Tag Archives: Value Investing Resources

Value Investing Conference in Copenhagen, Inflation and Clueless Pols.

“All for one!” “One for all!” “Every man for himself!” – Larry, Moe and Curly (Restless Knights, 1935)

Good luck on your case studies. Please stay with your efforts or else: http://www.youtube.com/watch?v=Ux3j-8iMi6s

 Value Investors Conference in Copenhagen (thanks to a reader)


Various presentations and videos on value investing and the market in 2012. Scroll down and read: The five things you didn’t know about value investing by SKAGEN Global portfolio manager, Torkell Eide.

Economic Growth and Inflation


Power corrupts and absolute power corrupts absolutely. See the video of Ron Paul’s speech condemning the Patriot Act.http://www.tomwoods.com/blog/ron-paul-floor-speech-on-ndaa/

Repeal 1021 of the National Defense Authorization Act which codifies into law rules allowing the President to arrest and hold American citizens indefinitely without any due process rights or protection of the Bill of Rights. Heil Obama!

Economic articles on impending inflation:

  1. http://mises.org/daily/5875/How-Deflationary-Forces-Will-Be-Turned-into-Inflation
  2. http://mises.org/daily/487/The-Value-of-Money

WMT 2003 and Coors Case Studies; Items of Interest

I got my driver’s license photo taken out of focus on purpose. Now when I get pulled over the cop looks at it (moving it nearer and farther, trying to see it clearly)…and says,” Here, you can go.” — Steven Wright

The Wal-Mart Stores in 2003 and the Adolph Coors in the Brewing Industry Case Studies are in the Value Vault.  If you just want me to email you the cases just write to aldridge56@aol.com with CASES in the Subject line–you will have them by tomorrow.

Other Items of Interest

Should we re-write the constitution every 20 years as Thomas Jefferson suggested? Check out: http://www.constitutioncafe.org/

How to strengthen willpower. http://artofmanliness.com/2012/01/15/how-to-strengthen-willpower/

Nassim Taleb’s New Book

Talk about Nassim Taleb’s new book, Antifragility, go here www.cafehayek.com and click on podcasts on left of blog.  Other interesting podcasts available.

Keynesian Economics is a Failure

Interesting lecture on classical economic theory: http://mises.org/resources/5278/Why-Your-Grandfathers-Economics-Was-Better-Than-Yours

  • A participant: “I really enjoyed this talk. Most of it is about Say’s Law and how Keynes was wrong. Keynes, in fact, got his idea from Thomas Malthus who was a contemporary of JB Say.”Here are some notes:Recessions are never due to demand deficiency.
    An economy can never produce more than its members are willing or able to buy.
    High levels of savings do not cause recessions.What causes recessions?
    – Structure of supply doesn’t fit the structure of demandGeneral Glut
    – Could you produce too much of everything? No.
    – Overproduction of particular goods can lead to a general downturnMen err in their production there is no deficiency in demand – David Ricardo

VALUE VAULT Additions, Unintended Consequences, Studying the Theory of Money and Credit

Before I speak, I have something important to say. —Groucho Marx

VALUE VAULT Additions*

  • You will find Money Management Interviews from 2005 to 2011, 1938 page PDF.
  • Howard Marks on the Human Side of Investing, 42 page PDF
  • Investors and Austrian Economics, 7 page PDF

All from generous, anonymous contributors. Thank you!

*Access to VALUE VAULT is given by emailing:  aldridge56@aol.com with VALUE VAULT in subject line. For your personal use only

Unintended Consequences of Goernment Action

Matt Damon in Good Will Hunting giving a 3-minute lecture on unintended consequences or Why I Won’t Work for the National Security Agency (NSA): http://www.youtube.com/watch?v=l8rQNdBmPek

Studying Von Mises’ Theory of Money and Credit at The Mises Academy

Readers should know that if ever I benefit from a reveral/advertisement, I will alert you upfront about any conflict of interest or incentive-based bias.

Mises Academy (http://academy.mises.org/) has an eight week course on Mises’ Theory of Money and Credit taught by Robert Murphy.  I have taken a few courses from Prof. Murphy, and he is an engaging lecturer. Go here: ( http://consultingbyrpm.com/blog).

