Tag Archives: Munger

Greatest Company Analysis, Studying Franchises and More………….

“The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them. And now it’s even worse because even the most sophisticated people have no idea what’s going on.” –Seth Klarman

I’m passionate about wisdom. I’m passionate about accuracy and some kinds of curiosity. Perhaps I have some streak of generosity in my nature and a desire to serve values that transcend my brief life. But maybe I’m just here to show off. Who knows? –Charlie Munger

Best Company Analysis

Several experienced investors (including charlie479) have called the lecture in the link below one of the best company analysis ever done. A Charlie Munger speech about worldly wisdom in solving the problem of building a trillion-dollar business almost from scratch.  http://www.scribd.com/doc/76174254/Munger-s-Analysis-to-Build-a-Trillion-Dollar-Business-From-Scratch

Analysis of a Franchise: Linear Technology

An analysis of Linear Technology’s franchise characteristics: http://www.valueinstitute.org/viewarticle.asp?idIssue=1&idStory=109

Do you agree with the above analysis? The five companies below are considered by some to be franchises. Build a database of franchise companies to eventually purchase at the right price for you. Write down what you think are the sources of competitive advantage. Can you arrive at a ball-park value?  If not now, then set aside for future reference. Note the level of ROIC, operating margins, use of excess capital, growth and investment needed for growth and the history of returns.

Linear:                      LLTC 25 Year    LLTC_VL

Balchem:                  BCPC_35 Year   BCPC_VL

Applied Materials: Charts 35 year AMAT  AMAT_VL

Analog Devices:      ADI_35 Year  ADI_VL

Intel:                         INTC_35 Yr   INTC_VL

Now is the time to dig into the Value Vault and read, Competition Demystified by Bruce Greenwald. A study guide is offered here (Thanks Sid): http://competitiondemystified.com/index.htm

Be the Best

To be the best, you will need to have character, be independent and tough like Joker: http://www.youtube.com/watch?v=gYxEIyNA_mk&feature=related

You will need to develop your skill in understanding and recognizing franchises. Eventually you will show skill like this: http://www.youtube.com/watch?v=HwtMPdMFXQA&feature=related or take it to the hoop like Jordan: http://www.youtube.com/watch?v=U17x7gJ33bY&feature=related

I have never held a ball in my hands, but even I know Jordan is practicing magic not basketball–but, then again, he almost didn’t make his high school team.

 A Good Data Source

Accounting, business studies, and data here: http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/index.html

Freedom vs. Tyranny

A satellite view of tyranny vs. freedom: North vs. South Korea    http://mjperry.blogspot.com/2011/12/legacy-of-n-korean-dictator-kim-jong-il.html

Answer to Economic Question Posed in previous post

The European Central Bank (“ECB”) is offering euro zone banks loans of up to 3 years on Dec. 21 at a rate of 1%. A Wall Street/City of London Whiz can buy Spanish paper at plus 2% on money borrowed from the ECB at 1%. Brilliant! This is going to deluge the Euro zone with money and become extremely bullish for the Euro zone markets and price inflationary.  How else do central bankers know how to deal with a financial crisis. Print.

A viewpoint of America’s involvment in the Euro crisis: http://www.thedailybell.com/3379/Ron-Paul-Beware-the-Coming-Bailouts-of-Europe

Have a good evening.

Corporate Finance: Dividend Policy, Strategy, and Analysis

Earlier we analyzed stock repurchases. http://csinvesting.org/2011/12/08/an-insiders-view-of-capital-allocation-corporate-financie-valuation-case-studies/

Now we beat the subject of dividends to death from all angles especially from an insider’s perspective. Munger, Buffett, Peter Lunch and others discuss dividends http://www.scribd.com/doc/75491721/Dividend-Policy-Strategy-and-Analysis-Value-Vault

Please refer to the charts of the companies mentioned in the document:

WDFC_30 year chart

MO_50 year chart

MRK 50-Yr chart

Treasure Trove Discovered! and Build a Multi-Billion Dollar Business Case Study

The link below will take you to many other links to investing resources like case studies, business histories, foreign stock information, value investing ideas.  There is more here to keep you learning for the next few months. I can’t vouch for the quality of all the information, but you can root around for yourself. Tell me your favorite links: http://www.scorpioncapital.com/manual/links.php. A potential treasure trove!

This brings me to the philosophy of this blog. In the Value Vault you will find the book, Applied Investing and a Powerpoint of Porter’s Five Forces. I do not feel those works are particularly useful. I wrote a critical review on Amazon of Applied Investing here:

http://www.amazon.com/review/R25P1MHUTA7C3J/ref=cm_cr_pr_cmt?ie=UTF8&ASIN=0071628185&nodeID=&tag=&linkCode=#wasThisHelpful

I find many of the readers’comments on Amazon’s book review section ludicrous. Do the the author’s students write the reviews?

