What Is Float? On Float Part 2

What Is Float? On Float Part 2

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 continue to 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 post Charlie Munger On Deferred Tax liabilities and Intrinsic Value – On Float Part 1.  And we’re going to answer the question today, what is float?

But before we get to that next is an excerpt from the July 2015 Press On Research issue where I talk about float extensively.

The Biggest Investment Secret In The World

How Warren Buffett Got So Rich And How You Can Too

Warren Buffett’s admired around the world for his philanthropy as he’s going to donate 99% of his $70 billion plus net worth to charity when he dies.

He can donate so much money because of how great an investor he is.  But almost no one knows how Warren Buffett made his fortune.

Yes, most investors know about his investments in Coke (KO), Johnson & Johnson (JNJ), and Wells Fargo (WFC).  But this isn’t how he built his fortune.

Investor’s who’ve studied Buffet know he built his partnership, and then Berkshire Hathaway, buying small companies.

But this still isn’t the true secret to Warren Buffett’s success.

Today I’m going to tell you how he grew $100,000 into more than $70 billion.  And tell you how we can start doing the same.

But before we explain the exact companies Buffett built his fortune on.  We need to talk about why Press On Research concentrates on small caps.

A University of Kansas student asked Buffett about this in 2005:

“Question: According to a business week report published in 1999, you were quoted as saying: “It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?”

Here’s Buffett’s answer emphasis is mine:

“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access.”

Yes, I’ve said this before many times.  But it’s an important concept to understand.

Small ultra safe investments that produce a ton of cash.  Have little to no debt.  Pay dividends and buy back shares.  And are cheap are my favorite investments.

These kinds of businesses are what Value Investing Journey and Press On Research is all about.

Today’s recommendation has no debt.  Owns more cash and cash equivalents than its entire market cap.  And just its net cash and cash equivalents make up 77% of its market cap.

This doesn’t count any of its property, plant, and equipment, future premiums earned, or cost-free float.  And this company is undervalued by 29% to 70%.

But this still isn’t all…  It’s also much more profitable than competition.

Today’s pick isn’t just a great company with all the above traits.  It’s also in Buffett’s favorite industry to invest.

Investing In Insurance

Most people won’t research insurance companies.  I wouldn’t early in my investing journey.  And many professional analysts stay away too.

This is because insurance companies are hard to understand at first.  Have new and confusing terminology to learn.  And normal profit metrics don’t matter much for them.

But if you learn how to evaluate them not only will you learn they’re easy to evaluate once you know what you’re doing.  But you can use the same repeatable process on every insurance company.  And Buffett has continued to buy into insurance – his favorite industry – constantly over the decades.  And it’s why he’s so successful.

In reality insurance companies are easy to understand.

Insurance companies take money – premiums, the insurance version of revenue – as payment for insuring things like businesses, equipment, health, life, etc.

The insurance company doesn’t have to pay you a dime of the money it earns over the years until there’s some kind of damage or theft of whatever’s insured.

When this happens they pay the agreed upon insurance rate out to the policyholder.

While the company continues to earn money – premiums again – it invests some of it so it can pay back your policy in the future.  And also make a profit in excess of the amount earned, invested, and paid out.

If the company writes its policies and invests well over time it will earn underwriting profits.  And grow the assets it can use to write more policies and invest more money.

If it doesn’t, the company will go out of business when a major disaster strikes.

Think of insurance companies like investment management companies.  But instead of only earning management fees.  Insurance companies earn premiums on top of investment earnings.

These effects can double profits over time…  If management is great at what they do.

The insurance business while easy to understand is one of the hardest businesses to be great at.

Other than being a low-cost operator like GEICO.  Owned by Berkshire Hathaway.  There are no competitive advantages in this industry.  And it also experiences wild swings of huge profitability than massive losses.

But if the company writes policies and invests money well over a long period they can grow to great sizes at almost no extra costs.  The only new costs may be to hire more staff.

Insurance companies also hold the greatest secret in the investment world…  Float.  This is how Buffett built his fortune.  And how we’ll start to build ours.

But before we get to this we need to know why float is so important.

Brief Berkshire Hathaway History

Buffett began buying Berkshire Hathaway stock in 1962 when it was still a textile manufacturer.  And when he still ran his investment partnership.

He bought Berkshire stock because it was cheap compared to the assets it had.  Even though the company was losing money.

He continued to pour millions of dollars into Berkshire to keep up with foreign and non union competition.  But none of this worked.

