Tag Archives: books

Book Review: Pitch the Perfect Investment

Pitch the Perfect Investment, by two money managers who have also taught for many years at Columbia University’s Graduate Business School, can stop small caliber bullets or deflect a vicious sword blow with its heavy-gloss 496 color pages.  Bad jokes aside, is the book worth the $30+ for its intended audience, young professionals seeking an investment career or can other readers gain investing insights?

FYI: I previously mentioned here Sept. 6th 2016, Pitch the Perfect Investment and Sept. 21, 2017 Pitch the Perfect Investment

Slide presentation:170926_Fordham_LC_final

The authors synthesized many academic publications for the reader to understand the subtleties behind concepts like the Wisdom of Crowds, market efficiency, behavioral finance, and risk into clearer language.  This book with its colorful diagrams can help you grasp the theory of a discounted cash flow model or “DCF”; DCFs are used throughout the book because as the authors say, “all valuation is at the core a DCF, either explicitly or implicitly, whether they (analysts and portfolio managers) admit it or not.”   Of course, it is a given that the young analyst can gain his or her own company and industry expertise so as to insert reasonable assumptions into the DCF model.

Investing is simple but not easy some say. This book provides the simple concepts in a colorful, insightful way, but you have to do the hard part—scratch out a variant perception while competing with many other professionals. Sobering.

The reader is taken through the basics of valuing an asset, a business, how to evaluate competitive advantage and value growth with simple examples (The Lemonade Stand).   The authors drive home the importance of differentiating between nominal growth and profitable growth.  Growth without competitive advantage earning a return above its cost of capital is useless or worse. Certainly, all investors must grasp those concepts.  Every page is festooned with color cartoons, diagrams, tables and graphs.  This is a visual text.

The most interesting part of the book for me was the Chapter 6, The Wisdom of Crowds.  As Buffett says, “You must know two things as an investor: how to value a business, and how to think about prices.”  If I can paraphrase correctly, the Wisdom of Crowds with an adequate amount of domain-specific knowledge and diverse views acting independently from each other on disseminated information will be a force to push price towards efficiency or intrinsic value.  My respect for market efficiency and the person on the other side of the trade from me was reinforced.  If you gain anything from this book, understand that earning an investment edge or variant perception is EXTREMELY difficult and rare.   The authors may have intentionally driven home their point with their example of Cloverland Timber Company.

In their example, the analyst had the domain expertise to notice a line in the financial statement that the Cloverland was undercutting its forests, then satellite imagery was used to assess the quality of the asset and arrive at a more accurate valuation than the market’s current estimate.  The information is available but not publicly disseminated.   I wonder how many analysts/portfolio managers have the time, energy, money, or inclination to go this extra mile?  If you are this able, then you deserve alpha.   What are the implications?

If diverse individuals with independent thoughts are required to have the “Wisdom of Crowds” operate effectively, how will investment firms with their hordes of MBAs and CFAs all taught the same concepts, reading the same newspapers, magazine, research reports, and attending the same investment conferences arrive at non-consensus conclusions often–or ever?

The Wisdom of Crowds gives you an understanding of how prices are set under normal conditions when the forces of darkness and “Mr. Mayhem” (cartoon figure in the book using a magnet to pull prices away from market efficiency; he is the guy you need to spot quickly) are not strong enough to pull prices sufficiently away from intrinsic values.  In other words, behavioral finance is complementary to efficient markets.  One can then recognize when the Wisdom of Crowds becomes the Madness of Crowds.  For an understanding of how prices are set by individuals in a free market, go to pages 79-185 in Man, Economy, and State by Murray Rothbard (Google: Man, Economy, and State.pdf) which has an analysis of how individuals set prices through direct exchange.

Another valuable chapter in the book is Chapter 9, How to Assess Risk.  When investors confuse uncertainty (unknowns) with risk (losing money), then opportunity may appear.

