*Repost* 17 Things That Changed My Life – Some Saved It

*Repost* 17 Things That Changed My Life

Some Saved It

This post is something I’ve wanted to write for a while but haven’t been able due to lack of writing skill and fear.  I fixed the lack of writing skill working at the investment newsletter.  And fear only went away because of something I posted on Twitter a few weeks ago.

While reading on StumbleUpon I found a great post: 10 Business Books That Changed My Thinking linked below.  And reposted it on Twitter.

This repost went viral after Tim Ferriss retweeted it.  And then Tweeted to me directly.  This inspired me to write my post detailing the things that changed my life.

At last count 44,854 people viewed this.  Favorited it 143 times.  And retweeted it 39 times.

A couple weeks ago I asked the question, Who Do You Want To Become?  And at the end of it I told you I wanted to be great at everything I do.

And if you’ve followed this blog for a while you know I dealt with serious health issues in the past.

But I’ve never explained either of the above because I’ve been afraid and embarrassed.

For the first time I’m going to tell my full story.  What led me to where I am now.  And what my mindset is going forward.

Some of the things in this post only people who’ve known me for 15+ years know.  Some of the things I’ve only ever told my family.  And some I’ve told no one other than my wife.

What makes people tick has always fascinated me.  Why people do the things they do.  And how great people become great even in the face of adversity.

My hope writing this article is to help anyone who’s struggling realize that if I can overcome, so can you.

17 Things That Changed My Life

Some Saved It

Growing up I only wanted to do two things when I got older.  Travel.  And join the Air Force.

My dad spent 22 years in the Air Force so it was the only life I knew and I loved it.  We moved around a lot growing up which was hard but also exciting.  When you move to new places you get to try new things.  Meet new people.  And visit new areas.

To me moving is like an adventure.  So I wanted to travel when I got older to keep experiencing this.

I was born on Cannon Air Force Base in New Mexico.  Moved from there to Mountain Home Air Force Base in Idaho.  Spent a few years there and then moved to Tyndall Air Force Base in Florida.  And after a few more years moved to Ellsworth Air Force Base in South Dakota where I’ve been for the last 18 years.

Because everyone moves on military bases it’s easy to make new friends.  But what made these transitions even easier was playing sports.  And growing up I played everything: Football, baseball, basketball, wrestling, and track.

Like most kids, I didn’t worry about anything growing up other than when to hang out with my friends next.  And I didn’t spend any time thinking about what I wanted to do when I grew up because I already knew what I was going to do when old enough.

Join the Air Force and travel the world like my dad.

But my plans went awry when I woke up shaking and not able to breathe one night in the summer of 2000.  This is where my story begins on 17 Things That Changed My Life.

Night Of Terror

This night was the most terrifying of my life.  It was so bad that every detail’s etched into my mind, still 15 years later.

We’d just gotten back from visiting family in Idaho in July of 2000.  And after sitting in the car with my brother for 14 hours I needed to get outside.

This was before portable DVD players, Kindle Audiobooks, IPods, and cell phones.  And all my brother and I could do at the ages of 12 and 11 was stare at nothingness or listen to our CD players for 14 straight hours.

For those not old enough to know, CD players are ancient devices use to play music.

I was going crazy by the time we got home so I got hold of my friends as soon as I could.  And we met up and walked to the base gym to play basketball.

I don’t remember how many games we played but when we walked to the gym it was the middle of the day.  When we walked back home it was pitch black.  I was drenched in sweat.  And the hot summer wind wasn’t relieving my overheated exhaustion.

Even though exhaustion overwhelmed me, when I got home I needed to eat something so I didn’t wake up feeling terrible the next day.  I ate some food then collapsed into bed looking forward to the next day hanging out with friends again.

But that would have to wait…

That night I woke up with my whole body shaking uncontrollably.  Not able to breathe.  And barely able to walk.

I shuffled my way towards my parent’s room thinking I was dying.  Got half way and then felt myself falling to the floor.  But I was paralyzed.  I couldn’t move my arms to brace myself.  So I fell head first into the wood floor and blacked out.

The next thing I remember I woke up in a panic.  Thrashing at everything.  And not knowing where I was as the EMT’s loaded me onto the gurney.  All I remember seeing before blacking out again was my mom crying.

The next time I woke up I was in the hospital thrashing again.  Not knowing where I was.  Why I was there.  And in a ton of pain due to my head dive into the wood floor.

After I found out why I was there and what happened the doctors ran more medical tests on me than anyone at the age of 12 should ever have to go through..

After hearing the worst from the doctors that it could be a brain tumor.  We were all in a state of panic waiting for the test results.

Luckily it wasn’t a brain tumor.  But it was still serious…

I had a grand mal – tonic clonic -seizure.  And had Rolandic’s Epilepsy.  A form of epilepsy that’s hereditary and found in kids between the ages of 8 – 18.

I was on medicine for a few years to prevent me from having another seizure.  I never did.  And got off the medicine when I was 17 after retesting and finding out I no longer had to worry about seizures.

While the medicine kept me from having another seizure, there was one massive side effect I had to it.  It damaged my short-term memory, but we’ll get back to this later.

In the short-term I was still able to do everything I wanted to do.  Including playing football.  But this one seizure disqualified me from doing what I’d dreamt of ever since I was a little kid.

I found out I wasn’t able to join the Air Force during my junior year of high school because of this one seizure.  And going into my senior year I had no idea what else to do because that’s all I’d ever wanted to do.  But I had to figure out something to do with my life.

Hamstrung in High School

Having only one year left to figure out what I was going to do I started scrambling.

My first thought went to running track in college.  I loved it.  Was decent at it.  Went to state in a couple sprint relays at the end of my junior year.  And just missed going to state in the individual 100M dash the same year.

I immediately went to a few of my high school coaches who knew state university track coaches to get in contact with them to see what they thought of my chances to make their teams.

I heard back from the head coach of South Dakota State University who said with my times, the first year at school I would have to walk on to the team.  But if I continued to improve I would likely get a scholarship for my sophomore through senior years of college.

Even though this wasn’t my first choice.  I was still excited and my girlfriend and I started making plans to both attend the school.

But at my first race at the state track meet my junior year, disaster struck.

A couple days before this at practice I felt a little twinge in both of my hamstrings.  But since there was no sharp pain, no popping, and only minor soreness I didn’t think much about it.

When our team got to the state track meet my legs were still sore.  But nothing I’ve not run with before so I kept practicing, stretching, and running like I always did to prepare for a race.

This was my first time at state.  And my first race was the 4 X 200 meter relay where I was the third of four legs.

As I saw my teammate rounding the corner coming toward me to hand off the baton my adrenaline spiked.  And the soreness in my legs was gone.  But this didn’t last long.

Within 50 meters of grabbing the baton I knew something was wrong because my legs tightened fast.  At 100 meters I could feel slight popping in my legs and knew I should stop.  But didn’t want to let me teammates down so I kept running.

At 150 meters I felt a couple loud pops.  And at this point all I could do was hobble-run towards my teammate.  I’ve never wished the end of a race came faster than I did then.

At 175 meters I felt some pops in my lower leg that slowed me down even more.  And when I finally got to my teammate I was in last place, exhausted, and collapsed to the ground in pain.

I’d run track since 8th grade in middle school.  Done all different running events up to the one mile.  The 800 meter “dash” is the worst.  Even did long jump and triple jump.    And I’d never been that exhausted.  Or in that much pain after finishing any event.

My coach helped me hobble over to the trainer’s tent to check out my legs.  And while I knew something major was wrong I didn’t expect to hear what he told me.  Not only had I torn both of my hamstrings.  But I also tore both of my calves as well.

After taking some time to recover I spent the rest of the next year working to become stronger for next track season.  But even this didn’t help.

This time as the anchor leg of the 4 X 200 meter relay during the first race of my senior year track season I felt the same pops and pain I did at state the year before.  Ended up hobbling to the finish line.  Threw the baton down to the ground in frustration.  And hobbled to the trainer’s tent already knowing what he was going to tell me.

My body was giving out… I tore both of my hamstrings again.  My senior year track season was over.  And my plans to run track in college were also over.

Back to square one again.

The Nightmare Begins

I spent the summer after my junior year recovering from my hamstring and calf tears working out.  Hanging out with my girlfriend.  Working at Burger King.  And hanging out with friends.

It was a normal summer until late July.

I don’t remember what happened in a vivid way like I did with my seizure because this was a slow progression.  Not paralysis, thinking I was dying, collapsing, and blacking out one night.

I remember getting a cold that lasted a while and being a bit dizzy during the cold.  But nothing else spectacular.

This cold lasted for a couple weeks and at the end of it I noticed I was dizzy all the time.  Not dizzy as in vertigo or Meniere’s Disease. But I always felt like I was moving.  Even when I wasn’t.

I’ve always had trouble describing this feeling.  And this is the best way I’ve ever found to describe how I felt.

One day a couple years after this started I was driving downtown with my girlfriend and stopped at a red light.  All the sudden I felt the entire car moving as if I was pushing the gas so I slammed on the brakes.

I turned to my girlfriend and asked her if the car was moving and she said no.

After this I didn’t drive for several years.

At first I was dizzy all day, every day for three months.  Then all the sudden one day it would go away and I would feel great for three months.  This went on for my senior year of high school.  And then one day the dizziness came and stayed.  This time for 10 years.

But before we get to that we need to finish talking about high school.  Because a few more things happened in my junior and senior years of high school that changed my life forever.

Good Things Did Come Out Of High School

High school wasn’t all bad.

For most of high school I had fun with my friends.  Played football.  Ran track.  Had girlfriends.  And had fun like any other normal high school kid.

You may have noticed that I haven’t talked at all about the things I learned in high school changing my life.  And that’s because even though I had great teachers, nothing I learned changed my life the entire time I was in school.  Formal education teaches you nothing about life.  How to make decisions.  Or how to think for yourself.

The exception was one semester during my senior year.

When I was in school, every senior had a light load of classes unless they chose to take AP classes.  The only mandatory classes were English and a Government/Consumerism class split one each semester.

The Government class was interesting because I’ve always loved learning history.  English was where one of my teachers told me ” I hope you never want to become a writer, because you’re terrible at it.”  But Consumerism class is where I learned several life altering things.

My First Foray Into Stocks

What follows is an excerpt from my book describing this class.

