How to invest

Jae Jun

Financial Shenanigans is so good that Mebane Faber emphasizes checking your company against all the accounting shenanigans described in the book. With the Chinese reverse merger frauds and the social media hype/bubble growing, you will definitely be better off scrutinizing the financial statements and getting into some forensic accounting work. This $23 book is what planted doubt into my mind with CCME and ultimately saved me thousands of dollars.

There is no better book than Financial Shenanigans to jump start your detective accounting work. Of all the accounting books I have read, there is none that is as descriptive, practical and applicable than Financial Shenanigans.

There is a reason why this book is used in business school and the lessons throughout each page is packed with information.

The early edition of the book only focused on earnings manipulation but the newly revised version includes a section titled cash flow shenanigans and key metric shenanigans which is a huge addition to the book.

Each section introduces you to how GAAP accounting can be played along with a supporting case study to hammer the lesson home.

As you read the book, you’ll realize like myself how amazingly simple it is to manipulate earnings. The author has also opened my eyes into seeing how easy it is to manipulate cash flow.

You’ll continually revisit the classic cases of Enron, Worldcom and Tyco along with plenty of other case studies for each financial shenanigan.

What are some of those lessons? Well take a look at the financial shenanigans Enron was involved in.

Earnings Manipulation Shenanigans

• Recording revenue too soon
• Recording bogus revenue
• Boosting income using one time or unsustainable activities
• Employing other techniques to hide expenses or losses

Cash Flow Shenanigans

• Shifting financing cash inflows to the operating section
• Shifting normal operating cash outflows to the investing section
• Inflating operating cash flow using acquisitions or disposals
• Boosting operating cash flow using unsustainable activities

Key Metrics Shenanigans

• Showcasing misleading metrics that overstate performance
• Distorting balance sheet metrics to avoid showing deterioration

Want to more? Then buy the book and read it. You won’t regret it. A $23 investment will increase your knowledge by thousands of dollars. Although the book reads like a case study, the knowledge contained within feels like an encyclopedia.

You’ll be a better detective for it.

Buy Financial Shenanigans from Amazon

Active Value Investing Book Review

Active Value Investing is written by Russian born value investor Vitaliy Katsenelson. I’ve been a reader of his blog Contrarian Edge and his content is insightful and stock analysis is wonderful. His analysis of American Express in 2008 was probably the best one out there for why AXP was cheap.

So that’s how I knew about Vitaliy, but it’s only now that I finally got around to reading his book, Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance).

Range Bound Markets

The reason why it took me so long to get a copy of this book was the title “Active Value Investing” and the price tag. I figured the book would be dry and read much like a text book. Thankfully I was wrong.

The first part of Active Value Investing is all about the economic and historical performance of past markets. Before reading the book, I had always thought the market went up, down or sideways. The author expands on the idea of secular bull, bear markets as well as introducing the “range bound market” which includes bull and bear markets that trade within a range.

I’m not much of an economist or market analyst so until this book, I avoided this type of reading, but surprising, Vitaliy’s case was very clear and the supporting evidence even helped me to understand what the heck it was all about.

Active Value Investing

The rest of the book is comprised of value investing concepts, fundamentals, valuation and strategy.

This second part goes through the QVG (Quality, Value, Growth) framework. It’s very much like my own spider graphs, but simplified with three axes.

Quality of an investment discusses topics such as

• Competitive advantage
• Management
• Predictable earnings
• Strong balance sheet
• and significance of FCF

In the Growth section, the vital point made by the author is that you need to understand the company and the industry it is in to determine the growth rate. This is exactly what I preach when it comes to choosing a growth rate for the premium stock valuation calculator users. There are many engines to drive growth and while I prefer to take a conservative stance in my growth calculations, the book covers various aspects that I had not considered before.

Up to this point, I was breezing through the content but the Valuation section is what caught my attention. There are several of pages on margin of safety, diversification and discounted cash flow explanations that I skimmed through. It’s when discussions of relative and absolute valuation methods came up that really interested me.

I’m a sucker for learning new valuation methods and in the investing world, it seems like it’s mostly just refined to DCF and multiples. At least in the value investing world, we have additional methods such as Graham’s NNWC and Greenwald’s EPV.

Vitaliy provides his own method called the Absolute P/E Model.

I won’t get into the details of the absolute P/E model, but it certainly is interesting and while not perfect (what is?), it definitely is a welcome new addition to my toolbox. There is even a model to incorporate margin of safety.

I’ll eventually include this in the premium stock analysis tools and provide working examples as I grasp a better understanding of how to use it effectively.

If you can’t wait so long for me to post about it, I recommended you read this section of the book yourself.

The Process

The final chapters of book bring everything together and deals with the process of finding ideas, buying, selling, risk and diversifcation.

Summary

• Learnt more about the way the market works
• Good review of value investing principles and fundamentals
• Great discussion of valuation and the process of active value investing.

Get a copy of Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) through Amazon.

Disclosure

I received a complimentary copy of Active Value Investing. I was not paid to write this review. Links to Amazon are affiliate links.

I’ve seen the author Phil Town on TV a few times and his first book Rule #1 has a big following but I never got into it because it spent a lot of time on technical analysis, trading techniques and an analysis method that didn’t resonate with me.

But when I was contacted to receive an advance copy of Phil’s new book Payback Time, I was happy to hear it was more about value investing and analysis and was glad to take a read.

Payback Time

The title refers to two things throughout the book.

