We launched a review campaign for paid subscribers this week, and people have been very generous with their feedback.
We also got some feedback on this newsletter. The basic gist was: “the promise of Old School Value is to simplify and distill things, but this newsletter has so many links there’s no way to read and synthesize it all every week.”
That makes total sense.
We’ve always approached the “Nugget Fest” as a way to do what many of our most admired investors recommend: to read broadly.
The problem with reading broadly is that only 1 out of 5 articles are any good. So, we try to give you links after reading tons of stuff each week that are the top 20% of good stuff that you can’t go wrong with.
You don’t need to read all of it or any of it. The brief descriptions are there to help you gauge whether it’s of interest to you.
That said, there’s clearly a need to offer more perspective and insight based on the most important new stuff we’re learning. We’ll take that feedback to heart and work to add more articles on our blog that dive deep into topics we think everyone really should stay abreast of.
Excerpts from an interview with Joel Greenblatt.
- Value investing is all about valuation. “Stocks aren’t pieces of paper that bounce around, they’re ownership shares of businesses that we value and try to buy at a discount.”
- Stay in the market, even if it’s expensive. “[The return is] still positive, and buying the cheapest stocks in the S&P 500, we would expect to do better than that.”
- “Most people don’t have the ability to value businesses at a discount and the discipline to hold them.”
John Malone is considered a master capital allocator. He focuses on cash flows and works to minimize earnings and thus taxes. Learning how he thinks about things can help you judge other CEOs.
“It’s not about earnings, it’s about wealth creation and levered cash-flow growth. Tell them you don’t care about earnings.The first thing you do is make sure you have enough juice to survive and you don’t have any credit issues that are going to bite you in the near term, and that you’ve thought about how you manage your way through those issues.”
I think it’s interesting to hear critiques of people like Buffett and think about whether I agree, and if I do, what should’ve been done differently and how could that be generalized to add to my checklist.
In this case, David Rolfe thinks Berkshire made some bad investments (IBM, Kraft), missed some opportunities that should’ve been in their wheelhouse (Mastercard and Visa), and has way too much cash sitting idle.
A good interview. He covers what he thinks are some of Buffett’s mistakes, too. He also gives us this reminder:
“In general, it is really critical to be right in the center of your circle of competence; you don’t want to be near the edges or, God forbid, past the edge. If there are any things that are fuzzy for you, move on.”
Markets & Investing
3Q 2019 GMO Quarterly Letter (GMO)
GMO’s data-driven case for why we’re standing on the edge of a Value renaissance, similar to (but not quite as good as) 2000.
The Price of Certainty (Ian Cassel – MicroCapClub)
“How can you be both quick and accurate? I apply these four filters to every new company I evaluate:
- An organization with signs of intelligent fanaticism
- A business that can grow through a recession
- A balance sheet that can weather a storm and act with occasional boldness
- A stock that can conservatively double in 3 years
When I apply these four filters I might miss something, but it cuts to the core of what is important.”
The Hidden Debt of Lease Obligations (UK Value Investor)
If you’re not familiar with operating leases, you should be if you’re doing good valuation work.
Lease agreements should often be treated as debt because a failure to meet these obligations typically results in a loss of control.
When you capitalize an operating lease (i.e., put it on the balance sheet), debt increases, leverage ratios look worse, and profitability changes with the removal of the lease expense and increased depreciation.
This can have a big effect in certain industries like retail.
Calculating Free Cash Flow: 5 Illustrated Examples From Actual 10-Ks (Focused Compounding)
Some great examples of calculating Free Cash Flow using different kinds of companies’ cash flow statements, primarily where CapEx can get categorized in different ways.
Company & Strategy
IPO Lessons for Public Market Investors (Damodaran)
Some take-aways from this year’s IPOs, particularly related to pricing vs. valuation. Damodaran highlights why IPOs are such a difficult game, but also suggests that where things are hardest, that’s where being really good at valuation can pay off the most.
Podcast of the Week
A good interview that covers Expectations Investing, calculating WACCs, etc.