Tag Archives: Blogs

EBITDA leading to EBIT and then to ROIC; Accounting blogs

We literally called Jon Corzine. We called Jon Corzine because we knew that he knew about the economy, about the world markets, about how we had to respond.” –Vice President Joe Biden, talking about the people he asked for advice from during the financial crisis.

Jon Corzine recently resigned as the CEO of MF Global. The firm declared bankruptcy after making bad bets on European Sovereign debt.
The bankruptcy was the fourth-largest financial firm in U.S. history, and the eighth largest overall.

EBITDA into Perspective

We will finish our discussion on return on invested capital (ROIC) this week, but first let’s return to fundamentals. Joel Greenblatt uses (EBITDA minus maintenance capital expenditures (“MCX”) as his proxy for Operating Earnings or EBIT.

Many may have not seen the 36-page PDF on placing EBITDA into context*. Once we know MCX, we can subtract that estimated figure from EBITDA to arrive at pre-tax operating income–the bedrock upon which we divide by the amount of capital used to produce such income for calculating ROIC.

We will discuss MCX in another post.

EBITDA mentioned here: http://csinvesting.org/placing-ev-and-ebitda-into-perspective-case-studies/

*Placing EBITDA into perspective (36-page PDF): http://www.scribd.com/doc/66843869/Placing-EBITDA-Into-Perspective

Recent blog discussion on EBITDA: http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/542

Educational Blogs on Accounting and Financial Statement Analysis

http://mgt.gatech.edu/news_room/news/2009/articles/FALreporttaxpayments.html

http://www.10qdetective.blogspot.com/

http://accountingonion.typepad.com/

http://www.footnoted.com/

http://www.footnoted.com/

http://www.thebigdo-over.com/

http://www.proxydemocracy.org/

http://sharesleuth.com/

http://blog.issgovernance.com/

Investing in Banks

A Lesson in Punctuation

An English professor wrote the words, “a woman without her man is nothing” on the blackboard and directed the students to punctuate it correctly.

The men wrote: “A woman, without her man, is nothing.”

The women wrote: “A woman: without her, man is nothing.”

A reader has asked me a question about investing in banks. Unfortunately I avoid banks because I believe banks are a speculation on a bank management’s ability to make prudent, rational lending decisions combined with the whims of Federal Reserve policy. You have the risks of “bank runs” due to fractional reserve banking. (I can’t value the bank or normalize earnings or ROIC so I do what a pretty girl at a bar would do–just say, NO!) However, understanding how the banking system works is critical to understanding economic booms and busts.  My suggestion is to begin reading the books mentioned below as a starting point before venturing to banks’ financial statements.

Excellent Blog: http://variantperceptions.wordpress.com/

To learn more about banks you can read American Banker: http://www.americanbanker.com/ and S&P industry reports on banking. Also, the Wall Street Transcript has articles on banks and the banking industry here: http://www.twst.com/

The History of Banking: www.mises.org/books/historyofmoney.pdf

How banking Works: www.mises.org/books/mysteryofbanking.pdf

Money, Banking and Credit Cycles: www.mises.org/books/desoto.pdf

Warren Buffett plugs Jamie Dimon, The CEO of JP Morgan as a good banker and suggests reading his shareholder letters.

Jamie Dimon’s 2010 Letter to Shareholders: http://files.shareholder.com/downloads/ONE/1713791083x0x458384/6832cb35-0cdb-47fe-8ae4-1183aeceb7fa/2010_JPMC_AR_letter_.pdf

2009 Letter: http://files.shareholder.com/downloads/ONE/1713793272x0x362440/1ce6e503-25c6-4b7b-8c2e-8cb1df167411/2009AR_Letter_to_shareholders.pdf

A reader, generously contributed this: http://www.scribd.com/doc/83007803/Banking-101-for-Large-Cap-Banks-May-2011

A Handbook on Analyzing Banks: http://www.amazon.com/Bank-Analysts-Handbook-Conjuring-Tricks/dp/0470091185/ref=cm_cr_pr_product_top

Review of the above book:

Great introduction, some conceptual/structural flaws,October 27, 2009

By Brad Barlow (Cave City, KY) – See all my reviews
(REAL NAME)

This review is from: The Bank Analyst’s Handbook: Money, Risk and Conjuring Tricks (Hardcover)

Frost’s book gets 4 stars based on its strength and accessibility as an introduction, it’s clarity (for the most part), and the breadth of topics that he covers related to banks and the banking industry.

