Enterprising Investor Forum

The Dhandho Investor, M. Pabrai Friday, August 24, 2007

Monish Pabrai reviews the value investing approach, explains how it has served him and takes it one step further by detailing the Dhandho method (pronounced dhun-doe). He follows in the footsteps of Warren Buffett and really offers the reader a unique insight in how he invests, what reference material he uses and how he is guided by maximizing rewards AND minimizing risk. As he says, you need to make sure that you only toss a coin when the odds are: “Heads, I win; tails, I don’t lose much!”

This book is an extremely easy read and is real gem! 100,000 USD invested with Pabrai in 1999 would have been worth well over 650,000 USD in 2006 – that’s an annualized return of over 28% after fees and expenses! What we really liked is that he did not start his career on the Street and is not a classic money manager. He was an independent investor that slowly and surely moved towards value investing and eventually started to manage his own hedge fund.

The book explains how the Dhandho way of investing – basically, the way a certain ethnic India group approaches life and business – can be applied to the stock market and to the value investing framework. Furthermore, what is truly exceptional is the Monish Pabrai opens up the doors of his world for the reader and offers them a unique insight on how he has successfully managed to make investing his trade.

Enjoy!

Buffett: The Making of an American Capitalist, R. Lowenstein Thursday, August 16, 2007

A must read, the biography of Warren Buffett, probably the best investor that ever lived! Lowenstein does a great job not only in detailing Buffett’s life and investment career but also allows the reader to understand more about the man himself and his unique perspective on life.

Starting from scratch, Buffett built his empire by consistently sticking to his investment philosophy, focusing on studying fundamentals in order to determine when to take positions in companies, usually, in difficult times and when the market fails to reflect/acknowledge their true potential. Despite his fame and fortune, Buffett has remained extremely modest for a billionaire and continues to stand by his principles, values and keeps on proving his detractors wrong.

Be prepared for a beautiful journey through Buffett’s life. You will get a taste of his views, philosophy, humor, integrity and actions. You will also see and appreciate how he has managed to lead his life according to his principles without backing down.

You cannot read this book without being inspired. It presents countless lessons on how to lead a simple and honest life guided by values and principles. If you manage to take in even a small part of the lessons that Buffett’s story highlights, they will not only make you a better investor but they will guide you through all aspects of your life.

Enjoy!

Key Management Ratios, C. Walsh Wednesday, August 8, 2007

As Mr. Walsh states, the common language of business is finance. Therefore, the most important ratios are those that are financially based.

Generally speaking, most finance books and literature on understanding ratios is quite daunting. If you are not already familiar with the subject, it is very difficult to start to understand and try and gain a more fundamental understanding – not only the financial terminology but – of how the ratio relate to the business in ‘real world’ terms.

Walsh sets out to remove the obscurity and make this subject accessible to all by using a lot of examples, diagrams and constantly summarizing and placing the information into the greater business context. He keeps this very simple by only talking about the KEY ratios; he purposely ignores concepts/ratios that are not vital to the business. He focuses on around 20 in depth: why they are important, hot to calculate them, standards/benchmarks and finally, their interrelationships.

What we really like is that he is always relating things back to the business, not simply being academic for the sake of it. Initially, this book has been written to help managers understand their businesses and how to drive them forwards. However, since we believe that the Enterprising Investor should always approach investing as taking part ownership in a business, this is an excellent book to guide you through this process.

Enjoy!

A Random Walk Down Wall Street, Burton G. Malkiel Monday, July 30, 2007

Most people in the financial community would consider this book a classic. The first sentence reads ‘In this book I will take you on a random walk down Wall Street, providing a guided tour of the complex world of finance and practical advice on investment opportunities and strategies’ – and that’s what the book is all about!

In essence, the book gives you a comprehensive investing guide that you can use throughout your lifetime. What really sets this book apart is that Malkiel takes the time, not only to take you through his theories and advice but he also explains other investment strategies out there and why he feels they are not adequate and will fail to succeed over time. Furthermore, he backs up all his claims and opinions with references to comprehensive published research.

