Weekend Reading Links

Oddball Stocks-What’s Your Real Business? The National Stockyard Story.

Geoff Gannon Guru Focus-Always Use Normal Numbers.

Shares and Stock Markets-How To Value A Business Like A Professional Money Manager.

The Aleph Blog-If You Want To Be Well Off In Life.

The Meta Picture-Learn To Read Korean In 15 Minutes.

Geoff Gannon Guru Focus-What Is The Best Way To Learn Accounting?

Oddball Stocks-Investing Like A Lender.

Graham And Doddsville-The Value Investing Gene-Buffett, Klarman, and Evolution.

The Guru Investing-Small, Illiquid, and Cheap: A Winning Combo.

Greenbackd-Quantative Value: A Practitioner’s Guide To Automating Intelligent Investment and Eliminating Behavioral Errors.  Have not read the book yet but plan to.

Micro Cap Club-Alter NRG Corp: Disposition Case Study With Ending Unknown.

Businessweek-Ryan Morris, 28-year-old Activist Investor.

Gannon And Hoang On Investing-My Investment Process.

OTC Adventures-Calloway’s Nursery $CLWY.

Aswath Damodaran Musings On Markets-Acquisition Accounting II: Goodwill, More Plug Than Asset.

 

Intel, Compounding Experience, Advice For New Investors, Yankees and Sunk Costs, Certainty, and East Coast Asset Management 3Q Letter

I forgot to mention Intel (INTC) in yesterdays portfolio update and that I still own stock in the company.  It falls in the bought before doing valuation category and it is a company I plan to own for years unless I find something better, or its business deteriorates.

Now that I have gotten rid of all the companies that I planned to get rid of, later today I am going to add a page to the site that lists what I hold in my current portfolio and will update the page any time I buy or sell stock in another company.

Compound Experience Not Just Interest is an article from Abnormal Returns about how gaining experience early in your investing career can be just as important, if not more so, than compounding interest.

Advice For New Investors is from Gannon and Hoang On Investing which contains lessons that I wish I would have seen when I first started investing.

The Yankees’ A-Rod Problem: Sunk Costs and Investing is another fantastic post from Aswath Damodaran on what the Yankees should do with A-Rod and how this situation can be related to investing.

Certainty In Investing is another excellent post from Oddball Stocks on what makes the certainty level in some investments go up, what can make the odds favorable for you, and what makes investments less certain.

East Coast Asset Management 3Q Letter On Investment Process.  This is from Market Folly and any lessons and examples from others investment process is always a good learning experience.

Vivendi News, Aswath Damodaran Valuing the Iphone Franchise, Warren Buffett, Great Investors, and Memory

Vivendi Studies Strategy After Two-Way Split Ruled Out is an article from Bloomberg Businessweek about what Vivendi might do now that it has allegedly ruled out breaking the company into two separate entities.  The interesting part of this article is that one of the scenarios states that Vivendi is looking at breaking up the entire company which would mean a sum of the parts valuation would be used.

My sum of the parts valuation done on 4-21-2012, written in my article here, came to a per share estimate of intrinsic value of $43.07 per share.  Looking back on the post now, I think that is a very conservative estimate.

Also on the Vivendi front, while I was reading Martin Whitman’s Third Avenue fund 3Q shareholder letter, I found that they have bought into Vivendi.  Here are their reasoning for buying into Vivendi at this time:

Also during the quarter, the Fund initiated a position in the shares of Vivendi S.A. (“Vivendi”), a company that has intrigued various members of our team for more than five years. The Fund had avoided investing in Vivendi’s shares for a variety of reasons, not the least of which were the company’s long-running addiction to debt-financed acquisitions and the absence of any discernible strategy for building shareholder value. In retrospect, the discipline paid off. The stock has performed very poorly over a long period of time. Vivendi spent much of its life as a French water utility, but in the mid-1990s was set on a path to become one of the world’s largest media and telecom empires. The improbable but very rapid transformation of Vivendi into a telecom and media giant was driven by a number of audacious debt fueled acquisitions. By the early 2000s, the tech, media and telecom bubble began to burst and the Vivendi empire famously came crashing down under a mountain of debt. The company spent much of the next decade languishing in the absence of strong management and a reasonable strategy. Most recently, though, considerable change is afoot at Vivendi. The company dismissed the CEO of its largest subsidiary, SFR, which is the second largest telecommunications company in France. SFR had been one of the epicenters of Vivendi mismanagement; the telecom company performed particularly poorly in the areas of cost management and in its failure to adequately address and confront the threat of new and increased competition. Shortly after the dismissal of SFR’s CEO, Vivendi’s board dismissed Vivendi’s own CEO, apparently as a result of irreconcilable strategic differences. Vivendi’s Chairman, who, during his own brief stint as CEO of Vivendi in the early 2000s, deleveraged the company considerably, has become the public face of the company and declared a strategic about-face. It appears that none of Vivendi’s underlying operating businesses are sacred any longer. As part of a broad restructuring effort, a number of its businesses have become subject to possible disposal in the effort to reduce Vivendi’s debt load and make headway in closing the gap between the share price and the underlying value of the company’s investee businesses, several of which are crown jewels within their respective industries. As it stands today, the company controls France’s second largest telecommunications company which, when combined with its control of the incumbent telecommunications company in Morocco and a highly successful Brazilian telecommunications company, would comprise a formidable global telecom business were they to be separated into an independent entity, as has been speculated. Vivendi also controls Canal +, France’s largest television business, as well as Universal Music and ActivisionBlizzard, the world’s largest music and video game businesses, respectively. There is considerable scope for dispositions as well as a sensible reconfiguration of the business into various components, all of which seem increasingly likely. Shares of Vivendi are trading at a considerable discount to our conservative estimate of its net asset value, essentially the current liquidation value of the company, and it appears that the mounting pressure on the company’s board has made value enhancing transactions and debt reduction increasingly probable.