In time Buffett realized he was never going to make a profit again in the textile industry.  So whatever excess funds Berkshire did produce he started buying other companies.

The first insurance company Berkshire Hathaway bought was National Indemnity Company in 1967.

Since then Berkshire’s float has grown from $39 million in 1970 to $77 billion in 2013.

Float compounds like interest does if you use and invest it well.  But not only does float compound, if you use it right it also compounds the value of the company that owns the float.

Since 1967 when Berkshire bought National Indemnity, Berkshire’s stock price has risen from $20.50 a share to today’s price of $210,500.  Or a total gain of 10,268%.

This is the power of insurance companies when operated well.  And today’s recommendation is an insurance company that operates the right way too.

But before we get to that I need to explain how float makes this possible.

The Biggest Investment Secret Revealed

‘Float is money that doesn’t belong to us, but that we temporarily hold.”  Warren Buffett

Float is things like prepaid expenses.  Billings in excess of expected earnings.  Deferred taxes.  Accounts payable.  Unearned premiums.   And other liabilities that don’t require interest payments.
But they are the farthest thing from liabilities.


Instead of paying this money out now like normal liabilities.  Companies can use these “liabilities” to fund current operations.

Float is positive leverage instead of negative leverage like debt and interest payments.
Think of float as the opposite of paying interest on a loan.  Instead of paying the bank for the cash you’ve borrowed.  The bank pays you interest to use the money you loaned.  And you can use this money to invest.
Using cost-free float to fund operations can improve margins by up to a few percentage points.

The best way to explain why float is so important is with the following quote:

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of free – other peoples money – in highly productive assets so that return on owners capital becomes exceptional.”  Professor Sanjay Bakshi adding to something Warren Buffett said about great businesses.
I said in last month’s issue: “When a company’s float/operating assets ratio is above 100% it means the company is operating with “free” or cost-free money.”

But this isn’t true with insurance companies.

For an insurance company to operate on a cost-free basis it has to produce underwriting profits for a sustained period.

I look for underwriting profits of at least five years straight to consider its float cost-free.

And the company I’m going to tell you about today has earned an underwriting profit every one of the last 10 years.

When you come across companies that are able to do this on a consistent basis you should expect exceptional returns in the future.

This is because when a company operates its entire business on a cost-free basis it means several things. 1)  It’s a great business.  2.)  It’s an efficient business.  And 3.) float magnifies profit margins.

So what is this great company?

I go on here to detail the company I recommended – and bought for the portfolios I manage – in July to subscribers.

So What Is Float?

To summarize the above float is anything listed in the liabilities section of its balance sheet you don’t pay interest on.

Interest based liabilities – NOT FLOAT – include capital leases, and short and long-term debt.

Most of the time these are the only interest based liabilities on a company’s balance sheet.  Make sure by checking the off-balance sheet transactions and total obligations notes – if any – in the companies footnotes.

Examples of non interest based liabilities – FLOAT – include prepaid expenses, accounts payable, taxes payable, accrued liabilities, deferred tax liabilities, unearned premiums, etc.

These vary more but remember if the company doesn’t have to pay interest on the liability it’s float… Money the company has to pay later but in the mean time can use to invest in and grow the business.

Think of float as normal debt without the negative effects.

In the short to medium-term – long-term for most insurance companies – float while listed as a liability on the balance sheet should be considered an asset to the company.  Why?  Because while the company owns the float it can use these “liabilities” to invest and grow the business.

How though?

Because while the company lists the liability on its balance sheet – and still owns the liability – it can use the float as positive leverage to grow the company or invest in other businesses.

Sometimes at a better than cost free basis as mentioned above… But we’ll talk about this in a future post on float.

Next up I’ll go through a company’s balance sheet to separate float from non float.  And show you how to value and evaluate it.

What do you think of float at this point?  Do I need to explain anything better?  Let me know in the comments below.


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.

10 Tips To Becoming A World Class Investment Analyst

10 Tips To Becoming A World Class Investment Analyst


This post is written in conjunction with Quandl as part of a series on how to become great investment analysts.

Quandl provides access to data and information useful to us as investment analysts.  So if you’re looking for specific data to make your analysis pop make sure to check out their site linked above.


Are you sure you want to be great?

No one admits they’re fine being average.  But our actions show otherwise.

Most of us would rather watch TV or random YouTube cat videos instead of working on improving and learning the skills necessary to improve and reach our goals.

