oddballstocks

Thanks, you'll enjoy it. As I read it I could a lot of it applied to different companies I've worked at both large and small. My wife thought I was crazy as I read it. I just kept nodding my head, the book explained so many real-world things that I'd seen, but couldn't put my finger on. I'm sure someone smarter than myself will be able to take the themes from that book and then apply it to investing as well. You could probably use it as a blueprint for finding growth companies that will explode from being small to large. If someone could identify true growth valuation doesn't matter as much anymore, just buy and hold on.

There are some insane deals out there. Someone passed along a deal they participated in maybe two years ago now. It was a chocolate shop in Long Island that was doing $250k in FCF a year, they were selling it for...$250k. The owner divorced and needed to cash out ASAP, they also liked the company and wanted to continue to work there running it. The friend ended up investing. I know someone else who found a similar business in Florida and invested. He outlined his goals and the owners who were looking to cash out were so excited they stayed to run it with him. They got a payday plus the potential for the future. Here's the thing with these deals, they are often low in terms of valuations but there is a lot of upfront legwork required. You might need to pay $5-10k in lawyer and accountant fees for due diligence alone. So be prepared to pay maybe $5k and then have to walk away, that's expensive. Key man risk is big, but I think you can minimize that by working out some transition period. Don't buy into something where the key man can't walk away though because they're married to their baby. There's a book I'd recommend, The Origin and Evolution of New Business. Pabrai mentioned it in one of his talks, for 99% of this board it isn't applicable. But if you own your own business, or are starting one the book is invaluable. It talks about how most bootstrapped businesses start, factors for success. Then how there's an entirely different set of skills and factors between what's needed to start something from scratch and grow it beyond a certain point. This gap is the reason most small businesses never grow into large companies. Recognizing this, and seeing the skills required will be good. You'll also appreciate the key man risk more as well. In the beginning EVERYTHING is done by the founder. They create a business by sheer force of will. That means some relationships and clients are there because of the founder, the Christmas gift they send, the kids on the soccer team together etc. You need to appreciate these things, they are important. You will probably end up owning something smaller that isn't scalable but throws off a lot of cash flow. The leg-work up front is why most don't get involved in these things. One other thing, those two deals mentioned above were found on brokerage sites. Just like stocks those investors continually turned over rocks for months before finding a deal that looked decent. A brokerage site is just like real estate. Put yourself in the shoes of a local ice cream shop owner who wants to sell. How do you find a buyer? You probably list and wait. The broker gets a cut, but that's fine.

A critical review of a "investing guru"...yup that'll be widely accepted. Rather it'll be rationalized and dismissed like it never happened.

Let me suggest an appropriate title for the review: "Intern reviews boss's book and likes it"

One thing that will never go away is the small batch/craft stuff. There is always going to be demand for higher quality non-scalable goods. Think of an artist, they can make one off paintings or make mass produced prints. You can't mass produce or automate creativity. The problem is right now some of this stuff is inaccessible to most because the cost of other everyday things are too high. Hopefully if everyday tasks are automated their price will fall and people will have more income to support the small niche stuff. A friend of mine said something to me that's been bouncing around in my head. It's that some of the luxuries we have would have been absolutely unimaginable to kings and world rulers 100-200-300 years ago. We dress, eat, and relax better than most historic royalty. Yet we also do tasks typically assigned to the servants, clean toilets, laundry, yard work. I want to see those things automated. Why hasn't anyone designed a cheap self cleaning toilet. Imagine the marketshare that'd take, the toilet just has a little robot arm or something that cleans itself daily. What about a cheap home carwash system? You park your car in the garage and it's cleaned top to bottom (inside too) nightly. Or what about a robot that can do interior painting, or trim bushes? What about some sort of digital paint that lets you change the room color with a button? Here's another, what about a refrigerator that you upload your menu to. Then the grocery store delivers the food. As items get low things are reordered for you. The interface a user would have into this system would be "I want a mushroom omelet Thursday and Sunday" everything behind the scenes would be taken care of. I'd like running shoes that know when they're about worn out and order me a replacement of themselves.

