Tag Archives: Reader’s Questions

Readers’ Links, Comments and Questions


A Reader’s Article on Value Traps

I found a very interesting piece of writing about Value Traps and Value investing


I must say lot of valuable advice from a seasoned investor.  

I read the linked article, but I wonder if the folks here took away the key lesson(s)

OK, why was this investment a “Value Trap?”   What can we learn from this example or ignore in this article?   Are you investing when buying this bank?  What makes a bank very different from investing in a widget factory?  The article goes on to say you should wait for a catalyst.  Is there a flaw to that argument?   What about checklists?   Can checklists save you from faulty thinking?

A Frustrated Reader:

Moreover, I wonder if it would be possible to have an index or anything like that in order to program and coordinate all classes and materials.

I teach under the chaos-and-mayhem method to force you to choose what is important to you.  In a more serious light, we are going chapter-by-chapter in DEEP VALUE and it is supplement by Quantitative Value and other readings. 

Next, use the search box in the upper right corner of this blog to type in: Lesson 1 Deep Value.   Then scroll to the links and begin there. The blog supplements the readings. You should have already received a link to the book folder.   Much of the materials are supplementary.   For example, we read in Chapter 3 in Deep Value about Buffett’s career, so various case studies were linked in the various posts that correspond to the chapter like See’s Candies or Dempster Mills.  Also, the Essays of Warren Buffett were sent out, but that is up to you if you want to read further (I highly recommend that you do and reread every year).

A Reader provides links:

Was on reddit’s Security Analysis sub (www.reddit.com/r/securityanalysis) and stumbled upon these notes from some other readers, good supplementary reading:

II Notes: https://docs.google.com/document/d/106U79BVHzzeCiO5SjWD1eCz4Lp6nm3VJ0rYThUk1Shg/edit

Buffett Notes: https://drive.google.com/file/d/0B8B1Rxv9hy1oOGM4eFZfcjF2eVk/view

For reference, if you don’t have the Buffett Annual Letters: http://www.rbcpa.com/WEB_letters/WEB_Letters_pre_berkshire.html

A Reader with Good Questions


While I agree completely with your analysis, I think its worth noting additionally that:

  1. Quant Value proponents (e.g. Graham, Greenblatt & Carlisle) are not arguing that any given filter (EV to EBIDTA for instance) accurately measures the intrinsic value of a given company.  Agreed
  2. But rather they argue that some filters (or combinations of filters) can capture mis-pricings in a basket of stocks.  Agreed
  3. And on average, over time the captured mis-pricings will deliver a return that dramatically exceeds the index and all but the most exceptional stock-pickers.  Agreed.  “Experts” may even degrade the results of a quant model!
  4. So while a given filter (EV to EBITDA for instance) may be just the beginning of the analysis for a stock-picker working a concentrated portfolio,
  5. that same filter alone may be enough for a Quant Value portfolio to outperform 99%+ of stock-pickers,
  6. and with far less work.

To the extent this finding is true and replicable in real time, it is a remarkable finding.  What puzzles me is this:

  • Given a huge economic opportunity–some screens deliver 2X market returns in back tests
  • Given the Quant Value idea has been around for 75+ years–since Graham described the Net Net idea in Security Analysis
  • And given the vast resources dedicated to optimizing portfolios

Why are there so few examples of this simple idea being executed effectively in real time?

The best answers I’ve heard to this question (most of which were mentioned by Greenblatt in TLBTBTM) are:

  • Quant Value strategies are difficult to stick with because they will under-perform the market for years at a time
  • Much of the excess return is found in small cap stocks so it cannot be run in a large portfolio
  • The stocks selected by the Quant Value screens are “ugly” stocks which are difficult to own and defend

While all these explanations make sense, it still appears to me that the lure of 2X market returns would be enough to overcome them.  So I am left with the puzzle: why is this opportunity not more widely exploited?  I would be interested to hear any thoughts from the group on this…

I will post tomorrow my thoughts on your other questions.


