Hielko

Understanding those differences will remain relevant for the foreseeable future because you need to be able to understand old financial statements.

I think he often buys companies that are simply very solid, conservative and reasonable priced. I doubt that he expects that it is going to have a ton of upside, but it probably should do well/reasonable in most scenario's

I think this number is mostly irrelevant to determine if you should exit; what matters is what the value of the life insurance policy is today based on factors such as your health, the average death probabilities for someone if your age/gender group, discount rates and other factors. Can you replicate your current life insurance policy with the same payout, term and annual premiums?

How much do you think it's worth? TTM operating income: 575K. Throw a 10x multiple on that (don't have to account for taxes) and you have a value of 5.8 million for the business. They have 6.7 million in cash, so potential value is around 12.7 million. Current market cap is 10 million, so upside is ~25% IF corporate governance can be improved. Must be possible to find a better deal, or not?

Doesn't hurt to think for yourself instead of blindly following Buffett's advice. You can short without timing the market or without taking large downside risks... But I don't think this is the right thread to discuss to pro's en con's of shorting. @jschembs: I'm long SODI as well, but is this really your highest conviction pick? Management is not shareholder friendly, and you probably also have a lot of key man risk (how does the company run without Seraf?). At the same time the business isn't doing that great (and hasn't improved vs a few years ago) while the stock price is up. I'm by the way also short CRM (since 2011... lol).

In the end it would usually normalize. If you only spend 1 million/year on capex and you depreciate 2 million/year the amount of PP&E on your balance sheet will shrink over time. But if you are a growing company you can delay when this happens for a very long time, because in that case you will be adding new equipment every year that can be depreciated. But - and depending on the growth trajectory - the new equipment is increasingly a smaller part of all equipment. This effect can by the way be very significant (and long lasting) for companies that regularly acquire other companies. This often creates intangibles on the balance sheet such as "customer contracts" that are depreciated over time, but for most businesses this represents not an economic loss.

You could make the same argument about day traders. They also provide liquidity to people who want to buy or sell: they don't have to trade against other day traders and they don't need to create suckers. Day trading is probably most profitable when you are the only one in the market doing it. The problem is that this is not the case today, and that most amateur day traders will be competing with traders with better technology and a better understanding of the market.

You should always use EV when you compare businesses that have a different capital structure. FCF/EV is not a suitable ratio because (usually) interest expenses are not excluded from the FCF number. You also need a predebt number for this (such as EBIT(DA) or FCFF). If it's a business that will be around 30 years from now even with a 1 billion in debt the company with no debt would have a suboptimal capital structure and it would need to trade at a discount to reflect that fact. What the optimal debt load is depends on how much (business) risk the company has. A company with an above average amount of risk could trade at a market multiple if it has zero debt. A company with a low amount of risk could trade at a market multiple while employing a lot of financial leverage. It's all about risk.

It seems to me that this is a business that should or could have returns that are scalable. As you note; acquiring students is one of the hardest part of the business, and I think advertising is a classic example of where you can have economics of scale. The fact that for profit education companies generated high margins and high returns on equity for years also suggest that this is a business that is pretty scalable. Check for example the historical numbers for STRA.

I'm guessing the average short portfolio posted in this thread must be doing well so far in 2014:

Yes, it's a great book. Not an easy read though.

Very good point imo that not all investors seem to appreciate sufficiently. Part of the cash on the balance sheet should be consider as working capital (for possible claims, to maintain their credit rating): it's not excess cash that can be invested in anything. Totally disagree with this. It might be true that market timing doesn't work, but that certainly hasn't been proven. Academic research can only look at simple rule based systems, and macro is probably too complex to make it possible to create a rule based system that delivers out-performance. That doesn't mean that it is impossible to time the market. Some humans might be able to handle unique situation after unique situation, something that would be nearly impossible to test in a scientific way. There is no proof that market timing works, but there is certainly no proof that it doesn't work (this would really be a nearly impossible, if not totally impossible proof)

How much liquidity you need is something personal. I have low liquidity needs. If it's cheap enough I only care whether or not I can buy it. Selling it is a problem for another day.

I don't think it matters at all. Are there really any good questions left that haven't been asked and answered already?

To make money with investing you need a significant starting capital. That's something few people have. With poker you need just a little bit of money and a lot of hours.

