Interviewed By Eric Schleien of The Intelligent Investing Podcast

Interviewed By Eric Schleien of The Intelligent Investing Podcast

A couple of months ago Eric Schleien – @EricSchleien on Twitter – asked if I’d like to get interviewed for his new podcast titled The Intelligent Investing Podcast.

Eric is great so of course I said yes.

In the 49-minute interview linked above we talked about the following things:

  • Value investing.
  • Valuation.
  • How I got into value investing.
  • The smallest company in my current portfolio.
  • The worldwide spread of where I research.
  • Why I don’t short.
  • The art of value investing.
  • My favorite kinds of businesses to invest in.
  • Red flag indicators when researching insurance companies.
  • Book and website recommendations.
  • And more.

Please check out Eric’s brief description of the interview below:

In this episode Eric Schleien interviews Jason Rivera who is on a mission to build a holding company inspired by Warren Buffett’s Berkshire Hathaway. Really fascinating individual and incredibly talented and smart value investor. He is sure to be someone worth following over the next decade to come.

I meant to post this on the blog when it first released but as I was updating the site the other day I realized I forgot to after I posted it to Twitter and Facebook.  My apologies to Eric about this delay.

His podcast has interviews with other great up and coming value investors as well so make sure to listen to them.

And just last Friday Eric announced a digital marketing company is now managing his podcast for YouTube so congrats on that Eric and thanks a lot for having me on your podcast.

You can listen to the interview at the link above.  And make sure to follow Eric on Twitter, and subscribe to his great podcast.

I hope you all enjoyed the interview and please let me know what you thought in the comments below.

Oh and yes I know the umm’s and pauses are terrible on my part.

Please bear with me, it’s what I do when I’m thinking and gathering my thoughts, I’m aware this needs fixing, and it’s something I’m actively working to improve.

Five Months Of Consistent Failure Leading To Magic

Five Months Of Consistent Failure Leading To Magic

In my last post – 2016 Performance Review – Five Full Years Beating Buffett and Crushing The Market I talked about many great things that happened in 2016.

Today’s post is the complete opposite…  It’s about the five months of consistent failure I’ve endured since October 2016 and the magic this is now leading to.

I planned for this post to come out shortly after the last one.  But until now, I didn’t have enough time to write it.  Or the better term is that I didn’t make enough time to write it until now.

I’ve been busy building the Rivera Holdings investor base.  Busy looking for deals.  Busy building my real estate career.  Busy making connections.  And busy trying to make money.

But those are excuses.

If I really wanted to I could have made time to write this post.  The main reason I didn’t is because it’s about failure.

Failure is hard on the psyche.  Failure isn’t fun.  Failure is hard to talk about.  And it’s certainly not fun to write about.

Even when you’re learning, improving, and growing as I did in 2016 and have continued doing in 2017, failure without much success – or perceived success – takes its toll.

I’m extremely hard on myself, have been ever since I was a kid, and likely always will be.  I’m always trying to improve, learn, and succeed in anything I do.  And no matter how much I do always think I can do more.

Because of this anytime I endure consistent failure, thoughts like the following begin to creep in and lead to even more doubt and frustration.

  • Should I keep going?
  • Why am I doing this?
  • Is this worth it?
  • When is this going to work out?
  • Will this ever work out?
  • When will I begin to succeed?
  • Will I ever succeed?
  • Should I do something else?

But because I’ve gone through this many times now I know this is the process I go through before figuring things out.

While writing How To Value Invest the following process occurred.

I spent a month or two in the “this is terrible” and “I’m terrible” phase while writing, editing, and getting the book ready for publishing.

The whole process from planning the book, to writing it, to publishing it took almost 10 months.  So this means I spent about 20% of the time while working it in the “This is terrible” and “I’m terrible” phases.

I don’t remember what got me out of that mindset other than continuing to work and grind every day and then publishing the book.

Earlier, I went through this same process before knowing what it was while beginning to learn about value investing.  And I’ve gone through this process multiple since then when starting businesses, raising capital, and with various other ventures.

I’m talking about all this because from October 2016 until now in Spring 2017 most of what I’ve done has failed.

But through failure comes progress…

We’ll talk about progress soon but let’s finish talking about how much I’ve failed in the last five months.

The Failed Acquisition

In November 2016 I posted that Rivera Holdings was going after its first acquisition target.  The owner and I agreed to an $8 million purchase price for the business and the land.  And we agreed on a 60 day exclusivity period.

