Tag Archives: Learning

A Fourteen Year-Old Reader Asks, “How to Start?”; Worldly Wisdom

ANSWERS

 

Education is the ability to listen to almost anything without losing your temper or your self-confidence. –Robert Frost

My idea of education is to unsettle the minds of the young and inflame their intellects.  –Robert M. Hitchins

My own education operated by a succession of eye-openers each invovling the repudiation of some previously held belief. –George Bernard Shaw

Every act of conscious learning requires the willingness to suffer an injury to one’s self-esteem. That is why young children, before they are aware of their own self-importance, learn so easily; and why older persons, especially if vain or important, cannot learn at all. –Thomas Szasz   (www.gloomboomdoom.com)

A Young Reader’s Question

How do I become a great investor?

CSInvesting: Well, it might be too late for you. I started at age eight, and I struggle to keep the pace. :) However, if you still wish to learn, read widely and experience life. Start a small business. Sell T-shirts or think of a fun business where you can sell products to your classmates.

My grandfather’s advice: “John, that’s your name right?” http://youtu.be/AloNERbBXcc

Buffett’s lecture to Indian business students (MUST SEE): http://youtu.be/4xinbuOPt7c   (Value the business BEFORE you see the price.)

A Course in Charlie Munger’s Worldly Wisdom

The journey towards worldly wisdom travels through two equally important territories. Firstly, learning significant concepts from the different disciplines (“the big ideas”). Secondly, learning to recognize patterns of similarities among them.

Worldly-Wisdom-by-Munger

Academic Economics_MungerUCSBspeech

Course Outline for Worldly Wisdom

Lecture_1

Lecture_2

Lecture_3

Track down more lectures: http://www.safalniveshak.com/fundoo-professor-called-sanjay-bakshi/

HAVE A GREAT WEEKEND!

Part 1: Analyzing a Gold Mining Company–Where to Start?

Idaho_Gold_Minegold mine 2

Gold mine 3gold mine

 

 

 

Assignment: Analyze and value a gold mining company

Mario Gabelli once suggested to a group of Columbia MBA students to become an expert in an industry. The process will take at least six months of intensive reading and research to get to a level of what you need to know and what you can ignore. Then in a year or so move on to another industry. After five or six years you will have competency in five to six different industries.   Since investing is all about context, we first need to learn about the gold (precious-metals) mining industry.

Whether you will analyze a gold mining company, a shipping firm, a title insurance business or a media company, you will need to develop an understanding of the industry within which your firm operates.

Since we do not have six months to study, we will move at an accelerated pace.

OK, so what do you need to start with and how would you begin?  Pretend that you wanted to build a mining company from scratch, how would you do it? If you were airdropped into Northern Pakistan, what would you first need after hitting the ground?

Friday, I will post my suggestions and information sources. Meanwhile, you can think and search for yourself. Eventually, we will move on to the particular company.   Don’t hesitate to post questions if you are unclear or my instructions are incomprehensible.

Good luck!

A Reader’s Question: Where Do I Start? My Reply: Competitive Advantages

BEARS

A Reader’s Question: Where Do I Start?

I’m writing to get some input from you about where to start regarding a fortunate situation I’ve found myself in.  Long story short, I have two very intelligent friends, one working as a newly minted credit analyst at a large regional bank and the other as an XXXX.

After reading “the Big Short” my credit analyst friend wanted to know more about investing – value investing specifically.  Given that his job is analyzing balance sheets, I figured there would be some relevant over lap. We have gotten together for the last three weeks to discuss the practice of investing, primarily in the Buffett/Munger framework with an emphasis on Moats more so than the Graham/Dodd cigar butts.

My lawyer friend and I always have interesting conversations about a wide range of world events. He is very sharp, asks excellent questions, and has become more and more interested in the art and science of investing. He asked me today if he could join our weekly investing discussions. Of course I said yes.

My dilemma is that i would like to bring some structure to this, but not suck out the fun. I am having trouble as to where to start with them.  I have been accumulating value investing knowledge for nearly a decade now and i don’t want to overwhelm them right out of the gate and potentially end the group before it gets started.

What are some good intro pieces or books or cases studies that you would start with. I’ve got two very sharp and inquisitive minds that genuinely want to learn more about Value Investing, and I’d really love to seize this opportunity as I think it would benefit all of us.

So far, I’ve shared your blog, Punchcard Investing’s blog, the MCO write up there and Hagstrom’s “Making of an American Capitalist”, and few other articles I  think are relevant.

Where would you start?

My reply:

It is fine to discuss theory but investing requires actually investing.  Your focus on moats is a good start.  You need to combine your study of moats into finding, valuing and perhaps investing in attractive franchises.

I divide the world into asset Investments with special situations as a subset, franchise investing or buying growth at a low price, and investing with asset allocators without paying a premium for their skills.

