Building Wordly Wisdom, What I’ve Been Doing, And What I Am Doing

What I’ve Been Doing

As you may have noticed over the past several weeks/months I haven’t posted any company analysis articles.  Since finishing up and publishing the book in September I have been back searching for companies to write articles about and potentially to invest in.  Up to this point I have only been able to add companies to my watch list because everything I have found has been either crap or if it has been a company I want to invest in (some even with some substantial competitive advantages) have all been overvalued.  I have searched in countries around the world, on the OTC markets, at higher market caps than I usually look at, spin offs, ADR’s, etc and here are my observations thus far.  The following does not mean that I think the market will crash anytime soon.

  1. Every single company I have found that I want to invest in is overvalued.  Most just marginally but I did find a company in Japan that I estimated to be worth AT BEST $20 a share and it was selling for more than $100 a share.  Companies with some kind of competitve advantages that I have found and want to invest in are overvalued in comparison to the other cigar butt type companies that I will mention next
  2. The cigar butt type companies with high cash, low debt, marginal to poor profitability, no moats that I would invest in if they were undervalued enough have been up to this point generally fairly valued in my opinion.
  3. The companies that I have found to be undervalued enough for me to invest in have all been terrible companies with very low to no cash, high debt, severely declining businesses, unprofitable, Chinese companies, etc that I will likely never touch.
  4. Markets, or at least individual companies, around the world are in my estimation fairly valued or overvalued at least at the micro level.  I have searched in the US, Europe, Asia, and South America for companies to invest in and the companies around the world have all fit into one of the three above categories.  Most in the fairly valued to slightly overvalued range.

As you know if you have read this blog for any amount of time I like to put my money where my mouth is, buy the companies I find to be good investments, and write analysis pieces about them.  I haven’t even found any particularly egregious or interesting companies to write negative articles about either like I did with Wendy’s in 2012, and Koss last year.  The Japanese company I found and alluded to above was a very well run company that I would possibly invest in if it weren’t so overvalued so I didn’t feel a need to write negatively about them.

The reasons above are why I have not been writing more on this blog which I frankly hate to not be able to do but I will not write half-hearted, vague, non quality company analysis articles just to keep the flow of content going.  I also will not write my thoughts on other general investing, the process of investing, and other value investing topics because people like Oddball Stocks, Wexboy, CSInvesting, The Red Corner Blog, and others write much better than I can about those kinds of things.

Building Wordly Wisdom and What I Am Doing

In December I decided that I needed to stop banging my head against the proverbial valuation wall since I have now built up a watch list of around 25 companies.  Far more than I ever would invest in at one time and already far more than I want to keep track of at one time.  For the past two years I have spent nearly 100% of my time either learning about investing or writing the book.  Since December I have decided to spend about 50% of my time searching for companies, adding and discarding companies from my current watch list, so that only the best companies are on there when valuations do become better.  The other 50% of the time I have caught up on some much needed reading that I severely neglected over the last two years while I was building my value investing knowledge, investment processes, and writing the book.

The below has been done in the last three weeks and is an example of what I will continue to do while awaiting a market crash and investment opportunities.

4 books read:

  1. Poor Charlie’s Almanack
  2. Guns, Germs, and Steel
  3. Only The Paranoid Survive
  4. Tulipomania

~500 companies evaluated at at least a minor level, vast majority discarded as only 2% of companies I decided to do further research into.

10 company annual reports and financials read

5 companies valued.

4 companies added to watch list

The above list does not contain anything like articles that I have read on the internet.

In addition to this blog being about company analysis, teaching, and learning about value investing, it is also a bit of a journal so that I can keep track of things that I have done, learned from, and to look back to see where I could have improved.  In that vein I periodically plan to update the list above of things I have done to keep track of where I have been.

Until the market crashes I will be doing the above, as Mr. Munger puts its, building my wordly wisdom, among other things like posting links that I have learned from, and depending on how long it takes for the market to crash go back to learning Mandarin again.   I have a couple ideas in mind of things that I can do to learn and practice in the meantime and will share any of those if they come to fruition. I will also be giving away some of the books I have read and will announce the first giveaway soon.

For now though I am going to get back to my current research list of OTC’s and ADR’s.

Value Investing Journey Giving Back! And Attention To Educators Out There.