The land, property, and equipment by themselves were worth between $6 and $7 million and I valued the business – including operations, land, and equipment – at between $10 and $15 million.

The business produced excess cash flow.  Had long-term competitive advantages.  And with some cost cuts and expansion, I projected cash flow to almost double within the first two years we owned it.

We had the chance to buy a cash flow producing business with long-term sustainable competitive advantages at a cheap price, with a huge margin of safety, and good potential upside.

So what happened?

The short answer is I failed…

Not because I didn’t put in the effort or time to query and pitch to investors.  But because I was a horrible sales person and didn’t have the right connections.

I sent emails, called, Skyped, and talked in person with more than 2,054 people during our 60-day exclusive letter of intent before informing the owner I wasn’t able to raise the capital to buy his business.

Out of the more than 2,054 people I was in contact with about acquiring the business I got no response from more than 90% of them.  Major failure.

The people who did respond to me were receptive and said I impressed them with my analysis and detailing of the business.  But I heard two things over and over about why they wouldn’t invest.

The first was that I lacked experience running a multi-million dollar business like this.

And the second was that because they didn’t know me on a deep personal level we didn’t have enough trust built up between us for them to trust me with millions of dollars of capital.

I had an estimated 98% failure rate talking with people about becoming Rivera Holdings investors so we could buy this business.

But what did all this failure lead to?

It helped me realize I needed to work on several things to get to the level I want to be on.

The first thing I needed to fix was being a horrible sales person.  Because by not closing this great opportunity I failed myself, my investors, and these potential clients.

The second thing was that I needed to gain experience owning and running a business.  This is one of the reasons I got into real estate. I’ll talk about the other reasons in a separate post.

And the third thing it helped me realize is that I needed to grow my network of connections.

This leads us to much more failure…

Much More Failure

After the acquisition failed, I stopped to think about what I needed to do going forward and where I needed to improve.

I talked about these above and then got to work again.

This now leads to major failures – yes multiple – every day.

A typical work day of mine now looks something like the following:

Call 10 to 20 people to talk with them about their home or property.  Either for Rivera Holdings to acquire for investment purposes, or for me to list for sale as a real estate agent.

On average I hear back from only one to two of these people.  Or about a 90% failure rate.

Email 20 to 30 people about the same as above.  Generally, I hear back from 1 to 3 of these people.  Or a 90%+ failure rate.

Go to any appointments I’ve set to either list a home for sale or look to buy it for Rivera Holdings.

Learn by listening to Audiobooks anytime I’m in my car… The only time of my day I’m not failing.

Send out information to potential investors every week on deals I’m looking at now or have looked at in the past.  There’s a 99%+ failure rate here.

Do preliminary due diligence on 5 to 10 assets I’m considering investing in.  This includes looking at single family real estate, multifamily real estate, public companies stock, private businesses, etc.  After doing this I generally only consider one of them a good investment.  Or a 90% failure rate.

After doing more due diligence I generally will put one to two offers in on properties per day.  Or consider doing further due diligence on a public or private business. This is after looking at more than 100 potential assets.

So on average for every 100 assets I look to invest in, after doing due diligence I will only consider investing in at most two of them.  Or a failure rate north of 98%.

As of this writing, I’ve had zero of the 30+ offers I’ve submitted accepted.  Or a failure rate of 100%.

And I have a wife and two young daughters so I get told “no” and am failing on a constant basis at home :).

After reassessing what I needed to do after the failed acquisition I now fail every day on a massive scale.  Something I haven’t done on this large of a scale since I began learning about value investing 10 years ago.

I now swim in failure.  But by doing this over the last five months or so something magical has begun happening.

The Magic Of Massive Failure

Image result for grant cardone on failure

For years I’ve known I needed to take more action every day.

That I’ve needed to call and email more people, meet more people in person, research more public and private businesses for investment, and recently to research more properties to invest in and talk to more people about helping them buy and sell their homes.

But this is hard because it involves a lot of failure and discomfort through things like cold calls or sending out mail or email advertisements.

After writing my article about positive obsession – 10 Tips To Becoming A World Class Investment Analyst – and then reading things like Be Obsessed Or Be Average and the 10X Rule both by Grant Cardone, I knew I needed to do even more to get to where I want to be.

Without failure there is no learning or improvement.  Without massive action you’ll never reach your goals because you’ll never be putting anything into practice and others who are doing more will leave you in their dust.

But by doing both of these things you’ll kick learning and improvement into overdrive.  And this will get you towards your goals and dreams faster.