Why not start a club to become experts in competitive advantages.   So you could focus on regional economies of scale and search for companies that might fit like trash haulers.   Or you could focus on specialty product economies of scale with customer captivity like Balchem (BCPC), etc. The fun is in applying what you have learned.   Part of where you go is based on the specific interests of your group.  How could a bank develop a competitive advantage? Then go find those banks with a competitive advantage, then what price to pay?  Or take a case study of a competitive advantage of low cost structure like Geico or Compass Minerals and try to find other companies to put into your franchise list.

Between the three of you you could after a few weeks put together a list of 40 to 80 companies with moat divided into type of competitive advantage.  Are there any attractively priced or at what price should you pounce?

You must understand barriers to entry.  No matter what, study will be time well-spent.

Why not start with a simple book on strategy:Little Book That Builds Wealth_Dorsey then progress to Strategic_Logic. You could then search for specific company case studies like COORS HBS Case Study on Losing EOS.

Go to Value-Line and/or Morningstar and put together a list of companies that have competitive advantages.

Be sure you can distinguish between a company that is efficient vs. one with a sustainable/structural advantage.  Either go from broad down to specific or the reverse.

Let me know how your group develops.   Good luck.

A Reader’s Book Suggestion; Opposing Views of the Manipulated Boom; Lonely Bear

Ice

Everyone holds his fortune in his own hands, like a sculptor the raw material he will fashion into a figure. But it’s the same with that type of artistic activity as with all others: We are merely born with the capability to do it. The skill to mold the material into what we want must be learned and attentively cultivated–Johann Wolfgang von Goethe

A Lonely “Bear” on the Market:

As a side note, the Federal Reserve presently has a balance  sheet of about $3 trillion, on total capital of about $54.7 billion, meaning  that the Fed is leveraged about 55-to-1. At an average maturity of over  10-years, the duration of the Fed’s portfolio is about 8 years, meaning that a  100 basis point move in interest rates impacts the value of the Fed’s holdings  by about 8% (about $240 billion). Since July, interest rates have increased by  about 60 basis points, which has undoubtedly wiped out the Fed’s capital,  making it technically insolvent (fortunately for Ben Bernanke, the Fed doesn’t  mark its capital to market). As a practical matter, the only effect is that the  interest that the public pays on Treasury debt cannot actually be remitted by  the Fed back to the Treasury as usual, but must instead be retained by the Fed  in order to recapitalize itself due to losses on the bonds it holds. The losses  therefore effectively represent an unlegislated fiscal expenditure. Moreover,  assuming an average interest rate of about 2.5% on Fed holdings, each further  increase of 30 basis points in interest rates would wipe out a full year of  additional interest payments. Needless to say, nobody cares. These observations  aren’t central to our current concerns, but it’s worth understanding how  reckless Fed policy has already become.

On the subject of Fed policy and market behavior, Bill Hester wrote an outstanding research piece this week - Fed Leaves Punchbowl, Takes Away Free Lunch (of International Diversification). It provides good perspective on the link between economic performance and international market returns, also highlights the growing importance of country selection in international investing. I’ve included a second link to that article at the end of the Fund Notes section.

http://hussmanfunds.com/wmc/wmc130204.htm

http://hussmanfunds.com/rsi/intldiversification.htm

A reader makes a book suggestion

http://boards.fool.com/quotthe-emotionally-intelligent-investorquot-30521293.aspx

A new title that arrived yesterday via Amazon (AMZN) that you’ll also enjoy is Ravee Mehta’s The Emotionally Intelligent Investor. Mehta, the eldest son of immigrant parents, graduated summa cum laude from the University of Pennsylvania with degrees from the Wharton School of Business and also School of Engineering, and later worked for George Soros and Karsch Capital before retiring at a young age to travel the world, teach, and study philosophy at Oxford. Now Mehta manages his own funds and enjoys the freedom of working for himself.

While not having a boss is liberating, I suspect Mehta realizes that he needs a certain amount of structure (as we all do), so he can stay independent and not have to get a job with another financial services firm. In this paperback, whose title is a nod to Ben Graham’s landmark The Intelligent Investor, Mehta tells us what he learned from his search for an investing framework, including the behavioral errors that separate us from our money.

“After writing this book, I have developed daily and weekly routines to understand myself and others better, deal with my particular vulnerabilities, prioritize my to-do list, evaluate investment opportunities, empathize with other market participants, monitor my portfolio, learn from prior decisions, leverage the intuition of others and anticipate danger with individual investments and more overall portfolio’s construction. I also make sure that my investment approach fits with my personality and motivations.

Mehta’s The Emotionally Intelligent Investor, like Train’s The Money Masters, is loaded with useful tips. Despite just 200 pages in length, this is a “big” book.