Readers’ Questions: Studying a Company; Gold Stocks; Down and Dirty on EGD.V

Mkt Cap to GDP

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– is the riskiest environment of all.–Seth Klarman

Read more on Buffett’s market indicator flashing red: http://greenbackd.com/2013/05/22/warren-buffetts-favored-measure-of-market-valuation-passes-unwelcome-milestone/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Greenbackd+%28Greenbackd%29


Reader #1: To give you a bit of an introduction about myself, I am based in Singapore and a third year accountancy student. Have been researching Asian equities for quite a while and would like to seek your opinion on my analysis process.

I have read many books on value investing; Greenwald, Graham, Fisher and also accounting books like Financial Shenanigans. However, this is what I noticed whenever I am about to start working on a company.

Financial statements: I am able to pinpoint out the basic stuff like gross margin, ROA, ROIC, balance sheet ratios etc. But to be able to paint the full picture of a company, I am still not quite certain of my ability to do so yet. I have seen how some investors are able to tell a story using the financial statements (Have seen in newsletters of funds, books). Like picking out the nitty-gritty stuff.

Qualitative aspects: I start out first by reading the past few years of annual reports to get an idea of the corporate structure of the company and the business model. This step is generally OK. However, I am kinda unsure how to proceed on from here. What I usually do is that I just google the business model. Etc this company sells jewelry. I google jewelry business/how is jewelry manufactured and sold…you get my point. 

But somehow, I still feel kinda lacking when I compare my analysis with the fund managers here. I read their newsletters, download conference calls transcript to see what questions they ask etc. And their level of understanding of the business simply astonishes me! 

Not sure how you go about doing it but would like to hear from you!

My reply: You may need to learn more about analyzing an industry/business. As you first look at a company you want to answer several questions:

Does the company have a competitive advantage as shown by fairly high and consistent profitability and/or market share? If yes, then what is the source of competitive advantage? Patents/Copyrights (Disney), Unique Asset (Compass Minerals) , economies of scale coupled with customer captivity (Coke), etc. Is the moat weakening or strengthening?   What price will you pay for growth?

You could draw up an industry map to understand the business better. Read Bruce Greenwald’s Competition Demystified or (Use search box on csinvesting.org and follow links to download cases on Coors, Coke, etc.).

Read: Strategic Logic by J. Carlos Jarillo and The Curse of the Mogul, What’s Wrong with the World’s Leading Media Companies by Jonathan Knee and Bruce C. Greenwald.  Also, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits by Adrian J. Slywotzsky.

If the business has no competitive advantage–95% of most businesses–then can management earn a fair return on the company’s assets?  Does management allocate capital effectively; do they eat their own cooking?

Always try to find a thesis for a variant perception. Is there hidden value in this company like shutting down a losing subsidiary, NOLs, underutilized assets, etc. Where can I develop an understanding that will give me an edge?

Read with a purpose. Develop a checklist of your own. Try to determine the key metrics of the business. What are the risks in the business?

Try to read biographies of business leaders in a particular industry. You can find  books about the cruise ship industry, steel, beverages, sports, media, and airlines. Also, try to speak to people in the business and industry once you have a basic understanding of the business. Read about the history of the industry–its booms and busts–what are the opportune times to buy and sell such a business?

But until you spend about ten years studying hard, it is difficult to develop proficiency in anything, so patience.  Good luck.

Reader #2:

I have been dipping my toe into gold stocks having owned Yukon Nevada and Energold (EGDFF) over the last year or so.  I am thinking along your lines that I need to diversify into ten or so names with a mix of producing and near producing.  I wondered if you knew the current top 10  GSA recommendations and if there were any other stocks at the exploration or near producing end that you thought were worth further investigation. I see Weiss has a large position in Seabridge, but I don’t really know how to analyze the opportunity?