This would be a great course–though advanced–to sink your teeth into Austrian monetary theory with an excellent teacher.  I will take this course and if enough people here are interested, I could try for a group discount. Your only risk is $25.00. But, I warn you, the course is demanding. See the texts below:



The course:   Econ 400 — with Robert P. Murphy

Cost: $145 Length: 8 weeks       Dates: February 1, 2012 – March 27, 2012
Click here to register for this course

This course will tour Ludwig von Mises’ classic work, Theory of Money & Credit. Space constraints prevent us from covering the entire book. Instead we will focus on Mises’ two crucial achievements in the book: (1) His unification of “micro” and “macro” by successfully applying the modern subjective theory of value to money, and (2) his development of (what we now call) Austrian business cycle theory. The course will showcase not only Mises’ brilliance as a novel thinker, but also his excellent command of the literature and his selection of the best ideas from other schools.


The video lectures are online. Lectures will be Wednesday evenings, 6:30 – 8:00 pm Eastern Time. They will be recorded and made available for enrolled students to download.


All readings for the course will be free and available online.

Grades and Certificates

The final grade will depend on quizzes. Taking the course for a grade is optional. The Mises Academy is currently not accredited, but this course is worth 3 credits in our own internal system. Feel free to ask your school to accept Mises Academy credits. You will receive a digital Certificate of Completion for this course if you take it for a grade, and a Certificate of Participation if you take it on a paid-audit basis.

Refund Policy

If you drop the course during its first week (7 calendar days), you will receive a full refund, minus a $25 processing fee. If you drop the course during its second week, you will receive a half refund. No refunds will be granted following the second week.

Academy Courses

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.

Questions from Readers-Emerging Franchises & Fusion Investing

Questions from a Reader:

Subject: Competition Demystified+Fusion Investing


I am currently reading Bruce Greenwald’s Competition Demystified, and I am not finished. However, I remember asking you before about emerging franchise, and you replied that Prof. Greenwald covered this topic in the book. I would appreciate if you can direct me to this chapter and where he exactly tackles the strategic issue of emerging franchise and company strategic actions.

Answer: Let me be sure we have the same definition for emerging franchise. This would be a franchise in its early to middle stage of (typically rapid)growth like Wal-Mart (WMT) in the early 1970s and 1980s as it grew through local economies of scale on the edges of its local territorial advantage. WMT could earn high returns while also redeploying its capital at the same high  returns (high marginal returns to capital) thus funding its growth and compounding capital at high rates for a 20-year period. No wonder WMT created more millionaires than any other company in history.  Now, of course, WMT can not grow by redeploying its capital at the same rates since it has saturated the US market, and the company does not have unique cost advantages in foreign markets. The first two cases on Wal-Mart and Coors will cover local economies of scale. See pages 77 to 112 of the book, Competition Demystified.

Then you have entrant strategies for a company trying to enter against established incumbents like Kiwi enters the airline industry–see pages 238 to 254. The entrant has to go into niches that are not of interest to the larger incumbents, then build from there. Note the Japanese Car companies entrant strategies into the US auto market–from small, fuel-efficient cars to Lexus! The Japanese took market share from the Americans.

Now if you are thinking of smaller, dominant companies in their niches, you might enjoy reading, Hidden Champions of the 21st Century: Success Strategies of Unknwn World Market Leaders by Hermann Simon (2009)


  1. What is your take on Fusion investing approach (blending Fundamental (value approach) +Technical + Quant+ behavioral + intermarket ). I noticed some successful money managers who are in the minority adopted this approach successfully over long periods of time. Names like : John Palicka, who this week published his book on fusion investing, John Bolton and Michael Burry).. http://www.amazon.com/Fusion-Analysis-Fundamental-Technical-Risk-Adjusted/dp/0071629386#_

Mr. Palicka is  a CFA and CMT. The value of a CFA designation: http://www.businessweek.com/bschools/content/apr2011/bs20110426_844533.htm

Answer: I don’t know if John Bolton and Michael Burry use technical analysis, but any tool which helps you understand who is on the other side of the trade from you is helpful. If I saw Seth Klarman, Einhorn, and Buffett on the Buy-side against my short position, I would seriously recheck my work or at least find out their reasons for owning the company. You have to respect the other side or else you discover the fool is you.

