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How value investing is like operating a pawn shop...


valuebull
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I am a big fan of the show Pawn Stars, which airs on the History Channel.  The show profiles the Gold and Silver Pawn Shop in Las Vegas, the people are surprisingly likeable and it is kind of like an every man’s “Antiques Roadshow”!

 

I started thinking about why I like the show so much and I realized successfully operating a pawn shop is very similar to successful value investing…

 

MARGIN OF SAFETY – the pawn shop typically buys items for 50% off what they can be sold for.  Just like Warren Buffett waiting for a fat pitch, the shop passes on lots of deals where the seller wants top dollar.

 

CIRCLE OF COMPETENCE – the shop is disciplined to make offers only on items within their circle of competence; they have a good Rolodex of experts they call to examine items when an item is outside their circle of competence.

 

The operators of the pawn shop say they like the business because everyday they never know what will walk in the front door.  I feel the same way about value investing, particularly since I concentrate on small caps you never know what business will look like a bargain and what business/industry you will be immersed in and learning about.  Just like operating a pawn shop, the variety that comes with value investing is appealing.

 

Warren Buffett currently buys great businesses at a discount and keeps them forever, but earlier in his career when he could buy the whole universe of stocks, the pawn shop analogy applies.

 

I can hardly wait for new episodes and see the new adventures for pawn shop employee “Chumlee” and the rest of the crew!

 

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This is a great analogy that I have often used... I got a taste for value by working in a pawn shop.

 

One thing that the show doesn't capture well enough, is the diverse groups of people that come in the shop, and all of the odd stories that inevitably come about. I know that there is some weird stuff in the show, but, in my experiences, it doesn't hold a shadow to the real thing. :)

 

I kind of wonder if there will be a bunch of people thinking that they can run a pawn shop and open one up, as a result (however indirectly) of the show.

 

As a value investor, I have often wanted to invest in some public pawn shop- but I can never seem to get past the payday loan segments of the business. While I don't think that regulation of pawn shops will ever get to be too bad, payday lending is another thing entirely, that quite literally, state legislators, banks, and consumer advocates generally want to put out of business. With that said, I am surprised that there are not more public pawn shops- especially ones that trade OTC.

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Guest ValueCarl

Might you be willing to share your most memorable story without getting into trouble and making us laugh?  :P

 

<but, in my experiences, it doesn't hold a shadow to the real thing>

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The traditional transaction there is the "pawn" of a valuable item where the item becomes collateral for a loan for about half its value.  If the loan is repaid within 60 days or so, the item can be redeemed for repayment of the loan plus a fee which is usually small, but actually has a rather high implied annual interest rate.  This fee is similar to the break up fee that must be paid in a corporate take out if another buyer takes the prized company away from the first buyer for a higher price.:)

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Guest ValueCarl

Do you not mean, "plus a fee." If not, I want to PAWN off of you. :-)

 

<the item can be redeemed for repayment of the loan less a fee which is usually small,>

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I think that buy low and sell high is the best method to apply.

 

Value investing works because it includes the appraisal process... without which you have not a clue where "low" and "high" fall.

 

I heard of buy low and sell high long before anyone told me about "value investing".  Later I realized they were the same.

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Might you be willing to share your most memorable story without getting into trouble and making us laugh?  :P

 

<but, in my experiences, it doesn't hold a shadow to the real thing>

 

I hate to go against the investment theme of this board, but this story is one of my favorites.

 

This happened a few years ago, and was a conversation between the owner of the shop I worked at, and one of his buddies, who, was (and still is) a very successful pawn broker. The names have been changed, to protect the parties involved :) . Keep in mind, this happened the Saturday before Christmas... So it was a busy time, with a ton of people coming in and out of the store.

 

My boss is "Jake", while the other pawn broker is "Sam".

 

Sam (quite frantically): "Jake... I am ruined. I am ruined..."

Jake: "Why? Whats up?"

Sam: "Well, I have a problem. When we opened up this morning, I opened up a Disney Christmas movie from the pile of used VHS tapes in the store- I popped it in the VCR that is hooked up to the wall of TVs that faces the entrance of the store."

Jake: "So?"

Sam: "You know how you can't see the front of the TV's from the sales floor?"

Jake: "Yeah, so what?"

Sam: "That video was a fucking home made porno! She taped it over the Disney video"

Jake: "No shit!? How long was it on?"

Sam (who is now white in the face): "It was on a loop from the time that we opened until we closed. None of the employees left the store and the sound wasn't on... Soooo, yeah... I am ruined. Even worse, the video was made by and stars one of our pawn customers that lives down the street. She sold us the stack of tapes a few days ago... I just put the video in and hit play..."

Jake (who is laughing his ass off at this point): "Well, did anyone complain? Was it a good video?"

Sam: "No! How can you ask something like that!?"

Jake: "Man, don't worry about it, if no one complained, then they must of seen something that they liked!"

 

 

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Yes, the show Pawn Stars has been both entertaining and educational. However, I would not call it value investing as part of the business is more like deeply distressed or panic investing of what we witnessed back in early '09. The other half of the business is just the sub-sub-prime loan arena. Irrespective though, the model does work for most proprietors as they do use the margin of safety as their guideline.

 

 

Cheers

JEast

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