Paul Sonkin, one of the authors, gives sobering advice to students who dream of becoming money managers.  Page 151: “I’m not trying to discourage you from pursuing your dreams, but you should do it with your eyes open.  Do it because you love analyzing companies, not to make a quick buck. And, if your goal is to outperform the market, keep in mind how difficult it has been in the past and the fact that it will only be more challenging in the future.” Those are true words.  The investing profession may end up like acting.  Only the crazy brave will pursue.

Once you have finished Section 1, The Perfect Investment, you then learn how to “Pitch” the Perfect Investment.   Assuming you are diligent enough to acquire the information, assess risk, identify an actual mispricing, and know the catalyst, then convincing another of the merits of your investment should be the easy part.  Unfortunately, too many do not provide a convincing case for the merits of their investment.   An example, of a devastatingly compelling case: The truth shall set you free (liar, liar)

The authors lay out a framework below in this example:

Value or What Can I Make:  Market price is $90 but the stock is worth $140—time horizon is less than 18 months.

Catalyst: Or Who else will figure this out:  Activist with a good track record is pushing for a sale.

Mispricing: The activist did an independent appraisal which the market is unaware of showing a substantially higher value than the company appraisal.  Also, the presence of the activist does not appear to be priced into the stock.  The market is unaware of the activist or does not think he will be successful.

Downside:  Limited. Timberland is a hard asset.

For another example of a forceful investment case with an implied catalyst: Other People’s Money Does Danny Devito provide a strong case? Does he show how much one can make, lose, what is the market missing, and the catalyst?

If you truly have a variant perception, then this is usually your reception: Michael Burry’s Variant Perception

And, only if you are right, and you make the decisions can you present this way: Michael Burry’s Investors  If you read the book, The Big Short, ironically you know that Michael Burry was not making a macro bet, but on the impossibility of individual mortgage holders to make their mortgage payment when asset prices decline and/or interest rates reset higher.

An investment edgeThere are only three ways to gain an edge

In summary, while I do not agree with the book-jacket blurb:

Mr. Nicholas Gallucio, CEO of Teton Advisors, who said, “In this era of hyper-competition on Wall Street ……even the smallest edge can make the difference between success and failure. Pitch the Perfect Investment will give the professional investor that edge.”  I do believe the book is worth $30 for a beginning and intermediate investor who wants to refine their understanding of key investment concepts and to review how to make clear and convincing investment pitches.   Even if an investor does not have a boss to pitch to, the investor should always write down a succinct investment case for each investment.

Remember, I’m biased. I’m a cheapie who went Dutch on his honeymoon, charged an entrance fee, and had a cash bar.  Sure, I made a profit, but the divorce cost a fortune.  Perhaps, I confused price with value.

PS: Graham and Dodd Oct 2017

Keys to A Few Value Vaults

Click on VIEW FOLDER and there are many books, cases, and more. Let me know if you wish more posted. Here are a few vaults.

Books View Folder
VV_CS_Inv View Folder

 

UPLOAD_Contributors View Folder

Value Vault Videos and Book Folders

ARROW Oct 23

 

VALUE VAULT VIDEOS AND BOOKS

 
Books

View Folder

Bruce Greenwald Valuation and VI Videos 2005

View Folder

Bruce Greenwald Value Investing Class Videos 2010

View Folder

 


                     Bruce Greenwald Videos Part two

View Folder

Greenblatt Videos

View Folder

Corp. Finance

View Folder

Distressed_1

View Folder

 

VV_CS_Inv

View Folder

HAVE A GOOD WEEKEND!

Plenty here to keep anyone busy. Post your notes/thoughts/questions.

 

Treasure Chest! Many Quality Investment Books

Books

Dropbox Links

Editor: It seems as though the traffic crashed the links, so I will need to find another storage/sharing method. Patience while I work on it.