Malkiel is a leading proponent of the Efficient Market Hypothesis, maintaining that markets are ‘efficient’ as prices already reflect all known information and therefore are unbiased in the sense that they reflect the expectations of investors about future prospects. However, despite the fact that he bases all his thinking on this theory and that some readers may not agree with him, we feel that he does a very good job at explaining why he supports this thesis and also highlights how variations can occur.

The whole book is extremely insightful and should be read by anyone who is interested in investing or managing any portion of his/her saving but the forth part of the book ‘A practical Guide for Random Walkers and Other investors’, is an absolute must read for anyone who is even slightly interested in the financial world.

Enjoy!

The Tao of Warren Buffett, M. Buffet & D. Clark Wednesday, July 25, 2007

As most of you know, Mr. Buffett is regarded as the world’s greatest living investor. He has managed to do this by compounding his money at an average of approximately 28% per year since the beginning of the 50s. If you had invested 10,000 USD in Berkshire Hathaway in 1965 when Buffett bought it, you would have 35.6 million USD today!

How has he managed to do this? Well, his strategy revolves around the teachings of Benjamin Graham and the principles of ‘value’ investing. Buffett aims to buy shares at a significant discount to their underlying value and then holds them forever, unless the fundamentals change. Another differentiating factor is that he is not simply buying shares but he stresses the notion of ‘investing’ and acquiring ‘part ownership’ of businesses.

As Buffett puts it: “Our method is very simple. We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices. That’s all I’m trying to do.”

What we love about Buffett is that his integrity and common sense have guided him throughout his whole life and allowed him to achieve truly extraordinary results without letting the money or fame ever get to him.

Anyway, we could go on for days praising Buffett… the purpose of this post is to review “The Tao of Warrant Buffet”. This book represent a collection of sayings from the man himself that basically offer the reader a unique insight on his overall approach to life and business.

To give you an idea what to expect:

• “You should invest in a business that even a fool can run, because someday a fool will.”

• “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

• “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

• “In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. But the most important is integrity because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”

The book offers an easy read, great quotes and is an amazing source of insight & wisdom.

Enjoy!

It’s Earnings that Count, H. Heiserman, Jr. Tuesday, July 17, 2007

As the title states: It’s Earnings that Count. Heiserman gives the reader a step-by-step guide on how to find a stock that will make a difference by determining whether it has quality earnings and the potential to deliver real earnings power.

Heiserman argues that picking the right stock to invest in is really a process of elimination. He details his method to calculate ‘defensive’ and ‘enterprising’ earnings; which plotted graphically with reported earnings, allow us to determine if we are looking at a company with a potential to deliver significant gains or simply a company that has managed to dress-up financials …

• The Defensive income statement will show how much the company depends on outside capitals sources and ultimately, the risk of it going bankrupt.

• The Enterprising income statement will asses the return generated by all of the company’s sources of capital.

It’s Earnings that Count offers an interesting perspective not only for the value investor but for anyone involved in stock selection. Although the method of how to analyze earnings primarily serves to improve investment decisions, the book also shows the reader what went wrong in corporate America in the past decade (i.e. Enron and Worldcom).

Enjoy!

Taming the Lion, Richard Farleigh Monday, July 9, 2007

The subtitle to this book is: “100 Secret Strategies for Investing”. Whilst we’re not sure that these are ‘secret’ strategies, they are very easy to understand and quite interesting.

Richard Farleigh undoubtedly has an enviable track-record and has managed to ‘retire’ at age 34 and now lives in Monte Carlo, using his private wealth as a Business Angel, investing mainly in small UK companies.

The book focuses on his experiences and gives you thought-provoking perspectives about how to try to preempt, understand and react to market movements. The best part of this book is that it is a very easy read and that it is written in a very open and unpretentious way. We assume that it’s what you would get out of sitting down with Mr. Farleigh for good old fashioned discussion.

Some of the interesting points he makes are:

• Markets tend to under-react and not over-react.
• Most professionals are not outguessing the market.
• Good ideas can lose money.
• Avoid options if you do not understand theirs pricing.
• Don’t be a hero – do not buying falling markets.

All-in-all, written in a semi-autobiographical way, this book offers an insightful perspective into the mind of a successful investor from his experiences in a banking institution, hedge fund and private equity.

Enjoy!