There isn't a finite amount of stuff to do. It isn't as if you can say, OK now we have these jobs filled that is it, there is nothing left. Human wants are infinite, thus there will always be more to do. That isn't to say that someone who works 25 years in a factory and loses his job to automation won't be in trouble. At a certain age learning new skills is difficult. And who wants to start over at the bottom in a new industry late in life? Those people will likely remain unemployed, but the next generation will simply learn different skills. This is capitalism's creative destruction and there are always people hurt in the shuffle. It isn't a new phenomenon. There is always change going on...I work in an industry that is likely to have 85% less workers in about 5 years due to software improvements/learning (document review). What is interesting is the people I work with. Most of them are in their very late 20's and early 30's. Most of them still live at home. Most of them are saddled with $100k+ in student loan debt. A significant percentage have $200k+. They all have graduate degrees and are all professionally licensed attorneys. I have a hard time figuring out a good outcome for these people...They make enough to live, and perhaps to pay interest on the loans...but not enough to make a dent vs. the balance due. If these people stay in the legal profession, they simply can't make enough to pay their loans. These people are going to be a "lost generation". The other problem is that it is very rare to get 2,000 hours of work in a year. A more realistic assumption would be around 1,500 hours. This is because we work on a project basis. When the project is over, there is no more need for workers, and you get "benched". There are frequently multiple projects going at the same time, but there are times when nothing is going on (right now). Of course, the better you are, the more work you get. However, only maybe the top 5% are employed 2,000 hours a year. Some of these people went to highly ranked schools too. I work with a Georgetown graduate, Duke, Vanderbilt, University of Michigan...and others. The document review industry employs a lot of people now, but automation & improvements will eliminate a lot of those jobs in a few years. This will add to labor displacement. There is also a problem with off-shoring legal work to India. The ABA has said as long as it is supervised by an a licensed American attorney and the locals are locally licensed, it is OK. Thus, the legal industry has lost a lot of jobs, and it will continue into the future. How many other industries are like this? Quite a lot, I'd imagine. The sad fact is, if you are young and want to be employed you probably should be studying some kind of science or engineering. Maybe medicine or finance would work too. I've told both of my kids this already. Taking out student loans for any other field isn't going to end well. The world is what it is, not what we want it to be. Spending all kinds of money and just hoping it works out isn't a good strategy. I have a degree in Computer Science and spent my first few years out of college programming various systems. Then I realized I loved finance and worked to steer my career into a non-programming direction. Then I had the light bulb moment, I had two skill sets that are unique and combining them would be much better than just one on it's own. So now I have a finance startup. There are things we're doing that a programmer couldn't do without a very deep understanding of specific topic areas. But the power of automation is mind numbing. I can pull back every single bank in the US and value them 5 different ways instantly. In the past the problem was getting data, now it's applying the data. This is where creativity comes into play. It's been fun to work on this stuff and get both sides of my brain working again. I'm no longer 'running' from programming, I've merely embraced it and applied my finance knowledge to it. That's where the power is. I have no idea what to suggest my kids do. Anything my dad suggested I didn't listen to. My friend knows a guy who started covering one song a day on YouTube with his guitar. Then he branched out into writing a song a day and making a video. The guy isn't on MTV or anything, but he has enough of a following that he is living off the ad revenue from YouTube for his full time job. These aren't things colleges are preparing kids for, it's entrepreneurism and creativity combined with whatever natural talents are possessed. Cool stuff.

Have some models that do this for banks. Basically take a DDM with the standard market assumptions and then calculate an implied P/B and P/E. Another alternative is to do a DCF on the stock and back into a multiple. The objection most have to this is that DCF and DDM are riddled with assumptions, which is correct. But if you're using the same assumptions as the market you can get some interesting data. The point isn't to find exact values, but rather determine odds. So you can run this model over the market and then break it down into deciles.

The problem with these online tools is they can't handle equities if they're not US listed, or if they're OTC. I check our net worth maybe once a year. I'm not even sure why this is something you need to update often. Our savings are stable, we are paying down our house, and I'm focused on longer period portfolio returns. As long as we keep saving and the portfolio does well over time my net worth will grow. I'm not competing with anyone so I don't see why I'd need to know twice a month or more often.