The ones who do work towards greatness are often labeled antisocial hermits for not hanging out with friends and partying more…  Especially when young.

This social stigma keeps many of us from doing what we really want to do…

If you want to achieve greatness you must do things different than everyone.

If you want to improve fast you must endure short-term pain.  And sometimes ridicule from peers when you’re not doing what they expect you do to.

If you’re willing to do the work necessary to become a world class investment analyst below are the top ten things you have to do every day.

  1. Be Patient

Are you fine searching through thousands of companies only to invest in a few of them?  Are you fine going months or years without buying a new investment?

If you answer no to either you won’t be a great analyst.

I invest in less than 1 out of every 500 companies I research.  You need to have extreme patience and enjoy the hunt of buried treasure as much as actually finding it.

  1. You need to be an autodidact

Do you rely only on your degrees and certifications to get you by? Do you seek out new and sometimes contradictory information to continue to learn and improve processes?

To be a world class investment analyst you have to love learning, reading, and gaining knowledge on your own.

Degrees and certifications have nothing to do with how great of an investment analyst you are or can become.

If you’re not willing to read and continue learning you won’t become a world class investment analyst.  Because people like me who constantly read, learn, and work to improve will always be ahead of you.

  1. You must have strict and disciplined processes

If you can’t make unemotional decisions based on how your analysis plays out you won’t be great.

You can’t rely on preconceived notions, hearsay, emotion, or what Mr. Market’s doing.  Let your analysis take you where it does.

If you spend 100+ hours researching a company only to find at the end it’s not one you want to invest in don’t invest in it.

Just because you spend a lot of time evaluating a company doesn’t mean you need to invest in it.

If you have strict processes and have the discipline to stick to these processes you’ll invest in a fraction of the companies you research as mentioned above.

Don’t be average be great.  Again, this requires you do things different than everyone else.  Be selective in your investments to produce greater returns.

  1. Practice everything you learn as you learn it

When I started investing I would read everything but not practice anything I learned.  This led to years of wasted time as I had to go back and relearn things as I came across them and needed to know what they meant.

Don’t do this.

And when I say practice I don’t mean the normal practice most people do.  I mean deliberate practice.

  1. You need the fundamentals down pat

If you can’t explain what free cash flow, operating margin, and return on invested capital mean in terms a 6th grader can understand you don’t understand it well enough yourself.

You need to understand the basics better than other analysts to have an advantage over them.

  1. Be selfish with your time

If you’re friends are doing something you don’t want to do don’t do it.

This sounds easy but it’s not…  Remember the social stigma I talked about above?

If you want to improve fast be selfish with your time and find any spaces of time you have to learn.

As an example if your significant other’s taking forever getting ready to go out, instead of getting mad and anxious about them wasting your time read something.  Even if it’s only for five minutes.

The more you learn the faster you’ll improve.  Knowledge like money compounds over time.

Note on above quote: Most people – including me – can’t reach the 500 pages every day goal because of kids, significant others, family, work, relaxing so you don’t burn out, and life.  But it’s a goal to reach towards.

Read as much as you can every day.

  1. Don’t get complacent

There’s always more to learn.  Always an investment or thought process you can improve.  There are always more companies to look through.  Etc.

“The thing that amazes me about him {Nick Saban} is that he doesn’t let up,” says retired Florida State coach Bobby Bowden. “People start winning, they slack off. But he just keeps jumping on ‘complacency, complacency, complacency.’ Most coaches don’t think like that.”

To learn more about what it takes to be great read my post: Greatness According to Nick Saban.

  1. You need confidence in your abilities

“You need to balance arrogance and humility…when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay an 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.” Seth Klarman

This doesn’t mean being overconfident.

You need to be humble enough to spot and fix any mistakes you make in your analysis that may only come out after you invest in or recommend something.

But if you’re not confident in yourself and judgments you make why should anyone else be?

  1. You can’t be afraid of mistakes.

No matter how great of an investment analyst you are you’re still going to make mistakes.  Investing isn’t something anyone can perfect.  Even Buffett, Munger, Klarman, and the other greats in our business make mistakes.

As investment analysts were doing great things if we’re right four to six times out of 10.  No one is right 10 out of 10 times in this business.  Leave your perfectionism at the door.

You need to be comfortable making mistakes.  And be humble enough to learn from them so you don’t repeat them going forward…  Hopefully.