This leads me to wonder if starting a private web-site/blog with a csinvesting analyst manual would be an improvement. A person could have a book with links to videos/case studies and books in an organized fashion to become a knowledgeable investor–more learning materials than any other web-site/university times ten!  Imagine a private library/study area/discussion lounge for learning value investing.  The site could be self-sustaining with a nominal fee per annum. It would weed out the people who are not very committed.

Also, sharing info would be easier.         Thoughts for the future………

Meanwhile I will try to find another way to share those books. 

REMS of a stock operator

Reminiscences of a Stock Operator (A Classic)

Next post………

 

 

 

Strategic Logic (Book)

AHAB

 This is an excellent book for understanding how companies have a STRUCTURAL competitive advantage. I am now re-reading it.
Strategic_Logic.pdf

carved-chess-pieces_pan_14937

Financialization of the US Economy    Why Wall Street will have to shrink over time.

INVESTING BOOKS & More from the VALUE VAULT

BOOKS

 Click on books and download as you wish
Books
View this folder
Accounting, Investment Banking and Business Analysis books.

But don’t forget to do your reading on history, economics and politics to round out your education. A monkey can do a NPV, but figuring out the assumptions–now that takes a lifetime of study.

Distressed Investing Value Vault Folder Posted

Capitalism without bankruptcy is like Christianity without hell.–Frank Borman

Distressed Investing Folder

A key has been mailed to all those who have requested keys before. If you did not receive a key, please email ALDRIDGE@AOL.COM with DISTRESSED in the subject heading, and I will send you a key by the next day.  This is a new folder with the following five books. From time-to-time we will add to the books here. Those who have material they think will help investors learn, please share.

These books were donated by Saran, an investor/reader from India.

  1. Bankruptcy__distressed_restructurings.pdf
  2. Buyyout_MBO.pdf
  3. Corporate_Financial_Distress_and_Bankruptcy.pdf
  4. Creating_Value_Through_Corporate_Restructuring.pdf
  5. Distressed_debt_analysis_Moyer.pdf       Excellent!

Funeral Industry Case Studies

If you received the email and you do not want to be on the email list, please reply with DELETE in the subject heading.  Your email will remain private.

A Reader’s Question: How to Build a Competitive Advantage?

What To Wear For An IRS Audit

A man was called in for an audit by the IRS. So, he asked his accountant for advice on what to wear. “Wear your worst clothing and an old pair of shoes. Let them think you are a pauper,” the accountant replied.

Then he asked his lawyer the same question, but got the opposite advice:”Don’t let them intimidate you. Wear your best suit and an expensive tie.”

Confused, the man went to his Minister, told him of the conflicting advice, and asked him what he should do.

“Let me tell you a story,” replied the Minister. “A woman, about to be married, asked her mother what to wear on her wedding night. ‘Wear a heavy, long, flannel nightgown that goes right up to your neck and wool socks.’ But when she asked her best friend, she got conflicting advice: ‘ Wear your most sexy negligee, with a V neck right down to your navel.'”

The man protested: “But Reverend, what does all this have to do with my problem with the IRS?”

“It doesn’t matter what you wear; you’re going to get screwed.

A Reader’S Question: How to start a business that will develop a moat?

From Arden—his question:

Regarding “real life” businesses- a lot of time when I drive by a vacant shop, I think a lot about what kind of business I would start there, usually the results I reach seem too risky for me. What are some businesses can a guy start, that will have even the most basic moat? Is it even possible? As a businessman, I would love to know your view.

Dear Arden:

Most likely, you would need to start a low-capital-intensive service business, so your chances of creating a competitive advantage would come through either regional economies of scale or niche product economies of scale with customer captivity. The odds are against you, but you must at least operate in a focused and operationally efficient way. Also, don’t confuse an arbitrage profit with a competitive advantage like I did when I started a tariff-switching business in Brazil. Fast growth with high profits don’t indicate a competitive advantage.

