• 022 09/21/2014

    I had to share this fantastic Q&A with Charlie Munger from The Wall Street Journal. I included a few of my favorite answers below, but I would suggest just following this LINK for the full article.

    On Benjamin Graham, the great investor who was Warren Buffett’s revered mentor:

    I don’t love Ben Graham and his ideas the way Warren does. You have to understand, to Warren — who discovered him at such a young age and then went to work for him — Ben Graham’s insights changed his whole life, and he spent much of his early years worshiping the master at close range.  But I have to say, Ben Graham had a lot to learn as an investor.  His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.

    I think Ben Graham wasn’t nearly as good an investor as Warren Buffett is or even as good as I am.  Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars.  But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals – probably the only intellectual — in the investing business at the time.

    On how he sank tens of millions of dollars into bank stocks in March 2009:

    We just put the money in. It didn’t take any novel thought. It was a once-in-40-year opportunity. You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is. For most professional money managers, if you’ve got four children to put through college and you’re earning $400,000 or $1 million or whatever, the last thing in the world you would want to be worried about is having gumption. You care about survival, and the way you survive is just not doing anything that might make you stand out.

    On the absurdity of much of the money-management industry:

    Back in 2000, venture-capital funds raised $100 billion and put it into Internet startups — $100 billion! They would have been better off taking at least $50 billion of it, putting it into bushel baskets and lighting it on fire with an acetylene torch. That’s the kind of madness you get with fee-driven investment management. Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top. I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’ He said, ‘20%.’ I couldn’t believe it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!’ The investment-management business is insane.


  • 021 09/10/2014 How to Integrate Financial Statements - Video Update

    I recently decided to rerecord the video titled "Overview of the Process" in the Integrating Financial Statements series. This is in an effort to reduce the amount of material posted where I sound like a robot (unfortunately I still sound a bit like a robot...).

    Whether you aspire to start a business, work in investment banking, or work on the buy side, a thorough understanding of the relationships between the three primary financial statements is critically important. For me personally, everything I had come to understand about accounting truly clicked for the first time in the process of building an integrated model. It may be biased (and I realize there are many different learning styles), but I believe it's the best way to achieve this level of understanding.

    Over time, and with enough practice, you will have the ability to make these calculations without looking at a model. If you are engaged in conversation about the future of any business, understanding how changes in the company’s operations will impact the balance sheet, and how that in turn will impact net income and cash flow, is invaluable.

    Link to new video: Overview of the Process.


  • 020 08/05/2014

    Those interested in investing or cheeseburgers (and I would hope that covers everybody) should read this article about Burger King. It covers the rise of Andrew Schwartz from analyst at Credit Suisse First Boston to CEO of Burger King by age 32, and the drastic changes made at the company since he assumed the role. The approach taken by Schwartz has been an unprecedented departure from the industry norm. Fortunately Wall Street is a fan.

    Excerpt taken from Bloomberg Businessweek:

    Schwartz, who did not cooperate for this article, has overseen much chiseling. McDonald’s owned 19 percent of its 35,429 restaurants worldwide in 2013. Wendy’s owned 18 percent of its 6,557 outlets. Historically, Burger King operated much the same way: When 3G bought the chain in 2010 it owned 11 percent of its 12,174 restaurants around the world. Since then, Burger King has sold all but 52; it keeps the last few for training executives and testing products.

    That’s such a departure from the way its competitors operate that some people are questioning the company’s strategy. “Unless you keep a certain percentage of stores, you don’t really know how the business is operating,” says Malcolm Knapp, a New York restaurant industry consultant. He contends that Burger King’s management is interested primarily in siphoning cash out of the business. Howard Penney, managing director of Hedgeye Risk Management, a research firm in Stamford, Conn., is similarly skeptical of Schwartz’s methods. “It’s financial engineering,” he says. Burger King disputes this, but such suspicions are reasonable. After unloading more than 1,200 restaurants, the company’s corporate head count has fallen from 38,884 to 2,425 in 2013. Now its income flows almost entirely from royalty fees from franchisees, on average 4 percent of franchisees’ monthly revenue. That’s less money than before overall, but Burger King has become a cash machine. And 3G hasn’t been shy about helping itself to some of that money.

    At the same time, Burger King’s business has been growing. Schwartz negotiated agreements with restaurant operators and financiers in Brazil, China, and Russia, where American hamburgers are still a novelty. They haven’t just purchased restaurants from Burger King, they’ve also constructed new ones. As a result, the number of Burger Kings worldwide rose by 1,493 in 2013, to 13,667. And the company hasn’t had to spend much money; its partners are putting up the bulk of the cash.

    Wall Street has responded enthusiastically. Burger King went public again in June 2012 in an offering that put a $4.6 billion value on the company. As of early July, its market cap had risen to more than $9 billion. The doubters are in the minority now, and many in the investment community would like McDonald’s and Wendy’s to mimic the kids at Burger King. 

    For the rest of the story please follow the LINK.



Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.