My reply: Like this gentleman, http://truecontrarian-sjk.blogspot.com/, I am drawn to cheap assets.   Precious metals miners (GDX and GDXJ) certainly qualify. The more I study mining, the more I dislike the business. These businesses are highly capital intensive, they are price takers and subject to many operational risks. Right off the bat, you HAVE to buy these assets cheaply to reduce your risks and you must diversify (8 to 12) names to take advantage of the insurance concept of GENERAL cheapness. One of your companies could get swamped but overall your other companies will flourish. I bought Energold last week once it went 15% below $2.00 per share because then you were buying  the company for less than its working capital of which 40% of that was cash. I don’t buy the thesis that Energold has a competitive advantage. I am buying cheap assets.

The mining industry has four tiers: Senior Producers like Yumana, Newmont, Agnico-Eagle, Goldcorp, Barrick. Then you have mid Tier Producers like EGO, GORO, and NGD, then you have developmental companies like Seabridge, Pretium and  others which may be years until production. Finally, the lottery tickets like explorers found in GLDX.

If you want exposure to bullion, I recommend CEF at a 2% discount or more. Avoid GDXJ because of some of the low quality names in that index. You might want TOCQUEVILLE. John Hathaway, the fund’s manager, has a long experience and good reputation. Read his letters for several years. See his fund below:TOCQUEVILLE


Above, is GROW (US Global Investors) this may be a cheap way to participate in the rebound in precious metals and commodities. The current price seems to be at a discount to its cash and AUM of $1.3 billion using 2% of AUM (pay less than $3 per share).

Another way to reduce your risk through diversification and avoiding operational mining risk is to look at the royalty/streamer companies like SLW, RGLD, SAND, FNV. Though they are not as statistically cheap, they have huge free cash flows. I think those companies will be needed more and more to finance future exploration and development. Put your hat in the ring with experts. Now is a better time to be buying than in the past five years based on valuations.

The safer strategy would be to go with Tocqueville because you get broad diversification with a manager who knows his companies. The downside is the annual fee. However,  You can make decent returns when this sector rebounds and be ready to sell when his fund become popular again. Look at Fairholme last year with its heavy investments in financials–a formerly out of favor sector:


The downside in gold and gold stocks may not be over. My thinking is that the current events are VERY bullish for gold long-term but bearish short-term. Japan’s insane policy of currency debasement is forcing down interest rates (for now) and leading to a reach for yield (return) so gold might be under pressure as investors leave gold to pursue stocks.  Eventually, Japan’s currency will implode, leading to massive unintended consequences and a rush back to safety.  But, gold miners don’t necessarily need gold to go up, they need their inputs to decline more than gold, so their margins widen/stabilize. 

Also, gold should just be part, not all, of your portfolio.

P.S: ENERGOLD (EGDFF): Down and Dirty Analysis

Someone sent me this……sometimes the best ideas are the simplest.

Or even better, Energold. I am a proud shareowner. But emotions and will aside. Here you have a biz with 3 operations. Earnings power is the best way to look at it and most valuable, but let’s imagine we just sold for parts:

Dando (worth 3mm or so – bought for 300k or so plus put in working capital)
Bertram (paid 18mm for it. But EBITDA now back up in the low/mid teens – worth at least 30mm today)

Mining Biz (133 rigs, let’s be super conservative and say 250k per rig – so worth floor of 33.25mm)

Impact Silver Stake (3.8mm at today’s prices)

In addition, 91.2mm of working capital (incl. cash and inventories)
Minus the 43mm in total liabilities = $3+30+33.25+3.8+(91.2-43)= 118.7mm ($2.59 per share) vs today’s EV of 68.15 mm.

I am no genius – but that seems silly cheap to me. What’s more, earnings power is substantially higher, and the company is growing, and it has amazing operational leverage. Sure, results may not look amazing until they are back towards 5000k meters per drill annually. But even if they were to only get 3500 meters per drill @ 180 per meter (assuming cost per meter is ~138 per meter) the minimg biz is still FCF positive and earnings positive. And these are bad times. Bertram still doing fine, as is Dando.

Another good blog:  http://brooklyninvestor.blogspot.com/




VALUE VAULT Distressed Investing; Readers’ Questions

Readers’ Questions 

As I rush to help a friend evacuate from coastal Connecticut, I will reply in terse fashion to readers’ questions.

Q1: When to sell?