And we all want to succeed faster.

So where has all this massive action and failure over the last five months gotten me?

I outlined some of the great things that happened since putting in massive amounts of effort every day in the 2016 Performance Review post.  And I repost these below:

  • Started Rivera Holdings LLC.
  • Began raising capital.
  • Grew personal connections by an exponential amount due to capital raising efforts.
  • Grew from 320 subscribers between Value Investing Journey and Press On Research to now 455 total subscribers between those two services and now also the Rivera Holdings Mailing List.
  • Read between 50 and 75 books in 2016.
  • Grew from 720 followers on Twitter as of the beginning of 2016 to 1,008 now.
  • Grew from 790 connections on LinkedIn as of the beginning of 2016 to 896 now.
  • As mentioned above we continued helping Mhicaella and her family in the Philippines survive and thrive.
  • For the first time in three years expanded my circle of competence in terms of industries.  I now understand and feel comfortable evaluating three new industries – marinas, hotels, and multifamily real estate.
  • Also expanded knowledge and experience into the private equity/investment arena as well.

But the above aren’t the only things that have begun happening since taking massive action and experiencing massive failure.  I’ve also…

  • Continued expanding my personal network and connections by an exponential amount.
  • Had lunch with, rode in cars with, talked in person with, and talked on the phone, through email, or through Skype with people who are worth more than $700 million combined in the last few months.  And who have access to more than $1 billion in capital.
  • Have even talked with a few about consulting with them on some projects.
  • Built up a huge deal flow.  After losing the original acquisition I had nothing else to attempt to acquire for a couple of months.  I’m now looking at and putting multiple offers in every day on assets.
  • Expanded my knowledge of sales and the sales process immensely.
  • Gotten Rivera Holdings on more than a dozen distribution lists for businesses, homes, investment properties, multi-family properties and more.  These give us access to deals before they hit public market sites like Loopnet.
  • Begun setting and going to more appointments with potential investors, home sellers, business partners, and business brokers.
  • And have hired two part-time independent contractors that I plan to hire full-time within the next month.

Not only am I doing all the above things, but because I’m acting in such a huge way I’m learning faster than I have at any time since first beginning to learn about investing almost a decade ago.

So is failure really failure if you’re learning, improving, and getting closer to your goals?  Or is not trying failing?

Case in point – the picture below is from a post I wrote on Facebook in February.

The picture on the left is truly failure…  While I have always read and learned as much as possible it doesn’t matter if you never put anything into action.

March was almost completely filled up.  And April will be even more productive than March.

So am I failing?  Or am I gaining the wisdom, knowledge, experience, and connections required get to where I want to take Rivera Holdings?

And if you aren’t even trying to achieve your goals and dreams, or you’re thinking about giving up… Read this –  If Charlie Munger Didn’t Quit When He Was Divorced, Broke, and Burying His 9-Year-Old Son, You Have No Excuse.

Let me know some of your personal failures and how this has or will lead to your success in the future in the comments below.

Book Giveaway – Giving Away Another $100 Of Books For Free

Book Giveaway – Giving Away Another $100 Of Books For Free

When I started learning about value investing I had no one to turn to for help or guidance except the infinite internet.  I sifted through thousands of articles, websites, books, videos, and other etc. information to get to where I am today.

Now that I have a solid knowledge base built I’m helping other value investors so they don’t have to struggle as much as I did when starting.

One of the ways I help is by giving away valuable books free to subscribers.  And I detail these book worth more than $100 below.

I’m a huge believe in Charlie Munger’s Mental Models and Worldy Wisdom philosophies that the more we read the more we can know.  And the more we know the closer we are to reaching our goals, making a ton of money, and changing the world.

These books represent knowledge, power, goal and wealth attainment, and much more.  True knowledge is one of the most powerful forces in the world.  But few hold this power…

My goal is to help spread this power to as many as possible.  And next week a lucky subscriber is getting a step closer to their goals by winning the following 10 books valued at more than $100.

Benjamin Franklin by Walter Isaacson

Now on the Recommended Reading and Viewing Page in the Financial History/Regular History section.  I’d give it a 4/5.

This book offered some new things – especially when it came to some of the back room diplomacy Franklin was involved in – that were interesting but not enough to make it a great read.  If I hadn’t studied this time period and Franklin so much this would have gotten a higher rating from me.

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

I’ve not read this book yet.  It’s been in my ever-growing to read pile for a while now though as I’ve heard nothing but great things about the book.

