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Benjamin Graham

A docile animal in captivity

Published on:
March 16, 2019
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Bored, without anything better to do, I looked which investment funds own the stock of Seritage Growth Properties (SRG on Nyse). The list in Seritage is the all-star dream team of value investing. Owners of Seritage common stock include Warren Buffett (owns 2 million shares), Bruce Berkowitz (owns 3.2 million shares), Mario Gabelli (owns 114 thousand shares) and Victor Cunnigham of Third Avenue Management (owns 291 thousand.)

Yet I had never heard of Seritage's largest investor, a mutual fund provider by the name of  Hotchkins & Wiley. Founded in 1985 in Los Angeles, California, Hotchkins describes itself as "boutique asset management firm with an orientation for long-only value investing." It manages $27 billion and it offers mutual fund products, from large capitalization stocks to small capitalization stocks.

One of its funds, the Small Cap Value Fund, looks for companies with market capitalization from $100 million to $4 billion. Since its inception, the annual return of the fund, net of fees, was 11%. That means that a dollar invested in the fund in 1985 would now be worth 31 dollars. Not bad, I reckoned.

I looked at the companies owned by Hotchkins, hoping to copy from them a few stock ideas. Their largest poisiton is in First Hawaiian Inc (FHB on Nasdaq) which seemed to trade at a reasonable price to value. I could not understand what lured the fund managers to own the stock. The second largest holding was Seritage Growth Properties, a stock which I already bought a few months ago. Enstar Group, their third largest holding, is an insurance company that trades at a fair price. A marketing firm by the name of MDC Partners (MDCA on Nasdaq) was the one company that caught my attention.

MDC Partners      

Described as "the first advertising hedge fund" by Adweek a few years ago, MDC buys established marketing companies and lets the original owners decide how to best run their business. MDC defines itself as "a partner company, not a parent company." 

According to its website, MDC’s business model "fuels the entrepreneurial nature of agency parents and provides collaboration and continued support to ensure that each partner achieves their greater ambitions." You would expect such marketing language from an ad company. But the operational results are quite good, too.  

In numbers: over the past three years, revenue grew by 4% compounded annually, from $1.3 billion in 2015 to $1.5 billion in 2017. I estimated that the 2018 revenue (which will be publicly disclosed in one week) will remain stagnant at $1.5 billion.

The company's normalized after-tax free cash flow increased by 24%, from $32 million in 2015 to $61 million in 2017. I estimate that the company’s normalized after-tax cash flow will be $50 million, or about 70 cents per share in 2018. With a current price tag of $2.30 and an earnings multiple of less than 5 times, the stock of MDC seemed attractive to me.

Yet the stock market feels differently. Over the past year the stock price slashed by over 70% from $8.45 as of February 2018. After MDC reported on a loss in the first quarter of 2018, the stock dropped by 40% in less than a week and throughout 2018, without significant improvement to report to shareholders, the stock tumbled.  

The (strange) reason why I bought shares in MDC Partners

Readers of this blog know that I refrain from social media and hardly know of our popular culture icons. This makes me the last person to understand how digital marketing works, let alone which marketing company has a brighter future than its peers. So to be clear: owning shares in the marketing industry is beyond my circle of competence.

Yet perhaps it is not beyond the abilities of a discrete hedge fund, FrontFour. Managed by Stephen Loukas, David Lorber and Zachary George, FrontFour owns over 5% of the common shares of MDC Partners. 

According to its 13D filing glossary, the company, through its various funds, bought - over the past year - 3,009,500 shares for $13.73 million, which are now worth $10.08 million. This is a market loss of $3.65 million, or 26% loss on paper.

FrontFour decided to do something about the loss in value and is now calling for a significant change to the board of directors. Its energy and enthusiasm are the reason I decided to buy a few shares in MDCA. Loukas, as an individual, bought 3,500 MDCA shares at a price of $4.2, and I bought a few weeks ago the same amount of stock at slighly lower price of roughly $3.

