This link has lecture 6:http://www.scribd.com/doc/65083826/Lecture-6-an-Investor-Speaks-of-Investing-in-a-Dying-Industry, where an investor describes his search and valuation of several video store companies in a “dying industry.” The firms are HLWY, MOVI and BBI.
But before going there, let’s remind ourselves about how we will become better investors. Any business school or CFA program will teach you investment theory. For free MBA finances courses, books and lectures go here: http://pages.stern.nyu.edu/~adamodar/ and for specific finance subjects and much more go to: www.khanacademy.org. Who needs an MBA or CFA? (I’m kidding!)
I hope to bring as much practical application to investing to help us learn. Your diligent study of principles, case studies and actual investing will be the key to your success. Track carefully what you do and don’t do! Ten to twelve years of intensive application will put you in the experienced category. Start now. As an example of practicality vs. theoretical knowledge, who would you rather invest with: Rodney Dangerfield or the PhD. Economist in this video? Go here for three minutes: http://www.youtube.com/watch?v=YlVDGmjz7eM&NR=1
You may think that video is a satire, but I went to a Yale Business School Seminar in investing in Cuba several years ago. Investing in Cuba? What is the crucial question? What would your cost of capital have to be to invest in a country where contracts can be broken at any time for any reason without any recourse? Oh, and Cuba is in arrears on ALL its trade debt. Your turn.
Back to Lecture 6: Investing in a Dying Industry. Before reading this lecture, I recommend that you hear the speech by Danny Devito (yes, the round, little actor) discuss a dying industry, The Wire & Cable Industry. Danny Devito, “Larry the Liquidator,” says, “Amen, amen, and amen… Because I just heard a prayer, and you always say “Amen” after you hear a prayer. You just heard a prayer for the dead. This company is dead. I didn’t kill it. It was dead when I got here……………..(an excellent twelve minute video) http://www.youtube.com/watch?v=p7rvupKipmY. Even experienced investors will enjoy this clip.
You either invest in assets or franchises. In Lecture 6 the investments discussed fall into the asset category. Since asset type investments typically cannot grow profitably (the company’s new investments cannot exceed their cost of capital), therefore you need to buy assets well below the assets’ earnings power. However, an asset in a dead industry (Berkshire Hathaway’s textile division) will have at most scrap to zero value. Buffett said he had to pay to have Berkshire’s textile machinery (looms)removed when he closed operations.
Greenwald speaks about buying cheap, obscure and forlorn: http://www.youtube.com/watch?v=YRWhEMEhVwI&feature=related
Further Greenwald discussion on investing: http://www.youtube.com/watch?v=xOn4VUrVZdw&feature=related
Successful investors have the ability to understand the strategic strengths and weaknesses of the businesses they analyze. These investors understand the barriers to entry or lack thereof of the industries they study. As a preview, two books: Competition Demystified, A Radically Simplified Approach to Business Strategy by Bruce C. Greenwald and The Curse of the Mogul, What is Wrong with the World’s Leading Media Companies by Bruce C. Greenwald and Jonathan A. Knee are recommended, especially Competition Demystified—an underrated book.
After reading Lecture 6, you would enjoy this article: Why Content Isn’t King: How Netflix became America’s biggest video service—much to the astonishment of media executives and investors
By Jonathan A. Knee at http://www.theatlantic.com/magazine/archive/2011/07/why-content-isn-8217-t-king/8551/
In 2011, five years after Lecture 6 was given, we know the history and future of the Video Industry. But there are lessons in how to approach industry analysis from a disciplined perspective with strategic logic. I am getting ahead of my readers here (anybody out there?), but we will come back to strategic analysis many times.