When I came across a cheap copy of the hardcover I had to buy it to give away.

Below is the description of the book from Amazon.

The New York Times’s Pulitzer Prize-winning columnist reveals how the financial meltdown emerged from the toxic interplay of Washington, Wall Street, and corrupt mortgage lenders.

In Reckless Endangerment, Gretchen Morgenson, the star business columnist of The New York Times, exposes how the watchdogs who were supposed to protect the country from financial harm were actually complicit in the actions that finally blew up the American economy.

Drawing on previously untapped sources and building on original research from coauthor Joshua Rosner—who himself raised early warnings with the public and investors, and kept detailed records—Morgenson connects the dots that led to this fiasco.

Morgenson and Rosner draw back the curtain on Fannie Mae, the mortgage-finance giant that grew, with the support of the Clinton administration, through the 1990s, becoming a major opponent of government oversight even as it was benefiting from public subsidies. They expose the role played not only by Fannie Mae executives but also by enablers at Countrywide Financial, Goldman Sachs, the Federal Reserve, HUD, Congress, the FDIC, and the biggest players on Wall Street, to show how greed, aggression, and fear led countless officials to ignore warning signs of an imminent disaster.

Character-rich and definitive in its analysis, this is the one account of the financial crisis you must read.

Profit from the Core: A Return to Growth in Turbulent Times

A great book that talks about competitive advantages.  How to gain them, how to cultivate them, and how not to lose focus on growing them.  This book is on the Recommended Reading and Viewing page in the Competitive Advantage/Competitive Strategy section.  I’d give the book a 5/5.

Messi

This is a great book even if you’re not a soccer or Lionel Messi fan.  The lessons I took from this book were what it takes to become great.  What it takes to stay great.  And the trials you’ll face on your way to greatness.

Now on the Recommended Reading and Viewing page designated as a MUST READ!!! in the Learning/Self-Improvement/Productivity section.  I’d give the book a 5/5.

The Black Swan

I’ve not read this book yet either like some mentioned here.  But I came across a copy of the paperback and had to get it to give away.  Heard nothing but great things about this book as well.

Below is the description of the book from Amazon.

A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences.

In this groundbreaking and prophetic book, Taleb shows in a playful way that Black Swan events explain almost everything about our world, and yet we—especially the experts—are blind to them. In this second edition, Taleb has added a new essay, On Robustness and Fragility, which offers tools to navigate and exploit a Black Swan world.

Good Strategy Bad Strategy: The Difference and Why It Matters

Another great book talking about competitive strategy and competitive advantages.  This book is in the Recommended Reading and Viewing page marked as a MUST READ!!! in the Competitive Advantage/Competitive Strategy section.

The first 1/4 of this book is bland generalities and theory about strategy.  But the last 3/4 of the book are great once it gets to the real world and business case studies.

I give the book a 5/5.

Team of Rivals: The Political Genius of Abraham Lincoln

I’ve not read this book yet either like some mentioned here.  But I came across a copy of the paperback and had to get it to give away.  Heard nothing but great things about this book as well.

Below is the description of the book from Amazon.

Winner of the Lincoln Prize

Acclaimed historian Doris Kearns Goodwin illuminates Lincoln’s political genius in this highly original work, as the one-term congressman and prairie lawyer rises from obscurity to prevail over three gifted rivals of national reputation to become president.

On May 18, 1860, William H. Seward, Salmon P. Chase, Edward Bates, and Abraham Lincoln waited in their hometowns for the results from the Republican National Convention in Chicago. When Lincoln emerged as the victor, his rivals were dismayed and angry.

Throughout the turbulent 1850s, each had energetically sought the presidency as the conflict over slavery was leading inexorably to secession and civil war. That Lincoln succeeded, Goodwin demonstrates, was the result of a character that had been forged by experiences that raised him above his more privileged and accomplished rivals. He won because he possessed an extraordinary ability to put himself in the place of other men, to experience what they were feeling, to understand their motives and desires.

It was this capacity that enabled Lincoln as president to bring his disgruntled opponents together, create the most unusual cabinet in history, and marshal their talents to the task of preserving the Union and winning the war.

We view the long, horrifying struggle from the vantage of the White House as Lincoln copes with incompetent generals, hostile congressmen, and his raucous cabinet. He overcomes these obstacles by winning the respect of his former competitors, and in the case of Seward, finds a loyal and crucial friend to see him through.