I’ve always liked the thought of investing since learning the basics and the power of compounding during my senior year of high school in 2004/2005.  At my high school every senior had to take one semester of government and one semester of consumerism.

This is a hybrid class that taught about different subjects one of them being the basics of investing and the power of compound interest.

Which I did not comprehend at the time, basic investing ratios, what dividends were, and other entry level investing concepts.

At the end of the class there was a project where we got put into groups of three or four people and found companies to invest in with a fake money account.

The group whose portfolio went up the most in the few week experiment won the contest and got the highest grade for the project.

I ended up being the leader of my group because I was the only one who was interested in investing at all.

The first batch of companies we picked were ones that typical hormone fueled teenage boys might pick to buy: Playboy and Nike among others.

I don’t remember picking those companies for any reason other than we liked the products as they pertained to Nike.  And thought it would be cool to be Hugh Hefner and own Playboy… For the articles of course.

This was the depth of our analysis on the first batch of companies we bought.

As the weeks went on and the school year got closer to ending, being normal seniors, the interest of the other members of the group interest dropped even further.  And I was the only one still doing work on the project as the semester was getting ready to end.

Since I was left to do whatever I wanted I started doing research on a company that would be a fantastic investment.  Not only for the class project but over the long term.

The company was overtaking its competitors fast.  It had its IPO within a year or two of that time.  And it was becoming one of the most used and well known sites in the world.

Again, this was the depth of the analysis at that time.

But even then with my limited knowledge I recognized what I would later call a moat.

Since I was, and still am, ultra competitive and wanted to win.  I dumped all the other stocks in the portfolio that we bought and put the entire fake money portfolio into this one company that was selling somewhere between $60-$70 a share if memory serves me right.

The company’s stock didn’t end up going up enough for our group to win the contest but I was proven right over the long-term.

The company the entire fake money portfolio of $100,000 was put into sold for between $60-$70 a share at that time.

If I would’ve held those 1428-1666 shares of stock until this present writing with the company now selling for around $793 a share I would’ve turned that original $100K fake investment into $1,132,404-$1,321,138 in eight years.

That comes out to a compound annual growth rate (CAGR) of 35.44% and 38.08% respectively.

As an example of how phenomenal that is, Warren Buffett averaged a CAGR of 20% over 40 years to become one of the richest people in the world.

This potential result while phenomenal was all luck because of the lack of research.  But it taught me a valuable lesson that I still adhere to today.

If you buy stock into a company that has huge market share and a sustainable competitive advantage.  Over time you’ll do great investing.

For those who haven’t guessed the company that I would’ve made a killing on if it was a real money portfolio.  It’s the worldwide search engine leader.  One of the biggest and most innovative companies in the world.  Google, stock ticker (GOOG.)

These first lessons in competitive advantage, market share, compound interest, and opportunity cost helped changed my life.

But we have one more thing to talk about before leaving high school.

Finding Love

I don’t do anything half assed.

I hate wasting others time and hate having mine wasted so I either do things 100% or I don’t do it at all.

This applies to all aspects of my life including relationships.

Ever since I can remember, every relationship I had I knew within a few months whether it should continue or not.  And any time I went into a new relationship I went in with the mindset it was going to last a while.

Even with this mindset I didn’t expect my next girlfriend to also be my last at the age of 16.

But great things don’t come along often in life.  So no matter what age you are, when greatness is possible, go for it.  Whether in business, love, or life in general.

And it turns out I was lucky when I found her.

She’s stuck with me through all the dizziness.  Through me not being able to do anything outside the house for years at a time.  And through me spending thousands of hours without making any money to become the best investor I can.  So when I did get healthy I could provide for my family.

The picture above is of my wife, two daughters, and me from last summer.

We’ve just celebrated our 12 year anniversary.  Six of those we’ve been married.  And I can’t wait to see what the future holds for us.

But this isn’t the only great thing to come from our relationship.

Becoming A Dad

At the point we got married I’d been dizzy for five years.

I went to an occupational therapist who gave me some exercises that helped my dizziness get slowly better.  But I still felt awful 90% of the time.

The little time I felt decent I started trying to figure out what I wanted to do when I got healthy.  Since I wasn’t able to go to college because of the dizziness, I had limited options.  And I could only think of three things.

I came up with becoming a local politician.  A writer.  Or learning about the stock market.

I figured the world didn’t need any more scum bag politicians and I’m a terrible liar so I ruled that out.  I decided not to become a writer because of what my high school teacher said to me.  So by default I picked learning about stocks.

Not because I wanted to or was excited.  But what I remembered learning in high school, it was the only thing I could think of that I had even minor interest in.

I started learning but lacked focus.  And I continued to use my dizziness as an excuse to do nothing.

That is until the day my wife told me I was going to be a dad.

I was sitting on the couch playing FIFA Soccer on my Playstation 3 one day when my wife tells me that she was pregnant.  I said ok because what she said didn’t register to me and went back to playing.

After a couple seconds what she said finally registered.  And I asked her to repeat what she said and it was something like this:  “I’m pregnant and you’re going to be a dad.”

After this I learned as much as I could when I didn’t feel terrible.  But still lacked focus and direction so I wasn’t retaining anything I read.

Until a trip to Best Buy gave my life direction.

Life Lessons Learned In Best Buy

A few months after this the wife and I took a trip to our local Best Buy to look at dishwashers to install.

We walked around the store like we always did when going there.  And then went to the appliance section to find our dishwasher.  While we didn’t find a dishwasher that day.  We found something more valuable that altered our lives.

As soon as we walked into the appliance section a smiling, tall, older guy with graying hair greeted us wearing khaki’s.  And of course the famous blue Best Buy associate shirt.

I don’t remember how we got on the subject that I was learning about investing.  But when we did he told me about the book Rich Dad Poor Dad by Robert Kiyosaki.  Said I had to read it.  And it would change my life.

He was genuinely nice and for some reason seemed to care about what I told him about me.  So after we got out of the store my wife and I went to Borders down the road and bought the book.

I’m always wary when people say something will change my life but he was right.

The book lit my imagination on fire and I read the book in a few days.  I took a bunch of notes.  And looked up anything I didn’t understand online.

Rich Dad Poor Dad changed my life.  Gave me direction and focus.  And set me on the path that I’m still on today.

I’ve been in the local Best Buy a lot before and after this, but I’ve never seen that guy any other time.  But if I saw him today I would give him a hug and offer to buy him a beer.  Because without this chance meeting I wouldn’t be where I’m at today.

But this isn’t the only book I read early in my investing journey that still shapes how I do things today.

Thinking Like A Champion

After years of not being able to do anything due to extreme dizziness I had no confidence in myself.  I thought I was a leech on society and my wife and family.  And even if I did get healthy I didn’t have any skills of value to offer the world.

But learning about investing took my mind off this horrible mindset.  And gave me hope that one day I would be able to contribute in a meaningful way.

Hope will only take you so far if you think of yourself like I did at this point in my life.

I needed to change my entire mindset but up to this point I didn’t know how… Until I came across Think and Grow Rich by Napoleon Hill.  Only 99 cents on Kindle now.

If you lack confidence you need to read this book.  It will teach you that if you have the right mindset you can do anything and become anything.

I can’t recommend this book enough.  And without it and the next two people I wouldn’t be here today.

John Chew Saved My Life…

A year or so after Rich Dad Poor Dad, and Think and Grow Rich revitalized me, my momentum stalled.  And I hit rock bottom sometime in 2009 or 2010.

At this point I’d dealt with extreme dizziness for almost five years.  The exercises the occupational therapist gave me weren’t helping anymore.  No other doctor or specialist I saw helped.  Most of them even treated me like I was faking.  And worst of all my stock portfolio just lost 50% of it’s value in a few months.

I was tired of not being able to do anything.  I was tired of feeling terrible all the time.  I was tired of leeching off my wife, daughter, family, and society.  I was tired of failing.  And I was tired of continuing to hope with no progress and no end in sight.

One night my wife left to work her overnight shift as an RN at our local hospital.  My daughter was in bed for the night.  And there I was, a ~24 year old man playing a game on my Playstation 3 bawling like I never had before or since.

I’d given up.  And as I sat on the couch bawling I thought about killing myself so my wife and daughter could have a better life without me dragging them down anymore.

I’d never had these thoughts before and they scared the hell out of me.  But I was in such a deep state of depression that nothing helped.  And I continued to flounder until I found John Chew’s CSInvesting a few months later which restored hope in my life.

If you’ve never been to the above site you need to click on the link and go now.  It’s one of the best investment sites I’ve ever been to.  And it saved my life.

Finding CSInvesting is what I imagine a religious person coming across a religious epiphany might feel.  Energized, hope restored, dark clouds of despair lifting, etc.

The site is so great that I went back from the start of the blog and read and practiced everything that was on it then.  Asked questions on the blog.  And became fanatical about learning everything I could.

Not only did this take my mind off the deep despair I was in.  But it replaced the despair with hope and knowledge that if I worked and practiced a lot I would become a great value investor over time.

The books, case studies, investment analysis, videos, and everything talked about on the blog is so phenomenal it lifted me from my years long depression.  And I’ve not looked back since.

While I devoured everything on the site he recommended something else kept my momentum going so I didn’t slip back into depression like I had many times before.

… And So Did Aswath Damodaran

I learned so much about investing and how to think from CSInvesting. Was so energized.  And worked so hard that I made myself feel even worse all the time.

But I couldn’t stop…

I had a newborn daughter that I had to develop a valuable skill for so I could provide for my family when I got healthy.  But more important in the short-term was I didn’t want to slip back into depression.  And I was afraid that if I slowed down I would.

So when John recommended a free MBA level course from a world-renowned value investing teacher I jumped at the chance.

Aswath Damodaran is a professor at NYU Stern in New York.  Consults with Goldman Sachs to teach it’s analysts how to value businesses.  Writes a great blog talking about valuing businesses.  And releases his valuation course online for free.

I was a part of the first online class he released where he shared everything he knows about how to value businesses using DCF calculations.

If you’ve followed this blog for a while you know I never use DCF valuations when evaluating companies.  So why is this course one of the things that changed my life?

Because he shared something even more important than just valuing businesses.  He taught how to think about businesses when you’re evaluating them.  And introduced Charlie Munger and his teachings into my life.   We’ll get back to Mr. Munger later.