Unfortunately, Frost’s understanding of economics is poor, leading to a relatively shallow (but certainly textbook these days) discussion of central banking and the regulatory framework in general. He, like so many other modern writers in finance and economics, would benefit greatly from actually reading a sound economic theorist, like Henry Hazlitt or Ludwig von Mises, rather than sporadically quoting JK Galbraith and Adam Smith. This lack of understanding on his part at times undermines the conceptual framework of the book, detracting from its clarity.

A few final praises and quibbles: His use of clear examples to illustrate important points is very welcome, but there are a few cases where he could give a fuller explanation (e.g., the 20-yr mortgage example). I like the diagrams showing flows of funds and parties to common transactions, but he could have picked a better font, as the small cursive script is not always easy to read. Finally, what’s with the front cover art, seriously?

Overall, I’m quite satisfied and thankful for the book. Definitely buy it if you are in the industry.

Avoid banks and seek other ideas.

You can look here: http://www.crossingwallstreet.com/buylist

http://www.crossingwallstreet.com/my-favorite-links

The key to doing well on Wall Street is actually very simple: Buy and hold shares of outstanding companies. But too many investors never learn this valuable lesson. Or if they do learn it, they learn it the hard way. That’s where I come in. I want to help investors avoid the mistakes that separate successful investors from those who always find themselves spinning their wheels.

Without a Central Bank

A reader, Taylor, mentioned the distortions caused by central banks. What would happen if we did not have central banks?

Life without a central bank (Panama) http://mises.org/daily/2533

In this modern, post-–Bretton Woods world of “monetary order” and coordinated central-bank inflation, many who are otherwise sympathetic to the arguments against central banks believe that the elimination of central banking is an unattainable, utopian dream.

For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past; the example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment.

The absence of a central bank in Panama has created a completely market-driven money supply. Panama’s market has also chosen the US dollar as its de facto currency. The country must buy or obtain their dollars by producing or exporting real goods or services; it cannot create money out of thin air. In this way, at least, the system is similar to the old gold standard. Annual inflation in the past 20 years has averaged 1% and there have been years with price deflation, as well: 1986, 1989, and 2003.

Panamanian inflation is usually between 1 and 3 points lower than US inflation; it is caused mostly by the Federal Reserve’s effect on world prices. This market-driven system has created an extremely stable macroeconomic environment. Panama is the only country in Latin America that has not experienced a financial collapse or a currency crisis since its independence.

As with most countries in the Americas, Panama’s currency in the 19th century was based on gold and silver, with a variety of silver coins and gold-based currencies in circulation. The Silver Peso was the currency of choice; however, the US greenback had also been partially in circulation, because of the isthmian railroad — the first railroad to connect the Atlantic to the Pacific — that was built by a US company in 1855. Panama originally became independent from Spain in 1826, but integrated with Colombia; however, being a small state, it was not able to immediately secede from Colombia, as Venezuela and Ecuador had done. In 1886 the Colombian government introduced several decrees forcing the acceptance of government fiat paper notes. Panama’s open economy, being based on transport and trade, plainly could not benefit from this; an 1886 editorial of its main newspaper read:

“there is no country on the globe, certainly no commercial center, in which the disastrous consequences of the introduction of an irredeemable currency would be felt as in Panama. Everything we consume here is imported. We have no products and can only send money in exchange for what is imported.”

In 1903, the country became independent, supported by the United States because of its interest in building a Canal through Panama. The citizens of the new country, in distrust of the 1886 experiment of forced fiat Colombian paper notes, decided to include article 114 in the 1904 constitution, which reads,

“There will be no forced fiat paper currency in the Republic. Thus, any individual can reject any note that he may deem untrustworthy.”