I would read all about competitive advantages by reading:

Competition Demystified: http://www.amazon.com/Competition-Demystified-Radically-Simplified-Approach/dp/1591841801/ref=sr_1_1?ie=UTF8&qid=1330361257&sr=8-1

Strategic Logic: http://www.amazon.com/Strategic-Logic-J-Carlos-Jarillo/dp/1403912599/ref=sr_1_1?s=books&ie=UTF8&qid=1330362742&sr=1-1

Then review this post and the video (link in the post) here: http://wp.me/p1PgpH-1N

Economics of Strategy: http://www.amazon.com/Economics-Strategy-David-Besanko/dp/0470373601/ref=sr_1_1?s=books&ie=UTF8&qid=1330361290&sr=1-1

Good Strategy, Bad Strategy: http://www.amazon.com/Good-Strategy-Bad-Difference-Matters/dp/0307886239/ref=sr_1_5?s=books&ie=UTF8&qid=1330362844&sr=1-5

I humbly suggest reading about the Pampered Chef by Doris Christopher. The company, The Pampered Chef, was purchased in 2004 for about $900 million by Buffett. Mrs. Christopher at the age of 35 started the company with a $3,000 loan—the only money ever put into the company! The company uses a multi-level sales organization to put on kitchen shows with proprietary cooking utensils (similar to a Tupperware Party). She built a business from scratch into a world-class organization. (Warren Buffett in the preface).

Additional readings:  

Billion dollar Lessons: http://www.amazon.com/Billion-Dollar-Lessons-Inexcusable-Business/dp/B003156BE0/ref=sr_1_1?s=books&ie=UTF8&qid=1330362800&sr=1-1

Competitive Strategy (Porter): http://www.amazon.com/Competitive-Strategy-Techniques-Industries-Competitors/dp/0684841487/ref=sr_1_1?s=books&ie=UTF8&qid=1330361326&sr=1-1

Co-Opetition:  http://www.amazon.com/Co-Opetition-Revolution-Combines-Competition-Cooperation/dp/0385479506/ref=sr_1_4?s=books&ie=UTF8&qid=1330361407&sr=1-4

Modern Competitive Analysis: http://www.amazon.com/Modern-Competitive-Analysis-Sharon-Oster/dp/019511941X/ref=sr_1_1?s=books&ie=UTF8&qid=1330361426&sr=1-1

Little Book that Builds Wealth (on Moats):http://www.amazon.com/Little-Book-That-Builds-Wealth/dp/047022651X/ref=sr_1_1?s=books&ie=UTF8&qid=1330361453&sr=1-1

Morningstar’s Five Rules for Successful Stock Picking: http://www.amazon.com/Five-Rules-Successful-Stock-Investing/dp/0471686174/ref=pd_sim_b_1

Essays of Warren Buffett    http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporate/dp/0966446127/ref=sr_1_1?s=books&ie=UTF8&qid=1330365582&sr=1-1

Joe Mansueto of Morningstar Discusses Moats

Here is what Joe Mansueto, the founder of Morningstar, said about building a business with a moat: “When I started Morningstar in 1984, my goal was to help individuals invest in mutual funds. Back then a few financial publications carried performance data, and that was about it. By providing institutional-quality information at affordable prices, I thought we could meet a growing need.

But I also had another goal. I wanted to build a business with an “economic moat.” Warren Buffett coined this term, which refers to the sustainable advantages that protect a company against competitors—the way a moat protects a castle. I discovered Buffett in the early 1980s and studied Berkshire Hathaway’s annual reports. There Buffett explains the moat concept, and I thought I could this insight to help build a business. Economic moats made so much sense to me that the concept is the foundation for our company and for our stock analysis.

…Why spend time, money and energy only to watch competitors take away our customers?

I wanted Morningstar’s economic moat to include a trusted brand, large financial database, proprietary analytics, a sizable and knowledgeable analyst staff, and a large and loyal customer vase.

Let me know if you start a business.  You will, at least, have a head start on building an advantage.