1. Mutual funds are a waste of time and money where only the managers and brokers get rich

2. It is the price of the business that will be repaid in x number of years out of earnings

As with most books, it starts off by explaining why mutual funds are a bad idea backed up by data and Phil’s own personal experiences from the industry and then moves onto the main concepts of what he calls “stockpiling”.

I have to admit I liked the section on the mutual fund and Wall Street bashing It’s why you need to fire your financial adviser.

Stockpiling

Stockpiling is a term used frequently in the book. It’s where an investor buys a company they truly understand and believe in with a MOS and then continues to buy more if the price falls. Essentially, it is a buy low and sell high strategy which so many people know, but fail to do.

However, Phil does a good job of explaining the difference between price and value so that a beginner investor won’t be overwhelmed by the fear that a falling stock price will make them bankrupt, but rather a perfect opportunity to load up more as long as price inefficiencies exist.

Value Investing Principles

To decide upon which company to buy, you first need to find a company that you can understanding and be willing to work on as well. The book makes it clear that work is required to invest successfully but you don’t have to be a genius. He boldly states that any normal person can make 25% annual returns compared to the average 6-8% you expect to see with mutual funds.

While looking for a company, you need to find awesome businesses that contains the 3+1 M’s.

• Meaning (understanding the industry, company and business model)
• Moat (competitive advantage)
• Management (passionate, ethical, dedicated, honest)
• and Margin of Safety (which is introduced later in the book)

Valuation

The valuation method that Phil uses is a very simple method. He doesn’t use DCF valuation, Graham based formulas or EPV like I do. It’s very simple math, or you can use the tools on his site, but to summarize the method, you need to:

• Find the average PE
• Check BVPS (book value per share), sales, EPS and cash growth rate
• How many years does it take to repay debt from earnings

If the company passes the criteria that each one is supposed to meet, you can now value the company.

• Use a discount rate of 15% aways
• Get the TTM EPS, growth rate calculated above, PE, and discount rate of 15%
• Follow the examples and instructions in the book or use the Payback Time calculator

A Very Practical Book

Payback Time, isn’t a value investing book per se, but for someone wanting to learn how to invest, it is an extremely practical book. In fact, it is more like an instruction manual.

The book provides step by step instructions and screenshots of Yahoo finance to show you how to find companies you are looking for. The valuation section is also dealt with in a clear step by step manner. It even goes into teaching you how to use the MSN screener.

The downside is that if the websites change, then the book is immediately outdated. Just like how the MSN screener is no longer available today.

Who is it For?

What I liked about the book is that it fills a big void by providing instructions on how to find, value and select a company. While the methods are not perfect (if there is one), I can see the book being valuable to many new investors. I see the book more as a skeleton to investing. This will be a good way for many people to start and learn from.

The book is conversational and very easy to read which I finished in 2 days by reading at a fast rate. If anything, I felt there was a little too much self promotion.

Investment Book: Why are we so clueless about the stock market

Many people are clueless about the stock market. I was as well in the beginning. I didn’t know where or how to start.

Considering the amount of noise in the media and people flogging that you are not smart enough or good enough to know how to pick your own stocks, it’s no wonder people have a misconception about getting started in stock investing. Value investing is also another language to them at this point.

Why Are We So Clueless about the Stock Market? is a great little book on how to start investing in the stock market and a fine book for the seasoned investor to organize their explanations and analogies when explaining supposedly simply concepts such as discount rates, growth rates, basic concepts of business, diversification and so on.

Easy to Read & Understand

The book is written in a very simple and clear manner. It makes reading very easy to follow and understand. So easy in fact that it would be a great first book for young budding investors.

Each chapter of the book is very concise and to the point with a short summary at the end of each chapter. A good way to maintain the flow of your reading and learning.

It’s probably on the same level as Greenblatt’s The Little Book That Beats the Market. The big difference being that there is more detail and it covers a wider range of topics and answers many questions that new investors are sure to encounter.

What types of questions does it answer? Let’s see below.

What’s the Book About

Why Are We So Clueless about the Stock Market? follows on the old school investing concepts of Warren Buffett. That is, stocks are small pieces of businesses and we should approach picking and buying stocks as if we were purchasing a real business.

The book will help beginner investors to answer and guide them through questions such as

• What is a good business?
• How do you identify a good business?
• When do you buy?
• How do you value a company? (note I didn’t say analyze)
• When do you sell?

I especially like the chapter that discussed the concept of using debt in a company. It’s definitely something that will help learning investors.

The book discusses other ideas such as how the economy affects the market, why investing in IPO’s is a bad idea and offers 4 good case studies of Burlington Northern Santa Fe (BNI), Thor Industries (THOR), Wells Fargo (WFC) and Moody’s (MCO).

Personal Comments

The one big topic that I felt was missing was a discussion on margin of safety. Even though the author shows the reader how to value a company using the discounted cash flow method, there is no mention of the all important margin of safety.

Another point is that while there is a chapter dedicated to valuing companies, there isn’t one on how to analyze a company. I mention this because I know from first hand the dangers of just “knowing” how to value stocks without understanding or knowing how to analyze them.

Summary

Overall, the book is a superb primer for the new investor and will help to open their eyes to the bigger picture of investing.

It’s also a great book if you’re a seasoned veteran but have trouble clearly explaining or teaching investing concepts.

The author, Mariusz Skonieczny, also has a website and blog at Classic Value Investors. You can listen to his radio interviews (interview 1 & interview 2) brought about by his due diligence on Mastech Holdings (MHH).