With this article, any currency in circulation would be de facto and market driven. In 1904 the Government of Panama signed a monetary agreement to allow the US dollar to become legal tender. At first, Panamanians did not accept the greenback; they viewed it with mistrust, preferring to utilize the silver peso. Gresham’s Law, however, drove the silver coins out of circulation.[1]

In 1971 the government passed a banking law that allowed for a very liberal and open banking system, without any government agency of consolidated banking supervision, and confirmed that no taxes could be exacted from interest or transactions generated in the financial system. The number of banks jumped from 23 in 1970 to 125 in 1983, most of them being international banks. The banking law promoted international lending, and because Panama has a territorial tax system, profits from loans or transactions made offshore are tax free.

This, and the presence of numerous foreign banks, allows for international integration of the system. Unlike other Latin American countries, Panama has no capital controls. Therefore, when international capital floods the system, the banks lend the excess capital offshore, avoiding the common ills, imbalances, and high inflation that other countries face when receiving huge influxes of capital.

Fiscal policy has little room to maneuver since the treasury cannot monetize its deficit. Plus, fiscal policy does not influence the money supply; if the government tries to raise the money supply during a contraction period by obtaining debt in international markets and pumping it into the system, the banks compensate and take the excess money out of circulation by sending it offshore.

Banks cannot coordinate inflation due to ample competition and the fact that (unlike even the United States banking system prior to the Federal Reserve) they do not issue bank notes. The panics and general bank runs that were so common in the US banking system in the 19th century have not occurred in Panama, and bank failures do not spread to other banks. Several banks in trouble have been bought — before any runs ensue — by larger banks, attracted by the profits that can be made from obtaining assets at a discount.

There is no deposit insurance and no lender of last resort, so banks have to act in a responsible manner. Any bad loans will be paid by the stockholders; no one will bail these banks out if they get into trouble.

After several years of accumulation of malinvestments during the booms, banks begin the necessary liquidation of bad credit. Since there is no central bank that can step in to provide cheap credit, the recession begins without any hampering by monetary policy. Banks thus create the necessary contraction by obeying market forces. Panama’s recessions commonly create deflation, which mollifies consumers and also facilitates the recovery process by reducing business costs.

Only the fact that the law does not allow for the downward flexibility of wages makes recessions longer than they would otherwise be.

Deflation happens without the terrible consequences that Keynesian economists predict; and the country, now under democratic rule, is experiencing its 4th year of market economic growth well above 7%. So the policy makers who have said that abolition of the central bank is unfeasible need only look to Panama’s macroeconomic environment, which has been favorable for over 100 years, to realize that it is, in fact, not only possible, but very beneficial. Clearly no government-forced fiat currency, no central bank, and the absence of high inflation are working quite well in this small country. Who can argue that these policies would not work in larger economies?

A Course on Mental Models–Helping Us All to Decide and Think Better

Perfect solutions of our difficulties are not to be looked for in an imperfect world.–Winston Churchill

Model Thinking

If you haven’t signed up, then here is another chance. I signed up; I need all the help possible.

Hi Everyone,

Good News!!! The course ‘Model Thinking’ will go live very shortly. When it does go live, we’ll be asking you to officially register and agree to some standard terms and conditions. In the interim, you can now go to the site, at http://www.coursera.org/modelthinking/lecture/preview and watch the first two sets of lectures. The first set of lectures covers the benefits of modeling and provides a framework for the course. The second set covers Thomas Schelling’s seminar model of segregation as well as a model of standing ovations that I developed with John Miller of Carnegie Mellon University.

The full site with quizzes, discussion forums, and all the other bells and whistles will be operational very shortly. I thank you all for your patience. Enjoy the first few lectures!!

As we say in Ann Arbor… Go Blue!!!