I won’t ruin any of the specifics of his course for you.  But if you want to learn about DCF valuations.  And want to learn how to become a better thinker and investor you need to take his course at the link above.

Thank you John and Aswath for sharing information.   Because without you two I wouldn’t be where I’m at as an investor today.  And I might not be here at all… Thanks for literally saving my life.

The Single Person I’ve Learned Most From

Charlie Munger

I’ve studied and learned more from Charlie Munger than any other single person about investing and life.  Yes, this includes Warren Buffett.

Charlie Munger is Buffett’s right hand man at Berkshire Hathaway.  Was a great investor in his own right before coming to Berkshire.  And is a philanthropist and great thinker.

I think so highly of Mr. Munger that if I had to choose who to have dinner with out of he or Buffett.  And I could never have dinner with the other.  I would choose Mr. Munger without hesitating.

Below is a partial reading list from and about Mr. Munger that have influenced not only how I approach investing and evaluating businesses.  But also how I think and do everything now.

Without Mr. Munger sharing everything he has I would be a much worse person, investor, entrepreneur, and thinker.

But there’s something that helped my business analysis skill level explode.

The Journey Begins

When I started learning about investing almost every site, book, video, or article I watched about getting better said you need to write your ideas and analysis down.  They all said this because if you write things down you’ll remember more.  Learn more.  And become a better investor faster.

But because of stubbornness and laziness I didn’t do this until years after starting to learn about investing.  And this stunted my growth.

How do I know this?  Because after I started the original version of Value Investing Journey, I improved faster in a few months than I did in the years before this.

Not only because of the reasons above.  But if you write things down it’s easier to spot gaps in your analysis because you can go back and see what you need to improve on.

But this wasn’t the biggest help.

The biggest help learning was the feedback I got from Whopper Investments.  Red from the Red Corner Blog.  Readers of this blog.  And many others who gave me constructive criticism on how to improve going forward.

Without help from these people, I wouldn’t be helping others today.

But I was still struggling health wise and needed to find a way to become more efficient with my time so I could be more productive.  Turns out there was a book that was helping people become more efficient.

“Man This Guy Is Full Of Shit.”

After getting out of the doldrums of deep depression I worked any minute I could towards learning about investing.  But because of the extreme dizziness I couldn’t work as much as I wanted.  And wasn’t learning as fast as I wanted to.

One day I was talking to Taylor from ValuePrax who told me about a book called: The Four Hour Work Week by Tim Ferriss – only $1.99 on Kindle.

I read the cover and back flap of the book and thought to myself man this guy is full of shit.  There’s no way Tim Ferriss does this, and there’s no way this book will help me become more efficient.

But because a friend I respect recommended it, I decided there must be something in the book I could learn so I went ahead and read it anyways.

And I’m glad I did…

Turns out the book isn’t about working only four hours a week.  It’s a guide to become more efficient.  Become a better thinker.  Travel more.  Find better people to work with.  And how to live the kind of life you dream of.

In short it’s a book that teaches you how to achieve your dreams.

The Four Hour Work Week changed my life more than any other book I’ve read.

Without the Four Hour Work Week by Tim Ferriss I wouldn’t be an author of the acclaimed value investment education book How To Value Invest.  I wouldn’t get hired at a prominent investment newsletter.  I wouldn’t be here helping as many people as I can with the blog, book, and other services.  I wouldn’t be giving to any charities.  And I wouldn’t still be working towards my goals today.

Without this book I would’ve given up again at some point of adversity.

If there is one thing everyone needs to read in this post it’s The Four Hour Work Week by Tim Ferriss.

But there are still three more books I need to tell you about that changed how I approach everything.

Need Help Developing? Read These Three Books

At this point I was more confident.  Developing good habits.  And starting to become a real thinker, investor, and writer.  But I needed help taking the next step because I was still procrastinating too much.  And was using my dizziness as an excuse not to work.

From The Four Hour Work Week to this point several years passed as I concentrated more on things other than learning and improving.

I learned a lot in this time.  But the three books below I’ve read in the last year after getting on some new medicine that’s gotten rid of my dizziness.  Mostly.  Effect everything I do now.  And will continue to help me going forward as I work toward success and helping as many people as possible.

I’ve combined talking about the three books below because the lessons taught in every book intertwine with each other.  And reading each helps understand lessons in the others.

Choose Yourself

If you want to work for yourself, build businesses, and be an entrepreneur you need to read this book.

It goes over Mr. Altucher’s own journey of making millions.  Losing millions.  Getting divorced.  Thinking about suicide.  And how he bounced back to become the huge success he is today.

One of the main topics the book talks about is how you can become creative over time if you train yourself to do so.

I’ve never been creative so this was of particular interest to me.  I always wanted to be better at generating ideas but never knew how.

The advice in the book helped train me to become more creative and come up with more ideas.  This in turn made me a better thinker, investor, and entrepreneur.

If you have Kindle Unlimited you can read this book for free.  Or you can buy it on Kindle for only 99 cents.

The Power Of Habit

Below is part of my post Car Wash Psychology, Mental Models, and The Power Of Habit where I talked about the amazing book The Power Of Habit.

The Power of Habit is an amazing book.  And I agree with Mr. Pink above.

It’s changed the way I think about how I parent.  My investment processes.  Psychology.  And how I do everything in my life.  In short I cannot recommend that you read this book enough.

Below is author Charles Duhigg explaining in a three-minute video how we develop habits.  And how to break bad habits.

Mindset

I came across this book of all places when I was on SportsIllustrated.com.

The article details how a young kid from the video editing department worked his way up to become a two-time NBA champion head coach of the Miami Heat.

Below is an excerpt from the above linked article:

The first time Miami fell in the Finals, to the Mavericks in 2011, Spoelstra installed an organizational “improvement program.” He ordered coaches to read books and attend clinics, then write reports about what they learned. One staffer was instructed to mine every Malcolm Gladwell article for relevant thoughts. Spoelstra, who listened to John Maxwell leadership CDs on the drive to work every day, was taking the equivalent of 30,000 jumpers again. He discovered a book by Carol S. Dweck called Mindset and became consumed with the distinction between a growth mind-set and fixed mind-set.

“When you subscribe to a growth mind-set, you challenge yourself to do things differently, and you actually produce a drug in your brain that allows you to work more creatively,” he says. “That’s when you’re most alive.” For someone naturally wary of change, the material was revelatory. Spoelstra and his assistants got into peak shape so they could carry lessons onto the practice court, where they devised the pace-and-space offense that yielded two championships, along with a 27-game winning streak in 2012–13. Love them or hate them, the Heat were the first superpower of the Information Age. They had to be seen, heard and tweeted about. They simultaneously bemoaned the scrutiny and fed off it.

As value investors we have to be autodidacts – learn and teach ourselves things all the time.  So we continue to improve all our processes.

Mindset by Dr. Carol Dweck should be mandatory reading for everyone who self learns.  Especially so you know how to get yourself back into the proper mindset when you reach adversity.

This is just one of many examples why you need to read everything and not just investment related content…  You never know when you will come across something that will change how you approach everything.

You Can Do It

As a kid I hated reading and writing.  And never did it unless I was forced.  Too bad I didn’t know then what I know now or I could be even farther toward achieving my goals.

Because not only does money and knowledge compound over time.  But so do the decisions you make.

But I know this now.  And will continue to compound knowledge well into the future with the habits and proper mindset I’ve built over the last several years.

Of course there are other great things I’ve learned from over the years.  And some of them not mentioned in this post are teachings by and from: Sanjay Bakshi. Dream Big – The Story of 3G Capital which you can read for free if you have Kindle Unlimited.  Moonwalking With Einstein which helped me realize I could train my memory and get back what I lost to the epilepsy medicine.  My memory is better now than it’s ever been. Joel Greenblatt’s You Can Be A Stock Market Genius.  Bruce Greenwald’s Competition Demystified and Value Investing: From Graham To Buffett and Beyond.  The Berkshire Hathaway Shareholder Letters, and Warren Buffett’s Partnership letters.  And much more.

But now that I’m finally healthy after a decade of extreme dizziness and deep depression.  And still only 28 I can’t wait to see what the rest of my life has in store.

Now that I’ve built the proper mental foundation, when I do come across major adversity again I’m positive I won’t slip back into deep depression.  And think the way I was then again.

But I didn’t write this post for me.  I wrote it for you.

If you know someone who is struggling or you’re struggling yourself.  My hope with this post is that there’s something in it that will help you recover and contribute to the world and your own well-being.

Because if I can do it with my long-term extreme health issues and lack of formal education.  So can you.

But most important, don’t give up, don’t ever give up.

P.S.  If you’re dealing with a major struggle/deep depression, talk to someone who you’re close with or get professional help.  While telling my wife didn’t get me out of depression right away.  It did lift a burden off my shoulders and helped me start the process of recovering.

P.P.S. Shitty writer, HA.

Reading Ease of 75.4 and an FK score of 6 for this 29 page 6,992 word post.

For more information on the above go here.

***

To subscribe Value Investing Journey to get all future posts, exclusive content, three things that will help you evaluate companies faster, and the chance to win prizes go to this link.

*Repost* Strattec Security Corporation $STRT: Potential Double From Today’s Stock Price

*Repost* Strattec Security Corporation $STRT: Potential Double From Today’s Stock Price

Introduction, Overview of Operations, And Brief History

The company I will be focusing on in this article is Strattec Security Corporation (STRT).  Strattec is a nano cap with a current market cap around $75 million and it is in the very boring and shunned automotive parts industry.  The company has expanded to become a worldwide auto parts supplier through its various joint ventures and alliances.

The company makes and sells various automotive parts such as: Keys with radio frequency identification technology, bladeless electronic keys, ignition lock housings, trunk latches, lift gate latches, tailgate latches, hood latches, and side door latches.  With its acquisition of Delphi Corporation’s Power Products in 2009 it is now also supplying power access devices for sliding side doors, lift gates and trunk lids.

In 2001 Strattec formed an alliance with Witte-Velbert Gmbh.  The alliance allowed Strattec to sell Witte’s products in the US, and allowed Witte to sell Strattec’s products in Europe.  In 2006 the alliance expanded to include ADAC plastics and a joint venture with all three companies owning 33% was formed called VAST or Vehicle Access Systems Technology.  ADAC makes such products as door handles.  The VAST Alliance has helped Strattec become a worldwide auto parts supplier as the alliance allows all companies involved to market and sell each other’s products in various jurisdictions around the world including in the US, Europe, Brazil, China, Japan, and Korea.  The VAST Alliance should have its first profitable year as a company this year which would help Strattec’s bottom line.  Full complement of VAST’s products can be viewed here.