The companion website: http://theemotionallyintelligentinvestor.com/

Another link: http://www.amazon.com/The-Emotionally-Intelligent-Investor-self-awareness/dp/0615688322/ref=lh_ni_t?ie=UTF8&psc=1

Manipulated Boom: 

James Grant: http://www.economicpolicyjournal.com/2013/02/lauren-lyster-talks-to-james-grant.html

Contrast that video with Krugman calling the artificial boom a “virtuous circle.”

http://www.economicpolicyjournal.com/2013/02/krugman-calls-artificial-boom-virtuous.html

Enroll in a Critical Thinking Course

https://class.coursera.org/criticalthinking-001/auth/welcome?type=logout&visiting=https%3A%2F%2Fclass.coursera.org%2Fcriticalthinking-001%2Fclass%2Findex

FPA Crescent Fund Annual Letter: crescent-2012-q4-1-24-138663BD8AD6C2 . This letter is an excellent read for understanding the current quandary that investors face today. The PM even quotes Von Mises. BRAVO!

 

A Reader’s Question on Case Studies

Fall from Grace

On my good days, I think of Wall Street as one large promotion machine and on my bad days, I think of Wall Street as a den of thieves.–Jean-Marie Eveillard

Capitulation everywhere (risks rising): http://www.hussmanfunds.com/wmc/wmc130128.htm

A Reader’s Question on Cases

Hi John: Do you have a compilation of case studies that you’ve found extremely instrumental in learning from, that you’ve collected over time?

I got a lot out of reading your notes on Greenblatt’s classes, so thanks for
that. Last night I read a great small case study from Einhorn and I realized
that the few pages I read was far better than all the time spent studying for my CFA exams. Any good compilation you have would be amazing.
My reply:  Good question. Besides a relentless curiosity, learning how to learn is critical for your development. I believe subscribing to Grant’s Interest Rate Observer then downloading ALL 30 years of his letters while also downloading the SEC filings of any company he mentions over the past 30 years will repay you many times more than any MBA, CFA–if YOUR GOAL IS TO BECOME A BETTER INVESTOR.  You will learn financial history, valuation, about market psychology, business cycles. This is what I am currently doing. I have downloaded 1983 to 1993 newsletters. Now I just need the time to finish reading them!
OK, you don’t want to do that–shell out $990 or whatever–then go here:

Take the first link. Download a research report, look at the name of the company and date, then download the financials for the company mentioned and try to analyze the company BEFORE reading the report.   What do you see? If you don’t understand something, look it up in your finance or accounting textbook that you keep by your side. Then read the report–what did you learn or miss?   Note what you need to learn, then learn it, then go on to the next report.

Yes, this takes hard work, doggedness, and discipline, but you can do it. Not many will, so there is your chance to become great.

Spend time doing this rather than listening to CNBC. Yes, we all laugh when we hear Icahn call Ackman a loser (I was appalled and saddened), but how will THAT help you become a better invesstor?

I will post a link to more case studies tomorrow.   Good luck.

PS: I haven’t forgotten my reply to an investor seeking an answer on what to do with his/her money.

Solution to Earnings Quality CS; Reading Hayek; Learning

Scarlet LEtter

Solution to Earnings Quality Case Study (Manufactured Housing)

The case was introduced here:http://wp.me/p2OaYY-1y8. Try it now if you haven’t. What jumps out at you? Red flags should be flying when you read the chilling lines (at the bottom of this post so as to not give you the answer now.)

Stirling Momex Supplement and Enron Too Shall Pass and GAAP Games_Stirling Homex

Learn more about reading Hayek. What books you should focus on: http://www.econtalk.org/archives/2012/12/boudreaux_on_re.html

http://www.econlib.org/library/Topics/Guides/TenKeyIdeas.html

How to learn (Refine your questions)

Learning Begins From Within

by Butler Shaffer

Don’t ever let school interfere with your education.~ Mark Twain

Education is an ongoing confrontation between those who want to help children learn how to think, and those who want to teach them what to think. While there are numerous variations on these themes, the contrast can most clearly be found in the distinctions between child-centered Montessori systems, and teacher- and test-centered schools. Government schools usually fall into the latter category. Homeschooling, religious schools, un-schooling, and other forms tend to emphasize either the “how” or the “what” in their efforts with children.

Those who focus on learning how to think have in mind helping children develop their own methods of questioning and analyzing the world around them; to control their own inquiries and opinions; to the end of helping children become independent, self-directed persons. The role of the teacher in such a setting is to provide new learning situations (e.g., open up new subjects of inquiry when the student is ready to do so) and to facilitate the processes of questioning so as to help the students get to deeper levels of understanding.

People who have developed the capacity for epistemological independence are not easy to control for purposes that do not serve their interests. Institutions – which have purposes of their own that transcend those of individuals – require a mass-minded population that has been conditioned to accept outer-imposed definitions of “reality.” Any deviation from this systemic purpose – as would derive from students questioning how the arrangement would benefit them – would be fatal to all forms of institutionalism.