A: If I only knew the answer to that….  The standard answer is when you can replace the investment with a cheaper one (bigger discount to intrinsic value).   But no one size fits all. If you buy a cigar butt, you will have to sell as fast as you can when it reaches your intrinsic value range. Time is not on your side. If you own a compounder, then be patient as value grows and the company continues to have reinvestment opportunities.  Each investor has their own psychological profile. I cry during cartoons, so I need more security. I will sell on a scale up so I have fewer regrets. I give up some upside for less downside.  There is no one key to selling.   Also, note you have to consider taxes and reinvestment risk.

Q2: What am I reading?

Cycles and Crises by W. Ropke which provides a history and analysis of the past hundred years of boom and bust (A Jim Grant favorite).  How to Make Money with Junk Bonds by Robert Levine (Rec. by Greenblatt). Very basic, but a good short primer on Junk Bonds patterned after The Little Book that Beats the Market, I don’t think intermediate or advance investors would gain as much from reading this book. Moyer’s book in the Value Vault (see below for link) is the best, IMHO.

My recommendation for students of business development, management, competitive advantage and history is:

The Great A&P and the Struggle for Small Business in America
Marc Levinson

Q3: What do I think of Investing in Dolby (DLB)?

I don’t give investment advice because it would violate the spirit of this blog which is to be independent. My opinion won’t matter; only the clarity and accuracy of your analysis and grasp of the facts.  Yes, investing can be lonely and uncertain, but we must embrace our ignorance.  Go through your checklist and write down your reasons for why you have an edge against the sellers. Obviously DLB has a patent cliff it is facing so what does the market price currently imply? Why are insiders selling? Is that unusual based on past history? Can you normalize this business?  Excess cash is good but what will mgt. do with it? Find out what the short sellers and those who are selling have to say (Scour the Yahoo message boards). Can you refute their arguments with evidence. If you can’t, just walk away.

VALUE VAULT for Distressed Investing

Distressed_1 (You can only download contents from this folder)
View this folder

Readers’ Questions

Questions from Readers

See’s Candies

My question was in regards toward proving mathematically why it would be appropriate to apply a 3X tangible book value for See’s Candy.

Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital.
After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)

See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested

How mathematically can you justify paying 3x tangible book value for See’s Candy, I realize they have some pricing power however growth in the candy industry is roughly flat.

Editor: Any smart readers want to have a go at this question?

Some discussion here: http://aliceschroeder.com/forum/topics/analysis-sees-candies and http://aliceschroeder.com/forum/topics/analysis-sees-candies and http://www.fool.com/investing/value/2007/11/15/how-buffett-made-a-killing-in-chocolate.aspx

I will chime in in a few days.

One clue might be this case study on how Buffett analyzed a start-up: Buffett_Case Study on Investment Filters Tabulating Company

Second Question from another reader

Got a question – apologies if you’ve covered this in a post I haven’t gotten to yet.

In examining WM, I see a 16B market cap, 9B in net debt, and 2B in trailing operating income. The TTM earnings yield is therefore 2 / (16 + 9) = 8%.

Check his work here:WM_VL

Now I say to myself, 8% isn’t bad, but I’d ideally like at least 10% – so maybe I’ll wait for a pullback to make the stock a little cheaper. BUT, if you do the math, the stock would actually have to drop a whopping 30% just to move the earnings yield needle from 8% to 10%, due to debt being 1/3 of the enterprise value.

So, do you still continue to use EBIT/EV for companies with a lot of debt, or do you convert to something like EBT/MarketCap? Even if WM’s stock goes to 0, the earnings yield maxes out at 22%!

My reply: No you don’t prostitute your standards. Stick with EV because debt gets paid before equity. You wouldn’t ignore a mortgage debt when buying a house.  WM is basically a slow growth bond.  Too rich for me, but my hurdle rate may be different than yours. But would I rather own WM vs. a US Bond–yes.

Other companies like this might be Paychex, PAYX. High Dividend and slow growth. PAYX_VL. I have owned both WM and PAYX but no longer because I view them as fair value not UNfair value. But you are looking in the right place if you want a sleep at night portfolio.