VastPlacemat

Picture taken from ADAC Plastics which shows how the VAST Alliance is structured.

ADAC and Strattec have formed a separate company, ADAC-Strattec de Mexico, ASdM,  whose operations are in Mexico due to cheaper labor prices, where the two companies separate expertise are combined to manufacture some of the above products for sale. In Strattec’s fiscal years ending 2012 and 2011, ASdM was profitable and represented $31.0 and $25.2 million, respectively of Strattec’s consolidated net sales.

With the help of VAST and its other joint ventures, Strattec’s export sales have risen to 37% of total sales which amounts to $107 million.  In 2001 exports only accounted for 14% of its sales which amounted to $29 million, which illustrates Strattec’s worldwide growth since then.

During the recession three of Strattec’s biggest buyers filed for bankruptcy protection, and the overall auto industry went to the brink of death before being saved by the US federal government.  Because Strattec’s major buyers were having so many problems, it also faced some very serious problems and had its only unprofitable year in 2009, lost more than $40 per share in value during the recession, about 2/3’s of its share price in total, and its share price has not recovered since.

Since that time Strattec restructured, improved its operations and expanded its product lines, signed various joint venture and alliance agreements which have allowed the company to become a worldwide auto parts supplier.  The restructuring, expanded product lines, and worldwide operations have helped Strattec become a more diversified auto parts manufacturer and has grown its sales and margins in the ensuing years.  With the help of VAST and its other joint ventures Strattec is a truly worldwide company with operations now in the US, Europe, Brazil, China, Japan, Korea, Canada and Mexico.

Strattec was spun off from Briggs & Stratton in 1995 as an independent company.  After Strattec was spun off from Briggs & Stratton, and through most of its entire history, it enjoyed massive market share of over 60% in the US and a 20% market share of the world’s vehicle lock and key operations.  With its huge hold of the market the company was able to dictate high prices to its buyers which enabled the company to enjoy a competitive advantage for a long period of time.

However, shortly after Strattec was spun off there were massive changes in the lock and key industry which deteriorated the company’s market share and competitive advantages. Due to Strattec’s managements excellent foresight and planning, it was well prepared for the change from basic locks and keys and the diminishing of the amount of locks and keys needed per vehicle, and has transitioned into the electronic key arena as well as expanding its operations into various fields though its partnerships with the VAST Alliance including: Door handles, power doors, trunk latches, lift gate latches, tailgate latches, hood latches, side door latches, ignition lock housings, sliding side doors, lift gates and trunk lids.  Since Strattec’s restructuring during the Great Recession, along with its VAST Alliance and other joint ventures, improved operations, and expanded product lines, Strattec’s sales and margins have both been growing and improving.  The trend of growing sales and margins should continue unless another recession hits.

Excellent Management

Due to the excellent leadership of Harold Stratton II, former CEO and current chairman, current CEO and board member Frank Karecji, and the other members of Strattec’s management team and board of directors, it has been able to adjust its original lock and key operations and changed massively to become a truly worldwide auto parts supplier with the products listed above.

Normally I do not talk much about management in my articles because I usually deem management to be either average or subpar, and as Charlie Munger says I want the business to be simple enough to be able to be run by the proverbial “idiot nephew” so management is generally not a factor in my analysis unless they are doing things that bother me quite a bit.

In this case I wanted to point out that I believe Strattec’s management to be excellent and I think that will continue now that Mr. Stratton has transitioned out of the day to day operations and handed the handling of those over to Mr. Karecji.  For the full view of why I believe Strattec’s management to be excellent I recommend reading its annual reports from 1999 to the present to get the true view of why I think its management has been fantastic, and to get a glimpse of the obstacles management has helped the company overcome to become an even stronger company.  Here is a profile of Mr. Karecji, Strattec’s new CEO from 2010 right after he joined the company.

For those who do not want to read all that information I will list a few pluses from management in recent years that I have not already talked about.

  • Strattec has bought back and reduced its shares outstanding by 3.66 million, or more than 50% of its original shares outstanding after being spun off, at a cost of approximately $136 million.
  • Most purchases have been at what I think are good prices to do buy backs.  I think now would be an even better time to buy back more shares (Strattec management has authorization to buy back more shares) because of Strattec’s current undervaluation which I will get to later, but I understand that it wants to put money into expanding its operations and product lines.
  • Another reason Strattec has not bought any shares back in the past couple years as it has been concentrating on reinstating its dividend and expanding its VAST Alliance operations. The company currently only has 3.3 million shares left that are outstanding.
  • Management compensation is fair and straight forward in my opinion which is another plus for management.

Insider and Fund Ownership

  • GAMCO Investors-Collectively Mario Gabelli’s Funds-Own 18.6% of Strattec.
  • T. Rowe Price and Associates through its Small Cap and Small Value funds own-15.5% of Strattec.
  • FMR-Fidelity Management and Research Company own-12.2% of Strattec.
  • Vanguard Horizon Funds own-6.2% of Strattec.
  • Dimensional Fund Advisors, a Small Cap Value Fund, owns-5.8% of Strattec.
  • Insiders Own-7.82% according to Reuters.
  • The above insiders and funds own a combined 66.12% of Strattec which partially explains why there is a very low average daily trading volume of around 2,000 shares per day in the stock.

Like I have said in my various other articles I love to see high insider and value oriented fund ownership of the companies I invest in so this is another plus for me.  Another possibility that might arise in the future is that due Strattec only having 3.3 million shares outstanding, its small overall size as a company, and some of the other factors I will mention or have mentioned in the article, I think that Strattec could be taken private or become a potential buy out target for one of the bigger automotive supply companies.

Competitors

The company faces stiff competition from the following three companies.

  • Magna International (MGA)-I talked about Magna a bit in my Core Molding Technologies (CMT) article and how I did not think that Magna was a major threat to CMT’s area of operations.  The story as it pertains to Strattec’s operations is different however.  Magna competes with Strattec in several of its product lines including the power access area and Magna appears to be a major player in those areas.  In 2009 Strattec bought the Power Access portion of Delphi’s business segment after it went bankrupt and renamed the unit Strattec Power Access.  For fiscal years ending 2012 and 2011, Strattec Power Access was profitable and represented $62.7 and $62.8 million, respectively of Strattec’s consolidated net sales.  Just for comparison Magna did $1.2 billion in sales just in its closure systems (power access) business in 2011.  Magna could present a problem for future growth of Strattec’s product lines as it will have to compete vigorously on price and quality for contracts.  It could also present a potential opportunity as with CMT, I could see Magna possibly buying out Strattec to expand its operations into more product fields.  This makes further sense since Strattec is such a small company in comparison to Magna and it being an $11+ billion market cap company.
  • Huf huelsbeck & fuerst-Huf and its various subsidiaries including Huf North America is a privately held company with operations worldwide and whose product lines compete directly with Strattec’s on almost every product around the world.  This company presents the same problem as Magna does to Strattec, but the same potential buy out opportunity exists as well.
  • Tokai Rika-This is a Japanese publically traded company who competes directly with Strattec on several products and who also has operations around the world.  Tokai Rika, like the two companies mentioned before, also dwarfs Strattec in size which could present problems to Strattec’s growth.

Strattec faces much stiffer competition from multiple much bigger competitors, sometimes directly on the same products than CMT did, who I thought carved out a bit of a niche in its industry.

Strattec’s Margins

Gross Margin TTM 18.50%
Gross Margin 5 Year Average 15.32%
Gross Margin 10 Year Average 18.25%
Op Margin TTM 6.20%
Op Margin 5 Year Average 0.44%
Op Margin 10 Year Average 5.18%
ROE TTM 12.11%
ROE 5 Year Average 3.59%
ROE 10 Year Average 9.91%
ROIC TTM 11.90%
ROIC 5 Year Average 3.49%
ROIC 10 Year Average 9.85%
My ROIC Calculation With Goodwill 25.90%
My ROIC Calculation With Goodwill If EBIT% Reverts to 3 Yr Avg 15.41%
My ROIC Calculation Without Goodwill 25.82%
My ROIC Calculation Without Goodwill If EBIT% Reverts to 3 Yr Avg 15.37%
FCF/Sales TTM 2.25%
FCF/Sales 5 Year Average -3.49%
FCF/Sales 10 Year Average 1.71%
Cash Conversion Cycle TTM 54.43 days
Cash Conversion Cycle 5 Year Average 48.97 days
Cash Conversion Cycle 10 Year Average 42.42 days
P/B Current 0.9
Insider Ownership Current 7.82%
My EV/EBIT If EBIT% Reverts to 3 Yr Avg 5.77
My EV/EBIT Current Unadjusted 3.43
My TEV/EBIT If EBIT% Reverts to 3 Yr Avg 8.09
My TEV/EBIT Current Unadjusted 4.81
Working Capital TTM $46 million
Working Capital 5 Yr Avg $48.6 million
Working Capital 10 Yr Avg $60 million
Book Value Per Share Current $25.25
Book Value Per Share 5 Yr Avg $24.54
Book Value Per Share 10 Yr Avg $24.78
Float Score Current 0.53
Float Intensity 0.77
Debt Comparisons:
Total Debt as a % of Balance Sheet TTM 0.88%
Total Debt as a % of Balance Sheet 5 year Average 0.66%
Total debt as a % of Balance Sheet 10 year Average 0.33%
Current Assets to Current Liabilities 1.79
Total Debt to Equity 45%
Total Debt to Total Assets 22%
Total Obligations and Debt/EBIT 2.1
Total Obligations and Debt/EBIT If EBIT Reverts To 3 Yr Avg 3.53

All numbers were taken from Morningstar or Yahoo Finance unless otherwise noted.  Final four debt calculations are including total debt and obligations.

