This article appears from guest contributor John Rotonti. John is the host of the JRo Show and is a long-time friend of 7investing.

In my opinion, Big Money Thinks Small by Joel Tillinghast is the best stock-picking book I’ve ever read, and it contains the single best sentence on stock-picking that I’ve ever read (see first quote below). I’ve now read the book three times and each time something new pops out at me. It’s also funny, sarcastic, witty, and at times self-deprecating, so I found myself laughing out loud each read too. The book covers everything from financial statement analysis and earnings quality red flags to valuation to corporate character and investor mindset.

These lessons come from an investing GOAT (“Greatest Of All time”), a true legend, that was interviewed by, hired by, and trained by the great Peter Lynch at Fidelity. Lynch says that Joel is “one of the greatest, most successful stock pickers of all time.” To read more of Lynch’s praise for Joel, please see my interview with Joel from January of this year. Joel generated nearly four percentage points of annualized alpha (outperformance) for his clients over more than 30 years by preferring to invest in slower-growing oligopolies that are “earning outstanding profits” with high returns on equity and returns on invested capital, high free cash flow conversion, little debt, run by skilled, honest adaptable managers that avoid dilution, and businesses that have long life spans and high terminal values because of high barriers to entry and durable moats. And he was very strict about only buying them at low P/Es and high free cash flow yields. Very strict!

For his incredible outperformance he was named Morningstar’s Domestic Stock Fund Manager of the Year in 2002 AND winner of the 2021 Morningstar Award for Investing Excellence in the “Outstanding Portfolio Manager” category. With Joel’s permission, I have included over 50 of my favorite quotes from my favorite investing book. Joel’s team at Fidelity also approved my aforementioned description of his investing style and philosophy!

I hope you enjoy.

(If you haven’t read his book yet, I can’t recommend it enough, and if you want a companion to the book that dives deeper into several of the topics please see our interview together).

“Crisply put, you want low P/E stocks that are also high quality and growing, with a high degree of certainty about the long-term outlook.”

 

“Instead of chasing the highest potential returns, I emphasize the durability of profit streams and the credibility of forecasts.”

 

“I generally prefer the likelihood of a good outcome to the slim chance of a fabulous outcome.”

“The four elements of value are profitability or income, life span, growth, and certainty.”

 

“Such an investment would combine all four elements of value: a high earnings yield, growth prospects, a moat or competitive advantage that protects against failure, and certainty about the future.”

 

“There’s a lot more to valuation than merely looking for low P/Es – namely, growth, longevity, and certainty.”

 

“The first step to identifying really valuable companies is to find ones with superior profits.”

 

“Nirvana is a profitable, growing enterprise that is certain to endure.”

 

“As an investor, I want profits that will keep sticking out and not be pounded down quickly.”

 

“Certainty and rapid growth rarely go together.”

 

“History suggests that many companies will turn out to have a terminal value of zero.”

 

“In investing, being a cheapskate, and not paying up, helps – a lot.”

 

“Most investors care about future rates of return as a yardstick for comparing opportunities, and for that purpose earnings yield is a fair proxy.”

 

“Gaudy P/Es produce miserable returns.”

 

“Just be sure that you are favoring stocks with low P/Es in stable industries. For good measure, look for earnings in excess of dividends, ample free cash flow, and stable proportions of debt and equity. Also look for companies in which the number of shares outstanding isn’t rising rapidly.”

 

“Tilt toward low P/E stocks, and veer away from high P/Es.”

 

“My preference is for businesses that can achieve appealing levels of growth and profitability without leverage.”

 

“It’s a good sign when management owns a lot of stock.”

 

“Many ignore the question of value because they think it’s too tough to answer.”

 

“People avoid reason until they have tried everything else.”

 

“Not thinking independently is absolutely toxic.”

 

“The stock market charges us for certain emotions and behaviors and pays us for others.”

 

“There’s also shadow income from patience, boredom, worry, courage, pain, loneliness, being a nerd, and looking like an idiot.”

 

“Almost by definition, the biggest mispricing will involve a glaring, hideous defect that popular opinion thinks cannot be overcome.”

 

On average, you are paid for being a nerd and sorting out the true situation…Are you willing to do the digging and endure the pain, loneliness, and worry that go with superior returns? Economic man is willing, but many are not.”

