The Manual of Ideas The Proven Framework for Finding the Best Value Investments

Considered an indispensable source of cutting-edge research and ideas among the world's top investment firms and money managers, the journal The Manual of Ideas boasts a subscribers list that reads like a Who's Who of high finance. Written by that publication’s managing editor and inspired by its mission to serve as an "idea funnel" for the world's top money managers, this book introduces you to a proven, proprietary framework for finding, researching, analyzing, and implementing the best value investing opportunities. The next best thing to taking a peek under the hoods of some of the most prodigious brains in the business, it gives you uniquely direct access to the thought processes and investment strategies of such super value investors as Warren Buffett, Seth Klarman, Glenn Greenberg, Guy Spier and Joel Greenblatt.

• Written by the team behind one of the most read and talked-about sources of research and value investing ideas
• Reviews more than twenty pre-qualified investment ideas and provides an original ranking methodology to help you zero-in on the three to five most compelling investments
• Delivers a finely-tuned, proprietary investment framework, previously available only to an elite group of TMI subscribers
• Step-by-step, it walks you through a proven, rigorous approach to finding, researching, analyzing, and implementing worthy ideas

John Mihaljevic, CFA, is a Managing Editor of The Manual of Ideas, the monthly idea-oriented research publication for value-oriented investors, and a Managing Director of ValueConferences, a series of fully online investment conferences for value-oriented investors. He has also served as Managing Partner of the investment firm Mihaljevic Capital Management LLC since 2005. He is a member of Value Investors Club, an exclusive community of top money managers, and has won the club's prize for best investment idea. John is a trained capital allocator, having studied under Yale University Chief Investment Officer David Swensen and served as research assistant to Nobel laureate James Tobin. John holds a BA in economics, summa cum laude, from Yale and is a CFA charterholder. He resides in Zurich, Switzerland, with his wife, two sons, and a daughter.

Foreword

Preface

Chapter 1: A Highly Personal Endeavor: What Do You Want to Own?

Give Your Money to Warren Buffett, or Invest It Yourself?

Cast Yourself in the Role of Capital Allocator

Role versus Objective: A Subtle but Important Distinction

The Buck Stops Here

The Scale of Investments: How Much is a Billion Dollars, Really?

Owner Mentality

Adopting the Right Mindset

Stock Selection Framework

Key Takeaways

Notes

Chapter 2: Deep Value: Ben Graham-style Bargains
Inelegant but Profitable Strategy of “Cigar Butt” Investing

The Approach: Why It Works

Track Record Dating Back to the “Father” of Security Analysis

Some Companies Are Worth More Dead than Alive

Investors’ Obsession with Income

Uses and Misuses of Ben Graham-style Investing

The Rewards of Psychological Discomfort

Not a Low-turnover, Long Term-oriented Investment Approach

Beware of Portfolio Concentration in the Land of “Cigar Butts”

Screening for Graham-style Bargains

Ben Graham’s “Net Net” Screen

Martin Whitman’s Modified “Net Net” Screen

Enhanced Screening: Repurchases, Insider Buying, Shrinking Working Capital Requirements

Value Creation via Buybacks

When Insider Trades Matter Most

The Upside of a Declining Sales Trend

Beyond Screening: Working Through a List of Deep Value Candidates

Adjusting Balance Sheet Values in a Liquidation Scenario

Companies at Cyclical Lows versus Those in Secular Decline

Oxymoron or Opportunity: “Net Nets” With Non Capital-intensive Businesses

Asking the Right Questions of Graham-style Bargains

Is Value Growing, Staying Flat, or Shrinking Over Time?

Is Liquidation Value Really Much Higher than Market Value?

What is the Catalyst to Unlocking Value?

Key Takeaways

Notes

Chapter 3: Sum-of-the-Parts Value
Investing in Companies with Excess or Hidden Assets

The Approach: Why It Works

Uses and Misuses of Investing in Companies with Overlooked Assets

Is an Identifiable Asset Really a Separate Asset?

What Is the Catalyst to Unlocking Non-core Value?

Is the Offer “Buy One Get One Free” or “Buy Ten Get One Free”?

Screening for Companies with Multiple Assets

Companies with Multiple Operating Businesses

Companies with Large Holdings of Net Cash

Companies with Investments in Other Companies

Companies with Large Real Estate Holdings

Beyond Screening: Proven Ways of Finding Hidden Assets

Scrutinizing the Holdings of Smart “Investor-detectives”

Combing Through Areas of Specific Opportunity

Thrift Conversions

Retail or Hospitality Businesses with Large Real Estate Holdings

Companies with Large NOL Carryforwards

Finance Companies Masquerading as Product Businesses

Conglomerates

Building a “Watch List” of Companies with Hidden Value

Asking the Right Questions of Companies with Hidden Assets

To What Extent Are the “Hidden” Assets Really Overlooked?

What Is the Investment Case without the Non-core Assets?

What Is the Path to Value Capture?

Key Takeaways

Notes

Chapter 4: Greenblatt’s “Magic” Search for Good and Cheap Stocks

The Approach: Why It Works

The “Magic” of Making Money

The “Magic” of a Low Price

Future Outperformance: Not Guaranteed, But Likely

Uses and Misuses of Investing in “Good” and “Cheap” Companies

Know Thyself (and Know Thy Clients)

Diversification versus Concentration

Leave it or Tweak it?

Screening for Good and Cheap Companies

Replicating Greenblatt’s Winning Screen

Replacing the Rear-view Mirror with Consensus Estimates

Going International

Beyond Screening: Hope for Improvement Springs Eternal

Throwing Out Capital-intensive Businesses

What’s the Right Way to Account for Brand Value?

Non-linear Ways of Combining “Good” and “Cheap”

Asking the Right Questions of Greenblatt-style Bargains

How Durable Is the Firm’s Competitive Advantage?