The established order has, from one culture and time period to another, insisted on educational systems that train young minds into what to think. “Truth” becomes a set of beliefs that conform to an institutional imperative, and it becomes the purpose of schools to inculcate such a mindset. Whereas “how to think” learning that finds its purpose and focus within the minds of self-directed, independent students, “what to think” education derives from outside the students’ experiences and analytical skills. As Ivan Illich so perceptively expressed it, “[s]chool is the advertising agency which makes you believe that you need the society as it is.”

To this end, the established order has helped generate – with eager assistance from academia – a belief that all understanding is a quality requiring phalanxes of self-styled “experts” who, by virtue of their prescribed status, enjoy monopolies to offer opinions about their respective fields of study. Plato’s designation of “philosopher kings” has been sub-franchised into categories of “experts” to be found in “history,” “physics,” “psychology,” “economics,” “law,” and seemingly endless sub-groupings that negate the role once respected for those who had received a “liberal arts” education.

Entry into the sanctum sanctorum of the upper floors of this pyramidal high-rise is determined by a process of certification usually reflected in a graduate school degree provided by those already recognized. Of course, given the logic of any vertically-structured system, there is a hierarchy of certifying agencies, wherein Ivy League universities are presumed more capable of identifying and recognizing expert genius, than would Boll Weevil State University. Nor is tolerance exhibited toward any interloper who might dare to offer an opinion outside his or her area of certification. (When my book, In Restraint of Trade was first published some fifteen years ago, one reviewer – from a history department at a highly-respected university – spent the bulk of his time criticizing not the substance of my book, but the fact that I taught in a law school!)

The assumption is often expressed that, in a complicated world we must rely on “experts” to navigate through the turbulence and uncertainties that abound. But the study of “chaos” and “complexity” challenge this thinking, reminding us that complex systems produce unpredictable outcomes; that the most effective action occurs when decision-making is decentralized closest to the source of such turbulence. In a world currently being destroyed by centralized state systems of “economic planning,” “military planning,” misnomered “intelligence agencies,” “health-care planning,” among others, it is increasingly evident to people that the certified “experts” tend to supply answers to problems that their epistemological arrogance has helped to generate.

Systems premised upon outer- rather than inner-directed learning – training students what to think rather than how to think – turn children’s minds into so much “mush” as to deplete their inherent creative energies. People become neutralized by a system that trains them to accept the inadequacy of their own minds to make empirical and analytical judgments about the world. The outer-directed approach, in which “truth” is presumed to be found within the opinions of the certified intelligentsia, is self-sustaining as long as students’ minds remain in the default mode. Expertism is a circular process that makes it difficult for people to break the circle unless they have a sufficiently independent mind.

The method of learning I have found essential for encouraging the inner-directed (i.e., how to think) approach is found in the use of the Socratic method, which used to be used in most law schools. My all-time favorite professor was Malcolm Sharp, a law professor at the University of Chicago, one of the loveliest persons I have ever known; but who frustrated most of his students with his insistence on getting us to keep refining the quality of our questions. This was done through an ever-deepening level of inquiry encouraged by the creative us of the word “why?”

To the proposition “government is necessary in order to protect the lives, property, and liberty of people” the following questions could be asked: “how is property being protected if the state must forcibly take property from people (taxation) in order to support its activities?” “Can liberty be protected if the state can compel people to act – or refrain from acting – in ways contrary to how they would otherwise choose to behave?” “How can lives be protected if the state is able to engage in deadly wars?” “If the war system generates restrictions on human action, including the forced conscription of people as soldiers, how is individual liberty being defended?” “If it is our purpose to protect the lives, liberty, and property of people, can such ends be served by a system that regularly contradicts such ends? Are there alternative ways to accomplish such purposes?” As each question is asked, the response might generate additional sub-questions to be explored (e.g., is it possible to support a system through voluntary payments? Is the marketplace an example of accomplishing these ends without violating them in the process?)

Most of my students experience frustration over my methods of providing them with cases and materials, and then playing around with hypotheticals – and the factual modification of hypotheticals – to explore the ramification of case holdings and rules of law. “I came to law school to get answers, one student raged, and all you’re giving me is more questions!” “How do you propose to deal with legal questions once you are in practice?” I asked him. “And if you think I am such a fount of understanding, how do you think I got that way; and do you think you might be able to develop such a skill?” It is encouraging to find some students who grasp, at the outset, that their success in the classroom and as lawyers depends upon this process of learning how to think. I often receive favorable responses from students years later. I had one student tell me “when I was a student of yours, I hated your guts. Now that I’ve been out in practice for ten years, I think I learned more from you than from anyone else.” Just a few months ago, a former student wrote me – thirteen years after graduation – to thank me for what she learned from my classes.

