The Manual Of Ideas: The Proven Framework For Finding The Best Value Investments. John Mihaljevic. Wiley, 2013.
Many books have been written on Value Investing over the years since Benjamin Graham’s Security Analysis was first published. Most have been rather specific, detailing well-defined methods of actual stock valuation. Some detail a single such method (Greenblatt: The Little Book That Beats The Market), others detail several different – but closely related in terms of theory – valuation methods (Graham: The Intelligent Investor).
Mihaljevic has seemingly gone a step further and written a framework for generating value “ideas”, by taking various specific yet different methods of determining value and relating them together in a way that is both readable and accessible and, in parts, entertaining.
The book is divided into a manageable 10 chapters, each describing a separate facet of using value to generate ideas; each chapter ends with 10 takeaways which summarize the main points discussed.
The first chapter asks a fundamental question: What do you want to own and how do you want to own it? This is a key self analysis question for new value investors – should you invest yourself or give your money to someone else to invest? You have to carve your own path, or agree with the path of those you invest with. Should you choose to go it alone, you should think like a capital allocator who ultimately reaps returns from good businesses while ignoring the whims of the stock market.
Once this key question is answered, we can get proceed to the different ways of generating value investing ideas, beginning with Deep Value or Cigar Butt investing. This is more or less what the NCAV screen on The Graham Investor is about – looking for bargains using tangible balance sheet metrics. Mihaljevic purports that basic screening for companies with high book-to-market values (read companies trading below current asset value) can be anointed with holy grail status by finding companies that also have high returns on capital although he asserts that this is nearly impossible in practice. He makes it clear that the right questions must be asked of such bargains. How is value growing, if at all? Is the liquidation value really what we think it is? (Hint: most investors overestimate liquidation values.) Is there a potential catalyst that might unlock value, other than value itself? The chapter goes into a lot of detail and is well worth a read for fans of The Graham Investor’s NCAV screen.
Chapter 3 discusses Sum of The Parts Value, and details how to generate ideas for investing in companies that have excess or hidden assets. What does a company really own? Does it have significant real estate, net cash, or investments in other companies? These questions are probed with vigor and Mihaljevic provides an in-depth guide to finding and appraising such hidden assets. Some of this information was new to me, and for that reason this chapter alone is worth the price of the book itself.
A recap of Joel Greenblatt’s “Magic Formula Investing” follows, with some suggestions on how to apply and enhance it for better idea generation, in particular by utilizing forward-looking earnings. “The future is what counts in investing.” There is no doubt that Greenblatt’s method on its own works, and works very well; what is surprising to me from reading the chapter is that more people don’t religiously follow it.
Chapter 5 describes the “Jockey Stock” method of idea generation. A jockey stock is a company with great management, and a CEO who either creates tremendous business value or is an intelligent allocator of capital. Steve Jobs (Apple), Henry Singleton (Teledyne), and Buffett himself, amongst others are mentioned as being jockeys that meet either criterion. Methods of seeking out and assessing jockeys are explained. For example: ROCE, Growth of Capital, Asset Turnover, CapEx, Management Incentives, and insider buying are all considered.
Superinvestors are established value investors such as Buffett, Mohnish Pabrai, Guy Spier, Bill Ackman, Seth Klarman. Chapter 6 discusses idea generation from tracking superinvestor portfolios and activity via SEC filings (CIK numbers are given for various super investors in distinct value sectors by Market Capitalization), news, activism, and determining superinvestor conviction levels by analyzing various factors that make a particular superinvestor holding stand out as one of their more promising ideas.
Chapters 7 and 8 respectively cover small/micro-caps, and special situations. I won’t go into much detail on these chapters, but they provide two of the more interesting reads in the book and I have come away from them feeling like I learned a great deal. If I had any criticism of the book, it would be that these chapters are buried so late in it!
I wasn’t particularly interested in Chapter 9, Equity Stubs; I find the idea of speculating in leveraged companies a little too risky for my liking. From here it was a quick flip to the final chapter on International Value Investments which is another key section. There is value all around the World, you just have to know how and where to find it in order to improve a portfolio’s risk-reward, while at the same time not being blindsided by differences in corporate governance, or by assuming that your circle of competence extends globally.
The Manual of Ideas is a timely book, and a handy Swiss Army Knife for the pocket of every value investor. It should be referred to time and again, particularly if “investor’s block” (the investor equivalent of writer’s block) ensues. A swift browse of a random chapter and you will be back generating value ideas in no time at all. My hat goes off to John Mihaljevic for putting together this excellent volume which is available on Amazon.