Epilogue

"The choice of a common stock is a single act," lamented Graham and Todd in their seminal work Security Analysis. "Its ownership is a continuing process. Certainly there is just as much reason to exercise care and judgement in being a stockholder and in becoming a stockholder. It is a notorious fact, however, that the typical American stockholder is the most docile and apathetic animal in captivity."

They continued: 

"In good part his docility and seeming apathy are results of certain traditional but unsound viewpoints that he seems to absorb by inheritance or by contagion. These cherished notions include the following: (1) The management knows more about the business than the stockholders do and therefore its judgment on all matters of policy is to be accepted. (2) The management has no interest in or responsibility for the prices at which the company's securities sell. And (3) If a stockholder disapproves of any major policy of the management, his proper move is to sell his stock."

Kudos to FourFront for proving otherwise and for also eliminating my boredom.

Why the Kahn Brothers own Voxx International

Published on:
January 5, 2019
Reading time: 3 Minutes.
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***April 29, 2020 summary: I bought 2,000 shares on December 18, 2018 for a total of $9,099 or $4.55 per share. Less than a year after, on November 29, 2019, I sold all shares at $4.64 a share. I didn't understand Voxx business and didn't have any interest in learning more about it***

It is one thing to watch a live soccer game, and it is quite the other when we know already which team had won the match. In the former, we try to make sense of what we don't know, and in the latter, we make sense of what we already know.

So it is in stock investing. When you know that General Electric (GE on Nyse) was $15 and now trades at $7 - it is simple to see the decline in price. GE had a shakeup in management; the spot price of energy dropped, and the prospects of solar energy are not as alluring as they were when Al Gore ran for president [1]. 

But determining whether in a year's time GE's stock will again halve in price is a different task. I once heard that as opposed to Physics - where three formulas explain 99% of the observed phenomena - in stock investing, 99 formulas explain less than 3% of what eventually happens. 

There are too many unknowable and unforeseeable variables that will cause a stock price to move up or down. And to predict price movement is to predict the future. Rarely a success.

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Voxx largest shareholders 

This week I came across Voxx International, a small-capitalization stock of $108 million that is controlled by its founder, the 86-year old Mr. John Shalam. 

Voxx sells audio accessories across the globe and holds an umbrella of 30 brands that it has acquired over the past decade. The company earned about one dollar per share in 2017 and is expected to earn roughly the same in 2018. It is trading at about five times the 2017-2018 average earnings per share.

More intriguing about Voxx are its owners. I mentioned already that Shalam owns the majority of the outstanding shares, and had rarely sold shares over the past 15 years (less than 1% in dilution, compounded annually). 

Voxx International Largest Shareholders
Voxx Largest Shareholders. Resource: Proxy 2018 filing.


More of interest is that Kahn Brothers Group (KBG), the flagship investment arm of the legendary value investor Irving Kahn, of blessed memory, not only holds about 15% of the outstanding common stock but has also been a shareholder in Voxx International for 15 years.

Why the long hold period, I wonder. Nothing appears to be unique about Voxx International. The operating margins are slim, and the business model has not been consistent either. 

Fifteen years ago, the strategy was to leverage the brand Audiovox Corporation. But the business model completely changed over the past decade as management realized that capital markets preferred that management grew earnings via mergers and acquisitions. And the company had enough years of operating losses that Benjamin Graham would warrant its stock to be a speculative position.

Why Kahn Brothers Group has owned the stock for 15 years

Initially, I estimated that this was a classic loss aversion case. Based on the 13-F filings, the average cost per share for KBG was $9, and since the paper loss is now about 50%, KBG is merely waiting until the stock climbs to a reasonable price.

Or perhaps KBG cannot quickly sell the shares in Voxx. If a company owns over 5% of the outstanding shares in a publicly-traded firm, the company must publicly disclose its intention to sell shares.

Finally, I concluded that KBG must understand something that I do not. Perhaps Mr. Market is unhappy with the controlling member or maybe the value of the business, as an umbrella that holds many brands is worth much more than the price of the brands individually. Perhaps KBG believes the intrinsic value is much higher than what the basic discounted cash flow approach reveals.