As I have gotten older and with young kids I have become more careful and consider the downside of my actions - especially as to physical safety. I heard the CEO of a major energy company always holds the railing of the stairs. At first I thought this was too much and laughed. But it is really a free backup system on safety where he also sets the tone. Basically I think it is good to have a margin of safety or backup system for your life. With spending money I am frugal and my wife says it is too much so I have been trying to balance it all out. I think the balance comment was right on. I think one reason people buy so much is that they have a hole in them and a desire for something. They buy the product and then the desire is gone and they feel happy - for a little bit. Then they have new desires and are unhappy again. So the true source of happiness is not getting more stuff to fulfill unlimited desires - because you will always want more which will make you miserable - but to be content with what you already have. Most religions and philosophies mention this and I think it is right on. Louis CK funny as hell on this. Everything's+Amazing+ +Nobody's+Happy I am not sure of what you mean by always looking at the downside. For safety that is great. For small purchases just look at it in its entirety and make you best call. Feel free to elaborate. Do you avoid traveling by car? I ask because that's the riskiest thing you could do maybe unless you're driving an humvee or something similar. Yes, there is a risk of falling down the stairs, but what's the worst case? I guess you could hit your head wrong and die. The same is true of anything, you could be standing outside and get caught off balance in a strong gust of wind, fall over and hit your head and die. So do you not stand outside anymore? The people I know with this attitude live terrible lives, they're afraid of literally everything. They are a prisoner to their own fears, anywhere they go and everything they do something could go wrong. Even if I expire early I'd rather not live like this. I'd rather live a great life that's short verses a terrifyingly long life that I don't enjoy. But to each his own.

Good points on money losing companies. I find the one year earnings screens tough as well. In terms of tools I know Screener.co is decent, I've also used FT.com, Bloomberg and OTCMarkets. Screener.co seems like the best tool for someone who isn't going to pony up for a Bloomberg Terminal. They pull from CapIQ I believe, so it's a way to pay for just the CapIQ screening and not their data feed. The Donald Smith interview is fascinating. Here's the secret of value investing, there are a lot of guys like him running simple investment strategies and generating great returns. The problem is it isn't 'sexy'. Readers want to know about someone who spent 500 hours reading old annual reports and uncovered some secret franchise value of some company. They don't want to know that buying low P/B companies and low EV/EBIT companies and selling them when they rise works, it's boring and has no curb appeal.

West, I remember Yahoo! had a free screener that could do EV/EBIT. It's a very clunky Java screener that you need to dig around for. I don't know if it's still updated, I'm not even sure if it's screening over Yahoo's data (which is CapIQ).

I'm a fan of screening, I don't know why they're so overlooked. Interesting notes from topofeaturellc on Donald Smith. I know Tweedy Browne crushed the benchmarks for years just buying ALL net-nets at 2/3 of NCAV and selling at NCAV. They then moved to BV and have had to change their strategy as they've become more successful. To the poster who said you need to become an expert on an industry before investing I disagree. There are a number of investors like Schloss who did 15% and were never experts. I'd argue that 99% of value investors who fancy themselves as 'experts' are only fooling themselves. If you want to be an expert in an industry you're bound to become a consultant in some industry. When you can charge a few grand an hour for advice why would you be investing? Build a business instead. For us mere mortals who aren't fooling ourselves the name of the game is to make a profit. I don't need to impress anyone, and I've found that buying cheap things and selling them when the market fairly values them has resulted in earnings for myself. I'll stick with this, so far I haven't really had to learn how much of what I own works, I don't think I ever will either. I'm making money on market psychology, not because I can identify the smartest widget manager. On screening I find it generates a great list to look through further. I had a list of companies I ran through last night, all earning 15% ROE's or higher and below 80% of BV. None were worth further research, each had what I'd consider a fatal flaw eliminating them from consideration. Two had averse auditor opinions. The point of a screen for me is to limit the universe, not find a perfect investment. I tend to conduct broader screens. I'll do screens like P/B < .8 and ROE > .01% (profitable and below BV). Or do 5 year growth and below BV or something. My hope is to get 25-30 results that I can pick through on my own. I've screened, and I've also gone A-Z on lists of stocks. For my money screening is worth it. Going A-Z I noticed that I was manually screening on factors that a computer could have done. There were a few companies I've found that a screener wouldn't turn up, but I'm not sure of the time tradeoff.

I give now, the impact is now, not some future time that we have no control over. We do have control over the now. Here's a story that drives this home. Some good friends of my parents were excellent savers. The guy was cheap to a fault, wore old clothes until they fell apart, drove old cars until they fell apart, just saved and invested. He grew a giant nest egg. They're 60 now and his wife has quickly advancing Alzheimer's, so much for living to old age spending down the nest egg. She has trouble remembering much of life right now. He had a change of heart, he realized that saving to just save for some future fantasy is just that, it's a fantasy. He drove his 20-yr old rusty Ford Focus to a Porsche dealership and bought a car with cash on the spot. His quip to my mom was that he realized he needs to enjoy what he saved now, nothing is guaranteed. In my view living a balanced life is key. Save and be prudent, but also enjoy life now. We never know if we'll be able to enjoy the future. In terms of charity here's something to think about. What seems like a small amount to most of us is usually a large amount to the receiver. So the server at a restaurant, maybe they make $15/hr, if you leave an extra $5 tip you just increased their hourly earnings by 30%.