I am not an expert on technical analysis but I do know that when I traded soybeans and T-Bonds on the trading floor in Chicago (1980s) finding out who the supra-marginal buyer or seller was and then doing the opposite was almost a guarantee of making money at least in the short-term (one hour to three days). The price would rally up for two or three days into long-term resistance and the chart breakout players would come into the market following the price, and I would sell responsively into their demand because the market orders were from small, weaker speculators whom were buying from commercial hedgers. I wanted to be with the strong against the weak.

If you see prices flat-lining for several years, it means that there is little new supply or demand, and people become used to this price level. If there is a breakout to the upside (especially if the marginal cost of production is above average costs), then I would buy on the higher price. There are economic reasons behind the price rise. However, what possible edge can you have (Barriers to Entry?) reading charts since everyone sees the same thing as you do? nGo where you have the biggest edge.

But I do not know in what exact proportions to “fuse” all the different methods.  All I am trying to do is figure out what something is worth and then pay a whole lot less for it. For most companies and for much of the time, I can’t figure it out. But there are certain times when the world goes crazy and prices become extreme then even I can find opportunity.

I can guarantee that too much complexity will hurt your results.  Also, I am extremely skeptical that Mr. Palicka with a CFA, CMT writing a book will provide anything new.  Having a CFA, CMT may not hurt you, but I do believe those designations are neither necessary nor sufficient to help you as an investor. I know that comment may find much disagreement, but I am happy to post such rebuttals in the comments section. At the risk of alienating some readers, I will call it; like I see it–like the umpire says.

I have heard Joel G. explain that despite going to Wharton MBA school, he learned value investing through Graham and Buffett and then his application of those principles.  There is no secret to investing–just relentless application over years with the right framework and independent thinking.

If you want a philosophical background to think for yourself then read, Atlas Shrugged or The Fountainhead by Ayn Rand.


I would also appreciate if you can share your reading list with us.

Do you mean a recommended list or what I am reading now? My current reading list is below. Since I live five blocks from a good research library, I can check out many interesting books on diverse subjects.  Also, I often just skim books.

  1. The Rise and Fall of the Third Reich by William Shirer–with the passage of the expanded “Patriot” Act, the U.S. President can arbitrary detain, torture and execute American citizens without Habeas Corpus and Due Process provided that they are “Terrorists.” How convenient. I don’t like my neighbor because his dog uses my motorcycle like a fire-hydrant.  He makes the perfect terrorist suspect don’t you think? …….So I want to study the lessons of Fascism and totalitarianism.
  2. The Great A&P and The Struggle for Small Business America by Marc Levinson. This books shows that corporate goliaths are not immune to the insistent forces of competition and change. Perhaps I can find a case study here.
  3. The Ikea Edge by Anders Dahlvig. Some people read Wall Street Research, but I find business histories on companies and CEO’s  a great education for studying competitive advantage and how companies evolve–the inevitable ebb and flow of success and failure.
  4. Uprising by George Magnus. Will emerging markets shape or shake the world economy? I have traveled and worked in Brazil, Cuba and other countries. I am not so enthused as the public hype about emerging markets.  Take China–how does a dictatorial regime that is directing the banking sector (similar to the Fed in the US) not go through a massive boom/bust? Brazil’s business regulations require 200,000 pages of fine print. Absurd! No wonder large segments of the economy operate on the black market. Using the best lawyers, we opened a business in Brazil after ten months–ten months of paperwork, delays and denial.

Thanks for the questions.

Investor Personality Tests; Research; Birth of Plenty; MBA Course on Hedge Funds

Investor Personality Tests

If you take these tests quickly and truthfully perhaps you will gain insights into your strengths/weaknesses as an investor. Have fun. http://www.marktier.com/Main/ipp.php



Unfortunately, if your test results were like mine, you will have little choice but to receive therapy. http://www.youtube.com/watch?v=UpL3ncoK99U

A Recommended Web-Site

Jason Zweig: http://www.jasonzweig.com/resources.html

Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.