Is Voxx International a Bargain Stock? 

While on the surface, Voxx appears to be a bargain at a price to earnings ratio of five times, at a closer look, management reported that only 3 cents of the reported earnings of $1.41 are from continuing operations. 

Last year's earnings were primarily the result of the selling of Hirschmann Car Communication. The sale of Hirschmann is an example of why the Kahn Brother Group continues to hold the stock is my final guess.

Voxx, in numbers

At its most recent annual filing, the company reported assets of $575 million with associated liabilities of $125 million. The equity is $450 million or $20 book value per share, resulting in a price to book value per share of 22%. 

Voxx 2018 to 2014 operating results. Resource: Public filings.


Removing goodwill and intangible assets of $250 million, which are 43% of the reported assets, the equity balance is $200 million or $9 per share, a price to book value of 49%.

So I went ahead and bought a few shares in Voxx. While I understand little about the consumer sector (I did not recognize a single brand owned by Voxx), I am hoping for two things. 

First, that KBG knows something about the business that I have yet to discover, and second, that, indeed, the value of the assets is worth more than what Mr. Market is now willing to pay for them at the moment.

FOOTNOTES: [1] GE traded at $45 a share at the time.

Why I don't own bonds

Published on:
November 24, 2018
Last Update:

The Golden Rule in financial planning is 60/40. If you saved $10,000 your financial adviser would tell you that $6,000 should be held in stocks. And that you should buy bonds with the remaining $4,000. The rationale is that stocks are known to be volatile and risky. While bonds are considered to be safe and sound and do not fluctuate in value as much. 

The Darwinian rule that only the fittest survive does not seem to apply in the world of bonds. You would think that over time, only the best - and safest - bonds would be available to purchase. But as a matter of fact, the types of bonds an investor can now buy nowadays are fulls of risks.

A few examples: there are bonds backed by the full faith and credit of the U.S. government; bonds backed by corporations, both domestic and international; bonds whose payments are tied to U.S. inflation, known an TIPS; bonds backed by the full faith and credit of foreign governments; bonds backed by promises of local municipalities; bonds backed by residential mortgages; And junk bonds, which are bonds that pay a higher yield due to a higher probability of default.

Great investors do buy bonds. Bill Gross, who co-founded Pacific Investment Management Corporation and ran their $270 billion Total Return Fund, is considered a legendary bond investor. 

In 1984, Warren Buffett bought large quantities of Washington Public Power Supply System bonds. He noted: “

Charlie and I judged the risks at the time we purchased the bonds, and at the prices Berkshire paid, which were much lower than present prices, to be considerably more than compensated for the prospects of profit."  

Bonds are not risk free

Yet holding bonds pose risks. First, at time of duress - think the Great Recession - it becomes difficult to sell bonds. This is known as liquidity risk. 

Second, while as a bond holder you are promised a certain rate of return, if interest rates increase, and similar bonds in terms of credit and risk offer a higher rate of return, the value of the bond you hold is reduced. This sensitivity of the bond's value to the interest rate environment is known as duration risk. 

Third, purchasing one bond, backed by just one corporation, will expose you to the financial health of the company. Read: if the operating performance of the corporation deteriorates, you may not get your payments as promised. This is known as concentration risk.  

Mr. Market solution to these three risks has been the advent of exchange traded funds (ETFs). In a conference I attended last week in Newport Beach, I learned that there are now over 380 bond ETFs; effectively, these are investment vehicles that buy bonds and pay you, the investor, a coupon payment. There are ETFs that track inflation, such as Schwab U.S. TIPS ETF (traded under SCHP) and municipal bond ETFs, such as SPDR Barclays Municipal Bond ETF (traded under TFI). The list goes on and on.

What can replace a bond ETF

But I never bought a bond ETF nor do I plan to own one. Nassim Taleb, the investment philosopher, once said that the greatest risk is the one we don’t understand. And I certainly cannot understand the value of the bonds owed by any of the varying ETFs.

