Boganmeldelse af John Mihaljevic' "The Manual of Ideas"

Book Summary

The Manual of Ideas: The Proven Framework for Finding the Best Value Investments

October 8, 2017

This post is also available in: Dansk

Abstract

  • John Mihaljevic presents 9 distinct types of value investment ideas, and how to screen for them: 1) deep value, 2) sum-of-the-parts value, 3) Joel Greenblatt’s Magic Formula, 4) jockey stocks, 5) follow the leaders, 6) small stocks, big returns, 7) special situations, 8) equity stubs, and 9) international value investments.

John Mihaljevic’s book outlines nine ways to find distinct types of value investment ideas. For each type of investment idea, John goes through the approach, why it should work, how it can be ‘abused’ and how to screen for that given type of idea. I’ll try to quickly sum-up each type and the screening criteria one can apply to spot them.

Deep Value: John focuses on Benjamin Graham’s net nets: those companies that are offered at a price below the value of its current assets after all liabilities have been honored. You should screen for stocks with a P/BV well below 1. Next, the analyst should engage in a thorough analysis of each security to determine if you truly have a net nets on your hands (e.g. by adjusting the value of receivables and inventories to reflect true liquidation value).

Sum-of-the-Parts Value: Rather than accepting a company or conglomerate’s face value, the analyst should investigate the worth of all its subsidiaries. You should then add up the value of all these subsidiaries to evaluate whether there’s a conglomerate discount or not. These ‘hidden assets’ are often found in the shape of ownership in other companies or undervalued properties. John explains that there’s no easy way of screening for these opportunities. There is only one way of uncovering these values: the painful task of looking over companies’ annual reports one by one. However, he explains that they are often found in the retail and hospitality industry, since these most often have larger real estate positions that may turn out to be undervalued in the balance sheet. He also recommends looking at famous investors’ moves, e.g. Bill Ackman, David Einhorn and Carl Icahn.

Greenblatt’s Magic Companies: In The Little Book That Beats the MarketJoel Greenblatt explains how one can spot the sweetest possible combination: above-average businesses at below-average prices. The formula is outlined in aforementioned post, so I won’t address it here. Just know that you can retrieve the highest ranked Magic Formula companies at www.magicformulainvesting.com.

Jockey Stocks: This strategy centres on identifying great managers, or jockeys. It’s all about spotting managers that can either 1) add value by improving the performance of the operation, or 2) via intelligent capital allocation. Managers that are able to do both are very rare. Steve Jobs was a CEO who could add value by driving innovation and profits. But he never quite got the hang of the art of capital allocation. It’s difficult to screen for good managers, but the following factors might aid the analyst: managers who have ensured a high return on capital, growth in employed capital per stock, improvement of margins, and intelligent handling of the cost base and assets.

Follow the Leaders: Here, you try to spot super investors with the same investment philosophy as yourself, and then track their trades. I personally follow Warren Buffett, Mohnish Pabrai and Seth Klarman at www.gurufocus.com. John lists an array of investors’ CIK-numbers, which you can enter on www.sec.gov to find their most recent trades. Aforementioned favorites of mine have the following CIK-numbers: CIK0001067983 (Warren Buffett), 0001138995 (Mohnish Pabrai) and 0001061768 (Seth Klarman).

Small Stocks, Big Returns: Everybody knows Microsoft and Coca-Cola. Every analyst covers them, and they’re trading at high volumes. The smaller indexes and the stocks within them don’t receive nearly the same coverage, which is why your chances of spotting undervalued stocks or bargains in these spheres are often considerably higher. You should screen for stocks with a market value of maximum $1 billion. You should set the lower limit yourself, but anywhere between $10-100 mio. should generate some interesting outputs. You should then add a +10 employees criteria, a minimum of 1% inside ownership and a minimum of $10 mio. in annual revenues. You can build upon this base by adding extra criteria, e.g. a P/BV below 1, a debt/equity below 0.2 and a P/E below 15.

Special Situations: Crises-stricken companies, bankruptcies, turn-around situations, spin-offs, debt restructurings, massive share buy backs, experimental short-term initiatives. Screeners are not ideal to spot these situations. However, you can screen after sudden movements on otherwise ‘boring’ (stable) price charts, large drops in outstanding shares, and acquisitions. However, as mentioned, it’s not ideal, so John recommends keeping an eye on the media instead. Furthermore, it might pay off to follow the blogs of investors who specialize in such situations. One of my favorite authors and investors, Tobias Carlisle, has a few websites where such ideas are voiced: www.greenbackd.com and www.acquirersmultiple.com.

Equity Stubs: These opportunities are defined as stocks sold at greatly reduced prices due to financial difficulties. Be cautious with this strategy, as it often deals with acquiring stocks in (very) leveraged companies. You often either fail miserably or triumph spectacularly. Equity stubs are often born from spin-offs (e.g. from a parent company). In addition, companies that resurrect after a bankruptcy may posses equity stub potential as well. In terms of quantitative metrics, the following criteria may be used in a screener: a debt/equity ratio above 2-3, high debt relative to EBITDA and large drops in stock prices.

International Value Investments: The chapter is introduced with a neat quote from Sir John Templeton: “Investors should see the investment world as an ocean and buy where you get the most value for your money.” It’s not about where the company is geographically located, but about finding the right qualities that warrant an investment. Most screeners are limited to e.g. the US and UK, which makes searching for international investment opportunities difficult. However, Financial Times has a free screening tool that can be used to scout for global securities, www.markets.ft.com. The next question is what you should screen for. This one is easy: it’s what you would normally screen for (e.g. ow P/E, P/BV, P/CF and high ROEs, margins etc.). Be weary, though, as the accounting rules differ from country to country.

The book has a lot of fine inputs for generating investment ideas. The content is fairly sharp, but jeez it gets quite dry at times. My recommendation would be to pick up a copy and only study the chapters that interest you based on the above (and other websites’) top-level expositions of each strategy.

This post is also available in: Dansk

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