This brilliant multiple biography is centered on Lincoln’s mastery of men and how it shaped the most significant presidency in the nation’s history.

Only The Paranoid Survive

This book is on the Recommended Reading and Viewing page in the Competitive Advantage/Competitive Strategy section.  I give the book a 4/5.

Below is a mini review I wrote of this book in January 2014.

I read Only The Paranoid Survive after it was recommended by Charlie Munger in Poor Charlie’s Almanack and I am glad that I did.

This book is mainly about the decisions Mr. Grove (Former COO, CEO, and chairman of Intel) made, and helped make, to completely reform Intel from a memory company that was suffering a slow death against Japanese competitors to helping it become the worlds biggest semiconductor company.

He walks you step by step on how and why the decisions were made within Intel which in and of itself is fascinating to me.  He also goes through some case studies on decisions that other companies made (and still make) that lead to companies losing market share or possibly even dying altogether.

The case studies and examples specifically from Intel do a great job of showing you examples of how you can spot these trends or potential trends in companies that you are managing or looking to invest in.

Is it as good as Competition Demystified?  In my opinion no, but it is not specifically a book about strategy like CD is.  It is one mans advice, stories, and case studies about decisions he made and helped make that helped start to turn Intel into the powerhouse it is today.  Along with Mr. Munger, I also highly recommend reading this book.

Traffic: Why We Drive the Way We Do (and What It Says About Us)

I’ve not read this book yet either like some mentioned here.  But I came across a copy of the paperback and had to get it to give away.  Heard nothing but great things about this book as well.

Below is the description of the book from Amazon.

Would you be surprised that road rage can be good for society? Or that most crashes happen on sunny, dry days? That our minds can trick us into thinking the next lane is moving faster? Or that you can gauge a nation’s driving behavior by its levels of corruption? These are only a few of the remarkable dynamics that Tom Vanderbilt explores in this fascinating tour through the mysteries of the road.

Based on exhaustive research and interviews with driving experts and traffic officials around the globe,Traffic gets under the hood of the everyday activity of driving to uncover the surprisingly complex web of physical, psychological, and technical factors that explain how traffic works, why we drive the way we do, and what our driving says about us.  Vanderbilt examines the perceptual limits and cognitive underpinnings that make us worse drivers than we think we are. He demonstrates why plans to protect pedestrians from cars often lead to more accidents. He shows how roundabouts, which can feel dangerous and chaotic, actually make roads safer—and reduce traffic in the bargain. He uncovers who is more likely to honk at whom, and why. He explains why traffic jams form, outlines the unintended consequences of our quest for safety, and even identifies the most common mistake drivers make in parking lots.

The car has long been a central part of American life; whether we see it as a symbol of freedom or a symptom of sprawl, we define ourselves by what and how we drive. As Vanderbilt shows, driving is a provocatively revealing prism for examining how our minds work and the ways in which we interact with one another. Ultimately, Traffic is about more than driving: it’s about human nature. This book will change the way we see ourselves and the world around us. And who knows? It may even make us better drivers.

The Long Tail: Why the Future of Business is Selling Less of More

This book is on the Recommended Reading and Viewing page in the Competitive Advantage/Competitive Strategy section.  I give the book a 4.5/5.

I read this book so long ago that I don’t remember a lot of the specifics about it.  But the lessons I do remember – the powerful economics of the long tail as one example – stick with me to this day years later.  It’s a powerful book that I recommend.

Since its been so long since I read the book I’ll let the Amazon description tell you more about it.

What happens when the bottlenecks that stand between supply and demand in our culture go away and everything becomes available to everyone?

“The Long Tail” is a powerful new force in our economy: the rise of the niche. As the cost of reaching consumers drops dramatically, our markets are shifting from a one-size-fits-all model of mass appeal to one of unlimited variety for unique tastes. From supermarket shelves to advertising agencies, the ability to offer vast choice is changing everything, and causing us to rethink where our markets lie and how to get to them. Unlimited selection is revealing truths about what consumers want and how they want to get it, from DVDs at Netflix to songs on iTunes to advertising on Google.

However, this is not just a virtue of online marketplaces; it is an example of an entirely new economic model for business, one that is just beginning to show its power. After a century of obsessing over the few products at the head of the demand curve, the new economics of distribution allow us to turn our focus to the many more products in the tail, which collectively can create a new market as big as the one we already know.

The Long Tail is really about the economics of abundance. New efficiencies in distribution, manufacturing, and marketing are essentially resetting the definition of what’s commercially viable across the board. If the 20th century was about hits, the 21st will be equally about niches.