Scotte

Interesting Free Investing Newsletters and Links

Just in case you missed these:

Ask for a free quarterly newsletter by emailing: Hewitt.Heiserman@EarningsPower.com,

Ask to be on his email list: kessler@robotti.com,

and his weekly emailings:sfriedman@gmail.com  There will be overlap, but you will find interesting articles, videos and value investors. Read ruthlessly, however, I don’t bother to read about Fairholme’s investment in BAC or AIG, because those companies are out of my circle of competence. Only read what benefits YOU.

Recommended blogs:

big picture blog: http://www.ritholtz.com/blog/

http://www.simoleonsense.com/weekly-roundup-16-a-curated-linkfest-for-the-smartest-people-on-the-web/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+SimoleonSense+%28Simoleon+Sense%29

Inflation and the Stock Market; Alice in Wonderland and the Federal Reserve; Recommended Blogs

Alice in Wonderland

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you ran very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
(Through the Looking Glass, Chapter 2)

Inflation and the Stock Market

It appears to me of preeminent importance to our science that we should become clear about the causal connections between goods. –Carl Menger, Principles of Economics.

A Reader asked about why I should be bullish about stocks with inflationary dangers like rising money supply numbers present and the Fed’s zero (0%) interest rate policy.

My reply is that I would rather own franchises that can pass along their costs (inflation pass-through) than just a basket of stocks. In severe inflation the goal is to lose less in real terms than holding other assets like bonds. We all lose as a society with rampant inflation, especially the poor and those on fixed incomes.  Also, in general, the context in which stocks rise is important.  See below.

The Stock Market and Inflationary Depression (page 938 in Capitalism by George Reisman—in VALUE VAULT).

The fact that inflation undermines capital formation has important implication for the performance of the stock market. In its initial phase or when it undergoes a sufficient and relatively unanticipated acceleration, inflation in the form of credit expansion can create a stock-market boom (Now in January 2012 we are seeing a NOMINAL boom not a REAL boom in stock prices). However, its longer-run effects are very different. The demand for common stocks depends on the availability of savings. In causing savings to fail to keep pace with the growth in the demand for consumer’s goods, inflation tends to prevent stock prices, as well as wage rates, from keeping pace with the rise in the prices of consumers’ goods. For a further explanation of this phenomenon go to Man, Economy and State by Murray Rothbard to read about the structure of production: pages 319 to 508 in the VALUE VAULT.  Also, The Structure of Production by Mark Skousen

The same consequence results from the fact that inflation also leads to funds being more urgently required internally by firms—to compensate for all the ways in which it causes replacement funds to become inadequate. At some point in an inflation, business firms that are normally suppliers of funds to the credit markets—in the form of time deposits, the purchase of commercial paper, the extension of receivables credit, and the like—are forced to retrench and, indeed, even to become demanders of loanable funds, in order to meet the needs of their own, internal operations. The effect of this is to reduce the availability of funds with which stocks can be purchased, and thus to cause stock prices to fall, or at least to lag all the more behind the prices of consumers’ goods.

When this situation exists in a pronounced form, it constitutes what has come to be called an “inflationary depression.” This is a state of affairs characterized by a still rapidly expanding quantity of money and rising prices and, at the same time, by an acute scarcity of capital funds. The scarcity of capital funds is manifested not only in badly lagging, or actually declining, securities markets but also in a so-called credit crunch i.e., a situation in which loanable funds become difficult or impossible to obtain. The result is wide-spread insolvencies and bankruptcies.

End

As a review and emphasis, read Buffett’s take on inflation and stocks: http://www.scribd.com/doc/65198264/Inflation-Swindles-the-Equity-Investor

Let’s take a step back from what you just read. If you know that money functions as a medium of exchange, then you realize in a modern society that money helps support the specialization of production and hence improves productivity. However, inflation—like dollar bills dropped into the jungle—does not per se increase savings and capital goods (stocks are titles to capital goods). Inflation, if unanticipated, artificially boosts stock prices and then eventually causes a decline because of the limited availability of real capital (bricks, trucks, machines) to reinvest (maintenance capital expenditures) into businesses AND, at the same time, consume consumer goods. In a finite world, you have to choose between mending your fishing nets or fishing to eat; you can’t do both unless you have a cache of fish saved.  Perhaps in the delusional world of a Federal Reserve bureacrat you can have your fish and eat it too–just print more.