Take, for example, PIMCO Total Return ETF, traded under the symbol BOND. The “sensible income-focused strategy paired with world-class resources” as described by Morningstar the ETF, owns U.S. Government bonds (25% of the fund), Mortgages (60%) of the fund and investment grade credit bonds. And if you had invested $10,000 in BOND in February 2012 it would now be worth $12,602, a pittance of return at 3.36%.

But even with an inferior yield for bond investing, for some investors buying bonds is important. Take banks or insurance companies, for example. These financial services entities are required by law to hold bonds and are discouraged from purchasing the stock of publicly traded companies. A second example would be a pension fund that expects to pay out, in 3 years, retirement benefits and would need to buy a bond that will expire in 3 years.

In the Intelligent Investor, Benjamin Graham devotes much space to historical patterns of financial markets. "To invest intelligently in securities on should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditons - some of which, at least, one is likely to meet again in one's own experience." 

And there is simply insufficient data to understand how bond ETFs behaved in different market cycles.

Epilogue

History shows that the return from holding bonds is less than the return from holding stocks. In Jeremey Siegel’s Stocks for the Long Run, he provides data that supports the prior statement. If you had invested $100 in 1802, you would have $704,997 in 2002. Compare that to the same investment in bonds and you end would have ended up with a pittance of $1,778 in bonds. 

The 200-year annualized return from stocks was 6.6%, and for bonds it was merely 3.6%. This is the magic of compounding interest.  

More important than choosing between stocks and bonds and the allocation between the two assets is that you follow Socrates’ advise to know thyself. Not very different from a scientist, a successful investor constantly asks: “Why? Why am I buying bonds, and will my rationale hold in good and in bad times?”

NAFTA And Core Molding Technologies

Published on:
October 20, 2018
Last Update:

That things are not always what they seem and that first appearance may deceive many was already understood by Plato over two millenniums ago. In this meditation I will describe what at a first glance appeared to be a bargain stock, was an ill-advised purchase upon a careful review. My purpose in writing this meditation is to demonstrate that financial numbers and the prices of stocks are the starting point, but not the final word in stock investing.  

Core Molding Technologies Inc., which trades on the New York stock exchange, appeared to be a bargain stock. Management had increased the number of outstanding shares by one percent compounded over the past decade. In 2008 there were 6.8 million common shares outstanding and today there are 7.7 million common shares outstanding. The average 10-year earnings per share was 93 cents - the stock traded at roughly 9 times the decade-long average earnings per share. The book value per share increased by three-fold during this time. And Benjamin Graham would be proud of my discovery, I thought.      

Its rags to riches story is remarkable. CMT sells a particular niche product called reinforced plastics. The top industries that use the product are transportation, construction and industrial. The company’s major customers include Navistar, Volvo, Paccar, Yamaha and Bombrader Recreation Production. As of the end of last year, these customers were responsible for over 90% of CMT's sales.  

What drove the stock price down

So here is a company with a reasonable product that traded hands at a cheap price. The company's common stock started at $20 in 2018 and had halved recently. The culprit was Mr Market's fear of how changes in the North American Agreement on Environment Cooperation (NAFTA) will affect the company.

NAFTA targets the relationship between America, Mexico and Canada, the same countries in which CMT predominately operates. In 2017 CMT revenue from Uncle Sam’s land was $103.5 million in the United States, $52.5 million from the land governed by Enrique Pena Nieto and $5.6 million in the land of Maple syrup. It also owns and leases manufacturing plants in all three countries.

As many of you know NAFTA is now being renegotiated. And while final details have yet to be published, it will be of little surprise to see red tape and additional costs in the auto industry (in which the majority of CMT’s customers operate.) And business logic dictates that if the customer of a company is suffering, then the company’s business will be hurt too. In short, the expected macroeconomic changes in policy penalized the stock price of CMT.    

But while the looming NAFTA uncertainty is not helping companies like CMT, the is more to the the decline in the stock price. I argue that CMT’s stock price to decline its purchase of Horizon Plastics International, which was announced in January of this year.