A lucky subscriber will win these 10 books – valued at more than $100 – free next week.  And I will even ship the books at my cost to anyone anywhere in the world.

All you have to do to have a chance to win is subscribe to Value Investing Journey for free.  Or be a Press On Research paid subscriber.  And this isn’t all you’ll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

And you can subscribe to Press On Research for only $49 if you’re a free Value Investing Journey subscriber.

If you have further questions about Press On Research go to its FAQ linked in this sentence or email me at jasonrivera@valueinvestingjourney.com

***

My new investment holding company Rivera Holdings is now open to investors.  There is no minimum required investment.  And you DO NOT have to be an accredited investor to invest.

For more information please go to the Rivera Holdings link above or email me at JasonRivera@valueinvestingjourney.com.

On Float The 60 Page Book Released

On Float The 60 Page Book Released

Over the last seven months I’ve detailed investment float a lot here.  All the nuances, and both the positives and negatives of float.

The hope being we’ll have a huge advantage over other investors by knowing the immense power float holds.  How to evaluate it.  And how it affects a company’s value among many other things.

Over the last seven months, seven parts, 12,000 words, and 60 pages of content I explain all the following in detail.

  • What float is.
  • Why it’s important.
  • How companies can use float as positive leverage.
  • How Buffett got so rich using float.
  • How to find float on a balance sheet.
  • How to evaluate float.
  • How float affects a company and its margins.
  • Maybe the most important thing why float affects a company and its margins.
  • How float affects a company’s value.
  • And answered the question is float ever bad?

I released the last part of the On Float series on the blog last week so why am I writing this post?

Because I’ve compiled all the information above and put the content into a 60 page PDF book that’s releasing free today.

And by free I mean free.

You don’t have to pay me a cent.  Don’t have to pass this along on Twitter or Facebook.  And don’t even have to give me your email address to gain access to this book.

All you have to do to download this book is click on the link below.  That’s it.

On Float The 60 Page Book

Feel free to share this with anyone you’d like and as many people as you’d like.  No restrictions and no hassles.

The only things changed from the blog posts to the transition into book were I deleted some redundancy from the blog posts and changed/fixed some formatting issues that popped up in the transition.

All other content to my knowledge is the same.

I hope you enjoy and learn as much from this information as I have.

Is Float Ever Bad? On Float Part 6

Is Float Ever Bad? On Float Part 6

The goal of this blog is to help us all improve as investors and thinkers so we’re a little wiser every day.  The hope being that our knowledge will compound over time so we’ll have huge advantages over other investors in the future.

The aim of today’s post is to continue this process by talking about a topic few investors know about.  And even fewer understand.

Most people overlook float when evaluating companies because they either don’t know what it is.  Don’t know the power it can have within a business.  Or don’t know how to evaluate it.

This won’t be an issue here.

Press On Research subscribers already know this as I talk a lot about float in many of the issues I’ve written.  But I want to begin talking about it more here because float is one of the most powerful and least understood concepts of business analysis.

Today’s post is a continuation of the earlier posts:

Today we’re going to answer the question “Is Float Ever Bad?

Is Float Ever Bad?

I’m a guy who likes to live by the above quote.  If I can make things simpler I always do.  Not only does this make things easier to understand but it also can save a ton of time.

When analyzing investments and dealing with complex topics like investment float this isn’t always possible.

Understanding the good things about investment float is definitely one of those things you can make only so simple.  The concept is simple to understand but the there are a ton of different nuances to understand which leads to complexity.  You can likely tell since it’s taken me 51 pages thus far in the five earlier posts to explain the good things about investment float.

Luckily the answer to the titled question is a simple one.  And also involves simple and easy to understand concepts as well.

Yes, certain investment float is bad.  And no, not all float is equal.

The heuristic or mental model I use when evaluating float is that if the company isn’t profitable – or near profitability – its float is useless.  And can even be a negative burden for a company.

Why?

Remember, float are liabilities that can become positive leverage if used well by management and the company is profitable.  But always remember leverage can go both ways as well.

If a company isn’t profitable and hasn’t produced profits in several years float turns into negative leverage.  This is because in the long run float are liabilities the company will have to pay at some point.

The longer a company goes without earning profits the longer it will take a company to pay its liabilities because it’s not earning enough money.  This also makes it harder to fund operations and grow in a healthy way without taking on a ton of debt or even more liabilities.

