As you have probably noticed, there are quite a few investing books out there. Many of them were written by some of the world's greatest investors. So, why should you read our book?

Stock investing is more prevalent than ever, whether directly or indirectly through brokerage accounts, exchange-traded funds (ETFs), mutual funds, or retirement plans. Despite this, the vast majority of individual investors have no training on how to pick stocks, let alone basic financial literacy. And, until now, there hasn't been a truly accessible, easy-to-understand resource available to help them. The Little Book of Investing Like the Pros : 5 Steps for Picking Stocks was written to fill this void.

We believe the simplicity and accessibility of our stock picking framework is truly unique. Using real-world examples and actual Wall Street models used by the pros, we teach you how to pick stocks in a highly logical, step-by-step manner. Our goal is straightforward—to impart the skills necessary for finding high-quality stocks while protecting your portfolio with risk management best practices.

Our practical approach is designed to help demystify the investing process, which can be intimidating. This training will help set you apart from others who are largely flying blind.

Pilots require extensive training before receiving a license. Doctors must graduate medical school, followed by a multi-year residency. Even those providing professional investment advice require certification. But, anyone can buy a stock without any training whatsoever. While buying stocks on a hunch and a prayer may not endanger your life, it can certainly put your finances at risk.

In our original best-selling book, Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions, we developed a highly practical guide on valuation and corporate finance. Our step-by-step, how-to approach resonated with a broad audience, selling over 200,000 copies and still going strong. While our first book was designed largely for investment bankers, it attracted attention from professional investors.

We also received positive feedback from beginner investors seeking to understand Wall Street valuation techniques. Hardly a day passed without family and friends asking us about popular stocks—e.g., Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google/Alphabet (GOOG), collectively known as FAANG. A popular line of questioning centered on a stock such as AMZN trading at $1,848 per share vs. FB at $205, with the read-through that FB was a bargain given the lower share price.

Though just one example, the prevalence of this type of thinking was yet another inspiration to write this book. Note: if it's not clear why comparing AMZN and FB on the basis of stock price as opposed to earnings, business model, performance trends, and other key metrics is fundamentally misguided, then this book is definitely for you. And even if you're square on that (and then some), we have a framework to help take you to the next level!

With the help of dozens of seasoned investors, we developed a concise 5-step framework for picking stocks in The Little Book of Investing Like the Pros: sourcing investment ideas, identifying the best opportunities, performing due diligence, determining valuation, and making the ultimate go/no-go decision. We also weave in key portfolio construction and risk management techniques. To assist your development, we provide real-world valuation, financial modeling, and portfolio management templates on our website: www.investinglikethepros.com

Our 5-step framework is designed to be sufficiently repeatable and flexible for various fundamentals-based investment styles. Most notably, these include value investing, growth, growth at a reasonable price (GARP),¹ long-only, long/short, event-driven/special situations, and distressed. These investment strategies all share the common goal of unearthing stocks with meaningful upside potential, many of which are misunderstood, ignored, or underappreciated by the market.

Our approach towards simplifying the investment process is supported by a playing field that is arguably more level today than ever before. Historically, the discrepancy in access to information between institutional and individual investors provided a tremendous barrier. Individual investors generally didn't know how or where to access relevant data.

Today, all investors have unprecedented access to information and resources thanks to more stringent disclosure requirements and technological developments. There are powerful tools in the public realm to identify, investigate, and execute informed investment decisions. However, proper training on how to use them is critical. That's where our book comes in—namely, a framework for identifying opportunities among the thousands of publicly-traded companies in the market.

Successful application of our techniques requires fine-tuning as you gain experience with real-world investment decisions. Over time, you will develop your own distinct style and approach, inevitably borrowing from your professional and personal life. Great stock ideas are often inspired by everyday observations and passions. Your eventual portfolio will likely reflect your educational training, sector expertise, outside interests, and hobbies. Do you have experience in a particular industry? Is there a topic, sector, or trend that fascinates you?

Of course, this is just the beginning of a continuous process. The journey towards becoming a successful investor is by no means easy. Taking the next step will rely upon your own hard work, diligence, judgment, and analytical abilities. You also need to be comfortable with making mistakes early on. Focus on improving your process vs. the outcome. Even pros learn invaluable lessons from their losers, often more so than from their winners.

In a world where passive investing has proliferated, it merits revisiting the virtues of active investing. Passive investing is exactly as it sounds—you will perform in line with the market/sector, for better or worse. These investment goals work for many. Hence, the arrival of passive investing as a permanent fixture. But, a large portion of investors seek superior returns, which requires an active approach.

The passive approach treats good and bad stocks equally when allocating capital to an index fund or sector ETF. Common sense dictates that a superior approach would target winners and seek to avoid losers to drive above-market returns. For example, as brick-and-mortar retail began to disappear in the face of e-commerce, an ETF tied to the S&P 500 would have kept you invested in an underperforming sector. So, why not use your natural curiosity, smarts, and the tools in our book to aspire to do better?