The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.

The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control – the unrelenting effort to keep yourself from becoming your own worst enemy.

The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding. There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk……

Risk is a function of probabilities and consequences – not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis-and to underestimate how keenly they will kick themselves if that analysis is mistaken. Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.

In the short run, hares have more fun; but in the long run, it’s always the tortoises who win the race.

The Strategy of Rich vs. Poor Countries

Video Lecture–How the world became rich: The Birth of Plenty by William Bernstein (58 minutes). This is an enjoyable romp through economic, political and financial history that explains how countries create wealth. http://www.youtube.com/watch?v=fTUZXwQwUJM from http://www.efficientfrontier.com/ Another great resource.

TREASURE CHEST for Research Sources

An amazing collection of academic research on securities and historical financial data here (need prices on stock from 1825? How about on the Shanghai Stock Exchange?): http://viking.som.yale.edu/ Follow the links.

For example: MBA course on hedge funds: Strategy and tactics here: http://viking.som.yale.edu/will/hedge/Hedge%20Funds%202005.htm

Strategy Lesson: The benefits of focus and specialization-A Gunslinger. http://www.youtube.com/watch?v=ks7-A-7Zvak&feature=related  & http://www.youtube.com/watch?v=JeFpM2OEWPs&feature=related

The duality of man: http://www.youtube.com/watch?v=KMEViYvojtY


Book on Moats; Best Blogs; Ask Greenblatt; Eddie Lampert


If you want to contribute to a book on Moats: The Competitive Advantages of Buffett & Munger Businesses go here: http://www.frips.com/book.htm. You can read a few sample chapters of the book. I disagree with Buffett’s comment that Net-Jets has a competitive advantage—perhaps the company’s scale reduces its deadhead costs—but the company has yet to show consistently high profitability. I am not recommending this book/project, only making you aware. I hope when we complete our study of competitive advantages, you could surpass the analysis found there.

Ask Joel Greenblatt a question by Jan. 21, 2012 here: http://www.morningstar.com/Conference/speakers?referid=B4112


What are the best blogs for intelligent investors? See for yourself: http://www.fatpitchfinancials.com/2048/what-are-the-top-5-blogs-or-online-resources-you-particularly-enjoy-reading/#more-2048  or to vote and receive a recent listing: https://docs.google.com/spreadsheet/viewform?formkey=dEtsSEVOaFNpU3JQRW5CY1FsSUxkVEE6MQ

An extensive list of blogs found here: http://www.valuewalk.com/links/

Below is an assortment of blogs I have come across. The bolded links are ones I have found to be informative, but with little time to read all of these blogs, I leave the rest up to you. Your first priority in learning about investing should be to read original company filings with your accounting textbook alongside and/or the works of the masters like Buffett, Fisher, Graham, Klarman, Greenblatt, and Munger. However, any blog which informs and encourages you to think is worth a perusal. Learn from many sources, just don’t fritter away your time.











www.newyorker.com (good, in-depth business stories)

www.brontecapital.com Also, read his analysis of Fairholme (name not mentioned) here: http://www.brontecapital.com/peformance/2011/Client%20Letter%20201111.pdf. SHLD, one of Fairholme’s holdings, is mentioned in the last posting. This is a lesson in correlated bets of a NON-diversified portfolio. If wrong, you go down with the ship.

















Eddie Lampert meets a bad business

Buffett does acknowledge that even the best managers (Eddie Lampert)  will flounder if the business is not intrinsically sound. His most telling comment on management is:

‘When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.’







Sears Holding Corp. announces its struggles. http://www.marketwatch.com/story/sears-holdings-provides-update-2011-12-27?siteid=bigcharts&dist=bigcharts

There are many lessons here: allocation of capital, operating a non-franchise business, a bad business, and hubris. We shall return again.

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.