Margin Conclusion Thoughts

  • The very first thing that popped out to me from the above margins is that across the board Strattec has improved its margins, sometimes by multiple percentage points, in comparison to its 5 year and 10 year averages.  Looks like the restructuring that took place during the recession, the various joint ventures including the VAST Alliance, and branching out to new product lines has helped the company immensely.  Improvements in operating margin, ROE, and ROIC have all been especially impressive
  • My ROIC calculations make the company look even better as even if Strattec were to revert to its 3 year average EBIT, which I don’t think it will unless another recession happens, I am estimating it to have an ROIC of 15.37% without goodwill.  If Strattec is able to keep up its EBIT margin to current levels I estimate that without goodwill its ROIC is 25.82%, an astounding ROIC margin.
  • Also positive as it pertains to ROIC is that in Strattec’s case it is not being artificially inflated by high amounts of debt.
  • The cash conversion cycle has gotten worse over the years, meaning less efficiency in the company, which I generally do not like.  That is to be expected in a company that has expanded operations overseas though so no red flag there.
  • Its P/B ratio at 0.9 is less than half that of its industry P/B at 2 which means that at least on a relative basis Strattec is undervalued in comparison to its industry.
  • My current unadjusted EV/EBIT ratio estimate for Strattec is 3.43.  Unadjusted TEV/EBIT estimate is 4.81.  Generally I like to buy companies selling at an EV/EBIT ratio of 8 or less so again Strattec appears to be undervalued.
  • Even if Strattec’s EBIT margin were to revert back to its three year average, which as above I do not think it will do unless there is another recession, its EV/EBIT ratio is 5.77 and TEV/EBIT is 8.09, again undervalued or about fairly valued at worst.
  • Book value per share has grown slightly over time, and should grow further with its improved operations.
  • The company has minimal debt and even if we include its total contractual obligations and debt its total obligations/EBIT ratio is a paltry 2.1.  Much improved from some of the other companies I have evaluated and its current total debt and obligations should be nothing to worry about going forward.

Below numbers in graphs are taken from Morningstar.

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As you can see in the above graphs Strattec’s share price has not improved as its operations and sales have.  The last year Strattec had comparable margins to what it had this year is 2006, when Strattec was selling for between $33 and $50 a share. As I found after doing my valuations, which I will show below, I think Strattec should be selling somewhere in that range now.  Sales are actually almost $100 million more than they were in 2006, and margins should continue to improve as Strattec’s now worldwide operations and expanded product lines become more efficient.

Valuations

These valuations were done by me, using my estimates and are not a recommendation to buy stock in any of the companies mentioned.  Do your own homework.

Valuations were done using 2012 10K and 2013 first quarter 10Q.  All numbers are in millions of US dollars, except per share information, unless otherwise noted.

Low Estimate Of Intrinsic Value

Numbers:
Revenue:

284

Multiplied By:
Average 3 year EBIT %:

3.77%

Equals:
Estimated EBIT of:

10.71

Multiplied By:
Assumed Fair Value Multiple of EBIT: 8X
Equals:
Estimated Fair Enterprise Value of STRT:

85.68

Plus:
Cash, Cash Equivalents, and Short Term Investments:

12.94

Minus:
Total Debt:

1.5

Equals:
Estimated Fair Value of Common Equity:

97.12

Divided By:
Number of Shares:

3.3

Equals: $29.43 per share

Base Estimate Of Intrinsic Value

Assets:                  Book Value:                    Reproduction Value:
Current Assets
Cash And Cash Equivalents

16.3

12.94

Accounts Receivable (Net)

45.1

38.34

Inventories

25.5

15.3

Other Current Assets

17.1

8.6

Total Current Assets

104

75.18

Deferred Income Taxes

9.7

4.9

Investments In Joint Ventures

8.4

4.2

Other Long Term Assets

0.5

0

PP&E Net

47.6

28.6

Total Assets

170.6

112.88

Number of shares are 3.3

Reproduction Value

  • 112.88/3.3=$34.21 per share.

High Estimate Of Intrinsic Value

Cash and cash equivalents are 12.94

Short term investments are 0

Total current liabilities are 57.8

Number of shares are 3.3

Cash and cash equivalents + short-term investments – total current liabilities=12.94-57.8=-44.86

  • -44.86/3.3=-$13.59 in net cash per share.

Strattec has a trailing twelve month EBIT of 18.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X18=90+12.94=102.94/3.3=$31.19 per share.
  • 8X18=144+12.94=156.94/3.3=$47.56 per share.
  • 11X18=198+12.94=210.94/3.3=$63.92 per share.
  • 14X18=252+12.94=264.94/3.3=$80.29 per share.

From this valuation I would use the 8X EBIT+cash estimate of intrinsic value of $47.56 per share.

I discounted the cash a bit in the above valuations because about 55% of Strattec’s cash is in Mexico so if Strattec wanted to bring the funds to the US it would have to pay taxes on that portion of cash.

  1. Strattec is undervalued by 23% using my low estimate of value, which assumes that Strattec will revert back to its 3 year average EBIT margin, which as I stated above, I do not think will happen unless there is another recession.  This is the absolute minimum I think Strattec should be selling for.
  2. Strattec is undervalued by 33% using my base estimate of intrinsic value on a pure asset reproduction basis.
  3. Strattec is undervalued by 52% using my high estimate of intrinsic value with EBIT and cash at current levels.  Now that Strattec has restructured itself and made itself a worldwide company with expanded product lines and improved operations I actually think that EBIT should rise over time meaning Strattec’s intrinsic value could continue to grow and it would become even more undervalued.

Pros

  • Strattec has excellent management.
  • The company is undervalued by every one of my estimates of intrinsic value above and relative valuation estimates such as P/B, EV/EBIT, and TEV/EBIT.
  • Strattec restructured before and during the recession to cut costs, expand product lines, and became more efficient and less dependent on one single product line.
  • Strattec signed joint ventures, and created the VAST Alliance with two other companies that now allow Strattec to compete on a global scale.
  • Strattec’s margins have improved across the board in comparison to its 5 and 10 year averages and margins should continue to improve.
  • Sales have also been improving along with margins.
  • Strattec has almost zero debt.
  • Strattec management owns just fewer than 8% of the company.
  • Most importantly as it pertains to management is that I trust that they have shareholders best interests in mind.
  • Various value and small cap oriented funds own more than 50% of the company, including Mario Gabelli’s funds.
  • The VAST Alliance as a company should have its first profitable year this year which should help Strattec’s profitability even more.
  • My personal estimates of ROIC show that Strattec is even more profitable than I originally thought while looking at Morningstar’s numbers.
  • Strattec has a $25 million revolving credit facility if it wants to do any acquisitions, which the new CEO has said he will look into, or the $25 million could be used in an emergency situation if one arises.
  • Margins are not artificially inflated by debt so margins show a true picture of how Strattec is running.
  • Strattec has drastically reduced its share count in the past decade at what I think were good prices to be buying at.
  • Strattec is currently authorized to buy back more shares if it chooses to.
  • Strattec recently reinstated its quarterly dividend.

Cons

  • Strattec is highly dependent on only a few customers for its orders as General Motors, Ford, and The Chrysler Group combine for 68% of sales.
  • Strattec is highly dependent on how well the automotive industry and the overall economy as a whole are doing which can be seen in the above graphs.
  • Due to the cyclical nature of Strattec, if there is another recession or major problems in the auto industry again, its sales and profitability will be highly affected.
  • The company has some very stiff and much bigger competition.  The competition could possibly mean further price cuts on products in Strattec’s product lines if some kind of price war starts.
  • Due to competition and the overall cost reduction plans put into place by the big automotive companies, Strattec has had to drop prices on its products in recent years.
  • At this point I do not see any kind of long term sustainable competitive advantages within Strattec.

Catalysts

  • Since Strattec is very small in comparison to its competitors it could become a potential buy out candidate.
  • Strattec’s margins should continue to grow which could lead to the unlocking of value.
  • The new CEO Frank Karecji has said that he would like to do some kind of acquisition in the short term.
  • Strattec is authorized to buy back more shares.

Conclusion

With all of the above taken into account, I think that the absolute minimum Strattec should be selling for is $29.43 per share which assumes that Strattec’s EBIT margin will revert to its 3 year average.  I think that Strattec’s true intrinsic value is somewhere between $35 and $45 per share.  None of that is even taking into account that its sales and margins should continue to grow which would also grow the company’s intrinsic value.

The company does face some headwinds to future growth as I outline above, the biggest ones in my opinion is that Strattec has to compete with various bigger companies and I do not see any kind of long term sustainable competitive advantages within the company.

Normally I would want some kind of sustainable competitive advantage within a company that I am buying as a long term value hold, but at current valuations, with Strattec’s good and rising margins and other factors listed throughout the article, I think the risk/reward is in my favor by a substantial margin and I have already bought shares for my personal account and the accounts I manage making this only the fourth company I have bought into this year.

*Repost* Wendy’s: Great Fast Food, Bad Investment

*Repost* Wendy’s: Great Fast Food, Bad Investment

About a month and a half ago I wrote an article stating that I believe Jack In The Box to be overvalued despite the recent positive hype around the company.  Lately I have been researching Wendy’s $WEN because it has had JACK’s opposite problem; very negative recent press and wanted to see if this might turn out to be a potential contrarian value play or a value trap.

I will be referencing and comparing Wendy’s to Jack In The Box and the other fast food companies I wrote about in my $JACK article so if you would like to see how Wendy’s compares to other fast food companies please reference my JACK article that I link to above.

Wendy’s Overview

Wendy’s is an owner, operator, and franchiser of 6,543 fast food restaurants, 1,447 of the restaurants are owned directly by Wendy’s with the remaining amount owned by franchisees.  Wendy’s offers hamburgers, chicken sandwiches, salads, wraps, fries, and the rest of the typical fast food restaurant offerings but at a higher quality profile than most of its other fast food competitors.  Higher quality also leads to higher prices for its individual product offerings and meals which greatly affected the company during the recession with customers generally looking for cheaper food.  In the past several years to combat the low cost offerings of its competitors, Wendy’s has brought out its own value and extra value menus with prices generally under $2 per item.

Since the recession Wendy’s has streamlined operations by selling off its Arby’s subsidiary, enacting cost cutting measures,  updating its menu to offer new products including breakfast at some locations, and has started reimaging some of its restaurants by starting its Image Activation Program.  The program has been put into place to update its restaurants making them look more modern, offering more amenities to get customers to stay longer at its restaurants, and making the food ordering and cooking process more efficient so customers can get their food faster.