If you’re stubborn like I am this may be a hard learned long-term lesson you need to work correcting every day.

  1. Be obsessive.

No one starts life as a great investor or thinker.  You need to train yourself to become great.  And the faster you learn the faster you’ll become great.

If you’re obsessive about learning the craft of becoming a world class investment analyst nothing can stop you.

High IQ isn’t necessary in this field.  It will be a hindrance if high IQ comes with overconfidence and not being humble.  So the only thing stopping you from becoming a great analyst is the amount of time you’re willing to put in.

Note the reading of 500 pages quote from Buffett above.

Are you obsessive enough about investing and analyzing businesses to work towards that goal?

Do you love learning, reading, and constant improvement enough in this field to continue to work even on days you don’t want to?

Bonus – Write your analysis down and let others critique your work.

Most of us hate being critiqued.  When we put dozen, hundreds, or thousands of hours into something over days, weeks, or years it’s natural that we don’t want people to point out the flaws in what we’re doing.

Fight this urge…

If you want to become great write your investment analysis down and have others critique it.  A great way to do this is to start a blog.

When I started my blog Value Investing Journey and began getting feedback my improvement as an analyst jumped into hyper speed.

I went from this “analysis” when I started the blog less than four years ago to being told a version of the following on a regular basis:

“If I were to go to anyone else in the entire company to get a second opinion valuing and analyzing an investment… I would go to you first.”

The above quote is what a former colleague told me upon leaving my job.

The company had around 50 employees.  And every other analyst had an MBA.  Decades of experience investing.  And ran or helped run billions of dollars at various hedge funds and firms before joining the investment newsletter we worked for.

I get told a version of the above on a regular basis but I’m not telling you this to brag.

I’m telling you this because if I can achieve this without any formal education and severe health issues while beginning my investment journey imagine what you can achieve with your formal training, degrees, mentors, and certifications.

If you don’t already have a or want to start a blog post articles on places like Seeking Alpha and Guru Focus to get feedback.

If you take this route beware of haters making personal attacks though.  Ignore these people and pay attention to the constructive feedback.


If you paid attention above you’ll notice many of the above tips go together.  And a lot of it revolves around how you choose to spend your time.

The choice is now yours… Are you willing to put in the time to become great?  Or are you fine being average and producing average returns and recommendations?

Time is the only thing keeping you from becoming a world class investment analyst.

So what are you going to do next?


February 2016 Press On Research Issue

February 2016 Press On Research Issue

Press On Research High Def

Below is an unfinished 11 page excerpt from this month’s 43 page Press On Research issue to release tomorrow.  If you’d like to subscribe to Press On Research you can do so at the previous link.  And if you’re already a free Value Investing Journey subscriber you can subscribe to Press On Research for a 50% discount of only $49 for one year.

When doing this you’ll also receive all back issues – which are exclusive to subscribers – sent to your email as well.  And my stock picks have crushed the market over the last four years.

Huge Margin Of Safety And Potential Competitive Advantages Mean As Much As 341% Gains For Us

February 2016 Press On Research Issue

By Jason Rivera

Press On Research Volume 1 Issue 9

When you think of investing in microcaps the last thing you think about is finding a company with gigantic competitive advantages.

Of course we search for companies that have them.  But we rarely find these companies.

After all small companies are small for a reason…

Most of the time they’re newer businesses that haven’t refined their business models.  Are struggling to find niches to thrive in while fending off giant competition.  And are just trying to stay afloat as they grow sales and profitability.

These are a few of the reasons why here at Press On Research I haven’t talked much about competitive advantages at this point.

Almost 100% of companies with huge long-term competitive advantages are the biggest companies in the world.

I can only think of a handful of microcaps I’ve evaluated over the years that have had even small short-term competitive advantages.

And only a few that if they got bigger, could have massive advantages over competition.  And none that already had them.

So why am I talking about competitive advantages here on Press On Research?  Because I’ve found a $263 million company that’s building a massive competitive advantage now.

But this isn’t even the best thing about the company…

Even if it takes them decades to build their competitive advantages to the scale of a world dominator, or it doesn’t build its competitive advantages at all.  It’s so undervalued now that it doesn’t matter.  We still should make a ton of money owning this company over time.

It’s selling between 20.9% and 341% below its true value.  And its priced now as if the market expects the company to go out of business as its selling at a 25.9% discount to just its net asset valuation.

This is one of the most conservative valuations investment analysts do.