I thought you were supposed to convert them to B shares in certificate form (so you'd have more certificates) then make a suit out of the certificates. You of course would be buried in the suit. It's buy and hold forever right.. I heard Buffett has already papered his future coffin with Moody's manuals. He sewed the pages with 100 bills.

I don't think this is correct. Joel Greenblatt's public track record for the 10 years he had his hedge fund, which did exactly the type of investing he describes in You Can Be a Stock Market Genius, was 50.0% per year gross/40% net of incentive fees. I don't think that Buffett beats this in any 10 year period. Buffett's track record is very long and he is one of the richest people in the world. I don't see Greenblatt putting up a similar performance when he hits Buffett's age. Guys, what is your point? Nobody disputes that Buffett is a great investor. I don't dispute that he may be a better investor than Greenblatt and I know that Greenblatt talks about being Buffettized. And achieving high returns on billions instead of millions is simply another league – it's incomparable. What you can't say, though, is that Buffett has the better track record, when there is no ten year period in which Buffett had better returns than Greenblatt managing similar amounts of money. Saying "spin-offs are bad investments because Buffett is the better investor" just doesn't make any sense. This is especially the case, because Greenblatt's 10 year track record is simply insane – and he achieved it by investing in special situations, of which he says spin-offs are his favorite. We're talking about the attractiveness of investing in spin-offs after all, aren't we? I think the point is that some investors equate Buffett's wealth with god-like status. If he's so rich then he must be the smartest person in the world, and if we must mimic his actions we'll all be as smart/wealthy/good looking as he will be too. For my money I'd say Greenblatt is the authority here. He literally wrote the book on this stuff, he generated incredible returns then got out at the top and shifted his style. Yes Buffett is richer, but I don't consider riches to equal authority, although most of America disagrees. There are a LOT of little market niches, many of them will have insane profits laying in the bottom for those who choose to specialize. I think the key is finding the niches and exploiting them, it worked well for Greenblatt. A last thought, not everyone has this weird drive to have the most money in the world and work their entire life. Some are happy with 'enough' and getting out of the game. In some past interviews I read of Greenblatt that seemed to be the case with him, he had enough money and was tired of running a fund, dealing with investors.

I'd ask a different question, why do they even happen in the first place? Ignore the market, think about working at a large company, why would a power hungry middle manager want to give up control over a portion of their company? Here's my personal pet theory. All companies that spin-off units think poorly of the units, if they didn't they'd keep them. The executives at the company don't want this drag on their business anymore. If you've worked in corporate America long enough this is definitely the raison d'être. I believe the market reflects this, these executives are dumping what they don't want, and the market appreciates that and prices the stock accordingly. The reason they work for investors is this. Most of corporate America is bloated and full of inefficiencies that for structural/cultural reasons can't be eliminated. So you get this division that's spun off, someone is now the CEO. Their pride is on the line, they want to do well and make a name for themselves with this job. Secondly there is a lot of fat they can cut that couldn't be cut in the past without affecting operations. So you get an executive team that's charged up and makes cuts and changes that should have been made with the company was a division of the parent. The company's results improve and the stock price rises higher. The irony is that in many cases if the parent had made the changes that are made after a spin-off then they'd never spin-off the division. But as anyone who has ever stepped into a conglomerate's office knows that rationality is not a basis for decision making.

Oddball - can you elaborate on the mechanics of your closing comment about "getting in on the ipo by buying a policy with them" (paraphrased) CorpRaider seems to be tuned into this more than myself. It seems in this case here they're cashing out mutual shareholders with the purchase, I'm guessing the $35m is to cash them out. A mutual company is owned by the policy holders, they are the true shareholders (hence mutual). So if someone buys them it's the policy holders who are receiving cash for their shares, which they often didn't even know existed. In many cases these mutuals will IPO, that is they'll raise cash and they give preference to current mutual unit holders. So if you own a policy you suddenly have this opportunity to buy shares in an IPO, most don't and shares are offered to the public. I'm on the outside here, there are clearly a number of other posters plugged into this much deeper than myself. I'm just speaking from my experience with mutually held companies in general. Maybe Dhandho is doing something a little off the beaten path, I'm not sure. If I were him I'd cash out the policy holders and take control of the company, although all of that depends on state law and what the regulators think of things. In general a mutually owned company is thought of as safer than a public company, the mutual company is in theory run for the interest of the policy holders, is more conservative and doesn't take undue risks. In this case you have this conservative insurance company that's being taking over by a hedge fund. Idle cash that previously was in Treasuries or corporates will be spread around in equity investments, some foreign. From an optics view for a regulator this appears to be a very risky transaction. Now if Pabrai can come to the table and show that he will somehow increase the capitalization (IPO perhaps) and won't take terrible risks then maybe that will grease the gears a bit. I'm sure there are expensive lawyers who can figure all of this out without a problem.