Unlike JACK who has recently finished up its reimaging of its restaurants and who should see at least small margin growth due to lower capital expenditures, Wendy’s has only just started this process with only a few dozen restaurants having been updated thus far.  Wendy’s hopes that by 2015 about half of its company owned restaurants will be reimaged so this process is going to take a while.  As we saw with Jack In The Box that will lead to generally higher cap ex for the foreseeable future, most likely lower or stagnant margins, possibly more debt, and potential loss of sales due to having some of its restaurants closed for construction periods of as long as eight weeks currently.

Valuations

These valuations are done by me and are not a recommendation to buy stock in any of the following companies mentioned. Do your own homework.

All numbers are in millions of US dollars, except per share information, unless otherwise noted. The following valuations were done using its 2011 10K, 3Q 2012 10Q, and its 3Q 2012 investor presentation slides.

Asset Reproduction Valuation

Assets: Book Value: Reproduction Value:
Current Assets
Cash And Cash Equivalents 454 454
Accounts Receivable (Net) 65 55
Inventories 12 8
Prepaid Expenses & Other Current Assets 32 16
Deferred Income Tax Benefit 95 48
Advertising Funds Restricted Assets 75 50
Total Current Assets 734 631
Properties 1241 745
Goodwill 877 439
Other Intangible Assets 1315 658
Investments 118 89
Deferred Costs & Other Assets 57 29
Total Assets 4340 2591

Number of shares are 390

Reproduction Value:

With goodwill and intangible assets:

  • 2591/390=$6.64 per share.

Without goodwill and intangible assets:

  • 1494/390=$3.83 per share.

EBIT and Net Cash Valuation

Cash and cash equivalents are 454

Short term investments are 0

Total current liabilities are 344

Number of shares are 390

Cash and cash equivalents + short-term investments – total current liabilities=454-344=110.

  • 110/390=$0.28 in net cash per share.

WEN has a trailing twelve month EBIT of 120.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X120=600+454=1054/390=$2.70 per share.
  • 8X120=960+454=1414/390=$3.63 per share.
  • 11X120=1320+454=1774/390=$4.55 per share.
  • 14X120=1680+454=2134/390=$5.47 per share.

TEV/EBIT and EV/EBIT Valuation

Total enterprise value is market cap+all debt equivalents (including the capitalized value of operating leases, unfunded pension liability, etc) -cash-long term investments-net deferred tax assets.

  • TEV/EBIT=3310/120=27.58
  • TEV/EBIT without accumulated deficit counted=2833/120=23.61
  • Regular EV/EBIT=2946/120=24.55

The average EV/EBIT in the fast food industry that I found when analyzing JACK was 15.68 and the only company to have a higher EV/EBIT than Wendy’s is Chipotle Mexican Grill $CMG which had an EV/EBIT of 26.53.

I usually like to buy companies that have an EV/EBIT multiple under 8 so the fast food industry as a whole appears to be massively overvalued to me.  Not only that but Wendy’s current EV/EBIT multiple is comparable to Chipotle’s which generally has very high margins, which is exactly the opposite of Wendy’s.  As we will see later Wendy’s margins do not even come close to Chipotle’s and are generally much worse than even the rest of the fast food companies margins, so its extraordinarily high EV/EBIT multiple is astounding and I will explain later why it is so high.

I also did my normal other valuations but they did not work because after you take out the company’s debt and or goodwill and intangibles from the other valuations you get negative estimates of intrinsic value for Wendy’s equity.

Margin comparison

Please reference my JACK article above to see my thoughts on each of the other company’s margins as I will only be commenting in this article about Wendy’s margins.  The below chart has been updated to include Wendy’s margins for comparison to the other fast food companies.  The industry averages are still only including the previous five companies I talked about.

All numbers in the table were put together using either Morningstar or Yahoo Finance.

Jack in the Box (JACK) Sonic Corp (SONC) McDonald’s (MCD) Yum Brands (YUM) Chipolte Mexican Grill (CMG) Company Averages Wendy’s (WEN)
Gross Margin 5 Year Average 16.28% 34.30% 37.94% 26.20% 24.28% 27.80% 25.70%
Gross Margin 10 Year Average 17.08% 43.38% 40.42% 35.59% 11.73% 29.04% 39.86%
Op Margin 5 Year Average 7.46% 16.24% 27.42% 14.22% 12.76% 15.62% -1.70%
Op Margin 10 Year Average 7.07% 18.05% 22.62% 13.50% 6.64% 13.57% 0.21%
ROE 5 Year Average 20.16% 66.33% 30.26% 131.56% 18.55% 53.37% -6%
ROE 10 Year Average 18.77% 43.71% 23.19% 105.85% 10.27% 40.36% -4.68%
ROIC 5 Year Average 11.17% 3.38% 17.38% 24.97% 18.49% 15.08% -3.77%
ROIC 10 Year Average 10.91% 8.97% 13.37% 23.54% 10.22% 13.40% -2.45%
FCF/Sales 5 Year Average -0.26% 6.48% 15.90% 7.70% 6.92% 7.35% 1.07%
FCF/Sales 10 Year Average 0.80% 7.10% 12.86% 6.70% 2.26% 5.94% -3.74%
Cash Conversion Cycle 5 Year Average 0.78 1.23 0.91 -36.35 -5.24 -7.92 -4.18
Cash Conversion Cycle 10 Year Average 0.27 1.14 -1.22 -49.02 -5.21 -10.81 -4.53
P/B Current 2.9 12.4 6.7 14.3 8.2 8.9 0.9
Insider Ownership Current 0.38% 6.12% 0.07% 0.50% 1.64% 1.74% 6.83%
EV/EBIT Current 14.25 9.65 12.16 15.81 26.53 15.68 24.55
Debt Comparisons:
Total Debt as a % of Balance Sheet 5 year Average 30.78% 80.91% 35.28% 45.24% 0 38.44% 34.03%
Total debt as a % of Balance Sheet 10 year Average 26.84% 50.77% 35.22% 40.72% 0.14% 30.74% 38.58%
Current Assets to Current Liabilities 1.02 1.38 1.24 0.97 4.13 1.75 2.13
Total Debt to Equity 1.03 9.69 0.97 1.6 0 2.66 0.81
Total Debt to Total Assets 30.50% 71.20% 41% 37.21% 0 35.98% 36.87%
Total Contractual Obligations and Commitments, Including Debt $2.6 Billion $1 Billion $27.20 Billion $11.42 Billion $2.20 Billion $8.88 Billion $1.9 Billion
Total Obligations and Debt/EBIT 21.67 8.85 3.15 5.4 5.82 8.98 13.33

As you can see from the above margin comparison, Wendy’s margins are almost all quite a bit worse or at best about even with industry averages in comparison to its fast food competitors.  Even if we were to exclude Wendy’s absolutely horrible 2008 from its numbers, its margins are still quite a bit lower than its competitors.

Especially of note are the horrible in comparison to its competitor’s margins: ROIC, ROE, FCF/Sales, EV/EBIT, and Total obligations and debt/EBIT ratios, which are all a lot worse than its competitor’s ratios.  Wendy’s EV/EBIT is especially inflated due to its high amount of debt in comparison to its profitability which is why it has a comparable EV/EBIT to the much higher margin Chipotle.  My calculations of ROIC are a bit different than Morningstar’s numbers and help out Wendy’s a bit, but even at 5.4% without goodwill and 3.85% with goodwill those numbers are still generally quite inferior to its competitors.

About the only thing that Wendy’s has in favor for itself out of the entire above table is that its P/B ratio of 0.9 is a lot lower than its competitors.  A P/B ratio that low generally means that the company could be undervalued. That P/B ratio in this case is a bit of a farce because goodwill and other intangible assets make up the vast majority of current book value as just those two combine for an estimated $2.2 billion in value.  After subtracting goodwill and intangible assets tangible book value is actually negative.  The $2.2 billion is actually more than the current market cap so I think that it is fair to say that those values are probably massively overstated and may soon have to be restated or written down to a more reasonable level, thus eliminating some further perceived value and bringing the P/B value up closer to its competitors.

I also think that Wendy’s debt levels and costs are too high in comparison to its profitability as 83% of operating profit (EBIT) goes to interest expenses.  Costs and other expenses, not including interest expense and loss on extinguishment of debt, take up 95% of total sales.  Other expenses include general and administrative, depreciation and amortization, etc.  If you include interest expenses and loss on extinguishment of debt that takes total costs and expenses over 100% of sales, which is why Wendy’s recent earnings have been negative.

Pros

  • Pays a dividend and recently upped it 100%.
  • After a lot of the stores are reimaged margins should improve due to lower cap ex and higher same store sales.  Of the stores that have thus far been reimaged Wendy’s says they have seen 25% increases in sales.
  • Has positive net cash.
  • Has a good amount of cash on hand.
  • Same store sales have risen for 6 straight quarters and a total of 2.3% in the past 9 months.
  • Wendy’s has recently paid off some of its 10% coupon debt by taking out lower interest debt, which should lead to lower interest expenses going forward.
  • Wendy’s recently overtook Burger King as the second biggest fast food burger chain.
  • Owns a lot of its restaurants and the property underneath the buildings so Wendy’s does hold some valuable assets in case it has some problems.
  • Just fewer than 80% of its restaurants are owned by franchisees that pay a 4% royalty to Wendy’s.  Collecting franchise royalty fees is a very high margin business.
  • The company produces positive FCF excluding cap ex.

Cons

  • Wendy’s is overvalued by every one of my valuations, sometimes in extreme cases, except when including the massive amount of goodwill and intangible assets.
  • Wendy’s margins overall are generally a lot worse than its fast food competitors.
  • Book value is only positive because of goodwill and other intangible assets.
  • The company has had recent negative earnings.
  • 83% of operating profit went to interest expense.
  • The company’s equity has negative value after subtracting goodwill and intangible assets on various valuations.
  • The company has been buying back a lot of stock at what I think are overvalued prices.
  • The company’s debt levels and costs are too high in my opinion in comparison to its profitability levels.
  • Wendy’s will have higher cap ex for the foreseeable future due to the reimagining of its stores.
  • The reimaging of Wendy’s stores could be going on for at least a decade if not more as it hopes to have around 750 stores reimaged by 2015 leaving around 5,750 stores to be reimaged after that, not including new stores that are opened by Wendy’s itself or its franchisees.
  • Cap ex this year has been around $225 million and will likely stay close to that elevated level for many years due to the reimagining of its stores and which should either lead to lowering or stagnating margins for the foreseeable future.
  • The company has negative FCF when including cap ex.
  • This year the company spent $126 million in cash on cap ex with the remaining $99 million coming from other sources.  To me that means Wendy’s will have to either increase its margins and FCF to pay the remaining cap ex costs, or more likely it will continue to have to issue debt to fund the reimaging of its stores.
  • While sales have been rising within Wendy’s, costs have also been rising at about the same amount which is why margins have not been increasing much as sales have improved.
  • The company has quite a few, what seem to me questionable related party transactions within the company, including with Mr. Peltz (former Wendy’s executive and current chairman) and Trian Partners the investment fund Mr. Peltz has formed with a couple Wendy’s other board members.
  • Just one example of the questionable transactions is that Wendy’s paid just under $640,000 in security costs for Mr. Peltz who is a billionaire and could easily pay these costs himself.
  • Trian Partners currently owns just under 25% of Wendy’s and has three members on Wendy’s board of directors so Trian could exert a lot of pressure on Wendy’s if it saw fit to do so.
  • Due to some of the what seem to me to be questionable transactions; I do not trust management to do what is right for shareholders and to increase shareholder value.