Perhaps the most pleasant experience I had with a first-year law student came on the first day of class a few years ago. We had discussed a particular case, and I began playing around with the facts to see how the students might follow the process of discovering the boundaries of legal concepts. At this stage, most students are able to give a one-line answer, but can go no further. This young woman, however, took the inquiry to greater depths: “how does this square with what the court said in the earlier case?,” and similar inquiries. I knew, at once, that she was a real “keeper;” that classes were going to be far more interesting with her ability to use the Socratic process to discover the kind of understanding one never gets from answers; that it is the endless pursuit and improvement of one’s questions that makes for real learning.

I asked this young woman about her educational background: “I was homeschooled up to high school,” she responded. “The best teachers I ever had were my parents.” I suspect that she was the beneficiary of parents who knew that how to think was of greater importance to a creative and successful life, than being conditioned into what to think! The former approach allows men and women to develop, within their own minds, the skills not only for understanding the nature of the world, but to act competently. The latter method reduces people to the task of seeking the opinions of others – particularly the “experts” – to be informed of what they are expected to know.

After working through a series of hypotheticals, I still get a few students who ask “but what is the answer?” “Who cares?,” I respond. “It is going through the process of constant questioning that is the purpose of what we are doing here? I don’t know how the courts would rule in this situation, but I do know what noises to make were I representing one of the parties.” The Socratic method helps students grasp the meaning of Milton Mayer’s observation that “the questions that can be answered aren’t worth asking.”

Our world is being torn apart by men and women who naively try to integrate into some manageable whole their confusions, contradictions, conflicts, lies, evasions, corrupt and violent dispositions, and other destructive behavior. We live at a time when people become righteously indignant over the heinous murder of another, but wave flags and cheer for those who conduct wars against the millions; when Nobel Peace Prize grantors cannot distinguish Mother Theresa from Henry Kissinger as worthy recipients of such an award. Perhaps when our well-organized, expertly-run world finally runs out of answers to the destructive conditions it has created, we may – as Malcolm Sharp urged – undertake the search for improved questions.

December 12, 2012

Copyright © 2012 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Butler Shaffer Archives

RED FLAG on Earnings Quality Case Study (Thanks to a reader)

Note 3 on receivables says revenues are recognized when units are
manufactured and assigned [at the company's discretion] to specific
contracts. (What the F%^&!)  Then it says contracts provide for payment upon completion.  (Expect a massive difference between GAAP accruals and CASH FLOW–lots of room for funny stuff!) 

[not manufacture/assignment] and receipt of all approvals necessary
[which is not in Homex's control]… Ergo revenues are booked when the
customer doesn’t even have to pay.   BINGO!

That note to the financials (Revenue Recognition) should have you reaching for the barf bag.

LESSON: READ THE NOTES TO THE FINANCIALS!

A Blog from a Self-Directed Investor

“There is a time in every man’s education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better for worse as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried. Not for nothing one face, one character, one fact makes much impression on him, and another none. This sculpture in the memory is not without preéstablishcd harmony. The eye was placed where one ray should fall, that it might testify of that particular ray. We but half express ourselves, and are ashamed of that divine idea which each of us represents. It may be safely trusted as proportionate and of good issues, so it be faithfully imparted, but God will not have his work made manifest by cowards. A man is relieved and gay when he has put his heart into his work and done his best; but what he has said or done otherwise shall give hint no peace. It is a deliverance which does not deliver. In the attempt his genius deserts him; no muse befriends; no invention, no hope.”  Ralph Waldo Emerson, Self-Reliance

Best Advice I Ever Got from Grandpa

 A Good Investing Blog

A good blog from an individual investor who has an attitude and philosophy that YOU should strive for–or at least that is what csinvesting.org HOPES you seek–independence.  Remember don’t mimic but learn.  My investments would be different from this blogger’s investments but our attitudes are similar. I just came across this blog this morning. Thumbs up!

http://reminiscencesofastockblogger.com/about/

http://reminiscencesofastockblogger.com/2012/09/01/the-community-banks-of-arbitar-partners/

Welcome to my blog

My name is Lsigurd and I plan to use this blog to share the research that I do for stocks that I am purchasing in my own accounts.  In the portfolio page I will keep track of my picks with an RBC practice account.

This is not my first attempt at a blog. I used to post regularly on stockhouse but I got tired of the spam on the site. I also have been posting regularly on Investors Village under the moniker of liverless.   I lost interest with the format of posting on a bulletin board, and I think its time for something new.

The RBC  account I will use to track my portfolio has been active since July 1st, 2011.  Performance from my accounts for earlier years can be viewed here.

Who am I?

I don’t think that investing acumen can be taught.  Everyone has to find their own investing personality, and the only way you can do that is by getting into the market and figuring out what works for you.  I made a conscious choice to bypass the route of an MBA or CFA  and to instead learn by experience.  I remain convinced that the best way to learn the market is by being in the market and making mistakes.