Do not blindly believe inflation is “good” for stocks.

Other Views on Inflation and Stocks

http://mises.org/daily/5881/Is-the-United-States-in-a-Liquidity-Trap

http://mises.org/daily/5544/Where-Is-the-US-Stock-Market-Heading

Alice in Wonderland and the Federal Reserve

http://www.thefreemanonline.org/in-brief/fed-rates-will-stay-low-through-2014/

“The Federal Reserve, declaring that the economy would need help for years to come, said Wednesday it would extend by 18 months the period that it plans to hold down interest rates in an effort to spur growth.” (New York Times)

Illogic 101: Artificially low interest rates helped produce the crisis. Therefore the Fed will fix the economy by holding down interest rates for the foreseeable future.  (Give the drunk more booze to cure the hangover!)

The article below will help clarify the points made at the beginning of this post.

Interest Rates and the business cycle: http://www.thefreemanonline.org/columns/interest-rates-and-the-business-cycle/

by Glen Tenney • November 1994 • Vol. 44/Issue 11

The cause of the business cycle has long been debated by professional economists. Recurring successions of boom and bust have also mystified the lay person. Many questions persist. Are recessions caused by under consumption as the Keynesians would have us believe? If so, what causes masses of people to quit spending all at the same time? Or are recessions caused by too little money in the economy, as the monetarists teach? And how do we know how much money is too much or too little? Perhaps more importantly, are periodic recessions an inevitable consequence of a capitalist economy? Must we accept the horrors associated with recessions and depressions as a necessary part of living in a highly industrialized society?

………..

New Money Gives a False Signal

Money is primarily a medium of exchange in the economy; and as such, its quantity does not have anything to do with the real quantity of employment and output in the economy. Of course, with more money in the economy, the prices of goods, services, and wages, will be higher; but the real quantities of the goods and services, and the real value of the wages will not necessarily change with an increase of money in the overall economy. But it is a mistake to think that a sudden increase in the supply of money would have no effect at all on economic activity. As Nobel Laureate Friedrich A. Hayek explained:

Everything depends on the point where the additional money is injected into circulation (or where the money is withdrawn from circulation), and the effects may be quite opposite according as the additional money comes first into the hands of traders and manufacturers or directly into the hands of salaried people employed by the state.2 [2]

Because the new money enters the market in a manner which is less than exactly proportional to existing money holdings and consumption/savings ratios, a monetary expansion in the economy does not affect all sectors of the economy at the same time or to the same degree. If the new money enters the market through the banking system or through the credit markets, interest rates will decline below the level that coordinates with the savings of individuals in the economy. Businessmen, who use the interest rate in determining the profitability of various investments, will anxiously take advantage of the lower interest rate by increasing investments in projects that were perceived as unprofitable using higher rates of interest.

The great Austrian economist Ludwig von Mises describes the increase in business activity as follows:

The lowering of the rate of interest stimulates economic activity. Projects which would not have been thought “profitable” if the rate of interest had not been influenced by the manipulation of the banks, and which, therefore, would not have been undertaken, are nevertheless found “profitable” and can be initiated.3 [3]

The word “profitable” was undoubtedly put in quotes by Mises because it is a mistake to think that government actions can actually increase overall profitability in the economy in such a manner. The folly of this situation is apparent when we realize that the lower interest rate was not the result of increased savings in the economy. The lower interest rate was a false signal. The consumption/ saving ratios of individuals and families in the economy have not necessarily changed, and so the total mount of total savings available for investment purposes has not necessarily increased, although it appears to businessmen that they have. Because the lower interest rate is a false indicator of more available capital, investments will be made in projects that are doomed to failure as the new money works its way through the economy.