 

“Without any concept of intrinsic value, it’s impossible to gauge whether the market has already picked up on your insight.”

 

“The good news is that stock-pickers can outperform simply by cutting out the stuff that drags down returns.”

 

“Most companies lack a strong character. This does not mean that they will be poor investments – only that they are less apt to be exceptional.”

 

“One of the ways I know that a management team is talented is that it develops a business with a distinctive character and unique capabilities.”

 

“I look for executives with a learning mind-set.”

 

 “If you seek out skilled managers, they may have anticipated the threats of obsolescence, commoditization, and over-indebtedness, and will adapt more successfully.”

 

“Distinctive businesses can grow at only a certain rate and keep their character and profitability.”

 

“Unless I can show that customers don’t view a product as a commodity, I assume that it is a commodity.”

 

“Scammers do leave clues, many of which can be found in corporate accounts.”

 

“The value of a business depends on the quality of its management, and good managers are skillful and honest. If they are not skillful, they’ll squander your capital. If they lack integrity, they’ll steal it.”

 

“It seems bizarre, but if start-ups can be sold at lavish prices, entrepreneurs will launch businesses they know will never earn any money.”

 

“An investment is the product of thorough research that indicates that capital is broadly secure and an adequate return should be earned.”

 

“Investors focus on the cash that can be paid out as dividends by a business over its whole life, while speculators key off discrete events. When a stock is pitched as a play on anything, stop.”

 

“The entire game is about figuring out what others have missed. The largest prizes go to those who think differently and correctly. Some investing ideas will look stupid or crazy, and a few will be, but the alternative is mediocrity.”

 

“Everyone is trying to look ahead, and your bet will pay off only if it is correct and different from what others anticipate.”

 

“One test for noise is to ask whether a piece of information will still be useful in a year or two.”

 

“If news won’t matter in a year, skip it.”

 

“Stick with companies where you can identify the key factors that will determine their income out some years, and how those factors interact.”

 

“Too many investors don’t think enough about information just slightly out of view and spend too much time on news that has been endlessly retweeted. After reviewing the quarterly earnings reports of a company for many years, I get a feel for which drivers matter.”

 

“Confidence comes more often from ignorance than from knowledge.”

 

“Some people can’t handle the truth and are in denial. When there’s a loss, unsuccessful investors try to shift blame. In small doses, we all claim our skill produced good outcomes and blame luck for bad results. But it’s your fault, so sort out what happened.”

 

“Many investors do not bother estimating future cash flows; instead, they run from discomfort and chase the emotional kick of being where the action is.”

 

“Under the influence of crowds, individuals act bizarrely, in ways they never would alone. [Gustave] Le Bon’s key theme is that crowds are mentally unified at the lowest, most barbaric, common denominator of their collective unconscious – instincts, passions, and feelings – never reason. Being unable to reason, crowds can’t separate fact from fiction. Crowds are impressed by spectacle, images, and myths. Misinformation and exaggeration become contagious. Prestige attaches to true believers who reaffirm shared beliefs. Crowds will chase a delusion until it is destroyed by experience.”

 

“Some people can’t stand to miss a moonshot, no matter how sketchy…Glamorous hype stocks are more likely to be scams, but I avoid them because they are usually overpriced and prone to raising capital constantly.”

 

“Glamour stocks with superstar CEOs and unstoppable growth are typically priced with a margin of unsafety.”

 

“When people pass on misunderstandings of the facts, they build on them, spreading more misunderstanding. It seems pointless to try to value companies.”

 

“Almost everyone got just one side of the boom and bust right. True believers stayed true believers. Doubters remained doubters. Either you rode the boom and lost it in the bust, or you resisted the bubble and collected a windfall later.”

 

“The story isn’t wrong, but the price is.”

 

“Contrary to popular wisdom, picking stocks based on low P/Es and high free cash flow yields often works particularly well with technology stocks.”

 

“Public market tech investors often ignore value, fail to think carefully enough about competition and obsolescence, and trade frantically – all of which often lead to disappointment. Their results would improve if they focused on companies with current earnings and cash flow, and compared a stock’s price with its value, as ephemeral as that may be.”

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