Using a combination of cash and debt, CMT paid $63 million for Horizon. "The purpose of the acquisition was to increase the company's process capabilities," explained management. "They will now include structural foam and structural web molding, expand the geographical footprint and diversify the company's customer base."

All nice and well, I thought. But at what premium? Instead of waiting to see whether the future value of companies that operate in Canada and Mexico will deteriorate given the new NAFTA agreement, CMT's management was eager to move forward and paid a premium for Horizon Plastics.

On an increase in goodwill and debt

In CMT’s10-Q filing as of year end 2017, the company recorded $2.9 million in goodwill and intangible accounts. Compare that to the second quarter of this year where it recorded a whopping $40.1 million in intangible assets. Yet what should truly scare current shareholders (yours truly is not included in that group) is the debt level.

Long term debt as of last year was only $3.75 million. Yet as of the second quarter of this year, long term debt was $39.4 million, a little over nine times as much. Evidently, management's appetite for debt affected the income statement. The interest expense this year was 8 times higher compared to the same period last year. In numbers: In June the interest expense was $1.07 million compared to $129 thousand a year ago. So operating income to interest expense deteriorated to 2.37 times, compared to 44.38 times a year ago.

In our rising interest rate environment, it is puzzling why management had added fuel to the fire by taking a variable debt obligation and not a fixed debt obligation. Since management had not addressed the matter in its recent earnings call, I will offer a few explanations for the variable versus fixed debt conundrum.

First, the bankers would not finance the acquisition of Horizon Plastic with fixed debt. Second, management does not consider this to be a rising interest rate environment. Third, the cost of variable debt payments was much cheaper than fixed debt payments. Fourth, management was just careless and does not see the variable-versus-fixed debt as a material issue. Fifth, and most likely in my opinion, management did not have other options.

All roads lead to Rome. And no matter the justification, current shareholders should be appalled by CMT’s management's past business decisions. To pay a premium for a company that operates in Canada and Mexico was wrong. To finance the acquisition using variable debt was wrong. And to reduce the cash balance to practically nil was wrong too.

The Liquidation Value of LSB Industries

Published on:
June 22, 2018
Last Update:

When accountants look at the operating financials,
they assume that the company will continue to operate in the future. By definition, The
reassures them that an asset
is "a resource controlled by the enterprise as a result of past events and
from which future economic benefits are expected to flow to the
enterprise."

Yet at times, what the investor may look for in a company's
financials is the exact opposite; that is, what the financial condition and
value of a company will be should it cease to operate. To look at a company
that way, one must look at its liquidation value.

LSB Industries

To explain liquidation value, I will use the operating financials of an
Oklahoma-based chemical manufacturer. In 2017, the management of
 reported on $1.2 billion in tangible assets and on $576 million in liabilities.
The equity balance - at first glance - was $438 million or $14 per share.

In 2017, revenue was $427 million but it reported a loss of
over $70 million; In 2016, revenue was $374 million but again management
reported on a loss of over $120 million; And in 2015, revenue was $438 million but the net loss was over $30 million. 

Let's take a quick detour and discuss the liquidation value
strategy. We will return to LSB Industries in four paragraphs.

The Liquidation Value Strategy

The thesis is simple: because a company has been losing
money, management is likely to either sell assets in the future so that the company
will (1) continue to service its debt, or that frustrated shareholders, tired
of management earning a salary at their expense, will (2) require management to
get rid of all the company’s assets; i.e. liquidate the firm.

Anticipating this scenario is an investor that believes that
after management sells its assets and pays off its lenders, there will be an
ample amount of capital left.

Some of the great investors practiced liquidation value strategy.
In
, Benjamin Graham mentions that
between 1926 and 1956, liquidation strategy was a major part of his investment
operations. He eloquently defined liquidation as the "the purchase of shares that
received one or more cash payments in liquidation of the company's assets."