My educational background is in oil and gas, and so I started my market education by buying a number of oil and gas stocks based on what I saw as strong fundamentals and cheap valuations (my first being a little producer called Belair Petroleum for those that remember such names).  I quickly learned that in the oil and gas sector, cheap is another word for dead.  Valuation is about more than numbers, and I have learned that a good story and strong prospective growth is a better value proposition than a cheap cash flow multiple.

From the world of oil and gas I expanded my area of investment based on the thesis that China was going to keep growing and that the middle class in China would evolve into consumers of refrigerators, indoor plumbing and automobiles.  This thesis lead me to my first forays into base metal stocks (I owe much of my early success to the likes of Aur Resources and Hudbay Minerals), to gold (I own much of my early frustration to Apollo Gold!), and from there to soft commodities like potash (I was one of the original potash bulls on the VT.to board on Investors Village), and most recently pulp.

Lately I have expanded my investment landscape to regional banks and US REITS.  Why would I make the jump from commodity investing to basically real estate (regional banks are almost all highly leveraged to real estate loans)?  Because these stocks have been crushed and at some point a good value proposition is going to emerge.  It’s the same reason that I keep a close eye on lumber and forestry stocks, and have been in and out of them on occasion over the last couple of years.   The time for these stocks, banks, REITS and forestry, has not come yet (with the exception of a few special situation banks I am invested in) but it will and I want to be ready for that moment.

So what can you expect to read about here?

I don’t run anyone’s money but my own.  I have for 10 years and I’ve done it well.  I have returned to myself somewhere between 400-500% over the last 10 years, while the S&P has done nothing. I run my own portfolios and do a lot of due diligence on my stock purchases.  I buy mostly (but not exclusively) microcap stocks, primarily because the value most often lies in those stocks that are not followed by many others.  This can cause my portfolio to have a lot of volatility and it has led to more than a few sleep deprived nights, but such is life and I have had good success with my strategy.

I’ve had success looking for undervalued stocks in unloved but growing sectors.  A lot of my success has come from commodity stocks.  As this commodity bull market matures and opportunities become more scarce, I have found myself expanding to other areas; to buy some US REITs, some regional banks, and there are a few one-off special situation stocks that I have not yet bought but am looking closely at.

So what you can expect here is that I will write about the stocks I own, much as I did on the stockhouse blog I had, and much as I do on Investors Village.

Advice on Learning from a Reader/Accountant, Agewisdom

agewisdom

As an accountant, I can understand some of the predicament that many non-accountants are facing. Three years to get a professional qualification and another 4 years in auditing and I still get a bit of headache digesting some information on financial statements. So, even though its’ daunting, please don’t get discouraged.

There’s been a lot of great discussion and tips by everyone here (great community) but I’d like to add my top 3 tips to help in understanding financial statements.

1. Start with the familiar.

Basically, I am sure everyone is familiar with some sort of business. You may be an engineer, so you’d be familiar with an engineering business. Or your family may run a stationery shop, so you’d be familiar with that sort of business.  After reading the basic books on financial statements, stop and get a copy of financial statements of businesses that you are familiar with.

Then from there, look at the figures, preferably for the past 3-5 years. You see, what is important to understand is that the financial statements with the notes over a 3-5 year period tells its’ own story. It’s like a novel, except with more figures and some explanatory notes. If you understand the business well, you’ll find that financial statements actually make a lot of sense and quantifies what you know in your gut-feeling. Further, the type of financial statement in every industry is sometimes vastly different. Financial statements in a trading business is vastly different from that of an insurance co, for example.

2. Understand the principles and Hot Areas

If possible, try to understand the underlying reasons why accountants prepare certain financial statements in a certain way. For instance, an understanding of the principle of deferred taxation would allow you to make the firm judgment call that any deferred tax asset in the Balance Sheet should be ignored. Why? I’d leave you to find out. Further, be aware of certain danger areas such as Contingent Liabilities and Special Purpose Vehicles (SPVs). Yes, it’s difficult reading but knowing these areas are quite crucial in assisting in making a firm judgment call.

3. Follow the money or http://www.youtube.com/watch?v=OaiSHcHM0PA

As with all things, cash is KING! So the cash flow statement is the most important part of the financial statements. It doesn’t matter if the company is making HUMUNGOUS profits if its’ cash flow is NEGATIVE. So, a company that is the darling of everyone but is hemorrhaging cash quarterly is a dangerous one. Coincidentally, Enron never prepared cash flow statements on the basis it was too complicated. We all know what happened next.

Enron Case Study: http://wp.me/p1PgpH-2U

A Tip for Beginners in Learning An Industry: Cruise Ships

Using this Blog

www.csinvesting.org has an eclectic mix of posts on valuation, competitive analysis and accounting. Use the search box in the upper right corner for relevant posts on subjects that interest you. For example, if you want to learn more about EBITDA as a cash flow metric then type those words into the search box and you will see several posts like this one: Placing EBITDA into perspective: http://wp.me/p1PgpH-yS.

