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A Reader’s Question on Modelling (Munger and Buffett’s View)



Just wanted to shoot you a quick email applauding you for putting together the “Ultimate Investor Checklist.”  investment_principles_and_checklists_ordway This may be the most valuable word document I have on my computer.


Quick question, I’m a huge fan of Charlie Munger (currently am reading Poor Charlies Almanack)- In the checklist when he describes being a business owner Charlie says:

      • Ignores modeling forecasts for the next quarter, next year, or next ten years.
      • Ignores forecasting completely. (Search through this link on Munger’s Mental Models.

If Charlie Ignores modeling and forecasting, how does he go about estimating Intrinsic Value? I know Charlie has said in the past that he has never seen Warren Buffett use DCF, so how do they go about estimating Intrinsic Value?

John Chew: A good question.  First, a model is not reality but a metaphysical description of reality.   You probably should build a simple spread-sheet of sales, capex, taxes, etc. to understand the economic model of the business you are looking at–we are not all geniuses like Buffett or Munger.

But rather than have me say what I think Buffett would say, read the source. Note his analysis of Coke and Sees Candies:

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998  Hope that helps!

Arbitrage by Buffett_Research  (just for Buffaholics)

JOB OPPORTUNITY at Value Fund/RISK  Book Mark this site (Risk)


Good luck!


The Search Process

Manual of ideas

There has been a good discussion on the search process from several members of the Deep-VAlue Group at Google Groups.   Join so you can learn and share with them. then follow the link in that post.

Here is part of the discussion


There’s more than one way to skin a cat, so I’m curious how others decide on where to focus their initial research efforts. 

Do you start with an industry you’re familiar with or have an interest in? Do you go off of recent news? Do you look at 52 week lows and go from there? Do you look at insider trades first and go from there?

This is a great question.  I’m an amateur (who hopes to someday go pro!).  I usually get my initial ideas from other investors.  I spend a lot of time reading investment theses.  If I like the company and its competitive position, I add it to my watch-list, then perform my own regular research updates.  Blogs, investment pitches for conferences, podcasts, magazine articles – all are great resources to discover new companies which have attractive economic characteristics.

An example is Input Capital, a canola streaming company based in Canada.  I initially heard about the company from reading a blog article, approximately 18 months ago.  The article piqued my interest, and from there I begun to conduct my own research.  Over the course of the 18 months, I gained an understanding for the business and drivers of value.  Then, in Nov. 2015, the price dropped over 40% in one day when it was revealed that 3 contracts were defaulted upon.  I updated my research over the weekend, talked to management, then made it my largest position.

The danger of sourcing ideas on other’s work is that you may not do your own.  But I think it can be a greater starting point for sourcing ideas, especially smaller, boring companies with little news or analyst coverage.  Just make sure you resist the temptation to get lazy.  I’ve gotten burned on that when I began investing in companies and not just ETFs.  It was JC Penny.  My investment was based on reading far too much into Ackman’s thesis and doing far too little of my own research.  I made the mistake of confusing the number of slides with the quality of research.  Not once did I, or Ackman for that matter, ask if JC Penny’s customers LIKED used coupons and buying items on sales.  Neither of us did the necessary “scuttlebutt” of actually *GASP* talking to JCP customers.  Lesson learnt: retail investing is a lot like political campaigning, it’s all about the ground game.

Hey all,

This is a great thread. I do a lot of what Ian talked about, but recently have started feeling that just reading investment pitches all day long isn’t the best idea. Not saying it shouldn’t be a serious tool in your arsenal, just I feel I need more balance. The old fashion way of just researching companies and industries where one can remain unbiased by outside opinion helps me recalibrate. Being able to maintain independence of thought is critical in investing. This might be obvious to some, but I figured I’d put it out there to see what the group thought.

We also need to a thread on investment process, a subject that is really fascinating to me. It’s an very individualized process that still can be honed by ideas from other investors.

Mr. Munger/Mr. Buffett would suggest that you start with the A’s and white-knuckle yourself through the 2,500 companies in Value-Line and Small-cap Value-Line.  Any major library in the USA should have it online. Better yet, page through the hard copy at the library. The_In-Depth_Guide_to_Reading_a_Value_Line_Research_Report  Now, many overseas readers may not have access to such a database, but some stock exchanges provide lists of companies.

Search is tied in intimately with your investment process which should contain:

  • Search
  • Valuation
  • Risk Management
  • You

Starting out with Value-Line is a great idea for a new investor. Eventually, you will have about 150 companies that are worth watching.

You can eliminate (with practice) many within seconds, but you will

  1. find unusual opportunities that may not be picked up by screens.
  2. build a wish list.  I would love to buy BCPC (Balchem) 35% lower. Ditto with CFX
  3. you build up a knowledge base in your head of various industries and the general financial metrics to compare.
  4. You can come up with your own investment ideas vs. being a late herder into ideas.

