This lecture will show you the power of focused investing. This investor invests mostly in mid-cap to small cap retail companies. A small circle of competence can be powerful indeed if the investor knows the circle well.
Go here:
http://www.scribd.com/doc/64866874/Lecture-5-Retail-Investor-Specializing-in-ANF-AEOS-ARO
The war stories continue. In this lecture an experienced investor speaks about how he found, valued and managed his investment in a distressed technology company, MIPS Technologies, Inc.
go here: http://www.scribd.com/doc/64833871/Class-Notes-4-Investor-Buying-Distressed-Tech-Company
You may wish to revist this depending upon your level of investing knowledge. You should learn about one type of search strategy to find unreflective (uneconomic) forced selling.
Remember that reading a case study about investing is a bit like reading about sex or sky-diving. Doing is different than observing. Can you act calmly and rationally during a bear market to buy a company after a huge price decline assuming there is value above price? A severe bear market (1929, 1974, 1987, 2008) feels like this (go to 1 minute 45 seconds of this video) http://www.youtube.com/watch?v=P6PhbLxLGno. Would you be able to act on an opportunity feeling such fear?
I would be interested in readers thoughts on what they learned or what they question.
Posted in Valuation Techniques
Tagged Distressed Tech Company, Investing War Story, Lectures
This lecture includes the 2005 10-K of Lear Corp starting on page 15. Begin reading the 10-K to determine if this is a good business; the price at $33 offers value and what risks are there in this investment. The lecture is here at:
http://www.scribd.com/doc/64823792/Lecture-3-a-Great-Investor-Discusses-Lear-Corp
There are many philosophical question and lessons in the discussion of Lear and what happened in this investment.
Please go to http://www.scribd.com/doc/64698012/Class-Notes-2-Intro-and-Duff-and-Phelps-Case-Study.
We continue on from lecture one focusing on two questions, “Is this a good business?” and “What price do I pay.”
There is a case study on valuing Duff & Phelps using what has been taught so far. Of course the valuation is “down and dirty” meaning the valuation is done quickly to see if there is potential to go further. Many assumptions would need to be further scrutinized.
A great movie to see how an activist investor values a business is Other People’s Money starring Danny Devito.http://www.youtube.com/watch?v=MfL7STmWZ1c&feature=related
Here is the script of a scene where Devito values New England Wire & Cable.
START
Well, let’s put it this way:
Back in New York, I got a computer. Her name is Carmen. Every morning, right after I brush my teeth, I punch out: Carmen, computer on the wall, who’s the fairest of them all?”
Now, most mornings, she spits out, “Garfield, you’re the fairest.” But three weeks ago, she said: “Garfield, Garfield, scratch your balls.
New England…” Pardon me. “New England Wire and Cable is the fairest of them all.”
New England Wire and Cable?
I said, “What’s it worth?” So she showed me the numbers.
You got equipment here that costs $120 million. Even at salvage, it’s worth $30 to $35 million.
– Can I use that blackboard over there? – Yeah, go ahead.
Thank you.
Come with me. Carmen will educate us. Let’s put down $30 million.
– How many acres you got? – A hundred and ten.
Carmen and I figure, even as farmland, grazing land…..it’s worth $10 million.
– Is that fair?
– Yeah.
Let’s lay the $10 under the $30. That makes $40 million.
You bought some other companies, didn’t you, Bill?
You have a plumbing, an electrical and some kind of adhesive company.
Boring, but all making a decent profit.
Carmen says they’re worth another $60 mil.
Let’s put the $60 under the $40.
And you have working capital of $25 million, $10 of it in cash.
Let’s put down $25 million, add them up and see what you got.
$125 million.
The only bad news is…
…that this wire and cable division isn’t making a profit…
…and all the other divisions have to support you.
Now, as a stockholder, that doesn’t make me very happy.
Are you finished, Mr. Garfield?
No, I’m not, Bill.
Let’s say Carmen was suffering from premenstrual syndrome.
No offense. A little nuts.
Let’s say she was too optimistic.
Let’s knock off $25 million. Here we go.
Let’s make it… $100 million. A nice round number. I like nice round numbers. Any debt? No. Any lawsuits? Any environmental bullshit? You throwing your garbage in the water? Of course not. Not you. What about pension liabilities? Carmen says you’re fully funded.
You people are dreams.
—
– I think this meeting is over.
– No, no, wait a minute.
Here comes the fun part.
– How many shares outstanding you got?
– Four million.
Divide 4 million shares of stock into $100 million, what do you get?
– Twenty-five.
– Good.
That means each share is worth $25.
But that was all foreplay. Let’s go for the real thing.
The stock was $10 when I woke up three weeks ago. That’s a $10 for a $25 item. What a sale!
Something worth $25 I can buy it for $10.
The company’s not for sale, Mr. Garfield.
I don’t want your company, Jorgy.
I just want what every other stockholder wants:
– I wanna make money.
– You are making money, Mr. Garfield.
You bought the stock at $10. It’s now $14.
The stock is $14 because I’m buying it.
I’m doing my part. Now you do yours. Get rid of this wire and cable division. It’s a financial cancer.
| Liquidation Valuation in $mils. |
Low |
High Estimate |
| Equipment at salvage |
$30 |
$35 |
| Land as grazing land |
$10 |
$10 |
| Sub-total |
$40 |
$45 |
| Other Profitable Businesses |
$60 |
$60 |
| Sub-total |
$100 |
$105 |
| Working Capital |
$25 |
$25 |
| Sub-total |
$125 |
$130 |
| Round Down conservatively |
$100 |
$130 |
| Number of Shares |
4 mil. |
4 mil. |
| Price per share |
$25 |
$32.5 |
| Purchase Price |
$10 |
$10 |
| Discount from Intrinsic Value |
60% |
69% |
END
Questions, thoughts and discussion are welcome.