlie Munger.

Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance

by Kenneth Jeffrey Marshall

Marshall covers all the fundamental terms, concepts, and skills that make value investing so effective. He does so in a way that’s modern and engaging, making the strategy accessible to any motivated person regardless of education, experience, or profession. His plain explanations and simple examples welcome both investing newcomers and veterans.

Good Stocks Cheap is your way forward because the Value Investing Model turns market gyrations into opportunities. It works in bubbles by showing which companies are likely to excel over time, and in downturns by revealing which of these leading businesses are the most underpriced.

Build a powerful portfolio poised to deliver outstanding outcomes over a lifetime. Put the strength of value investing to work for you with Good Stocks Cheap.

Article by Vintage Value Investing

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…

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