Concentrated in Financials, Don’t Invest in Banks at Any Price, Money, Lessons from Poker

Value Investing Blog

A reader, Mohammed Al-Alwan, graciously pointed out an interesting web-site for value investors.   Some interesting articles here: http://www.valueinstitute.org/default.asp

Read about the issues of portfolio concentration: http://www.valueinstitute.org/imgdir/docs/43124


We mentioned the struggles of Fairholme Funds holding concentrated positions in financial companies like Bank of America (BAC) and American International Group (AIG) here: http://wp.me/p1PgpH-dT

The Risks of Investing in Financial Firms

This article warns value investors from investing in banks at any price. http://www.valueinstitute.org/imgdir/docs/21967


You will understand the risks from reading What has the Government Done to Our Money?  Posted here: http://wp.me/p1PgpH-dX. From pages 56 and 57:

A bank, then, is not taking the usually business risk. It does not, like all businessmen, arrange the time pattern of its assets proportionately to the time pattern of liabilities, i.e., see to it that it will have enough money, on due dates, to pay its bills. Instead, most of its liabilities are instantaneous, but its assets are not.

The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but its bankruptcy is only revealed when customers get suspicious and precipitate “bank runs.” No other business experiences a phenomenon like a “run.” No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.

And let not forget the derivatives risk financial firms take: http://www.lewrockwell.com/rozeff/rozeff372.html

Derivatives Risk – A Brief Rant by Michael S. Rozeff

Today I read a very technical article on credit derivatives as used by banks (and other institutions), and in the end I came away thinking “this is madness.” There are so many hairy problems involved here in attempting to price these things and no one knows the answers. I think answers are unobtainable. The assumptions being made about measuring risks are untenable. In an “Austrian” world, no one can predict them and past distributions do not suffice. Banks doing large amounts of trading in derivatives do not know what their risks are. However, astoundingly, huge sums of money are recorded as gains and losses on accounting statements based on estimates of risk parameters that no one actually is sure of.

I kept thinking that these banks are doing all this trading while having their deposits insured and the FED as a backup. This is a huge moral hazard problem. Mention was also made of the re-hypothecation issue that can set off unknown chain reactions of failures. The MF Global collapse is the canary in the mine. If the dollar had stayed anchored to gold, we would not have had the explosion in derivatives. They grew at first mainly as instruments to deal with the increased risks in interest rate and currency volatility. But now almost any company plays with these things. I have a hard time believing that it’s efficient for companies routinely to be using these as supposed hedges. It’s hard to find good reasons why such activities add value for stockholders.

The financial companies and banks have used them off-balance sheet and to create excessive leverage, while regulators allowed it. The whiz kids at these banks could wave mathematical models and jargon at them endlessly, as they are doing again at Basel where there is yet another vain attempt to control the moral hazard in banks. The last time around, sovereign debts were thought to be riskless and always excellent collateral. If ever a system cried out for a complete reset, it is the monetary system.

Another historical view of banking: http://www.bis.org/review/r111026a.pdf

Money and the government:

Many believe that the U. S. Constitution says the government’s power to “regulate” money means the power to increase its quantity. No, the power to regulate money was placed in the “weights and measures” clause because that’s what “regulating” money meant. Silver dollar coins were the U.S. standard from the very beginning, and “regulating” the currency meant establishing a ratio between the silver dollar and other precious-metal coins that may circulate alongside it. http://www.project.nsearch.com/video/pieces-of-eight-and-constitutional-money

The Pure Time Preference Theory of Interest

If you want to understand how the Federal Reserve damages the economy by causing malinvestment through manipulating interest rates see: http://mises.org/books/PTPTI.pdf

And read this short article: http://mises.org/daily/5838/The-Pure-TimePreference-Theory-of-Interest

Consumers and entrepreneurs often speak of “the cost of money” when referring to interest rates. Modern lenders also refer to the interest they charge as “loan pricing.” Viewed this way, interest is viewed as if it were any other good. The cheaper a good the more affordable it is. And so the lower the interest rate, the more affordable. By dictating key interest rates, modern central bankers are believed to be alchemists, lowering interest rates to magically transform scarcity into prosperity.