 

Always nice to see a big time value fund buying into the companies you own.

Aswath Damodaran’s: Apple’s Crown Jewel: Valuing the Iphone Franchise is amazing valuation piece which could be used as a template to value other powerful franchises.

Warren Buffett Reflects on why he stayed in Omaha.

How to Gain an Investment Edge with Quotient’s Andre Bertolotti is a 4 minute video clip from The Manual of Ideas on how Bertolotti gains an edge in his investments.

How I got Religion and Dropped My Series 7 is a very interesting 6 minute video interview with the Reformed Broker about what he sees as the failings of holding the series 7 and the problems it can create in investment firms and Wall Street.

The Science and Psychology of Memory is a short write up from Farnam Street on things that you can do to improve your memory.

More links to come until I figure out if either of the two companies I have found to research deserve full article treatment.

Mini Review of Valuation: Measuring and Managing the Value of Companies and biases

My mini review

Let me first be up front with you about my bias against DCF (discounted cash flow) valuation, which is what this book overwhelmingly talks about.

There are several reasons why DCF valuation does not make sense to me from a practical perspective on a way to value companies:

  • 1) If you go through all the work it takes to do a proper DCF valuation, but you are off by 1% on one important number, your valuation could be off by more than 10%.  There are so many inputs in a DCF valuation that the margin for error seems astronomical to me.
  • 2) Lets say you are very good at DCF valuations and get all of the numbers correct, you still have to forecast out 5-10 years in the valuation.  If Warren Buffett, who is a certifiable genius, cannot forecast months or even a year in advance, why should I think that I can forecast out 5-10 years?
  • 3) Lastly, why do you have to do something as complex and time consuming as DCF valuation when you could just do relative/multiple valuations and come to pretty much the same conclusions in a fraction of the time.  Time you could be using to think about the how the company and its competitors operate, and the strategy the company should use going forward, or finding another company to evaluate.

I am interested to see what some other people think who might be keen on DCF valuations, feel free to write your thoughts or rebuttal.

On to the review

The first 200 pages, out of 860 plus, I read completely, learned some things, and was very excited for the rest of the book.

Part 2 on to the end of the book is unfortunately techniques and concepts I have learned in various other places such as Aswath Damodaran’s free online valuation course, Bruce Greenwald’s books, and other various books I have read.

The book is not bad by any means I just did not want to go over DCF valuation techniques again after having just finished up Damodaran’s class that was almost exclusively going over those same techniques.

Valuation is mainly a book that talks about how to do DCF valuation and how to master the techniques that it entails.  Throwing in some strategy, and some things to look for like high ROIC.  There was one major thing in the book that bothered me though while I scanned through the remaining 650 plus pages.

  • He talks about how markets are mostly efficient, except in rare cases, whose opportunities only last for a short time.  If he thinks markets are mostly efficient, except in rare cases, which only last for a short time, why does he need to value companies at all, shouldn’t they already be properly valued?

Individually I would recommend:

  • Learning how to do DCF valuations: Aswath Damodaran’s free online valuation course.  I took his free course on Coursekit, which is now Lore here.  I learned an enormous amount about how to think about doing valuations and things I need to watch for that I could apply to relative valuation.  Here is a different link to his free course on Academic Earth.
  • Thinking about strategy: Bruce Grenwald’s Competition Demystified..
  • Learning why ROIC is important: Various books, some of which I list here.

Collectively I would recommend Valuation to people who are just starting to learn about valuation techniques, how to do them properly with a little bit of strategy thrown in, and/or people who want to learn DCF valuation specifically.  Especially if you download the free book from Csinvesting’s site that I wrote about here.

Now it is time for me to get back to valuing and evaluating companies.  My next post will be showing you some of the new valuation techniques I have been working on.