Eventually, prices in general will rise in response to the new money. Firms that made investments in capital projects by relying on the bad information provided by the artificially low interest rate will find that they cannot complete their projects because of a lack of capital. As Murray Rothbard states:

The banks’ credit expansion had tampered with that indispensable “signal”-the interest rate—that tells businessmen how much savings are available and what length of projects will be profitable . . . . The situation is analogous to that of a contractor misled into believing that he has more building material than he really has and then awakening to find that he has used up all his material on a capacious foundation, with no material left to complete the house. Clearly, bank credit expansion cannot increase capital investment by one iota. Investment can still come only from savings.4 [4]

Capital-intensive industries are hurt the most under such a scenario, because small changes in interest rates make a big difference in profitability calculations due to the extended time element involved.

It is important to note that it is neither the amount of money in the economy, nor the general price level in the economy, that causes the problem. Professor Richard Ebeling describes the real problem as follows:

Now in fact, the relevant decisions market participants must make pertain not to changes in the “price level” but, instead, relate to the various relative prices that enter into production and consumption choices. But monetary increases have their peculiar effects precisely because they do not affect all prices simultaneously and proportionally.5 [5]

The fact that it takes time for the increase in the money supply to affect the various sectors of the economy causes the malinvestments which result in what is known as the business cycle.

Government Externalizes Uncertainty

Professor Roger Garrison has noted another way that government policy causes distortions in the economy by falsifying the interest rate.6 [6] In a situation where excessive government spending creates budget deficits, uncertainty in the economy is increased due to the fact that it is impossible for market participants to know how the budget shortfall will be financed. The government can either issue more debt, create more money by monetizing the debt, or raise taxes in some manner. Each of these approaches will redistribute wealth in society in different ways, but there is no way to know in advance which of these methods will be chosen.

One would think that this kind of increase in uncertainty in the market would increase the risk premium built into loan rates. But these additional risks, in the form of either price inflation or increased taxation are borne by all members of society rather than by just the holders of government securities. Because both the government’s ability to monetize the debt and its ability to tax generate burdens to all market participants in general rather than government bond holders alone, the yields on government securities do not accurately reflect these additional risks. These risks are effectively passed on or externalized to those who are not a part of the borrowing/lending transactions in which the government deals. The FDIC, which guarantees deposit accounts at taxpayer expense, further exacerbates the situation by leading savers to believe their savings are risk-free.

For our purposes here, the key concept to realize is the important function of interest rates in this whole scenario. Interest rates serve as a regulator in the economy in the sense that the height of the rates helps businessmen determine the proper level of investment to undertake. Anything in the economy that tends to lower the interest rate artificially will promote investments in projects that are not really profitable based upon the amount of capital being provided by savers who are the ones that forgo consumption because they deem it in their best interest to do so. This wedge that is driven between the natural rate of interest and the market rate of interest as reflected in loan rates can be the result of increases in the supply of fiat money or increases in uncertainty in the market which is not accurately reflected in loan rates. The manipulation of the interest rate is significant in both cases, and an artificial boom and subsequent bust is inevitably the result.

Conclusion

Changes in the supply of money in the economy do have an effect on real economic activity. This effect works through the medium of interest rates in causing fluctuations in business activity. When fiat money is provided to the market in the form of credit expansion through the banking system, business firms erroneously view this as an increase in the supply of capital. Due to the decreased interest rate in the loan market brought about by the fictitious “increase” in capital, businesses increase their investments in long-range projects that appear profitable. In addition, other factors as well can cause a discrepancy between the natural rate of interest and the rate which is paid in the loan market. Government policies with regard to debt creation, monetization, bank deposit guarantees, and taxation, can effectively externalize the risk associated with running budget deficits, thus artificially lowering loan rates in the market.