Value Vault

Also, there are over 60 books, many case studies and 30 videos on investing in the VALUE VAULT. Email me at Aldridge56@aol.com with (only) VALUE VAULT in the subject line. Within 48 hours, I will do my best to send you the keys to the cloud-based folder so you can download anything you might like to study. No reply? Just email me a reminder. I know this blog needs better organization and all the information can be overwhelming for new investors. The trick to developing skill is to cut through all the noise to focus on the key issues that will drive the success of the investment. Practice reading original 10-Ks and 10-Qs and Proxies.  Look at profitability, margins, trends, ownership, and the history of the industry. Take and keep notes. What are you learning?

Other blogs

A self-taught investor with excellent examples http://www.gannonandhoangoninvesting.com/     

Another for beginners: http://www.oldschoolvalue.com/blog/

http://www.oddballstocks.com/
http://www.practicetruthfearnothing.com/
http://brooklyninvestor.blogspot.com/
http://www.ritholtz.com/blog/2012/06/picture-guide-to-financial-markets-since-1800/
http://www.thedividendguyblog.com/2009/04/27/

lessons-and-ideas-from-benjamin-graham-by-jason-zweig/

APPLY, APPLYBut YOU must apply what you read to the actual world. Practice.

Investing is something that you DO. OK, you are a beginner and you have read a basic book

on accounting (Go to the folder called BOOKS in the VALUE VAULT and choose

How to Read a Financial Statement. Next ask yourself,

“Would I want to invest in the cruise ship industry?” (Find out)

“Can I understand what drives profitability? What factors can the

companies control? Is there a better company than the others?” Compare the

two (CCL and RCL -see below) using common-size financial statements to

see trends or indications of strength or weaknesses. Common-size financial statements:

http://smallbusiness.chron.com/normalized-commonsize-financial-statement-25471.html.

Read through two years of annual reports and proxies for both companies,

noting what you don’t understand–then go look up and research the answers.

Read about the industry BEFORE you read this article (click on link):

Case Study for Beginners Study an Industry Cruise Ships.

Background on Carnival Corporation

CCL_VL  CCL_Morn   CCL_2011 Annual Report

Royal Caribbean

RCL_VL    RCL_Morn   RCL_Investor Relations Presentation March 2012

Then read the article and see if you agree or can reverse engineer

what the writer did. I think you will have more fun and make your learning more relevant.

 Have a Great Weekend!

A Reader Asks What is the Best Way to Learn Using the Resources Here.

How Best to Learn?

An intelligent reader and I have had an exchange on how to approach using the resources on this blog to learn most efficiently. There are many resources on this blog and in the Value Valut–just email me at aldridge56@aol.com to request a key)–but the orgainization can be improved upon.

Ben Graham was right when he said a conservative investor can do better than average through using a disciplined, rational approach here: http://www.grahaminvestor.com/

Benjamin Graham always tried to buy stocks that were trading at a discount to their Net Current Asset Value. In other words he buy stocks that were undervalued and hold them until they became fully valued.

“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.” Ben Graham in “The Intelligent Investor”, 1949.

The problem is how difficult it is to perform much better than average. You have to expand your skills and circle of competence while keeping the costs of your learning to a minimum.

I will be traveling the next few day (until Tuesday), but I will think carefully on my answer to his question. Other readers, please feel free to offer your experiences, thoughts and suggestions. The quality of readership here is outstanding.

Dialogue

Hi John,

Just a quick question regarding your suggested learning methodology.

I am currently working through your lectures (blog and Value Vault) and there are a number of useful book recommendations. Would you suggest reading the books before moving on, to appreciate and understand the subsequent lectures? e.g. In lecture two, you quote, “The professor (Joel Greenblatt in his Special Situations Investing Class at Columbia GBS) stressed studying carefully the essays of Warren Buffett.”

I do have the book and was wondering whether to take a break from the lectures and study the book, then return to the lectures. Given you’ve been through the learning process already, what would you recommend?

I’d be very interested to hear your thoughts. Keep up the good work, it is really appreciated.

My reply: Dear Reader please tell me about your background, how you became interested in investing and how YOU think is the best way to learn.

What drives your interest in investing? Then I can better frame my answer.

THANKS.

That is a very good question and I’ll try to be as clear and honest as possible.

Background: I am from the UK, 42 years old, married, with one child.

Job: Sales & Marketing Director for a small Manufacturing Company selling custom robotics/automation machines/systems to pharmaceutical and petro/chemical industries.

Professional Background: I am a Chartered Mechanical Engineer.

Education: 2001 – First Class Honours Degree in Mechanical Engineering.

2006 – MBA from XXXXX Business School.

2010 – MSc module Valuation with Professor Glen Arnold at Salford University (10 week semester). Glen is author of “Value Investing” and other related investing/corporate finance titles (FT Pearson).