A full discussion is here: THE SEARCH PROCESS

Go where it is cheapest:


For you non-drummers out there–did you pick up the Charlie Watts pattern? or view the legend:


“Answers” to Hedge Fund Analyst Quiz on Gold


We pick up from we were last:

Analytical point #1: CPI is a meaningless measure to determine the future dollar price of gold.  CPI is an arbitrary government statistic. You are comparing gold in US Dollars (apples) with an index of oranges, grapes, raisins, etc.)

You must have mentioned this to stay employed at Ackman’s hedge fund.

CPI vastly understates monetary debasement Think Differently About Purchasing Power

The Futility of Price-Inflation Measurements

The practical problems with price indexes such as the CPI are the issues of which prices are to be measured and what “weights” will be assigned to what goods. Another problem is deciding what to do about changes in quality. For example, what do you do when Apple introduces a new and improved iPhone at the same price as the previous version?

To deal with this, government statisticians systematically increase the weights for goods that are going down in price and reduce the weights of things are going up in price. If the quality of a good goes up, the statisticians “hedonically” reduce the price of the good.

Those sorts of adjustments do not seem fair to most normal people. If you are eating more ramen noodles and fewer lamb chops you can take little comfort in the fact that that the CPI is staying inside the Fed’s target range. Moreover, under the system of hedonic adjustments, every time entrepreneurs and engineers come up with better products for consumers at lower prices, the Fed takes credit for keeping inflation under control.

Why hasn’t the CPI picked up since 2008?

The first thing to keep in mind is that the CPI is not an economic variable. It is a statistic that at best gives an inaccurate picture of an economic phenomenon: inflation. To calculate the monthly CPI, the US Department of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a “mythical” household budget. For example, the statisticians may hold that housing costs are 30 percent of household expenditures, food costs 20 percent, gasoline another 15 percent, and so on.

Analytical point #2: Gold maintains its purchasing power over

L O N G periods of time. Gold is the “golden constant” (Jastram).  Look at research over the past 600 years: : RoyJastram-TheGoldenConstant

Jastram arrived at four conclusions:

  • Gold is a poor hedge against major inflation. (Jastram finished his book in 1977, only 6 years after the link between gold and the dollar was broken. For the period prior to 1971, gold was fixed in price to the US dollar or British Sterling.
  • Gold appreciates in operational wealth in major deflations. Of course if gold is money (it is!) then it should appreciate relative to the goods it can be exchanged for.
  • Gold is an abysmal/ineffective hedge against yearly commodity price increases.
  • Nevertheless gold maintains its purchasing power over long periods of time. This is not because gold eventually moves towards commodity prices but because commodity prices return to gold.

In contrast in the late twentieth and early twenty-first century it was the market price of old which adjusted so that the purchasing power of gold relative to general prices returned to a constant.

Other main points to glean are:

  • Gold is money – J.P. Morgan
  • Gold maintains its purchasing power over decades but not necessarily year-to- year.
  • Gold at the “Attila effect.” Jastram points out that throughout history men and women have turned to gold in times of distress, whether political, economic or personal.  Gold is sought for two basic needs: the imperative to survive and to be secure; and the desire to possess and enjoy beauty.
  • Gold, unlike all paper-based assets, is no one’s liability. It therefore has a near-unique “safe-haven” quality since its value cannot be eroded by any declining of the creditworthiness of its issuer unlike fiat currencies.

In choosing the title The Golden Constant, Jastram did not imply that there was an absolute mathematical rule to which the purchasing power of gold adhered, but rather that gold exhibited the qualities of constancy in a wider sense. The fact that gold is almost immune to corrosion, rust or decay is one element of this. The metal has an enduring attraction for humankind. Also, the purchasing power of gold, while in fluctuation, returns over the centuries and in different countries to a broadly stable level is testament to all these elements of its constancy.  How many grams of gold to purchase cattle in Rome vs. today in Cedar City, Utah?  Not much difference despite the thousands of years of time and the different local.

You then advise Ackman that if investors lose faith in Central Banks’ ability to manipulate both credit and investors, then gold might be a safer place to hold wealth than dollars.  You then instruct Mr. Ackman to carefully view this video.

In all seriousness, you should have learned two concepts:

Be careful in comparing data sets.  CPI is useless.

If you choose to research an asset or money, then study ALL its history. Don’t look at just the most recent past.

READINGS   Follow the links!

The key to booms and busts




Video of The Fed at Work


Federal Reserve members at work



DKAM-ROE-Reporter-January-2016   High ROE Companies in Canada

Screening_Weed out the losers



Videos of Investors


Videos of Great Investors



Deep Value Investor and Case Studies


So that is the thinking behind my style of deep value investing: swimming against the earnings obsessives to pluck out liquid-asset-rich companies with nimble service-focused business models.  Then buying them when no one else will, and selling them when everyone else wants them.  –Jeroen Bos

Deep Value Investing – Jeroen Bos A great series of case studies of balance-sheet investing

Deep_Value_Investing_Appendix The financials to supplement the book of cases above.

valuewalk-article1_1  His deep value approach has severely LAGGED the small-cap index AS YOU WOULD EXPECT in the latter stages of a bull market.



At a minimum you will learn more about how to analyze balance sheets.