Either of these two influences on interest rates, or a combination of the two, can and do influence economic activity by inducing businesses to make investments that would otherwise not be made. Since real savings in the economy, however, do not increase due to these interventionist measures, the production structure is weakened and the business boom must ultimately give way to a bust. []

  1. For a detailed discussion of the phenomenon of interest and the corresponding relationship to the business cycle, see Ludwig you Mises, Human Action, 3d rev. ed. (Chicago: Contemporary Books, 1966), chapters 19-20; Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing Corporation, 1970), chapter 6 in Value Vault; and Mark Skousen, The Structure of Production (New York: New York University Press, 1990), chapter 9.
  2. Friedrich A. Hayek, Prices and Production, 2d ed. (London: George Routledge, 1931; Repr. New York: Augustus M. Kelley, 1967), p. 11.
  3. Ludwig von Mises, The Austrian Theory of the Trade Cycle (Auburn, Ala,: The Ludwig von Mises Institute, 1983), pp. 2-3.
  4. Rothbard, Man, Economy, and State, p. 857.
  5. Richard Ebeling, preface to The Austrian Theory of the Trade Cycle by Ludwig von Mises, Gottfried Haberler, Murray N. Rothbard, and Friedrich A. Hayek (Auburn, Ala.: The Ludwig von Mises Institute, 1983).
  6. Roger W. Garrison, “The Roaring 20s and the Bullish 80s: The Role of Government in Boom and Bust,” Critical Review 7, no. 2-3 (Spring-Summer 1993), pp. 259-276.

Recommended Blogs

Here is an investor who has the guts to put his work in the public domain. This is one way to track your thinking and investment progress.

http://www.mandelcapital.blogspot.com/

For those who want to dig deeper, here are notes on Competition Demystified from an “Austrian” Value Investor.

http://valueprax.wordpress.com/

Book on Moats; Best Blogs; Ask Greenblatt; Eddie Lampert

Moats

If you want to contribute to a book on Moats: The Competitive Advantages of Buffett & Munger Businesses go here: http://www.frips.com/book.htm. You can read a few sample chapters of the book. I disagree with Buffett’s comment that Net-Jets has a competitive advantage—perhaps the company’s scale reduces its deadhead costs—but the company has yet to show consistently high profitability. I am not recommending this book/project, only making you aware. I hope when we complete our study of competitive advantages, you could surpass the analysis found there.

Ask Joel Greenblatt a question by Jan. 21, 2012 here: http://www.morningstar.com/Conference/speakers?referid=B4112

 BEST BLOGS

What are the best blogs for intelligent investors? See for yourself: http://www.fatpitchfinancials.com/2048/what-are-the-top-5-blogs-or-online-resources-you-particularly-enjoy-reading/#more-2048  or to vote and receive a recent listing: https://docs.google.com/spreadsheet/viewform?formkey=dEtsSEVOaFNpU3JQRW5CY1FsSUxkVEE6MQ

An extensive list of blogs found here: http://www.valuewalk.com/links/

Below is an assortment of blogs I have come across. The bolded links are ones I have found to be informative, but with little time to read all of these blogs, I leave the rest up to you. Your first priority in learning about investing should be to read original company filings with your accounting textbook alongside and/or the works of the masters like Buffett, Fisher, Graham, Klarman, Greenblatt, and Munger. However, any blog which informs and encourages you to think is worth a perusal. Learn from many sources, just don’t fritter away your time.

www.valueinvestorsclub.com

http://www.magicformulainvesting.com/welcome.html

www.greenbackd.com 

http://fundooprofessor.wordpress.com/

http://www.simoleonsense.com/

www.thomasewoods.com

www.mises.org

www.lewrockwell.com

http://www.jamesaltucher.com/

http://www.grahamanddoddsville.net/

www.newyorker.com (good, in-depth business stories)

www.brontecapital.com Also, read his analysis of Fairholme (name not mentioned) here: http://www.brontecapital.com/peformance/2011/Client%20Letter%20201111.pdf. SHLD, one of Fairholme’s holdings, is mentioned in the last posting. This is a lesson in correlated bets of a NON-diversified portfolio. If wrong, you go down with the ship.

www.fatpitchfinancials.com

http://www.footnoted.com/

http://www.whopperinvestments.com/are-you-an-asset-based-or-franchise-value-investor#more-836

http://variantperceptions.wordpress.com/

http://dealbook.nytimes.com/

http://pink-sheets.blogspot.com/

http://www.distressed-debt-investing.com/

http://www.farnamstreetblog.com/articles/

http://www.oldschoolvalue.com/

http://boombustblog.com/

http://www.cornerofberkshireandfairfax.ca/forum/

http://www.stableinvestor.com/

http://insidercow.com/

http://thebrowser.com/

http://www.ritholtz.com/blog/

http://www.barelkarsan.com/

Eddie Lampert meets a bad business

Buffett does acknowledge that even the best managers (Eddie Lampert)  will flounder if the business is not intrinsically sound. His most telling comment on management is:

‘When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.’