Potential Catalysts

  • The reimaging of its stores will most likely eventually lead to margin and sales growth.
  • If Wendy’s can get its costs under control, which it is trying to do now, it could achieve some margin growth.
  • In my opinion Wendy’s has overstated its goodwill and other intangible assets and may have to restate or write down some of the value of each.  Wendy’s warns it may have to do this in its most recent annual report, which would lead to less perceived value in the company, and would probably drop the price of the stock further.

Conclusion

Wendy’s has recently overtaken the number two spot for hamburger fast food chains in the United States from Burger King.  Growth in this case appears to be bad for shareholders as its costs have been rising about in line with sales which are why margins have not seen much growth as Wendy’s sales have been growing.  Wendy’s margins are also generally quite a bit worse than its other fast food competitors, in my opinion its debt levels and costs are too high, and I do not trust its management to do what is right for shareholders.

Wendy’s appears to be destroying shareholder value with its high costs and debt levels, buying back its stock at overvalued prices, and continuing to grow its restaurant count and sales but not improving its margins.  Because Wendy’s margins have not improved as sales have been rising, it looks like Wendy’s is growing at less than its cost of capital which in my opinion has led to value destruction for shareholders.  The destruction of shareholder value will not reverse unless Wendy’s can cut its costs and debt levels and or improve profitability which probably will not happen for a while due to some of the reasons stated above.  Unless something drastic happens, in my opinion shareholders of Wendy’s stock can only look forward to further value destruction of their shares into the future.

Having stated all of the above I would estimate Wendy’s intrinsic value to be my 5X EBIT and cash valuation of $2.70 per share.  Due to all of what I stated in the above article I do not think that Wendy’s is even worth its reproduction value and I would not even be a buyer of the company at my $2.70 per share estimate of value.

Even if Wendy’s margins and sales do rise after reimaging of its stores, which should happen, that will not take place for many years as Wendy’s has only recently started to reimage its restaurants.

I hope I am wrong about Wendy’s because food wise it is by far my favorite fast food restaurant.  I hope it can fix its problems, and hope that it starts to thrive as a company.  However, as an investment I think Wendy’s is the proverbial value trap and I plan to keep my investment funds far away from the company.

*Repost* Car Wash Psychology, Mental Models, And The Power Of Habit

*Repost* Car Wash Psychology, Mental Models, And The Power Of Habit

Getting back from a 33 hour drive across the country left me exhausted.  But I had one thing left to do before resting.

I had to wash my truck…

From the salty and sticky humidity of South Florida.  Through the rain, snow, and ice of Tennessee and Kentucky.  Then the dry wind of Iowa and South Dakota.  And all the bugs and dirt between.  My truck was a disaster after a 33 hour drive through nine states.

Why did I have to wash my truck when I got home?

Because several weeks before this I’d read a psychology and marketing case study about car washes. And I wanted to see if it was true or not.

Exhausted from the three-day drive across country. I waited at the car wash and marveled at the surprising beautiful March day in Western South Dakota.

Instead of negative wind chills. High wind. And blizzards that are common at that time of year here. I came home to a cloudless sunny sky. And 70 degree temperatures.

It was a perfect day to wash my truck. But after getting it into the car wash bay I worried that I’d made a mistake.

Why?

Because of marketing, psychology, and habit.

But we will get back to this later…

Building Worldly Wisdom and A Latticework of Mental Models

Why am I talking about marketing, psychology, and habit on a value investing blog?

As a contrarian deep value investor, I’m always looking for ways to gain legal advantages over other investors.  Most of the time this involves working hard.  But sometimes it also requires the ability to think well.

To think better I study a lot of topics.  And follow Charlie Munger’s teachings about gaining Worldly Wisdom.  And building a latticework of mental models.

One of the areas I’ve spent a huge amount of time studying is human psychology. Trying to figure out  why we do what we do.  And what makes us tick to become a better investor.

How To Get People To Buy Things

I know a lot about how to analyze businesses for potential investment.  So when I got hired by the investment newsletter I was not only excited to write an investment newsletter.  But I also looked forward to learning about the investment newsletter business.  And everything associated with it including psychology and marketing.

If I wasn’t at work.  At the beach.  Sleeping.  Or working at home.  I was reading anything I could about marketing and how to improve my writing.  But for this post I want to talk about some of the things I learned about marketing…

Marketers Rule The World

Did you know that shampoo doesn’t have to foam to clean your hair?  What was Listerine used for before marketers got involved?  Did you know that Febreze was a failure until marketers used psychology and habit to market it?  And does your car get cleaner when you upgrade to the “Super Wash.”

I will answer these questions below.  And also answer how marketers use psychology to get us to develop habits.  And buy products.

Shampoo

Below is a marketing case study from Procter & Gamble brand Herbal Essences.  Which before marketers revamped it was floundering.  Emphasis is mine.

I also changed some of the wording to shorten things.  For the full transcript go to this link.

When Procter & Gamble acquired hair-care company Clairol in 2001, it inherited a floundering shampoo brand. By 2004, Herbal Essences was in a “long-term decline,” reports Chairman and CEO A.G. Lafley.

Marketed to all women the line had gone stale, with little distinction from the many competitors it shared on the drugstore shelf.

By 2006, Lafley and P&G’s beauty business chief, Susan Arnold, knew something had to be done with the tired brand.

To find the right new, smaller target market for the brand, Arnold and her team turned to marketers.

There, the team came up with a new target audience for the brand—Generation Y. “In the case of Gen Y, there really wasn’t another hair-care brand that was really meeting their needs,” says Lafley. “The question was: ‘Can Herbal do it?'”

Arnold’s team bet yes. They redesigned the packaging of the product to “fit” this more tailored market: The shampoo and conditioner bottles are curved so that they literally fit together on the shelf. The nesting shape not only helped Herbal Essences stand out from others on the shelf but also encouraged more young women to buy both products, driving up conditioner sales.

To appeal to Millennials, the team also updated the language on the packaging. The ho-hum “dandruff” reference gave way to “no flaking away.” Names for different hair styles were changed to more youthful phrases such as “totally twisted” or “drama clean.” “We totally reframed the proposition,” says Lafley.

P&G made Herbal Essences more relaxed and more quirky, all in the language of young women.

Marketers used psychology and habit to turn this floundering line into a billion dollar plus brand.  And Herbal Essences parent Clariol now controls an estimated 39% of the entire hair care market.

For further information on the revival of Herbal Essences look at this infographic.

Oh and to answer the above question…  The chemical sodium lauryl sulfate was added to shampoo to foam and bubble.  It’s not necessary in shampoo.  And it doesn’t affect how well the shampoo cleans your hair.

Shampoo makers added the foaming agent for marketing and psychology purposes. To help sell product and build habit.

I will explain this more later.

Oh and the foaming ingredient is also what irritates your skin and eyes.  So thank marketers for your dry skin.  And eye pain when washing your hair.

Listerine The Antiseptic

Did you know Listerine was a deodorant and after shave.  A brand of cigarettes.  And used to treat gonorrhea and cuts before becoming a mouth wash?

Below is one of the ads used to promote Listerine after it launched..

But by focusing on cuts, scratches, and gonorrhea Listerine was a failure.

Then marketers got involved.  Made bad breath a terrible thing.  And launched a $317 million brand as of 2013

Until that time, bad breath was not conventionally considered such a catastrophe. But Listerine changed that. As the advertising scholar James B. Twitchell writes, “Listerine did not make mouthwash as much as it made halitosis.” In just seven years, the company’s revenues rose from $115,000 to more than $8 million. From Wikipedia

Instead of saying Listerine will help keep your cuts from becoming infected.  Marketers found out that Listerine also helped get rid of bad breath.  And they used the second ad above to illustrate the point.

Listerine marketers made having bad breath a terrible thing.  Up to that point this wasn’t awful.

In the second ad above marketers said that if you have bad breath you won’t get married.  But if you use Listerine on a regular basis – making it a habit – not only will you get rid of bad breath.  But it will also help you get the guy or girl of your dreams.

So marketers used psychology and habit to help get rid of smelly hair and breath.  What other smells have marketers helped us get rid of?

Febreze The Failure

The below quoted area is from Wikipedia.  Emphasis is mine.

The product, initially marketed as a way to get rid of unpleasant smells, sold poorly until P&G realised that people become accustomed to smells in their own homes, and stop noticing them even when they are overpowering (like the smell of several cats in a single household).

The marketing then switched to linking it to pleasant smells and good cleaning habits instead, which resulted in a massive increase in sales.

Only after the product became well established in the marketplace did the marketing go back to emphasising odor elimination properties as well.

They have advertised it so that people use it for cleaning, and for designing the house air.

Febreze was a failure when it launched.  Even after Procter and Gamble – one of the best product launch companies in the world – spent millions of dollars to promote it.

Febreze didn’t become the huge success it is until P&G figured out how to market it to us.  And they’ve done a great job… Febreze is now a billion dollar plus brand.

For more information on how marketers used psychology and habit to change Febreze from a flop to a billion dollar brand go here.

Now let’s get back to the story at the beginning of this post…

Car Wash Psychology

So why was I so eager to get my car washed when I got home from my 33 hour cross-country trip.  And how did marketers make me think I’d made a mistake when selecting my car wash?

A few weeks before my trip I was reading about marketing and psychology to improve my knowledge in those areas.  And came across a case study about the car wash industry.