, famously known to purchase a majority interest in Sears. He began to acquire position in the company in 2005. And told his investors that the company at the time did not reflect any of the value of Sears real estate
holdings.

From discount to premium

As LXU trades at about $5, it appears to be a mouth-watering, cheap stock price relative to the book value. Like purchasing a $100,000 home for $36,000. But capital markets had reason to discount LXU’s book value since management reported losses for over three consecutive years. 

Excited about the steep discount to book value, I read the latest

. On page 63, you can read that $1.01 billion of
the $1.2 in assets is related to property, plant and equipment, net of
depreciation. And if you flip to page 80, you will read that this book entry is
related solely to machinery and equipment (buildings and land are less than
5%). And management reports the value based on the cost of the equipment and not the market value.

But what is value of the equipment?

In liquidation, the
equipment - or any other assets, except for cash - is often sold anywhere between 70%
to 50% of its cost. Let's put the last sentence in numbers. If LXU were to sell
its equipment at a 70% discount of the reported cost, the equity per share
would be $112 million tangible net worth or $3.23 net worth per share. 

If LXU
were to sell its equipment at a 50% discount of the reported cost, the equity
per share would be negative. Read: at a 50% discount, the common shareholder
interest in LXU would be completely wiped (the deficit would be about $90
million, or a loss of $3 per share).

For the accounting enthusiastic reader, here is how I calculated the
book value per share. I removed intangible assets such as goodwill. In
the case of LXU, that amounted to $11.4 million of intangibles. I also added to the liabilities the liquidation preference of the preferred shares. Since LXU issued 140 thousand of cumulative, redeemable preferred
shares, with a liquidation preference of $185 million. (What this means is that,
in the case the company liquidates, lenders would be paid $576 million, and
then preferred shareholders would be paid $185 million.) 

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Founded in 2004, by Charlie Tian PHD, GuruFocus provides institutional-quality financial stock research for the individual investor.

GuruFocus hosts many value screeners and research tools and regularly publishes articles about value investing strategies and ideas. One of the features I use most is the 30-year financial information on businesses. Visit the 30-year analysis on LSB Industries to see more.

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Three lessons

The story of LXU teaches us three lessons. First, stock investing
requires more than a quick glance at financial ratios. Unless you had carefully
read the 10-K report, the $185 million in liquidation preference would be
hidden. That is to say, in the case of liquidation, there were 32% more liabilities than reported by the accountants.

Second, accounting statements are the starting point for analysis but are not the final word. In the case of LXU, because of three years of
consecutive operating losses, the possibility exists that the management will
decide to sell the company’s assets, so the investor must ask: how much capital
will remain – if any - after a sale?

Third, while the purpose of the liquidation value strategy is to find
stocks, its real value at time lies in telling us which
stocks to avoid.  

Great Reads About Value Investing

Published on:
December 22, 2017
Last Update:

Standard & Poors 500 Guide 2013

The 2013 guide provides a 10-year operating performance on 500 companies. Forget sifting through annual reports. The balance sheet items and income statement ratios are at your fingertips. And most importantly, the guide allows you to see how a hypothetical investment would materialize now, after a reasonable five-year holding period. This is a mental exercise I enjoy greatly.

The guide is organized alphabetically. So flip through it randomly and come across very different businesses, from firms that provide filters for healthcare and aerospace industries, such as Pall Corporation to companies that underwrite an array of personal and commercial lines of insurance, such as Progressive Corp. In short, the guide offers a unique, bird’s eye glance at the operations of businesses and allows you to test investment concepts.

Berkshire Hathaway Letters to Shareholders 1965 to 2014

The last time I read Warren Buffett's letters to shareholders was in 2011. My goal at the time was simply to understand his business lingo. I studied amorphic terms such as “intrinsic value” and “moat” and a bit more technical ones, such “tangible book value,” “earnings per share” and to how to look at depreciation estimates. I learned greatly and so will you. But now my purpose is different.