 

 

 

 

 

 

Sears Holding Corp. announces its struggles. http://www.marketwatch.com/story/sears-holdings-provides-update-2011-12-27?siteid=bigcharts&dist=bigcharts

There are many lessons here: allocation of capital, operating a non-franchise business, a bad business, and hubris. We shall return again.

Lose Weight; Eat More Fat. Interesting Blogs…….

Seth Klarman, “An investor must balance arrogance and humility. When you pay 1/8th more than the market for a stock, you are arrogant in believing you know more than the market. At the same time you must have humility to admit you can always be wrong.”

Eat More Fat

If anyone can find scientific evidence against this, I am eager to learn. http://www.marksdailyapple.com/how-to-eat-more-fat/

Blogs of Interest

Interesting valuation discussion of a micro-cap from a deep value investor here: http://greenbackd.com/2011/11/30/guest-post-imation-corp-nyseimn-worth-more-sold-than-alone/

What you do not learn in college: http://www.jamesaltucher.com/2011/11/10-things-i-didnt-learn-in-college/

A good short-seller and stock analyst http://brontecapital.blogspot.com/

Good learning resources: http://compoundingmachines.wordpress.com/ http://www.grahamanddoddsville.net/?page_id=52

http://pragcap.com/

http://www.gannononinvesting.com/

http://turnkeyanalyst.com/blog/

Let me know of others that you like…………

Anatomy of a Housing Bubble and a Great Blog

This blog is from an intelligent thinker–worth a perusal:
http://www.oftwominds.com

Combine your Austrian Economic studies with these charts of the housing bubble: http://www.oftwominds.com/journal08/State-of-Real-Estate.pdf

Without understanding the underlying economic theory of booms and busts you won’t draw the proper conclusions.

Helpful Investing Blogs

Recommended Blogs

www.greenbackd.com   This blog does not have much recent content but it has excellent posts on special situation investing and asset based investing like finding net/nets.  You won’t go wrong studying this blog.

http://www.gannononinvesting.com/   A blog written by a serious, self-taught investor. He is thoughtful and conservative.  You gain a sense of his personality through his writings and investments.  Investing is a personal endeavor.

Articles

Two interesting articles on money and economics:http://mises.org/daily/5673/Understanding-the-Price-of-Money

http://www.thefreemanonline.org/featured/great-myths-of-the-great-depression/

Enjoy the day.

Lectures on Behavioral Finance, Buffett and Munger

Since this blog is a learning resource, I will happily point you to other websites/blogs where you can learn.

Sanjay Bakshi is an investor and professor in India who applied the lessons of Graham, Buffett, and Munger to his teachings and investing. I recommend: http://www.sanjaybakshi.net/Sanjay_Bakshi/BFBV.html

You can download 9 lectures and peruse his site. Also, a student organized a few of his past posts–perhaps an easier way to find your interests.

http://kiraninvestsandlearns.wordpress.com/prof-sanjay-bakshis-posts/

Sanjay’s site will help deepen and broaden your thinking. For example:

Nothing is more dangerous than an idea when it is the only one you have–Emile Auguste Chartier

Why should I buy this stock?

Because it is cheap!

Under what circumstances would this be a mistake? Name three reasons why you could be wrong?

  1. Fraud
  2. Value Trap (declining industry)
  3. Bubble Market

I followed a golden rule that namely whenever a new observation or thought came across me, which was opposed to my general results to make a memorandum of it without fail and at once for I had found by experience that such facts or thoughts were more apt to escape from the memory than favorable ones. –Charles Darwin

I will post other recommended blogs, but when they fit a context.