Klarman, Einhorn, Tudor Jones Readings, Hedge Funds and a Reader’s Questions

Note the chart below. Thoughts? Hedge Funds are a better deal for the fund managers than the clients.  Buyer beware.


The Loser’s Game by Charles Ellis: http://www.scribd.com/doc/78279980/CWCM-the-Loser-s-Game

(Source: www.santangelsreview.comFailure Speech by Paul Tudor Jones (2009) http://www.scribd.com/doc/16588637/Paul-Tudor-Jones-Failure-Speech-June-2009

Einhorn on Why He Shorted Lehman Brothers’ Stock: http://foolingsomepeople.com/main/TCF%202008%20Speech.pdf

Seth Klarman Interview by TIFF: http://www.tiffeducationfoundation.org/commentaryPDFs/2009_Ed2_COM.pdf

Questions from a reader

I owe several of you replies to your questions. Bear with me as I finish reading the Wal-Mart and Global Crossing Case Studies.

 A new readers asks,

I spent about 3 hours yesterday catching up on posts from your site that I had saved in my Google Reader over the past month. I am not sure how to describe my feeling right now besides to say I was enthralled and inspired. Your website is like finding a value investor pirate’s secret treasure trove on a deserted island. There is such a wealth of material and information and it’s all such high quality thoughts that I kept thinking, “Who the hell is this guy?” Attempts to dig into posts related to answering that question yielded several tantalizing details but the mystery remains.

Are you currently or were you an MBA student? I am trying to figure out where these lecture notes are being pulled from. It says “auditing classes from 2001-2007″… that’s an awful long time and the institution and role of the note-taker are left unsaid. I get you’re trying to focus on quality, not reputation, a worthy goal, but I am fascinated simply from the stand point of why I am suddenly able to access all of this information, for free. It doesn’t really matter, I am just curious, that’s all.

My replay: Thanks for the kind words. I have never been an MBA student. I worked on Wall Street as a broker and investment banker before starting a few companies here in the US and Brazil. Upon selling those businesses, I sought to dig into value investing. I saw that the author of a value investing book was teaching at Columbia Business School so living in Greenwich, CT–only 45 minutes from the campus–I hopped the metro train and sat in on his class.  The first class was around 1999, when his students would regularly laugh at the idea of valuing companies when all you had to  was buy Price-Line or Yahoo and see the price rise five percent in an hour. All I had to do was sit in the back and keep my mouth shut. Now, I think Columbia is touchy about outsiders sitting in on classes.

But you really don’t have to do what I did. You just need to read, read and apply your independent thinking to investing. Look how Michael Burry learned (See the Big Short by Michael Lewis or search this blog). But, I do believe that becoming an “expert” or skilled investor probably takes 5 to 20 years of intensive commitment.  Of course, you never “master” investing which is why the journey is fascinating. Also, several great investors have confirmed my belief that the best way to learn about value investing is through your own efforts and application of principles that you will learn through Buffett, Fisher, Klarman, Graham and your accounting textbooks.  There are a lot of dead ends and wasted time if you do not know the proper principles and methods for investing.


Investing really is constant applied learning which is cumulative. Let me share what I have noticed with ALL successful investors:


The investors work alone. Any group decisions for Buffett or Walter Schloss? They make their own deicsions, and they are little influcned by any form of group affiliation.  Buffett said of Walter Schloss: “I don’t seem to have much influence on Walter. That is one of his strengths: nobody seems to have much influence on him.” Ditto for Michael Burry.


These terms originate from a remark attributed to the Greek poet Archiloschu: “the fox knows many things, but the hedgehod knows on bigf thing.”  Foxes are eclectic, viewing the world through a variety of perspectives, with no allegiance to any single approach.  READ WIDELY and not just on finance and economics.

Understanding how markets work is more important to an investor than understanding technology (trading systems).

  • Few great investors are overnight successes. Many have to overcome failure.
  • Money is about freedom, not consumption.
  • They enjoy the process, not the proceeds.