Value Investing Journey Giving Back!

Ever since my health issues started I told my wife than when I did start to make some money that I wanted to help needy families with a portion of that money.  With How To Value Invest coming out this year we have finally been able to do just that.

20131221_202408-1

 

The picture above are gifts for two very needy local families this year that my wife and I bought with some of the proceeds from my book sales.

This is just the start as we plan to make this a new yearly tradition with proceeds from any book sales and money made from this site going to help people in a lot of different ways in the future.  None of this would have been possible without you buying the book so thank you so much once again to everyone out there who has bought the book this year.

Attention To Educators Out There

If you are an educator out there and are interested in using How To Value Invest in your curriculum or as gifts to outgoing/graduating students.  I would love for you to contact me at jmriv1986@gmail.com.  If you order in bulk I will offer the paperback version of the book to you at only $2 above MY COST per book.  I will be making NO profit on any of these transactions as the entire proceeds from this will go directly to buying and shipping the books to you.

If you are an educator overseas we can work something out with the PDF version of the book if you are interested in this.  I will unfortunately not be shipping paperback books overseas due to the obscenely high costs of overseas shipping.  If you live overseas you can buy the paperback version through your countries Amazon site and it will ship to you at the normal price though.

The book is probably best for people of high school and college ages.  I would love to see the book used in classes around the world or as gifts to people who are interested in value investing so please contact me if you have any interest at all.

How To Value Invest Epilogue Excerpt: How Far I Have Come In Less Than Two Years Time of True Dedication To The Craft of Value Investing

Epilogue

“Rule number one: never lose money. Rule number two: never forget rule number one.”  Warren Buffett

I hope you have been able to see the progress that can be made in a short period of time because you can make the same progress if you follow the lessons of this book.  When I started to dedicate myself to getting better I tried to learn and implement as many new things as possible into every article as you probably noticed in the huge chapter on Altria.  After doing this for a while and getting a bit overwhelmed I decided it would probably be better just concentrating on adding or learning one new thing for each article written   I found that this was a much better way for me to do things as I improved much faster than when trying to learn many new things at once.  Going by this process I also noticed that my analysis was still concentrated, I was improving more, and the actual analysis articles got much better because I understood what I was doing better than when trying to learn multiple things at once.

The exact process of becoming a better investor is tough and when you first start, you will probably be doing a lot of things and concentrating in areas that you later will have no interest in.  Treat every company you research as a potential learning experience, try new things, and continue to constantly push for improvement.  Your investing journey will change drastically over time and it is a good thing if it does because it means you are pushing yourself to keep learning and improving.

As an example of how far you can come using the principles and techniques outlined in this book I want to show you how much I was able to improve in just one year once I dedicated myself to becoming an excellent value investor.  The following is my first ever stock “analysis” write up.  The information is completely unedited other than change of the font, size of font, some of the formatting, and a few typos.

Vodafone Group PLC, ADR, (VOD) info

All information taken from Morningstar.com, Vodafone’s website, fool.com, or Vodafone’s most recent annual financial report.

Overview:

With 343 million proportional customers (total customers multiplied by its ownership interest), including its 45% stake in Verizon Wireless, Vodafone is the second-largest wireless phone company in the world behind China Mobile. It is also the largest carrier in terms of the number of countries served. Vodafone has majority or joint control in 22 countries and minority or partnership interests in more than 150 total countries. The firm’s objective is to be the communications leader across a connected world.  They have four major markets that they break their financials into: Europe, Africa Middle East and Asia Pacific or AMAP, India, and the United States through a partnership with Verizon.

Pros:

  • Huge company operating in more than 150 countries making them more diversified and able to withstand drops in revenues and profits coming from a single region or country.
  • Generates huge free cash flows of at least $8.25 Billion in each of the last 8 financial years.  Free cash flow or FCF is basically the money that’s left over after expenses, dividends, payments, etc that the Vodafone can use as it pleases.  Generally VOD uses their FCF to increase their dividends, buyback their own stock, acquire other companies, or pay down debt.
  • Current dividend yield of 6.97%, the average company in the S&P 500 has a yield of around 2%.  Pays a semiannual dividend in June and November of each year.  Also receiving a special dividend from Verizon, $1 billion of which will go to paying down Vodafone debt, $3.5 Billion will go to pay a special dividend to Vodafone shareholders in January or February of 2012.
  • FCF/Sales ratio over 16% each year since the 2002 financial year.  Anything over 5% means they are generating huge amounts of cash.
  • Interest coverage ratio of 23.4, anything over 1.5 is good. Interest coverage ratio is how many times they can cover the payments of interest on their debt.
  • Payout ratio of around 50% for the dividend meaning the dividend should be safe for the foreseeable future.
  • Raising their dividend an average of 7% per year for the next 3 years.
  • Lower debt/equity than their industry competitors.
  • Growing a lot in Asia, Middle East, India, and parts of Africa.  Also still a lot of room to grow in those areas as they are relatively new to them, especially India.
  • Paying down debt with FCF.
  • Gross margin, net margin, and EBT margin all over 17% which is very good.
  • Still a lot of room to grow their revenue through people upgrading to smart phones and paying for data packages which they make more money off of then regular phones.
  • Executive pay is linked to how well the company does, and they encourage their executives and directors to own company stock.

Cons:

1. Still a lot of debt even though they are paying it down, around $40 Billion

2.  Most of Western Europe except Germany is having huge economic problems which have led to lower sales and profits in those areas.

3.  The fear or actuality of another global recession would hurt their sales and profits.

4.  Problems at Verizon which VOD owns 45% of would hurt future payments from Verizon to VOD.

5.  Most of their revenue is generated in Europe where as above, there are big financial problems.

6.  Since they are in so many countries they have to deal with many regulations and sometimes even lawsuits from other governments or companies in those countries.

Final Thoughts:

Overall I feel very good about Vodafone’s prospects to be a great investment for the long-term.  We are buying them when they are valued at a very good price, especially compared to their competitors. They have huge growth potential in India, a country that has over 1.3 billion people, as they have only penetrated that market by around 10%.  They are paying down debt, upping their dividends and receiving a special dividend from Verizon.  Even if their share price doesn’t go up over the next few years, which I believe it will by quite a bit, then we are still covered by the near 7% dividend that they are going to keep growing at least 7% a year for the next 3 years.  Also, with their huge FCF they can maybe pay down debt faster, acquire other companies to keep growing, pay more dividends, or buyback their stock.

As always if there are any questions let me know.  I believe we will all do well with this stock in our portfolios over the long-term.

Jason Rivera

Go back and compare this to any of the chapters in the book and the difference is shocking.  Shocking in how inadequate my thinking still was at this point where I was investing real money as most of the above you can tell was taken directly from financial sites and the companies own website, not exactly in-depth independent analysis on my part.  The reason I put my first ever write-up in this book is to illustrate how much better you can get in a very short time frame by using the principles and techniques outlined in this book and dedicating yourself to constantly improving.

If you do love value investing, have followed what has been shown to you in this book, have read from some of the sources that I have talked about and listed on my blog, and have the drive to continually improve yourself and get better, I guarantee that you will now be better at evaluating whether a company is a potentially fantastic investment better than most MBA’s and professional level investors without having to spend tens or hundreds of thousands of dollars at a big time university and saving years of time having to research all of this information for yourself.

Thank you so much for buying this book, good luck, and continue to work constantly at getting better and improving your processes.

I shared my first ever “analysis write up” last year during my year-end performance review and wanted to share it again to illustrate how far you can come by truly dedicating yourself to the value investing craft and continually learning and improving in a short amount of time.  With the things I teach in the book I hope the process will become even faster for you if you choose to go down this road.

Next week I will release the 2013 year-end review for my personal portfolio and the portfolios I manage.  The results were shocking to me since I only do a full performance review usually once a year.

If you have enjoyed this and other portions of the book I have released thus far please visit this page to buy the book and to see the now four reviews, all of which are 5 stars, that the book has received thus far.

If you would like to read other excerpts from How To Value Invest that I have released please view this page.

I’m Going To Be Interviewed On Blog Talk Radio In Less Than 2 Hours; Link Available.

Last week I was contacted by Mr. Gary Gonzales who has a show on Blog Talk Radio named Come and Take It that is about investing and how to take control of your financial future.  He found my book on Amazon and asked if I would come on his show to talk about How To Value Invest and value investing in general.

