A Young Reader Seeks Advice on Career (Updated)

The above depicts my conversion to becoming a “Goldbug.”

My family business is somehow facing sales shrinkage and cash flow problem due to low capital (my family made terrible mistakes in managing it) and economic downturn. They are specialty contractors and manufacturers of fenestration products (windows, doors, kitchens, curtain walls, and rolling shutters). If I am to work with them, I can be able to help them in reorganizing the company. It might be risky for me, but if everything worked out well enough, I will have earnings that I believe is better than being an employee.

Kind Regards,

XXXXX

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Dear XXXXX:

You present an interesting quandary/opportunity.  I will weigh in tomorrow once others with more wisdom (the readers of this blog) present their thoughts.

Best,

John Chew

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Advice:

Since you are young, you have about fifty to sixty years ahead of you. It will take a minimum of five but most likely ten years before you use a style of investing that you can consistently follow because YOU developed it.  I am assuming that you are self-aware in assessing your strengths and weaknesses. After your five to ten years, you will have almost half a century to really compound your capital!

It is my experience that people who lack a business school degree do NO WORSE in investing than those who do. In fact, I wonder if obtaining a CFA hurts. Joel Greenblatt, Jim Rogers, and another great investor have all told me that an MBA is “useless.” Go study Graham, go read history, go trade soybeans for a day—they say.  I am NOT against a business school degree–I just don’t see the relevance or the cost/benefit IF investing is just what you wish to pursue.

What is the purpose of learning “efficient frontiers.”  Institutional investors seem like index-hugging sheep to me.  Yes, you hear of the big-wigs like Loeb, Carl, Icahn, etc. but no one mentions the thousands of over-charging hedge funds.  Buffett only attended Columbia so he could learn from Graham.  You can do the same but you have his books and other writings (right here at www.csinvesting.org).

You can develop yourself like Michael Burry, but you will have to be extremely fanatical and diligent in learning and applying yourself to investing.  Look in the mirror.

Also, your family is important to you and they need your help. Can you just focus on business school?  You can make more money which you could put towards investing to both learn and build a track record. Managing and turning around a business should provide even more of a life lesson and skills for other businesses and investing. As Buffett says, “I am a better investor having been a businessman and I am a better businessman because I have been an investor.”

But you should have a plan. What exactly do you need to learn, what skills to develop and from whom or where or how based on your current/future situation(s)?

Obviously, basic skills in accounting. Can you take a course/audit from where you live or do it on-line?  Order a CPA Test Taking Work book, or get an intermediate accounting text WITH a workbook to do ALL the problem sets.  Talk to your professors or look up others who you can stay connected to who can suggest material to learn. Tell them your long-term goals. Perhaps, you can obtain course material for free or future references.

But, at the end of the day, it is not your degree that matters but what YOU know and apply as shown by your investing results or the quality of your analysis.  Who cares that you have a degree from XXX but what is the quality of your thinking and how can others see that. What have you done that applies to becoming a successful investor? Better to carefully invest $1,000 and keep track while turning around the family business—a great accomplishment if you can pull it off–than obtaining an MBA.

Now back to what you will need to learn……………….

• You will need to be constantly learning………..
• Reading financial statements
• Understanding strategy and competitive advantage.
• How to value growth
• Understanding regression to the mean
• Understanding basic economics (www.mises.org) like production structure, interest rates, Austrian business cycle theory.
• A vast reading of market history for the past 200 years in commodities, stocks, interest rates, and individual companies. Study the history of rail roads, canals, semi-conductor companies, etc. The history of civilizations.
• Study the great investors—EVERYTHING by Buffett, Graham, Fisher, Munger, Icahn, Klarman, etc.
• Expertise in valuing companies that can be valued.
• Building up a track record with written analysis of each investment entered and exited.
• Keep a diary of your thoughts and progress. 

Who needs an MBA with www.csinvesting.org and its wealth of materials and suggestions?

 Let me know if that helps and please keep in touch. Good luck and many successes.

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Follow up question

I am really thankful to you for your thorough advice. You know, I have been thinking about the industry and how competition is hurting our business.  Our business is related to the construction industry which is cyclical in nature plus we have been dealing with the economic downturn. Our balance sheet is not strong enough, but we have dealt with it in numerous ways. We are low in capital and we have not even spent anything in the last 20 years on modernizing our machines. They are old and obsolete. But we still managed with them, and we have around 3 million dollars in sales.

I know they are too low, but there is a lot to improve on. I will try my best to modernize our business and make it efficient. I will try to control our costs and expenses. I will try to manage our working capital in the best possible way. This industry is not going any where. People will always need windows, doors, facades that would make buildings look nice, and, of course, rolling shutters. We are in the same business as PGT Industries (NASDAQ: PGTI), Permasteelisa Group & Far East Global (both of which are global businesses outside U.S. Stock Exchanges).

The most important of all is sales of which I will do my best to gain customers, and make them loyal and happy. But you know my father been telling me that margins are quite low due to competition and price wars. For us to get a business, we have to provide the contractor a quotation. Our competitors will provide it, also. The one with the lowest bid will win the business. So, for our company to be able to compete, we have to be cost conscious and try to be as efficient as possible. We might be the lowest cost producer, right? Is that a competitive advantage? Is it sustainable? I guess I have said a lot, and I am really grateful that someone would listen. Thank you a lot for your advice. It really helped.

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Reply:

Your business must be as efficient as possible.   Sustainable competitive advantages are very difficult to have.

Your business can be efficient in sales, finance, installation, manufacturing to earn a FAIR return on capital.

But to have a STRUCTURAL cost advantage that your competitors can’t copy you need either economies of scale in a region or product.

So, for example, if you ran a garbage pickup company (picking up trash and then disposing of it) you could have new trucks, well-trained drivers but then anyone could do that. But if you had 95% of all the customers in a small geographic space/region/city/town then your costs per customer and your fixed costs of trucks/permits/gas would be STRUCTURALLY lower.  Even if your crews were drunk and your trucks old, your overall costs would be lower vs. competitors in THAT specific region.

The geographic density of your customers would be impossible to compete against because you would be the lowest cost supplier.  If your trucks were picking up garbage every 30 feet in a city vs. a competitor who has to travel 1/4 mile between customers then you will have more revenues per mile/truck/crew than a competitor.

You see the DIFFERENCE?    Being efficient is not structural. It is important, of course.  Go to blog and type in search box: Strategic Logic

What are you looking for and what problems do you have with the blog–I can try to fix.