Note that Michael Burry accumulated his investment knowledge gradually, from his own experience and from reading others’ experience via bulletin boards, rather than from finance textbooks. (Hint: study the www.valueinvestorsclub.com or www.yahoo.com finance boards of intelligent contributors).

Successful investing is a practical craft, not an academic discipline, and certainly not a science. The craft of investing is comprised of heuristics: a toolkit of approximate, experience-based rules for making sense of the world. (See the book: FREE CAPITAL by Guy Thomas).


My goal is placing all this material here is multi-fold:

I have the material so I might as well post for the 20 or so hard-core students who will wish to use it. Many talented investors helped me, so giving back is my responsibility, though sharing this material helps me as much as anyone. I do not expect many readers because few people are suited for long-term, intensive self-directed learning.

There are those who are already in the business who think they already know everything; others seek a conventional route of the MBA; while some want investment ideas/tips–not theory, case studies and practice.   I wanted the material on the web for easy searching and access.

Secondly, many people have made excellent contributions to the value vault. Like the quarterback who hands the ball off to the running back who then runs 98 yards down field while breaking 7 tackles and leaping into the end zone, I receive too much credit.

Thirdly, interactions with curious readers help keep my thinking sharp.

Other questions:

I have a friend who has been working on developing a grass-based, intensive rotational grazing miniature farm on an acre of land about an hour north of Los Angeles, California. He looks at all the reading, time, energy and money he has spent on this project so far (and in the future) as the cost of acquiring a “personal MBA in agriculture” (yes, he gets that agriculturalists don’t get MBAs, but he’s approaching this project from the mindset of a businessman).

When I read through your site, I realize I could do the same thing using some of your material, as well as other blogs I follow and various recommended readings, as a launching point to pursue my own “personal MBA in investing” over the next 12 mos or so. The focus on case studies, and the ability to directly apply my learnings to my own small portfolio in real-time provide the perfect means to make real-world application to the theory being taught in the “classroom.” I think this is a big idea and I am very excited as I consider it more and more seriously. I plan to blog my entire journey and produce various supporting course materials along the way (such as reading list, top blog posts, favorite video lectures links, etc.) as well as keep a running tab on costs, so at the end of it all I can show other people what I learned and how much it cost to get the knowledge.

Yes, use the material how you wish. Start a study group and work on several of the cases. Eventually, there will be sections on special situation investing, competitive analysis, valuation, Austrian Economics.  Or you can take a case study and develop it further.  Seek higher; you can also sign up for courses at the Mises academy (www.mises.org) or go to www.thomasewoods.com to learn about Austrian economics.

I want to thank you again for the resources you place on your site. I’ve only just begun to dig into them and it may be some time before I begin actively participating in your site’s discussion but I do think it’s wonderful already.

And I absolutely LOVE that you’re into Austrian economics, as well. Finally, I’ve found someone else who is interested in synthesizing these two great (and in my view, complimentary) philosophies/disciplines, just as I am:   http://valueprax.wordpress.com/about/ (going to need to re-write that soon, though, to reflect my slightly new direction for the site, ie, cataloging my progress in acquiring a “personal MBA”)

My reply: I became interested in Austrian Economics because Rothbard and von Mises had the only coherent theory and explanation for booms and busts. But as I studied fruther, I learned more about the structure of production  and time preference which helps you understand the risks in different businesses. Every wonder why a steel company fluctuates more in earnings and price than a beverage company? The distance from the consumers in terms of time and production structure. Look at your watch. How long did it take to make? Two hours? Well, who mined the sand to make the glass? Who mined the metal to make the case? Who killed the cow to make the leather wrist-band? And who planned all the production? Perhaps your watch took two years from the moment of assembly to the first production of the materials.  You need to understand this if you EVER invest in a highly cyclical company–what company isn’t at some level cyclical?

Okay, that’s all for now. Thanks for sending the link to the Value Vault. Where are you located geographically, generally speaking? East Coast, West Coast? Big city, small town?

I live in Greenwich, CT home of many hedge funds, but I have never been to one.

Good luck on your journey.