2012 – Professional Certificate in Accounting (Open University). This was a distance learning course done over two years in financial accounting (year 1) and management accounting (year 2).

Background: Hard to say how I started out, but I invested in Thatcher’s UK privatisation initiatives in the mid 80s. I made a small amount of money on this purchase of UK utility company British Gas and I was hooked. I was 16 years old.

Since then I had limited free capital due to mortgage, pension and so on. About seven years ago, I became interested again and read “The Motley Fool Investment Guide” on investing which basically advocated index/mutual funds. I did this for a couple of years, invested mainly in Fidelity funds, UK, China, India, US index funds and by sheer good fortune sold out near the top of the market to buy a house (May 2007). Shortly after I had a brief spell spread betting (futures), with limited success, actually no success! I wanted to get rich quick and attended numerous trading seminars in London. I shorted one of the worst hit UK banks (RBS) during the banking crisis and still lost money because of the volatility (and my ineptitude). Imagine losing money shorting Lehman! It was that bad.

I managed to stay out of the market for 2008 and started to reinvest in 2009, mainly FTSE100 companies that are mostly popular (by volume e.g. Vodafone, Royal Bank Scotland) but with no analysis or reason to invest other than a ‘gut feel’ that they would go up! They did, but so did everything else…I later sold once I became interested or aware of small cap value.

I’ve read (once only) many classic investment books (Graham, Dreman, Lynch, Greenwald, Glen Arnold, Montier, Shefrin, Buffett partnership letters, Greenblatt, Pabrai etc.). As you know there are many references in these books to the accounting numbers and having read them I realized I didn’t know that much about accounting despite my MBA education. As a side note, I did the part-time Executive MBA and it was way too hurried to absorb the vast amount of information, so my finance learning was minimal. I oculd calculate WACC, CAPM etc., but didn’t understand the context. And so I decided to embark on an accounting distance learning course which I recently passed a couple of months ago.

After reading these books and several biographies on Buffett, I became more and more interested in the value philosophy (low P/E, P/BV etc.). I stumbled across various value oriented blogs such as Richard Beddard in the UK, Geoff Gannon and your own blog. Since reading these blogs I started to follow the UK small cap scene. (John Chew Small-caps have the tendency to be more over-or-undervalued for liquidity and informational reasons). The reasons for this philosophy are mainly based on Buffett’s early days, Greenwald, Beddard and Glen Arnold’s teachings. I can also relate to the idea that they are under researched, too small for the institutions and are a lot easier to understand.

So far my learning process has evolved from trying to understand quantitative financial analysis through books and working my way backwards, i.e. if I don’t understand something in a book or on a blog, I know I have to educate myself rather than think I know what I’m doing. I’d like to think I recognize my behavioral failings e.g. overconfidence, which I hear a lot in investing. My current thinking is to learn financial statement analysis first, along with valuation and then I can focus on the qualitative factors such as competitive advantage etc.

I believe that to buy a company cheap, you should know its intrinsic value and so I have become more interested in valuation and the teachings of Damodaran. I have just started to look at his Spring 2012 lectures. At the same time I saw his course mentioned in your first lecture. Not long after reading your first lecture, my question occurred to me, i.e. if John is recommending these resources – does he suggest that the reader works through those recommendations first before proceeding with the lectures. I realize that if you read and did everything you posted, it would take a lifetime, so although I am definitely not looking for shortcuts, I would appreciate advice on the case study approach to learning. My intention is to work through the lectures and stop at the point a book is recommended. However there are about five or six books mentioned in lecture one alone. I’ve just started, Essays of Warren Buffett by Cunningham. I also understand there is no substitute for getting your hands dirty and reading the financial reports of the companies you’ve either screened or shortlisted for some reason. I suppose I’m at the stage where I’m not sure what ratios are important, profitability vs financial strength etc. Do I look at a company qualitatively first or do I screen based on PBV, P/E, Yield, ROIC, ROE, EV/EBITDA etc.? I’m conscious that I need to avoid value traps, so maybe look at F-Score, Z-Score, solvency.

I realize you can never stop learning, but I just need some direction from a person who’s been there already. Once I have the right approach in mind, I will study and ultimately learn from my mistakes akin to Kolb’s experiential learning theory.

What drives my interest in Investing?

I suppose this could be answered with a quote from the Guy Thomas book, Free Capital:-

“Wouldn’t life be better if you were free of the daily grind – the conventional job and boss – and instead succeeded or failed purely on the merits of your own investment choices? Free Capital is a window into this world.” Guy Thomas – Free Capital.

That quote would sum it up for me. I can cope with not being rich, but being free would be pretty good! In addition, I actually love the game of investing and the intellectual challenge interests me enormously. I read investing books for fun, much to my wife’s disapproval!

I hope the above gives you enough to answer my original question and thank you for your time and help.