I agreed to be on the show that will air live tonight at 7 PM Eastern time.  For those who would like to listen in the link is here.  If you cannot listen in tonight he said that the link and interview would be archived on his site for listening later. There will also be the chance for you to call in and ask questions if you would like to do that the number is (877) 537-2878.

I am honored to be asked on the show and hope to not sound like an idiot.  Invoking Charlie Munger’s principle of not being an idiot instead of trying to be brilliant, which I obviously struggle with if you have followed this blog for any amount of time : )  Hope to hear from some of you tonight and hope that you listen in.

Chapter 15 of How To Value Invest Excerpt Part 3: Challenge To You and How I Do Research

Challenge To You and How I Do Research

The first thing I recommend after reading this book is to find a company you find interesting for some reason, read its annual, quarterly, and proxy reports, and value and evaluate the company.  THE ONLY WAY you are going to improve as a value investor is if you constantly practice techniques and valuations, work on your thought and investment process, and work on your patience, temperament, and confidence as you get better.

When I say constantly practice I do not mean just doing the same thing over and over like most people do, is very easy, and is sometimes even fun.  When I say practice I mean deliberate practice where you constantly push yourself to learn new things and constantly look for ways to improve by going back over your previous articles and reports to see where you may have made some errors.  This kind of practice is not easy, generally isn’t fun, and takes a lot more time.  If you truly want to become an excellent value investor though you must practice deliberately and not just keep doing the same things over and over.  For some examples of deliberate practice search my blog or Google with the words Deliberate Practice.

The way I do research has probably been the area that has changed and evolved the most since starting to invest.  I used to put together very detailed stock screeners on places like finviz.com looking for companies that had good-looking ratios and that was about it. I looked for things like a high current ratio, high margins, growing revenues, high insider ownership, etc and ended up wasting a lot of time sifting through poor companies because I didn’t have a defined and repeatable way of searching for companies.

Now I follow a very regimented research strategy that has paid off by saving me a lot of time and has helped me find better companies faster. Instead of doing my full research on a company that had good-looking ratios, I now follow a three-step process that discards a lot of companies off the bat and saves a lot of time.  Before we get into the details of what I do, I want to tell you that this is just what works for me and it may not work for you.  You need to find whatever works best for you but I wanted to share how I do research because I get the question relatively often.

The first thing I do now is put together a very basic stock screen with only a few criteria instead of the 10+ individual criteria I used to use each time.  All of this is based on finviz.com.  I use very basic search criteria in the screens now like recent positive insider buys, if it has a P/B below 2, and it has a market cap below $300 million.  Sometimes using more sometimes less, but generally this is the criteria I now use to start with.

I also consider the amount of shares that insiders own, if any analysts are covering the company, if a company has had recent bad or good news, if the company is under strategic review, and a lot of other criteria as well but those are a lot more subjective to my preferences than anything.  Recent insider buys are always something I like to see because insiders know more about the company than anyone and if they are buying it usually means they expect the company to do well over time or they think the company is undervalued.  Make sure that the insider buys are actually buys in the open market and not just the awarding of options or shares by the company.  You can do this by looking at the company’s form 4 releases which can usually be found on the company’s site or on Morningstar.com.  In all honesty I would love to see a company that has P/B below 1 but I use 2 as my cut off.  I used to use a P/B of 1 and below as the cut off but that left very few companies to look through.  Now that I am more confident I concentrate almost exclusively on small and nano cap companies because a lot of investors and analysts do not look at these smaller companies.  This is different from large caps where sometimes dozens or hundreds of entities are following a company.  If you are interested in special situations you can use sites like stockspinoffs.com as well.  I also find investment ideas from other value investing blogs, insidermonkey.com, Seeking Alpha, GuruFocus, etc.

With the above criteria from the stock screen I usually end up with a list of between 50-350 companies to look into.  After that I discard Chinese companies because of my previous horrible experience with Chinese small caps.  I also discard financials except insurance companies, pharmaceuticals, and mining/natural resource companies because I do not understand how to value or analyze those companies.  After discarding those companies I end up with a list of between 30-150 companies usually.

When I get to this point I go one by one using Morningstar.com or yahoo finance to look at things like insider ownership, what the company does for business, how healthy the company’s balance sheet is, its profitability, any positive or negative news, or if I find a company to be interesting for some reason, to determine which companies I am going to do further research on.  Using my personal criteria for what I look for in an investment (Again, this is something you will have to figure out for yourself) I narrow that list of usually as many as 150 companies down to fewer than 5 that I start minimal research on.