But this company is far from terrible…  It’s profitable on an operating margin basis in eight of the last ten years.  And on an return on invested capital (ROIC) basis has been profitable every year of the last ten.

It’s grown revenues 3.67 times in the last ten years.  It’s got a strong balance sheet that’s in a net cash position.  And its operations are becoming more efficient over time.

Best of all this company operates in an industry that’s necessary to governments around the world.  And will remain so for decades to come.

This all means that not only will the company not go out of business, but that it’s already a good to great business priced far below its true value.

By buying this company we get to combine the ideas of two value investing giants Benjamin Graham and Warren Buffett.

But most important for you is this means we should expect great returns over time… Even if the company isn’t able to build its advantages.  If it does this company could become a multi bagger in the long-term.

But before we get to all this I need to explain what competitive advantages are.

What Is A Competitive Advantage?  And What Kind Of Advantages Are There?

A competitive advantage is simply something that gives you advantages over competitors.  They’re simple to understand as outside investors.  But difficult – impossible in some industries – to cultivate over the long-term.

Why? Because in most cases competition works to erase any competitive advantages over time.

Let’s start by talking about the kinds of competitive advantages companies can have.

In general there are five different advantages companies can build.  And often if you have one kind of advantage over competition you may have others as well.

Patents, Brand Names, Trademarks, Etc

These advantages are things like patents, trademarks, copy rights, customer lists, or brand names that protect valuable assets the company owns or have the rights to use.

Think Altria and Philip Morris, Louis Vuitton, Coach, Michael Kors, Ralph Lauren, etc.

These can be indefinite assets in the case of trademarks, copy rights, and brands.  Or short to long-term – one to 30+ years – in the case of patents.

If a company has a lot of these assets make sure to check how long they’re supposed to last, especially when it comes to patents.  This information is in the company’s annual reports in the footnotes.

These assets are listed on balance sheets under terms like indefinite lived assets, intangible assets, or the other names above.

Unless you have an ultra-powerful brand like Marlboro, these are the weakest competitive advantages to keep over the long-term.  Why? Because even immensely profitable drugs like Viagra come off patent in time.

These are also the only kinds of advantages you’ll find listed on a balance sheet.  The rest of the bunch you can only find doing thorough analysis on a company and knowing what to look for.

Network Effects

Network effects come from having a large network of customers using your service.

When networks reach a tipping point it makes it difficult for similar companies to compete because the more people you have.  The fewer – generally –will use competitor sites that are similar.

This competitive advantage is a gigantic barrier to entry for smaller competition.  But the network effect can also tip backwards if you don’t continue to do things well.

Current companies that have gigantic network effects are ones like Facebook, EBay, and LinkedIn.

Yes, there are similar – much smaller – companies out there but unless you search for them they’re hard to find.  And they only operate in niches.

Many times once a company gains this advantage over competitors it becomes almost impossible to compete if you offer similar products.

The only time these advantages don’t work is if you’re doing something a lot better and your competition is getting worse.  Think MySpace before Facebook came around.

If you’re trying to cultivate this competitive advantage you either need to be different or a lot better than competition to gain any share.

Even then you’re still hoping to gain enough subscribers and customers to reach the tipping point so this effect will swing in your favor.

The next two competitive advantages many times go together so I’m combining them.

Economies of Scale And Low Cost Operator Advantages

The economy of scales advantage comes when you’re so big you can lower your costs below competitors.  This gives you a huge advantage with customers because you can have lower prices for goods you sell.

The keyword within this advantage is efficiency.

The more efficient you are as a company the lower costs you’ll have.  The lower costs you have to charge to customers.  The more profitable you’ll become at the expense of non efficient competition.  Even if they’re bigger when you start.

When it started Wal-Mart was smaller than K-Mart.  Now K-Kart is almost nonexistent due to Wal-Mart’s competitive advantages and efficiency.

Companies gain these advantages because they do more business and sales than similar companies.  So their costs spread out over a wider range of products and suppliers.

Some giants like Wal-Mart have so much power over suppliers they can negotiate lower prices when they buy products as well.  Furthering their advantage.

This can be a double edged sword though if not cultivated right.

If not done well this can also lead to a chase to the bottom to ever lower profitability.  The container shipping industry is one example.  It’s efficient and cost effective but has always struggled to stay profitable.

If done well this can lead to crushing of competition and a huge barrier to entry which keeps smaller companies out of the industry.  Or crushes non efficient competitors already on the market.