The case study detailed how car washes get us to upgrade to the higher end washes so they make more money.  But the thing that struck me like a brick was that the different color bubbles in the car wash don’t do anything to clean or wax your car.

The colored bubbles only make us think they wash better

The car washes add colors to the bubbles of the higher end washes to make us think they are doing something.  It’s a clever way marketers – in this case the car wash – affects our psychology to get us to upgrade.  But it also builds habits as well.  And habits are what marketers use to get us to buy stuff.

The Power Of Habit

The Power of Habit is an amazing book.  And I agree with Mr. Pink above.

It’s changed the way I think about how I parent.  My investment processes.  Psychology.  And how I do everything in my life.  In short I cannot recommend that you read this book enough.

Below is author Charles Duhigg explaining in a three-minute video how we develop habits.  And how to break bad habits.

The Combined Power of Psychology, Marketing, and Habit

So now let’s get back to why I worried at the beginning of this story.

After my trip I decided to do a little experiment to see if the car wash case study I read was full of crap.  Or if it was right and car washes were using psychology and habit to get us to upgrade to stuff we didn’t need.

When I got to the car wash I picked the basic wash without the colored bubbles to see if the case study was right.  But when I got into the wash I started to worry that I’d wasted my money.

Ever since I was little everyone always told me to upgrade to the “better” car washes.  If I didn’t my car wouldn’t get clean and I would have to wash my car again.

So even though I knew that the upgraded car washes weren’t necessary after reading the case study.  And doing further research to confirm the findings.  As I sat in the car wash bay with the water and soap running over my truck.  I began to worry that I’d wasted my money when I didn’t see the colored bubbles washing my truck.

Marketers have incredible power when they combine psychology and habit when selling stuff…

Even though I knew the colored bubbles were a marketing tactic.  I still worried that I was wasting money.

So the longer I sat there the more anxious I got to see if the basic wash worked…

After I got through the air dryer I got out of my truck to see if I wasted my money or not.

With the water still beading off my red Dodge Ram 1500 I saw that the basic wash got all the salt, dirt, bugs, snow and rain water spots off my truck.  And my truck was as clean and shiny as the day I bought it.

Seeing this brought a smile to my face knowing that I learned some powerful lessons about marketing, psychology, and habit.  Built my latticework of mental models and worldly wisdom up.  And got a bit closer to achieving my goals as an investor, teacher, and entrepreneur.

Still smiling knowing I learned something valuable, I drove my clean truck home and slept for the next 16 hours.

And I’ve shared this story in the hopes that it will help you in some way too.

What quirky mental models, worldly wisdom, or aspects of psychology have you learned that blew your mind when you first saw them?

Please share below in the comments.

***

Want more information on how marketers use psychology to get us to buy stuff…  Go here.  It looks like an entire college level course about marketing and consumer market psychology.

And if you want to read more about Mr. Munger’s thoughts on psychology and how to think better, read his speech Psychology of Human Misjudgment.

Or watch the 76 minute talk below from YouTube.

This is the best thing I’ve ever read about psychology.  And how to become a better thinker.

***

Don’t forget, if you want to receive two free gifts that will help you evaluate companies faster.  Get all future blog posts. And be entered to win a hard copy of: The Snowball – Warren Buffett and the Business of Life and a $50 AMEX gift card. Sign up for the Value Investing Journey newsletter here.

*Repost* Warren Buffett And Charlie Munger Are Failures

*Repost* Warren Buffett And Charlie Munger Are Failures

I’m on vacation right now so I’m reposting some of the most popular articles from the blog until I get back on Monday August 3rd.

On Failure Part Two

I wrote a version of this post a few days after leaving my job almost a month ago and planned to keep it private.  But it helped me get over losing my job.  And helped me get over the anger, sadness, depression, fear, and other emotions I felt.  So I’ve decided to share it with everyone.

Rough times happen to everyone from time to time.  But destructive thoughts if left unchecked can lead to bad things.  I’m sharing this post in the hopes of helping someone else who may be going through their own rough times.

But I’m not the best resource to learn from on failure… Let us learn from a couple masters who both failed before making billions of dollars.  And helping millions of people around the world.

Warren Buffett and Charlie Munger Are Failures

Warren Buffett’s biggest failure is now his biggest triumph.  And he uses this “failure” to help millions of people throughout the world.

One of Charlie Munger’s first major investments failed.  But he used that “failure” to become rich and help the world too.

I have failed.  And I will now use this “failure” to help make the world a better place like Buffett and Munger did.

But before we talk about that we need to talk about three major failures.

Warren Buffett’s a Failure

File:Warren Buffett KU Visit.jpg

In the 1950’s and 60’s Warren Buffett started an investment partnership with $100,000 of his own money.  And money he raised from family and friends.

Over time he built the firm by buying portions of smaller companies whose prices were cheap.  He did this so well that soon after starting he was able to buy entire companies instead of just portions of them.

But he soon failed…

Berkshire Hathaway Is a Failure

The original Berkshire Hathaway was a textile company based in New England.  When Buffett took it over no matter what he did the company continued to lose money.  This was because new and cheaper foreign and non union Southern US companies made it impossible for Berkshire to compete on price.  This led to the company losing millions of dollars over the years after Buffett bought it.

As this continued for years Buffett came to realize he was fighting a losing battle.  And instead of continuing to pour money into Berkshire and letting the business fail.  He used this money to buy companies that would make money instead.

He started buying smaller insurance companies.  And used the excess funds from these insurance companies – insurance float – to buy even more profitable and undervalued companies.

In doing this he turned his original $100,000 investment funds into the $357 billion behemoth it is now.  Today Berkshire is one of the biggest companies in the world.  And it owns some of the most valuable companies and brands on Earth.

But by his own admission he wouldn’t have done as well without teaming up with another failure.

Charlie Munger Is a Failure

File:Charlie Munger.jpg

Charlie Munger was first a high profile lawyer.  And then a property developer in California before becoming a full time investor in his late 30’s.

His fund did well for years as he built up the companies assets.  And one of his first major investments was in a company called Blue Chip Stamps.

It was a stamp trading company that also produced a lot of float. For example, if you gained 100 stamps you could exchange the stamps for a prize like a vacuum cleaner.

When Munger bought Blue Chip it was growing and producing a lot of excess cash.  At its peak in 1970 Blue Chip generated $126 million in sales.

But Munger recognized a problem a few years after buying Blue Chip.  Sales began to decline fast.  And nothing Munger did stemmed the tide of falling sales

Instead of letting it fail he used the excess funds from Blue Chip – which was still profitable while sales fell – and used these funds to buy other companies.  He eventually bought Wesco which is an insurance/financial company.  And used the float from this business to buy ever bigger stakes in profitable and undervalued companies.

Sound familiar?

By this time Buffett and Munger had met, exchanged ideas on a regular basis, and were friends.  But they still didn’t work together.

Munger did such a great job running Blue Chip that Buffett bought Blue Chip and merged it into Berkshire Hathaway and then a change occurred.

The Change of Mindset

Buffett has said when this happened, Munger helped change the way Berkshire invested its growing cash machine.  Instead of concentrating on just cheap companies that weren’t great businesses.  They turned their focus to companies that were cheap or fairly valued.  But now concentrated on good to great businesses.

***

Side note on the book Mindset.

I first read the book Mindset after seeing Erik Spoelstra – multi time championship coach of the Miami Heat – recommend it.

It’s a phenomenal read.  And while I read this before the problems I had at my job.  The lessons I learned reading Mindset helped me cope with losing my job.

I cannot recommend Mindset enough not only for coping.  But also for teaching lesson on how to get into the proper “championship” mindset.

If these kinds of lessons interest you I also recommend The Obstacle Is The Way.

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Due to this combination of minds.  The change in mindset.  And the power of compound interest, Berkshire exploded…

But we will get back to that later…

I Failed Too

After overcoming debilitating health issues that lasted for 10 years.  After teaching myself about investing.  Writing my own full length value investing education book.  And then being hired, I failed.

I thought my knowledge about how to analyze a company’s balance sheet and investment potential was all I needed… I was wrong.

I thought I had all the tools necessary to succeed but I didn’t.  Hard work can only get you so far…

Without the proper mindset, and in my case purpose, you will still fail no matter how hard you work.  And I don’t mean fail at your job.  I mean you will fail yourself.  Your principles.  And what you are striving to become and build.

Buffett and Munger’s Failures Are Now Helping The World

Buffett and Munger grew to become two of the wealthiest, most powerful, and respected people in the world.

Mr. Buffett who has been one of top three most wealthy people in the world for years has gained 98% of his $77 billion net worth after the age of 65.

And will give 99% of this fortune to the the Bill and Melinda Gates Foundation upon his death.

Charlie Munger is worth $1.3 billion.  And has already given hundreds of millions of dollars causes he supports.

Both men not only plan to give billions of dollars to causes they care about.  But the luxury of having all the money they do enables them to also give time to these causes as well.  This is far more important.

While I can’t speak for Mr. Buffett and Munger on their motivations.  I can speak for myself…

I wasn’t making an impact on anyone else’s lives other than my families.  And I failed myself and what I’m striving to build.  That changes now…

My Purpose is Helping Others

This is what I had to learn by leaving my prior company and coming back to this blog.

Together we can make not only the lives of our families betters.  But those of the rest of the world as well.

This is my purpose…

This blog will no longer be about improving my own knowledge.  It will be about teaching and improving others lives.

I have several projects that I will announce over the coming weeks.  All related to finance and geared towards helping and educating as many people as possible.

While I can’t reveal what they are yet since they aren’t finished.  I can tell you today that part of all sales from this blog will go towards helping, educating, and feeding kids and adults who need a hand up.

5% – to start – of all sales from this blog.  My book.  And all future unannounced projects will go to charities of my choosing in the Philippines.  And also to local charities in my area.

The percentage given will grow over time as me and my family become more secure financially.  And the scope of the charities will grow as well.  But this will be a great start.

Together we can make a difference in people’s lives.   Do great things.  And improve the world.

Mr. Buffett and Mr. Munger are going to help tens of millions of people with the money and time they’re contributing.

How many people can a blog and like minded people help?

Let’s find out in the coming years.

Are there any books, articles, sayings, or lessons that you’ve learned that have helped you when you’ve failed in the past?

If so please share with everyone below so we all can learn.

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