Poker Lessons for Life

Let’s have some fun. Lessons learned from poker: http://www.jamesaltucher.com/2011/12/lessons-i-learned-from-poker/

Strategic Logic Quiz, Review of Austrian Economics, and What about Tomorrow?

The three biggest achievements of the Cuban revolution are health, education, and low infant-mortality rates, and that its three biggest failures are breakfast, lunch, and dinner. — Government Worker, Habana, Cuba.

Strategic Logic Quiz

Last week, I promised the greatest business analysis ever done.  See here: http://wp.me/p1PgpH-cs

A reader, Logan, gave a strong hint for the solution.  Before I post the answer, let’s try another question.

Use Munger’s multidisciplinary thinking or Professor Greenwald’s strategic logic to find an answer to the following problem: The Cuban dictatorship collapses and property rights are restored. You have been given the job to develop a business in Cuba with barriers to entry.  You must build a business with the strongest combination of competitive advantages. What business would you choose, why and how would you build barriers to entry? How many advantages can you design for development? If you come up with a sensible plan, you will be given $5 million to start.

Two hints: the business can not be involved in cigars or tourism (like hotels or restaurants). A reading of Cuban business history would lead you to an answer, but I presume many have little knowledge of that history.

Tip: A great way to learn about businesses is to read corporate history or the biographies of business leaders.  You will sense how a business grows and develops advantages or loses them.

Austrian Economic Review

What are the markets telling us? Deflation has gold and commodities selling off?   I don’t think so. Never predict, but here goes………The Fed and the ECB both have the ability to print money and exchange good collateral for bad collateral with banks. What do central banks know how to do? What motivates central bankers? What are the monetary aggregates telling us?

The dollar is weak: http://scottgrannis.blogspot.com/2011/12/dollar-is-still-very-weak.html#links

Keeping an eye on longer-term investors: Insiders are long-term bullish. http://www.marketwatch.com/story/those-bullish-corporate-insiders-2011-12-07

Place facts into a coherent theory

How do we place facts into context? A rap video of Hayek (Austrian Economist) vs. Keynes (An Interventionist)http://www.youtube.com/watch?v=d0nERTFo-Sk

Bernanke vs. the Austrians during the housing bubble:http://www.youtube.com/watch?feature=player_embedded&v=MnekzRuu8wo

What confidence do you have in Bernanke’s planning ability or in bureaucrats controlling our monetary system?

Inflation today: http://www.economicpolicyjournal.com/2011/12/exposed-why-krugman-smoothed-inflation.html

Note the unusual bond yields.http://scottgrannis.blogspot.com/2011/12/bond-yields-are-out-of-whack.html

MF Global is an example of our Ponzi financial system in action: http://lewrockwell.com/french/french143.html

Murray Rothbard wrote, “If no business firm can be insured, then an industry consisting of hundreds of insolvent (banks) firms is surely the last institution about which anyone can mention ‘insurance’ with a straight face. ‘Deposit insurance’ is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public.”

Our Media

The videos below reinforce the need to read original documents or to speak to people who are actually involved in an industry or sent to war rather than believing our press. Excuse the political connotations.

A savage spoof of the media and our government that hits closer to the truth than I would like! Hitler reacts to Ron Paul’s Rise in the Polls: http://www.youtube.com/watch?src_vid=fFbc3sHl3Ic&annotation_id=annotation_162843&feature=iv&v=5ScPXDRcIfc

War and the importance of understanding history: http://www.youtube.com/watch?v=I8NhRPo0WAo&feature=youtu.be  Note that many against war are the folks who actually have experienced it.

Entrepreneurial Alertness

A podcast on finding opportunity: http://www.economicpolicyjournal.com/search/label/The%20Robert%20Wenzel%20Show  Scroll down to the second or third show.

Adapt or Die: Be Creative and Sell your Skills http://www.lewrockwell.com/north/north1073.html

Old (2007) but detailed Longleaf Interview:  http://www.palmerstongroup.com/articles/2007july/interview.html

Interesting Blog from a former Wall Streeter: Reading Fiction will Make You a Better Investor: http://interloping.com/

Have a great day and weekend.