Other companies not mentioned above that have a combination of these two advantages are GEICO, Coca-Cola, Pepsi Co., Altria, and Philip Morris.

Regulatory/Government Aided

At first you’d be surprised to see a government/regulatory aided competitive advantage right?

After all governments around the world do everything they can to end monopolies.  And try not to help certain companies at the expense of others in an industry.  But this backfires when the law of unintended consequences comes in to play.

This can be the most powerful competitive advantage of all.  Why?  Because if an industry is highly regulated by government it keeps competition out.  And whoever is already “in” gains all the business.

This explains why Altria, Philip Morris, British American Tobacco, Lorillard, and the other tobacco giants have dominated their industry for decades.

It also explains why they have generated such huge profits for so long.  And why newer, smaller, and more innovative companies haven’t disrupted the industry.

If you’re going to get regulated and taxed to death what’s the incentive for smaller more innovative companies to come into the industry?

There isn’t one.

Take a look at the taxes on cigarettes below as an example of why small companies can’t get into the tobacco business.


The dollar numbers above are the average per state tax rate per pack.  These are on top of the federal per pack tax rate of $1.0066 as of July 2014.

These taxes combined with the other regulations at cigarette companies are why cigarettes cost so much.

This is also why when this advantage combines with something like a powerful brand name – Marlboro –companies can continue to raise prices.  And still get customers to buy.

This means higher margins, greater profitability, and higher returns for shareholders.  At least until governments raise taxes again and the process of raising prices starts again.

All tobacco related companies enjoy this competitive advantage.  And today’s recommendation does as well… But I’ll get back to this later.

For more information on competitive advantages go to the following links.

Having a combination of the above advantages over the long-term enables higher margins than the competition.

If the company grows in a healthy way with these competitive advantages – and higher margins – value within the company grows and compounds

As will shareholder returns… Whether it’s stock gains, dividends, buybacks, or some combination.

Today’s company is building the government/regulatory competitive advantage over the last several years…


Press On Research High Def

I go on from here to describe everything about the company.  Its competitive advantages.  Some giants it works with.  Its valuation and margins.  And everything else great about the company.

I also detail its risks to make sure subscribers are comfortable owning it for the long-term before recommending subscribers buy it.

If you’d like to subscribe to Press On Research to get this issue and all past issues you can do so at the previous link.  And if you’re already a free Value Investing Journey subscriber you can subscribe to Press On Research for a 50% discount of only $49 for one year.

Charlie Munger On Deferred Tax Liabilities And Intrinsic Value – On Float Part 1

Charlie Munger On Deferred Tax Liabilities And Intrinsic Value

On Float Part 1

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 continue to 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.

Below is an unedited thread from the value investment forum Corner of Berkshire and Fairfax discussing Charlie Munger’s thoughts on deferred tax liabilities and intrinsic value.

Bolded emphasis is mine below.

So, I’ve been reading Munger’s Wesco letters (they are quite repetitive).  However, while reading, I found the following section pretty interesting:

Consolidated Balance Sheet and Related Discussion

As indicated in the accompanying financial statements, Wesco’s net worth increased, as accountants compute it under their conventions, to $2.22 billion ($312 per Wesco share) at yearend 1998 from $1.76 billion ($248 per Wesco share) at yearend 1997.

The $459.5 million increase in reported net worth in 1998 was the result of three factors: (1) $395.8 million resulting from continued net appreciation of investments after provision for future taxes on capital gains; plus (2) $71.8 million from 1998 net income; less (3) $8.1 million in dividends paid.

The foregoing $312-per-share book value approximates liquidation value assuming that all Wesco’s non-security assets would liquidate, after taxes, at book value.  Probably, this assumption is too conservative.  But our computation of liquidation value is unlikely to be too low by more than two or three dollars per Wesco share, because (1) the liquidation value of Wesco’s consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco’s equity in its office property in Pasadena) containing only 125,000 net rentable square feet, and (2) unrealized appreciation in other assets (primarily Precision Steel) cannot be large enough, in relation to Wesco’s overall size, to change very much the overall computation of after-tax liquidation value.

Of course, so long as Wesco does not liquidate, and does not sell any appreciated assets, it has, in effect, an interest-free “loan” from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth.

This interest free “loan” from the government is at this moment working for Wesco shareholders and amounted to about $127 per share at yearend 1998.