This time, I will be looking for observations about business. Most of us can recite the clichés: that it is only when the tide goes out do you discover who's been swimming naked. Or that price is what you pay but value is what you get. But this time, I will be looking for the overlooked, unpopular thoughts and reflections. For example, in 1983 Buffett commented on free market:

We are aware of the pie-expanding argument that says that such activities improve the rationality of the capital allocation process.  We think that this argument is specious and that, on balance, hyperactive equity markets subvert rational capital allocation and act as pie shrinkers.  Adam Smith felt that all noncollusive acts in a free market were guided by an invisible hand that led an economy to maximum progress; our view is that casino-type markets and hair-trigger investment management act as an invisible foot that trips up and slows down a forward-moving economy

Or, in 1994, he commented on the value of macroeconomics in making investment decisions:

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or  treasury bill yields fluctuating between 2.8% and 17.4%.

By the way, while many authors have written about Buffett’s principles and wisdom, to discover some of the principles for yourself will make you remember them better. But finding enduring principles is really the topic of our next book.

The Intelligent Investor

To rediscover investing principles, I plan to read again Benjamin Graham’s book. His principles endured from the lure of investing in conglomerate companies in the 80s to investing in tech stocks in the late 90s. The same principles, written in the late-40’s, apply to us almost 70 years later. Besides, the principles are pragmatic. I bought shares in Famous Dave and Terra Nitrogen, only because I was looking for companies that Graham would find agreeable to invest in.

At this point, the careful reader would realize that I love financial history. And the Intelligent Investor offers plenty of historical wisdom that is relevant to today's capital markets. Graham discusses how the airline industry, a marvelous discovery that forever changed the way we travel and commerce, proved to be a poor place in which to invest. Using a pen and paper, Graham provides us an overview of market irrationalities throughout the book. 

Yet Graham will leave students of finance unsatisfied. In the Intelligent Investor, he hardly offers valuation formulas, nor provides us with financial statement analyses. For that, we will need to head to the next book choice.   

Security Analysis: Sixth Edition

When I read Security Analysis for the first time, I must have felt the same joy that Darwin experienced when he walked the Galapagos Island for the first time in 1835. Read Security Analysis and you will get a new, profound appreciation of the profession of stock investing. You will realize how each rock must be turned before making a stock purchase; you will see how tricky it is to truly understand financial statements. And besides, it is a very practical read. When I wrote What Rait Financial Taught Me, I based the entire analysis using preferred stock adjustment methods discussed in chapter 14: The theory of preferred stocks.  

Security Analysis focuses on equity and bond investing. And readers may argue that the intense focus on those two asset classes is really its weakness. Our investing world now consists of esoteric asset classes from currency to derivative trading. So, for those who favor the hedgehog over the fox view on investing, the final set of books  will do the trick for you. 

CFA Program Curriculum 2018 Level 1 Volumes 1-6 Box Set

This curriculum includes a wide array of topics, from probability and descriptive statistics to corporate finance issues, such as mergers and acquisitions. The last time I reviewed the level 1 material was in 2010 and because in my day to day work I don't follow macroeconomics nor wealth planning, I could use a refresher.

I view the Level 1 material as a gym for the (financial) mind. Knowing how to value bonds with embedded options and how the theory behind the optimal capital structure works is most likely meaningless in what you do. But it will make you better at what you do.

A word of caution, unless you intend to participate in the CFA program: The price of the curriculum for the six-volume CFA Institute Level 1 curriculum is a hefty $233 price tag. Write to me if you can't afford to register for the program or the curriculum. 

For five individuals, I will contribute 50% of the curriculum costs in 2018. 

Finally, two points of disclosure. First, while I am an active board member of CFA Society of San Diego and a current CFA charter holder, I do not receive any compensation from the CFA Institute. I recommended the level 1 curriculum solely because I think it’s the best resource out there for students and practitioners who are interested in expanding their knowledge in investment management.

Second, if you purchase any of the books using the links above, Amazon pays me up 10% of the proceeds. I donate 100% of these Amazon proceeds. Write to me if you would like to know which charities I support or if you have a specific charity in mind.