Opportunity to Reinvest Capital at High Rates of Return?

How Good Are Management’s Capital Allocation Practices?

Are There Any Disqualifying Factors?

Key Takeaways

Notes

Chapter 5: Jockey Stocks
Making Money Alongside Great Managers

The Approach: Why It Works

Uses and Misuses of Investing in Jockeys

Appearances May Be Deceiving

The Compensation Factor

Mind the Attitude

What Happens in the Boardroom…

Not All Situations Are Created Equal

Screening for Jockey Stocks

Management Ability

Proxy One: Return On Capital Employed

Proxy Two: Growth of Capital Employed (Per Share)

Proxy Three: Margin Profile

Proxy Four: Asset Turnover

Proxy Five: Capital Expenditure Trends

Management Incentives

Proxy One: Stock Ownership

Proxy Two: Insider Buying Activity

Capital Allocation Ability

Proxy One: Share Repurchases

Proxy Two: Dividends

Beyond Screening: Building a Rolodex of Great Managers

Asking the Right Questions of Management

Key Takeaways

Notes

Chapter 6: Follow the Leaders
Finding Opportunity in Superinvestor Portfolios

Superinvestors Are “Super” for a Reason

How Superinvestors Add Real Value to Companies

Have Superinvestor Disclosures Been Arbitraged Away?

Uses and Misuses of Superinvestor Tracking

When the Going Gets Tough, Where Is the Conviction?

The Importance of Context: “Why”, Not Just “What”

Screening for Companies Owned by Superinvestors

Deciding Which Superinvestors to Track—and Which to Ignore

The Superinvestors of Buffettsville

Scouring News and SEC Filings for Superinvestor Activity

Honing In On High-conviction Ideas

Beyond Screening: What Makes a Company Attractive to Superinvestors?

One Step Ahead: Anticipating Superinvestor moves

Know Your Superinvestors — Defining Style Buckets

Does It Ever Pay to Go Against Superinvestor “Herds”?

Key Takeaways

Notes

Chapter 7: Small Stocks, Big Returns?
The Opportunity in Underfollowed Small- and Micro-Caps

The Approach: Why It Works

Sources of Inefficiency in Small-cap Investing

Steering a Speedboat Rather Than a Cruise Ship

The Numbers Don’t Lie: Small is Beautiful

Uses and Misuses of Investing in Small Companies

The Underfollowed-equals-inefficient Fallacy

A Chance to Know What You Own

If You Might Need the Money, Mind the Liquidity

Screening for Promising Small- and Micro-Caps

Removing the Chaff with a Basic Investability Screen

Zeroing In On “Investable” Companies Meeting Specific Criteria

Sample Stock Screen: Deep Value

Sample Stock Screen: Activist Targets

Sample Stock Screen: Margin Upside Potential

Sample Stock Screen: Growth At a Reasonable Price

Beyond Screening: Other Ways of Finding Compelling Small- and Micro-Cap Ideas

Big to Small, Small to Small, or Small to Big: Where Is This Company Going?

Hidden Inflection Points, and How to Uncover Them

PT Indosat Case Study: Hitting a Mobile Penetration Inflection Point

Meadow Valley Case Study: Growth Business Masked by Legacy Losses

Asking the Right Questions of Small-Cap Prospects

Did a Company Pass the Right Screen for the Wrong Reason?

Do the Financial Statements Raise Any Red Flags?

Who Has Been Buying and Selling the Shares?

What is Management’s Attitude Toward Outside Shareholders?

Where Are the Shares Relative to Their Historical Range?

Moving On to the Subjective Qualities of a Business

Key Takeaways

Notes

Chapter 8: Special Situations
Uncovering Opportunity in Event-Driven Investments

The Approach: Why It Works

The Rewards of Obscurity

Informational and Analytical Inefficiencies

Uses and Misuses of Investing in Special Situations

The Danger of Robotic Analysis

Timing As a Driver of Annualized Returns

Positive Spillover Effects

Uncovering Special Situations

“Hacking” Traditional Screeners to Identify Special Opportunities

Other Ways of Building a Pipeline of Event-driven Ideas

A Step Ahead: Uncovering Equities That May Become Special Situations

Asking the Right Questions of Special Situations

What Is the Source of Potential Inefficiency?

What Is the Margin of Safety?

What Is the Path to Value Creation?

Key Takeaways

Notes

Chapter 9: Equity Stubs
Investing (or Speculating?) in Leveraged Companies

The Approach: Why It Works

Uses and Misuses of Investing in Equity Stubs

Avoiding Biases

Who Owns the Debt?

When the Stars Align

Screening for Equity Stubs

Private Equity in Public Markets

Distressed Equities

Beyond Screening: An Ambulance-chasing Approach

Asking the Right Questions of Equity Stubs

How Vested Is Management in the Common Stock?

Are Business Fundamentals Improving or Getting Worse?

What Is the Nature of the Leverage?

Key Takeaways

Notes

Chapter 10: International Value Investments
Searching for Value Beyond Home Country Borders

The Approach: Why It Works

A Different Animal

The Value of Choice

Uses and Misuses of Investing in International Equities

Don’t Assume You Know Who You Are Dealing With

The Pitfalls of Chasing Growth in Emerging Markets

Making Money Amid Challenging Demographic Conditions

Practical Trading Considerations

Clarity Through “Extremist” Thinking

Screening for International Equities

Go Anywhere or Stick to “Investable” Markets?

Beyond Screening: Riding the Coattails of Regional Experts

Asking the Right Questions of International Equities

A Question for Europe: How Global Is the Business?

A Question for India: What’s the Right Concentration?

A Question for Japan: What’s an ROE?

Key Takeaways

Notes

References

About the Author

Index

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