Recognizable even though I currently still play (but it's most accurately described as part-time since I also spent a lot of time on investing and other hobbies). My winrate has roughly halved the past two years while I also dropped down in stakes. Game isn't getting easier, and at the moment probably not investing enough time in learning to maintain my current win rate. We'll see where this goes... so far still doing alright though. About investing in 2008; I had ~50% of my net-worth in some semi-random stock fund at the time, and while the sum was considerable for someone of my age it wasn't that big compared to my disposable income. Probably checked the value of my account a few times that year, so guess that tells something about the (lack of) stress about what the market was doing. Probably going to be (a lot) tougher to see a similar decline today because my net asset value is higher in an absolute sense, and higher compared to my earnings power.

I'm curious to know if you apply any poker strategies to investing and do you generate any income in poker? If you don't generate income from poker you aren't a poker pro... and no, don't really use any poker strategies in investing. But you get some insight in high-level ideas such as risk management and psychological biases.

I think this implies that you need to make a decent bit more than 10% to stay even because of the volatility in your net worth. If you get a bad year that $150K withdrawal is a lot bigger than after an up year, and you would need to make a lot just to earn that back. If the first year would be a -40% year you would start the second year at 0.84 million. Spend 0.15 million and you need to get a 21% return just to get back to 0.84 million. That's why I linked to that Monte Carlo calculator a few posts above. Volatility matters!

I don't know what your expenses are, but between $500K/$1MM it's probably doable if you don't spend too much and you are indeed able to generate some alpha. You can use http://www.firecalc.com/index.php as a quick sanity check to see how you would do if your portfolio would provide historical market results. Given current valuation levels you probably need to generate some alpha to get those results today. If your portfolio would be $750,000 and your yearly spending would be $50,000 it gives you just a 20% success ratio if you would need it to generate income for 60 years. But if you only spend $40K it already increases to more than 45%. But I think quitting at this level is not the safe/conventional thing to do. You need some money management skills to make it, and it could be though psychologically if you don't have a big margin of safety. And this in turn might influence your actions and results in a negative directions. Having said that; I don't think it's a bad choice, because you can probably always get a job again if things don't work out, and there are always ways to generate a bit of income on the side if you aren't employed. I write for example the occasional article for SA, and generating a couple of thousand/year will increase those odds quoted above a lot (even if you don't generate alpha). For the record; I never quit my day job, but I never started a day job either. I'm now a part time poker player and part time private investor.

The easiest option seems to me to rent a home instead of buying. That way you don't have any capital locked up in bricks.

The question is if this is really about becoming a public company, or if remaining private but having tradeable shares on the pink sheets is also an acceptable outcome. In that case you don't have all those expensive regulatory requirements.

If management is able to acquire the company at a price much lower than your entry you probably didn't buy it that cheap. It basically never happens that a company isn't acquired at some sort of premium compared to the latest market price. So for management to be able to buy significantly below your entry price it means that the stock needs to drop even more after you bought it. This would usually mean that intrinsic value also dropped significantly after you bought it. It doesn't mean that management might not be able to get a good deal, but the main reason for the loss is the drop in intrinsic value after you bought. If you buy something that should be worth $1/share, but is trading at $0.50/share management might be able to buy it at $0.75/share: giving themselves a good deal. But too be honest; I don't see that as a major problem. Both sides needs to be winners for a successful deal.

At IB you get 1.5%, but you can borrow even cheaper/close to risk free rate if you use synthetic long positions.

I think excess liquidity is the only thing that matters for determining how much buying power you have, but you probably don't want to use so much leverage that this question is really relevant. Because if you have no excess margin room you will have positions auto-liquidated as soon as there is a slight drop in value.

If you pick a value manager you want to benchmark that manager to a value index because you made the asset allocation/bet on the value factor; he needs to perform within that space. But if you have no constraints - usually the case for a private investor - I think it makes sense to opt for a benchmark that is as "decision free" as possible since the asset allocation is also your responsibility. If I invest 100% of my portfolio in companies in the S&P 500 I don't think that the S&P 500 would be an appropriate benchmark. If the S&P 500 goes down 25% next year, my portfolio 20% and MSCI world is flat it's not a good result because the decision to invest everything in the S&P 500 would have been a bad one, even though I would have 'out-performed' the index.