But I do not want to censor material because of what I think; instead make up your own mind.  Greenwald in his book Competition Demystified says that Porter’s analysis is four forces too many. I would rather have you read Porter’s book, Competitive Strategy (1980) or view the Powerpoint of the Five Forces than exclude them. If you find material totally misleading or harmful to learning how to become a better investor, let me know.

TEST QUESTION

To prepare yourself to read the world’s best business analysis ever done (to be posted Friday December 16th) please read Munger’s, The Art of Stock Picking.

http://www.scribd.com/doc/75389403/Charlie-Munger-Art-of-Stock-Picking

Next, sit quietly and write to your investors how you will build a multi-billion dollar business from scratch.  Take no more than an hour. You can go into the Value Vault* and read Bruce Greenwald’s Competition Demystified and the Powerpoint of Porter’s Five Forces to assist your understanding of competitive advantages since if you are to succeed you will need several or many working for you.

Good luck.

To gain access to the Value Vault (a collection of videos and materials on business and investment analysis) just email me at aldridge56@aol.com with VALUE VAULT in the subject heading. I will email you a key provided you use the materials for your own use.

Question from a Reader–The Best Way to Improve Your Skill as An Investor

Question from a reader

There seem to be two courses of action in trying to apply the lessons learned via your website to improve your skill as an investor. The first is to do an in-depth study of a single company, its industry and its competitors. The second option is to read as many 10-Ks as possible and do quick and dirty valuation similar to those found in, say, Greenblatt Class #5.

Which option do you see as more valuable? Am I missing a third way?

Great question and I will elaborate more as this blog develops.

Mario Gabelli advises students to pick one industry and study that thoroughly then after 3 to 4 months move on to another industry. Buffett started by pawing his way through Moody’s manuals and Value-Line to find cheap asset stocks like cigar butts. Munger influenced Buffett with Sees Candy to look at high quality businesses.

After you have read the obligatory required materials like Buffett’s shareholder letters, his Buffett Partnership letters, Margin of Safety, The Intelligent Investor, the Greenblatt books and lecture notes, you need to build from there. My interest and suggestion would be to find 6 to 8 compounding machines which can be bought at a discount.  If you can find a few high return on capital companies that are able to redeploy that capital for several years at high rates, you will have outstanding returns. These companies are rare that is why you must be patient to find them and to hold them.  But you must know what to look for.  You should become an expert in how companies develop and maintain competitive advantages. This will help you in searching for great investments and give you confidence to hold them for a while.

For example, if you understand regional (geographic) economies of scale you could focus on service companies like waste hauling and disposal or rock aggregates or health care providers and notice if they dominate their particular regions. Do you see high returns on capital? Study these companies and wait for them to go on sale.  Rather than wait for blow-ups and disasters to study companies, find the best emerging companies you can find, study them regardless of price then wait for your opportunity.

Take a look at the last case study on charlie479.  He epitomizes what I am talking about.  Read broadly and deeply about businesses—10-Ks but books and autobiographies too.  As you learn more about competitive advantages you will see connections in other businesses. You will see companies losing their advantages but look for companies that are successfully entering against incumbents. Look at niche companies that can dominate smaller markets.   Read, read and read.

Next week I will post the best company analysis in the world done by Charlie Munger.  If you can learn how he views business problems then you will grasp what is most important in business analysis.

You can buy cheap assets in special situations where management restructures the debt or assets and you get a nice bump up in price, then you must redeploy your capital like a merchant into another asset play.   This can be profitable and relatively low risk but the big money is made sitting on fantastic businesses that are compounding at high rates.  I would focus there. Few investors study competitive advantages–I mean become an expert at spotting and understanding great companies.

Fire away with more questions.

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.

Lecture 10: Analyzing Moody’s and Using Buffett’s Purchase of Coke as a Comparable

The art of investment has one characteristic that is not generally appreciated. A credible, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.  — Ben Graham, The Intelligent Investor.

It’s not supposed to be easy. Anyone who finds it easy is stupid. — Charlie Munger.

Please use the link below to read this lecture on Moody’s.  You will learn how a great investor used Buffett’s purchase of Coke in 1988 to make a case for buying Moody’s in 2000 at a high multiple (21) of earnings.

http://www.scribd.com/doc/69137839/Lecture-10-Moody-s-Corporation-Example

Note how this Great Investor is focused on quality companies. You will not learn in business school his creative comparison of two companies at different times and in different industries.