Let’s go through a quick example to show this.

Let’s say we have two insurance companies.  Company A has an average combined ratio of 90% over the last five years and Company B has an average combined ratio of 110% over the last five years.

Not only does this mean Company A’s profits are 20 percentage points better on average than Company B.  But it also likely means that Company B has continued racking up liabilities it can’t afford to pay when due or when a catastrophe strikes.

This is because Company B hasn’t earned a profit on average over the last five years.  And of course all else remaining equal a company earning 20 percentage points better profit’s on average is the higher quality company.

The same general rule goes for non insurance companies as well.  If they aren’t, haven’t been, and show no signs of becoming profitable float should be viewed as negative leverage for a company.

I use the following rules when evaluating all companies float…

  • To view float as a giant positive for any company I like to see consistent profitability in the last five years.  And/or seven of the last 10 years.
  • If a company has off and on profitability I view float as neutral.
  • And if the company is consistently unprofitable I view float as a huge negative for the company.

I consider profitability of operating margin, ROIC, ROCE, and FCF/Sales.  The company doesn’t have to produce huge excess profitability in each category.  I look for consistency and trend of profits more than anything when evaluating float.

This idea is a lot simpler to understand than the concept of what float is and makes it potentially great for companies and investors.

One last thing to remember when evaluating float is that whether the company has positive or negative acting float doesn’t matter if the company doesn’t allocate capital well.  And the management doesn’t know what float is or how to use it.

To evaluate these potentials see the previous five posts on this topic.

Summary

If I’ve explained everything well enough in the series so far we should understand –

  • What float is.
  • Why it’s important.
  • How companies can use float as positive leverage.
  • How Buffett got so rich using float.
  • How to find float on a balance sheet.
  • How to evaluate float.
  • How float affects a company and its margins.
  • Maybe the most important thing why float affects a company and its margins.
  • How float affects a company’s value.
  • And answered the question is float ever bad?

In the next and final seventh chapter of this series I’ll share the best resources I’ve learned from about float with you.

Knowing what we know now we should have a gigantic advantage over other investors who either don’t know about float.  Or aren’t willing to put in the time to learn what it is and what it can do for a company and investment.

If you have any questions, concerns, or comments on float up to this point please let me know in the comments section below.

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Remember if you want access to my exclusive notes and preliminary analysis you need to subscribe for free to Value Investing Journey.  And this isn’t all you’ll get when you subscribe either.

You also gain access to three gifts.  And a 50% discount on a year-long Press On Research subscription.  Where my exclusive stock picks are evaluated and have crushed the market over the last four years.

Answering A Question On Quora – Is it possible to learn invest securities simply by reading?

Is it possible to learn invest securities simply by reading? If so name the books

Below is an answer I wrote on Quora to the above question.  The question and answer are important to how we all learn our craft of value investing so I’ve decided to post it here as well.

In this post I even show my first ever “analysis” article I wrote less than four years ago to prove how much someone can improve in a relatively short amount of time.

***

As Matus said the answer is no.

Books are a great place to learn concepts and theory but if you don’t know how everything works together in the real world it won’t matter. One of the best ways to learn this is by practicing a lot.

How does someone practice value investing?

There are several ways but the best thing to do once you know the basic finance and value investing terms is to begin reading company financial reports – 10K, 8K, Proxy, 10Q’s, etc – then taking notes while reading these financials. Value the company if you know how. And then build an investment thesis from all that information.

It’s then best to show this analysis to someone who knows more about value investing so they can give you feedback on where you can improve. Things and concepts you may have not thought of that you want to add for the future. Etc.

The best way to do this if you don’t know anyone personally who knows about value investing is to start a value investing blog to get feedback. And/or also by posting analysis on sites like Seeking Alpha and Guru Focus.

Beware and don’t take it personally but your first shots at analysis will be crap. Mine was and I post my unedited first ever written “analysis” below to prove this. Be prepared for the suck.


Vodafone Group PLC, ADR, (VOD) info

All information taken from Morningstar – Independent Investment Research, Vodafone’s website, The Motley Fool, 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:

1. 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.

2. Generates huge free cash flows of at least $8.25 Billion in each of the last 8 financial years. Free cach flow or FCF is basically the money thats 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.

3. 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.

4. FCF/Sales ratio over 16% each year since the 2002 financial year. Anything over 5% means they are generating huge amounts of cash.

5. 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.