A quick disclaimer before we get started. While we have sought to distill the highly complex world of investing, we can only simplify so much. Along the way, you will need to research and brush up on some basic terms and concepts. This extends to rudimentary accounting and financial calculations. Proper investing is a serious endeavor and requires real commitment. We believe, however, that the potential rewards are worth the effort.

Structure of the Book

Our book is structured as five chapters that correspond to the five steps in our framework. We use real-world examples throughout to bring these concepts to life.

Our flagship case study centers on Delphi Automotive, a global automotive supplier that was the predecessor company to what are now two distinct entities following a tax-free spin in December 2017.² Today, these entities trade independently as Aptiv (APTV) and Delphi Technologies (DLPH).

Throughout the book, we focus on the opportunity that investors faced upon Delphi Automotive's initial public offering (IPO) in November 2011. By the time of the company's split in 2017, those who invested from the beginning made nearly five times their money. Using our framework, we take you back in time to illustratively guide you through the process that helped discover, analyze, value, and bless this stock.

Delphi was a textbook restructuring and turnaround opportunity. Before filing for bankruptcy in 2005, it had a fragmented business model with an uncompetitive cost structure and burdensome liabilities. Delphi used the bankruptcy process to rationalize its product lines, sell uncompetitive businesses, and migrate manufacturing to best-cost countries (BCCs). Delphi's lead shareholders, Silver Point Capital and Elliott Management, played a key role in the turnaround, working with CEO Rod O'Neal and the management team to transform the company. The reconfigured strategy for the “New Delphi” centered on technology and the three core themes of “Safe, Green and Connected.”

Upon emergence, Delphi featured a focused product portfolio, globally cost-competitive structure, and revamped balance sheet. The company also had a concentrated shareholder base that was very active in pursuing value creation. Over time, these core shareholders would be natural sellers as Delphi's stock performed.

As part of their value creation plan, the lead shareholders assembled a world-class Board of Directors, comprised of public company CEOs, auto industry veterans, and highly experienced domain experts (e.g., technology, human resources, capital markets, and M&A). Former DuPont Chairman and CEO Jack Krol was appointed Chairman of the Board and played a critical role. His background as lead director of Tyco International, where he oversaw their successful corporate overhaul, was a key factor in the lead shareholders' decision to bring him on board. He and his fellow directors were instrumental in working with management to develop the strategy around capital allocation, IPO preparation, and messaging to investors.

Delphi also emerged with a more competitive tax regime at the time due to its status as a U.K. tax payer. Add in secular and cyclical tailwinds, a fortified moat, improved financials, and a compelling valuation—in sum, there were multiple ways for an investor to win. There were also many risks to consider. You just had to know what to look for … and how to do the work.

In late 2011, Delphi went public at a $22 share price. The new strategy would prove enduring over the next several years, persisting long after O'Neal passed the reins to CFO Kevin Clark in 2015. Along the way, there were numerous strategic initiatives that created significant value for shareholders, culminating with the tax-free spin of Delphi's Powertrain Systems segment in 2017.

By the end of 2017, just prior to Delphi's separation into two entities, the stock was trading above $100 per share. Investors who seized upon the opportunity at Delphi's IPO were rewarded with a 375% return. This represented a 30% annualized return vs. the S&P 500 at 13%.

Our 5-step approach to stock picking is designed to help you uncover the next Delphi Automotive. It is also designed to help you manage your stock positions along the way. For example, in 2018, the automotive market began to show signs of a cyclical slowdown. As discussed in the Post-Mortem, the newly spun powertrain business, Delphi Technologies, also experienced some self-inflicted wounds and headwinds related to its geographic footprint. Our system of early warning signals and active monitoring is crafted to help you avoid these pitfalls. Knowing when to exit or downsize a position is no less important than determining when to enter or upsize.

Step I: Idea Generation

Step I focuses on how professional investors source investment ideas. This process requires a great deal of patience and discipline. It is not uncommon to review dozens, or even hundreds, of companies before a high-quality opportunity is discovered.

Our book focuses on bottom-up investing, which is a company-first approach to identifying attractive stocks. You start with the individual company and perform in-depth analysis on its business drivers, financial performance, valuation, and future prospects. We also discuss the top-down approach, where you search for opportunities based on macroeconomic (“macro”) or secular themes. Key top-down strategies center on identifying global or domestic market and business trends/cycles, and buying the beneficiaries. The flip side is to avoid or even short the victims.

Experienced investors tend to incorporate elements of both bottom-up and top-down in their approach. For the bottom-up investor, paying insufficient attention to important macro and other big-picture trends is dangerous. Similarly, the successful top-down investor can't ignore fundamental analysis for individual companies.