Why is it a tough market? I just ran a screen for companies in France selling below 85% of book value with an ROE > 10%, there are 20. I can run the same screen around the world and probably come up with 30 good investment candidates, sure it's not 200 or 2000, but to those willing to turn over rocks I think there are great opportunities out there. I just ran my screen, there are 682 companies worldwide that are selling for less than 75% of BV with ROE's above 15%. Maybe half of those results are junk, so 321 names that are potential purchases, it seems like there's a lot of opportunity...

I think he purchased larger ones and he didn't wait long enough. I have had some net-nets that were true duds, losing a lot of money or just sitting flat. Most eventually recover and result in a gain two or three years later. I think he had this trade maybe six months.

The Japanese equivalent of the SEC filings page is EDINET: http://disclosure.edinet-fsa.go.jp/EKW0EZ1001.html . If you run a search query you can view the resulting documents online or download them either as PDF or XBRL. Download the XBRL version (it's a zipfile), unzip it somewhere and you can open the HTML-files it contains with Chrome. How are your Google Translates working with Japanese? My past experience has resulted in some bizarre translations, possibly related largely to different syntax (Japanese and Korean syntax is heavily dependent on declension/conjugations, kind of like Latin, whereas English and modern European languages and even Chinese rely more on word order in sentences). My $.02, if you're investing at a big enough discount I'm not sure the minutia in the filings matters all that much. If you can read the essence of the filing and know that the business isn't going under then you should be fine. I will invest in these things without reading anything beyond the financials or a few metrics. Most investors probably think I'm crazy, and I'd agree to that, but to each his own.

Is the low ROE partially due to holding significant excess cash? Although Japan is not the US, it's still reasonable to exclude obviously excess cash from the ROE when calculating the quality of the business, imo. Some is due to excess cash yes. I believe if you adjust the ROE for deflation and productivity as well. I remember reading an article or book about this a while back, if you do the calculations their adjusted ROE's are similar to the US. This is a great thread, I own Fujimak as well. Always in the hunt for more of these things. I avoid any and all retailing net-nets regardless of the country.

Tim, I believe Jeff Moore has done it himself for either one or two companies. My impression was that it's easy enough to do yourself, just time consuming. If you're looking for someone professional I'd call a few law firms and get a quote. Something like this is so routine I doubt there'd be much variance in cost. If you're looking for a securities law firm I'm sure a few on here could help, or you can just pick up the NYC phone book and start calling. I'm not sure if a firm would do this if they didn't have a previous relationship with you. Did you check with your firm's lawyer? They might have something standard setup already. Nate

So this makes me wonder what the mechanics of the IPO will be. We have a mutual insurance company, the most straightforward path is to demutualize, raise capital from policy holders and outside individuals. This is something other insurance companies have done many times. Or maybe they try to create a MHC structure where the holding company is public, but the insurance company is mutually owned. If they demutualize the easiest way to buy into the IPO at a fair price is to get a policy with the company.

Can you give an example of your deposit adjustment? I'm not wknecht but a typical way to calculate deposit premium is as follows: Cost of FHLB borrowing minus deposit cost to get the spread. You calculate that forward 4-5 years and discount it back at the 10yr treasury rate. That's in effect the deposit premium one should pay for the bank franchise. In a transaction this deposit premium is usually called out in a news release. You take the premium paid over book and divide it by deposits and you have the deposit premium.

I have a question regarding this, I've heard 10% thrown around often. But when I look at the average or mean for all banking indexes (KBW/Dow/NASDAQ/others) the average ROE is between 8-9% and ROA less than 1%. The indexes are biased towards larger banks, if we looked at all banks in the us the average ROE is 7% and ROA is .84%. My question is where does 10% come from? Is that what a bank should earn in some normalized environment? A bank earning 10% ROE is in the top 1/3rd of banks in the US, which is better than middling along. Anyways curious about the 10% number, that seems to be the anchor metric in many people's minds, I was wondering where it comes from.