Barbarians at the Gate, B. Burrough & J. Helyar Thursday, June 28, 2007

This book is the story of the largest corporate take-over in America history at that time; the battle for the control of RJR Nabisco.  If you interested, intrigued and fascinated by Wall Street, Corporate American and LBOs, then this is a book you must read.

Not only is this one of the best business books you will ever read but you could easily mistake it for John Grisham’s best novel. As the book states: “The rules were simple: never pay in cash – never tell the truth – never play by the rules.”

Just to give you an idea of “The Players” involved:

• Henry Kravis & George Roberts, KKR
• Bruce Wasserstein, Wasserstein Parella & Co.
• Theodore J. Frostmann, Frostmann Little & Co.
• John Gutfreund, Salomon Brothers
• James D. Robinson III, American Express
• And last but not least, F. Ross Johnson, RJR Nabisco

Basically, the story portrays the “greed is good” era and shows how money and power shaped the business arena and general corporate environment. Whereas the founder of Nabisco felt that he was responsible not only for increasing shareholder value but also for contributing to the general prosperity of the United States, Ross Johnson simply noted that “Some genius invented the Oreo. We’re just living off the inheritance.”

Enjoy!

Confessions of a Street Addict, James J. Cramer Monday, June 25, 2007

Jim Cramer is a very controversial character and we were not sure what to expect from this book. The only exposure we had to Cramer was from his CNBC show and he can come across as a bit crazy, loud and very arrogant.

We say, “he can come across as” because we are convinced that after reading this book, you will start to see him in a different light. Don’t get us wrong, what you see is what you get but the book allows you to get a better understanding of where he comes from, what he has accomplished and why there is a lot more behind him than people think. For example, most don’t know that he graduated from Harvard College where he was President and Editor-in-Chief of The Harvard Crimson, that he is the co-founder of TheStreet.com and that he compounded 24% after all fees for 15 years at the hedge fund he started.

This book takes you through his life from his youth and early interest in the market to how he quickly started to manage some more serious money at Harvard. Then the adventure continues to his first experiences on Wall Street at Goldman Sachs, him meeting his wife “the Trading Goddess” and setting up his own hedge fund and eventually TheStreet.com.

Cramer is characteristically outspoken, the pace is frantic and it really feels as if you are there within him (getting to the office at 04.30 a.m., celebrating the victories, not being able to sleep through the bad times, etc…). We would almost go as far as saying that he is contagious.

Honestly, this is probably on of the best glimpses your going to get into Wall Street and makes for an exciting read even for people how are not particularly interested in the financial world. In case you are not familiar with Cramer, here is a quick interview where he candidly talks about market manipulation – truly priceless – click here.

Enjoy!

One Up on Wall Street, Peter Lynch Wednesday, June 20, 2007

It is refreshing to see a Wharton graduate, great fund manager and Wall Street legend demystifying the investment world. Like Warren Buffett, Lynch is a quintessential value investor and has a very clear and simple way of expressing his views and strategies.

His mantra is “… average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professional by doing just a little research.”

In fact, he maintains that the average investor is in a better position than the professional as he is free to invest in whatever company presents the best opportunity and does not have to justify the decision to anyone. A professional will never be questioned for investing in a Blue Chip company that does poorly (he could always blame the economy, the management or unexpected events) but funnily enough, he would have a difficult task explaining why he invested in a Small Cap with excellent fundamentals that did poorly. Taken to an extreme, as Keynes put it: “Worldly wisdom teaches that it is better to fail conventionally that to succeed unconventionally.”

Lynch also talks about how people always forget to focus on what they know (i.e. a doctor would recommend an IT stock to a friend who is and IT specialist and in turn, the friend would recommend a drug stock to the doctor); do not forget to leverage your knowledge and competence! The book is full of check lists, rules and advice – some of them are:

• Don’t overestimate the skill and wisdom of professionals.
• The average person is exposed to interesting local companies and product years before the professionals.
• Invest in a house before you invest in a stock.
• Invest in companies that sound dull and operate in boring industries.
• Large profits can be made in common stocks.
• Large losses can be made in common stocks.

In essence, the book is a no nonsense look at value investing focusing on fundamentals, taking a long-term approach to portfolio management and avoiding hype through solid research. It really is a must read for any investor.

Enjoy!