In Step I, we discuss the primary buckets from which professional investors source their ideas. We start with undervalued companies for whom there is a path to improved financial performance or a higher valuation. We then focus on companies undertaking value-enhancing corporate actions, such as mergers & acquisitions (M&A), spin-offs & divestitures, restructurings & turnarounds, stock buybacks & dividends, IPOs, and insider buying. Lastly, we explain how to track proven investors to help source new ideas.

Step II: Identifying the Best Ideas

The initial idea search often yields dozens of potential investment opportunities. Step II explains how to parse through a broad list to identify the best ones. This involves a deeper examination of each stock in order to focus your attention on ideas that can become “core” positions. All you need are a few high-quality stocks to kick-start a strong portfolio.

This thinning of the herd relies upon performing high level research on each potential idea in a quick and systematic manner. Towards that end, we provide you with a framework that helps you do just that. It centers on investment thesis, business model, management team, risks & considerations, and financials & valuation. This preliminary analysis is necessary to separate fool's gold from the “real McCoy.”

We also provide a corresponding investment write-up template to help you track and organize your research on each stock idea. This template maps to our Step II framework and allows for easy comparison across multiple companies.

The longer the list of potential ideas generated from Step I, the more difficult the task of refining. Sometimes, an idea may jump off the page as a game-changer for your portfolio. In most cases, however, the ideas with the highest upside opportunity are not so black and white. Once the obvious outliers are eliminated, in-depth analysis on the remaining stocks can begin.

Step III: Business & Financial Due Diligence

In Step III, it's time to perform a much deeper dive on those opportunities that survived the culling process. More thorough business and financial research is needed following the early stage vetting. In other words, this is the key due diligence phase.

On the business front, we demonstrate how to judge whether a company is high quality, or can become high quality. This involves examining its core strengths as well as the risks that could potentially derail your investment thesis. Much of this work is qualitative, requiring sound judgment and insight. Experience and familiarity with specific business models and sectors is particularly helpful here. Your personal interests and perspectives may also come in handy.

On the financial front, the company's core financial statements need to be thoroughly scrubbed to determine its track record, health, and prospects. A large portion of this analysis is simply making observations about key financial items and seeking defensible answers. You must be acutely aware of any key weaknesses related to growth, margins, FCF, or balance sheet. We also show you how to develop a financial projection model, which serves as the basis for your valuation work in Step IV.

If you can't gain comfort with the business and financial case, then the investment is probably not going to work for you. And that's okay. You don't want to invest in a business you don't understand or believe in. And, you don't want to invest in a company with a weak financial profile that is unlikely to dramatically improve.

Step IV: Valuation & Catalysts

In Step IV, we turn our attention to valuation, arguably the core component of the investment process. Here you need to determine what the company is worth, whether it is cheap or expensive, and whether there are any “catalysts” for revaluation. Even a stock that passes the business and financial test with flying colors may fail the valuation test. In other words, it may be too expensive at current levels to produce an attractive return. This is the trap of “good company, bad stock.”

In this chapter, we teach you how to perform the key valuation methodologies at the core of any stock analysis. These include market and intrinsic valuation techniques, such as comparable companies and discounted cash flow analysis. We also discuss M&A valuation approaches, including precedent transactions, leveraged buyout analysis, and accretion/(dilution). More nuanced techniques, such as sum-of-the-parts and net asset value, are then introduced to round out your skill set.

Some combination of these tools is used to determine your price target (PT) for a given stock, which is critical for making your ultimate investment decision. Further, we review common catalysts that can unlock the hidden value in a stock and trigger a revaluation. Catalysts may be internally-driven, as part of an evolving management strategy, or external, triggered by shareholder activism or regulatory changes. Key catalysts include earnings beats, M&A, capital return, refinancings, CEO changes, and new product launches.

Step V: Investment Decision & Portfolio Management

You have identified a compelling idea, performed due diligence, and have a view on what the company is worth. All of this informed your all-important price target. It is now time to make the ultimate investment decision. Is the stock a buy, short, track, or pass?

In the event a buy or short decision is made, the work doesn't stop there. Going forward, the position must be constantly monitored. New developments may materially change the initial investment thesis for better or worse. Effective monitoring involves constant reflection, analysis, and synthesis of events that may impact the underlying business.

Building a sound portfolio requires additional skills beyond just stock picking. Successful portfolio construction involves selecting a collection of stocks tailored to your specific investment goals, strategy, and risk tolerance. This means proper sizing and prioritization of your positions. A large position should reflect its ranking relative to other stocks in the portfolio in terms of overall quality, upside potential (including possible catalysts), and conviction level.

Disciplined investors employ risk management techniques to optimize their portfolios and protect their downside. Key tools include capping exposure levels, as well as setting guidelines for limiting losses and taking profit. Exposure levels refer to individual position sizing, sector concentration, and geographic focus, among others. We also teach you basic techniques for hedging and portfolio stress testing.