6. Payout ratio of around 50% for the dividend meaning the dividend should be safe for the foreseeable future.

7. Raising their dividend an average of 7% per year for the next 3 years.

8. Lower debt/equity than their industy competitors.

9. 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.

10. Paying down debt with FCF.

11. Gross margin, net margin, and EBT margin all over 17% which is very good.

12. Still a lot of room to grow their revenue through people upgrading to smartphones and paying for data packages which they make more money off of then regular phones.

13. 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, are having huge economic problems which has led to lower sales an 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 goverments 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 atleast 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


Man that’s painful to look back on. But it’s also inspiring as well.

The analysis is painful to look at because along with the obvious misspellings I didn’t even attempt to correct for whatever reason the analysis doesn’t do anything but spout off random stats I pulled from it financials and places like Morningstar.

That’s not analysis. That’s a regurgitation of facts.

You can see glimpses of analysis in the above piece such as the paying off debt with FCF line. But I don’t take these lines any further. I again chose to just leave off by stating facts. Not what the underlying effects of these things would have on the company. That’s analysis.

At this point I’d been learning about value investing off and on for years but wasn’t improving much because I hadn’t written anything down or shown it to anyone else until the above post.

I actually sent the above “analysis” to a family friend who I was managing some investment money for. Bless their hearts they still stuck with me. They must really love me to have done so 🙂

But the above is also inspiring because in less than four years I’ve gone from the above train wreck to being hired by a prominent investment newsletter due to my analytical ability.

Writing regular 30 to 50 page analysis reports on companies for subscribers and investors I manage money for.

Have written an acclaimed value investment education book teaching everything from the concepts of value investing, to various valuation techniques, how to develop the proper mindsets and processes. Etc.

My stock picks and portfolio have crushed the market in the last four years 2014 And 2015 Portfolio Reviews – Still Kicking Mr. Market’s Ass.

And am told a version of the following on a regular basis – “If I were to go to anyone in the entire company to get a second opinion on my company analysis I would go to your first.”

Posting analysis – and the above one less than four years ago was my very first written remember – jumped my analysis articles, abilities, thought processes, and education into hyper speed.

Doing analysis on a company. Writing it down. Showing it to someone who can give you feedback. Implementing that feedback into future analysis. And then repeating over and over. This is a great way to learn value investing.

But it’s still not the best.

Study after study shows that teaching is the best way to learn any skill and value investing is no different.

This is also another reason you should start a value investing blog so you can teach others.

The below learning pyramid graphic is from the National Training Laboratories showing the best way to learn things.

Now to get back to your original question you see reading at the top showing you only retain ~10% of the information you read and why I struggled before writing things down.

This is how my value investment education jumped into hyper speed by combining practice by doing and teaching.

Anyone asking me how to learn any skill I always tell them to do the same thing that worked best for me.

Doing analysis on a company. Writing it down. Showing it to someone who can give you feedback. Implementing that feedback into future analysis. And then repeating over and over. Then start teaching others as soon as you can to help retain even more information.

If you are looking for book recommendations to learn value investing I recommend going to this post I wrote the other day on Quora What advanced books would you recommend for an aspiring self taught value investor? And this post for more information on How do you learn value investing?

Within the last post is a post on my blog titled 10 Tips To Becoming A World Class Investment Analyst.

I hope this all helps and if you have any further questions please reach out to me at jmriv1986@gmail.com

***

In the comments below please let me know your method and processes for learning and retaining information.

Book Giveaway Update

Book Giveaway Update

Well that didn’t go as planned…

In the post at the end of March The Winner of The Book Giveaway Is… I announced a subscriber as the winner of more than $300 worth of books.  The books were supposed to go to David at my cost.  Key word being supposed.

At this point I’ve tried multiple times to get a hold of David with no response so another subscriber is getting these books sent to them at my cost anywhere in the world.

I’m a huge believe in Charlie Munger’s Mental Models and Worldy Wisdom philosophies that the more we read about a wide range of things the more we can know.  And the more we know the closer we are to reaching our goals, making a ton of money, and changing the world.

These books represent knowledge, power, goal and wealth attainment, and much more.  True knowledge is one of the most powerful forces in the world.  But few hold this power…

My goal is to help spread this power to as many as possible.  And today a lucky subscriber is getting a step closer to their goals by winning the following 20 books valued at more than $300.

And the new winner of more than $300 worth of books is now Andrealiz.  Your email starts with reyesa.  I will get a hold of you today to get your contact information so I can send you more than $300 worth of books at my cost.