However, some day, perhaps soon, major parts of the interest-free “loan” must be paid as assets are sold.  Therefore, Wesco’s shareholders have no perpetual advantage creating value for them of $127 per Wesco share.  Instead, the present value of Wesco’s shareholders’ advantage must logically be much lower than $127 per Wesco share.  In the writer’s judgment, the value of Wesco’s advantage from its temporary, interest-free “loan” was probably about $30 per Wesco share at yearend 1998.

After the value of the advantage inhering in the interest-free “loan” is estimated, a reasonable approximation can be made of Wesco’s intrinsic value per share.  This approximation is made by simply adding (1) the value of the advantage from the interest-free “loan” per Wesco share and (2) liquidating value per Wesco share.  Others may think differently, but the foregoing approach seems reasonable to the writer as a way of estimating intrinsic value per Wesco share.


It immediately struck me that such an evaluation could easily be applied to Berkshire, although Berkshire at this point is much more complex than Wesco was then.  Turns out, someone had already done the analysis for 2011 and 2012:


(As a side note, I had trouble following Dan Braham’s line of thinking on this evaluation in the comments of the first article)

This evaluation contrasts from the “investments per share” and “earnings from owned companies” approach, which I believe was advocated by Buffett more recently.


The Importance of Float

‘Float is money that doesn’t belong to us, but that we temporarily hold.”  Warren Buffett

Why does Munger think the above is a good approximation of Wesco’s intrinsic valuation then?  Because while the company “owns” these liabilities on their balance sheet the company can use them to grow the business.

This is an example of float and the power it can have on a company.

Munger only used an estimated 1/5th of the value of Wesco’s float in his valuation.  Why?  Because when these “assets” are sold it comes off Wesco’s balance sheet.

I agree with Munger that this is a necessary and conservative way to look at valuing float within a company.

And 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 issues I’ve written.  But I want to begin talking about it more here for a simple reason.  Float is one of the most powerful – and least understood – concepts when evaluating businesses.

We can gain a gigantic advantage over other investors by knowing what float is.  How to evaluate it.  And and how to value it.

Also, contrary to common belief float can be found in any business.  Not just insurance companies.

But we’ll get to this in a later post… In the next post I’m going to explain what float is in more detail.

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.

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Let me know your thoughts on deferred tax liabilities and other float in the comments below.

Value Investing Journey 10 Most Popular Posts Of 2015

Value Investing Journey 10 Most Popular Posts Of 2015

The following list is the Value Investing Journey 10 Most popular Posts of 2015.

If you missed any when they were first posted make sure to check them out below now.  Here’s looking forward to an even better 2016.

10. Car Wash Psychology, Mental Models, And The Power Of Habit

9. Searching For Case Studies – Turning $2 Million Into $2 Trillion

8. My Answer To How Do You Find Stock Opportunities?

7. Armanino Foods Case Study Part 1 – Preliminary Analysis

6. On Failure

5. The 15 Steps I Took To Become An Excellent Value Investor

isaac newton

4. 17 Things That Changed My Life – Some Saved It

3. Why The P/E Ratio Is Useless – And How To Calculate EV

2. Lionel Messi Is A Failure

And the number one most viewed post on this site in 2015 was…

1. Warren Buffett And Charlie Munger Are Failures

File:Charlie Munger.jpgFile:Warren Buffett KU Visit.jpg

From the views it looks like you’re interested in a variety of topics.

Valuation, case studies, Buffett and Munger, failure, psychology, habit, mental models, and personal improvement were major themes of the above list.

According to Munger reading a wide variety of things means we all improved as investors and thinkers in 2015.

Remember, no matter how fast you improve or learn as long as you continue to learn and improve this will compound over time and lead us closer to our goals.

Bonus – Most Viewed Page Of The Year

The number one viewed page on the blog – besides the home page – was the Recommended Reading And Viewing Page.  This one page got almost 8,000 unique views last year by itself.

If you’ve never visited this page you should.  It holds links to all the best resources I’ve learned from over the years.  And gets updated regularly.

Is there anything I haven’t written about yet that you want me to in 2016?  Did your favorite post make the list? If so which one was your favorite?  If not which post was your favorite that didn’t make it?  Let me know in the comments below.

And to make sure you don’t miss any more great content subscribe to Value Investing Journey for free here.

Once subscribed you’ll also get entered to win prizes.  Get a 50% discount on a One Year Press On Research subscription.  And get three gifts.