For each of the as many as 5 companies remaining I download each company’s most recent annual, quarterly, and proxy report, read through those reports and take notes on them.

At this point I will discard more companies, sometimes all of them if I find enough things about the companies that bother me.  Things like related party transactions, decreasing profitability, excessive management pay, expensive law suits, expiring patents, debt filled balance sheets, etc.  If I discard all the companies at this point I then adjust the stock screener and start the research all the way over from the beginning going through several hundred companies again.  I also may look for things like spin offs, companies that are experiencing good or bad news, or a company that I find interesting for some reason.

If I find a company or companies that I still like after reading the most recent financial reports of a company I then value the company or companies and analyze its float to see if they are undervalued and if they could potentially have a moat.  At this point I usually end up discarding all the companies because they are not undervalued enough or their margins are not good enough for me to invest in.  I will then adjust my search criteria again and start looking through potentially hundreds of companies to find more to research.

If I do find a company that is undervalued or supremely interesting still, this is where I end up doing my full amount of research and analysis and generally end up writing an article.

At this point I download an annual report for at least each of the past five years (10+ years if they go back that far) and read every one of those annual reports and take a lot of notes to see if a company has had problems in the past, how they went through the previous recession to get an idea of how they may react in another worst case scenario, how they came out of those problems and got better, and how the company’s operations have evolved over time.  I take notes about margins, debt, cash levels, profitability, revenue, float, total obligations and commitments, how a company’s operations have changed over time, and how these things have changed over the years.  I also research the company’s competitors, usually reading at least a few of their annual reports, taking notes on their margins, debt, cash levels, profitability, revenue, float, etc to compare the companies together over a long time period to see how they stack up against each other and to see who is at least on a relative basis the most undervalued.  While doing research on competitors keep in mind that these can also turn into potential investments if they end up having better margins, better profitability, and are more undervalued than the company you are analyzing as well.  I read proxy reports to see what executive and management pay is, if there are any red flags, who owns 5%+ of the company, and to find out if management is exceptional.  I also search Google to see if there have been any new developments within the company since their last annual or quarterly report came out to see if there are any new things that need to be factored into the analysis.  Those are the main things I look for but I also look at some other things I consider to be more minor but can potentially have major relevance as well like industry trends, if the overall market is over or undervalued, how the company may do over the long-term, etc.  At this point I usually end up writing an article because by this point I have put in well over 100 hours discarding companies, researching, valuing, and analyzing the company that I did find that was interesting or undervalued and its competitors.

Even after all of this work I still may not end up buying into a company.  You need to keep an open mind and let the numbers and your analysis take you where they may and not be boxed into wanting to buy into a company just because you put a lot of hours into researching said company.  When I get to this point I still end up buying into just over half of the companies I do full research on because they ended up not being as good of an investment as I thought they would be.

If you think value investing is easy and not time-consuming you are very wrong.  By the time I write an article about a company, I have discarded a few hundred companies, and spent a hundred hours plus discarding companies, researching, analyzing, valuing, and comparing a company or companies to their competitors, still to only have a little better than a 50% chance of buying into a company.

This seems insane, and it probably is to some degree, but if you want to truly be an excellent value investor you need to research as many companies as possible.  Around the world there are tens of thousands of companies that you can research and you can only find investments that fit your particular criteria if you put in the work to find them.  This obviously takes a lot of personal drive, will, and passion.  Value investing is probably something you cannot get excellent at if you do not have passion for it and actually like digging into companies.   Reading companies annual reports fascinates and relaxes me and is treated like a kind of treasure hunt.  Most people, including most professional investors, find it boring and just are investing because it is good way to make money.  If you do not have the drive, will, and passion to do hundreds of hours of work, while still only having a little better than a 50% chance of finding a company to buy into, this is probably not a very good way to spend your time and you should probably let someone like me who loves doing this manage your investments so that you can free up your time to do things you like and want to do.

If you have enjoyed this and other portions of the book I have released thus far please visit this page to buy the book and to see the three reviews, all of which are 5 stars, that the book has received thus far.

If you would like to read other excerpts from How To Value Invest that I have released please view this page.