A Mr. Market Lecture


Chapter 20_Margin of Safety Concept




Gone huck finn

Back in two weeks!

But don’t stop learnin’.  Check out:


10 Value Investing Blogs

By Wall Street Survivor | More Articles | Save For Later
March 2, 2014 | Comments (4)

So you want to be the next Warren Buffett?

The man himself famously started out by reading all the books in the Omaha Public Library with “finance” in the title. Over the years, Buffett took that knowledge and turned it into investing tips that have helped countless investors. The Motley Fool has even taken the best of Warren Buffett’s wisdom and packaged it in a new special report that you can get free just byclicking here now.

Today, we also have blogs that can make the learning process quicker. But with so many blogs out there on the subject of value investing, the quality of content varies widely. So here, in my opinion, are the 10 best value investing blogs for you to follow and what you can learn from them.

  1. Contrarian Edge
    Why you should follow it:
    Two reasons. One is that its author, Vitaliy Katsenelson, is a well-known value investor who’s been dubbed “the new Benjamin Graham” by Forbes. The other is the wonderfully eclectic nature of its content, ranging from insightful analysis of popular stocks like Apple and to musings on Tchaikovsky.

Philosophy: “I invest, I educate, I write, and I could not dream of doing anything else.”

Sample post title: “Why Investors Hate Apple — and Are Dead Wrong

  1. ValueWalk
    Why you should follow it:
    This site started in 2010 as a simple value-investing blog but has mushroomed into a popular site delivering breaking news, analysis, and syndicated content from other blogs. Expect multiple posts a day, as well as useful resources like a list of books recommended by Warren Buffett, Charlie Munger, and other gurus.

Philosophy: “Many academics claim investing is a random walk. We believe this to be partially true, but believe that value investing can outperform the market.”

Sample post title: “Follow Up On Technical Analysis And Why To Avoid It

  1. Brooklyn Investor
    Why you should follow it:
    Well, not for the design, which is old-school BlogSpot. The draw here is the supremely detailed posts analyzing individual securities, taking extracts from annual reports and investor presentations and explaining what they mean for investors. Even if you don’t plan to invest in the companies in question, the posts offer great insight into some good ways of researching a stock.

Philosophy: “Random Thoughts on Investing and Investment Ideas.”

Sample post title: “Alleghany Corp Investor Day

  1. The Aleph Blog
    Why you should follow it:
    Asset manager David Merkel has been blogging since 2007, covering a range of different topics but accumulating almost 700 posts on value investing. He looks at both individual stocks and more general investing principles, and his posts are full of detail but easy to follow.

Philosophy: “To fight for what is right in money management, and encourage readers to pursue strategies that reduce risk and enhance returns.”

Sample post title: “If Investing Were Free, How Would It Change What You Do?

  1. Wexboy
    Why you should follow it:
    This blog spends a lot of time analyzing Irish stocks, which may not immediately seem useful to people from other parts of the world. But even if the companies are unfamiliar, the methods are classic value investing, picking through the numbers and trying to uncover value other investors have overlooked. And the breezy writing style makes it fun to read!

Philosophy: “I think the most valuable ‘skill’ any investor can wish for is a little dose of humility.”

Sample post title: “The Great Irish Share Valuation Project

  1. Greenbackd
    Why you should follow it:
    Author Tobias Carlisle runs a value investment firm and has some smart insights on value investing. His posts often introduce interesting research on subjects like negative-enterprise-value stocks and present them in a way that the rest of us can understand.

Philosophy: “Deep value, contrarian, and Grahamite investing.”

Sample post title: “A Market of Stocks? Distribution of S&P 500 P/E Multiples Tightest In 25 Years

  1. Value Investing World
    Why you should follow it:This blog takes a cerebral approach, bringing in a broad range of articles on investing and economicsthat are relevant to value investing, along with quotes from people like Seneca and Einstein.

Philosophy: “Promoting the multidisciplinary approach to investing.”

Sample post title: “Marcus Aurelius quote

  1. The Graham Investor
    Why you should follow it:
    Posts here aren’t released very often — just once or twice a month — but they’re usually well thought-out. And the worth of this site lies not only in the blog posts, but also in the stock screens to help you find investments that meet the criteria proposed by famed value investor Benjamin Graham.

Philosophy: “I am generally a long-term value investor and try to use as many of Ben Graham’s principles as possible.”

Sample post title: “Has Your Portfolio Suffered an ACL Tear?

  1. Old School Value
    Why you should follow it:
    This is a long-running blog with five years of value investing posts, some of them collected into series of tutorials that are a great way to learn the basics. Owner Jae Jun also writes very detailed posts analyzing particular stocks using a variety of valuation methods to show you how value investing works.

Philosophy: “Provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor.”

Sample post title: “Stock Analysis Lesson with CommVault Systems

  1. Long Term Value Blog
    Why you should follow it:
    Some bloggers tend to trumpet their successes and gloss over their failures. This one is refreshingly honest, charting its owner’s real-life investing experiences and analyzing both what worked and what didn’t.

Philosophy: “Value Investing for the Long Term.”

Notice that is off the radar. Good.