The Unrepentant Recalcitrant

Lessons for an accidental entrepreneur

Archive for the tag “If”

Principles of Value Investing

Toto, I have a feeling we’re not in Kansas anymore.

Yes boys and girls, put away your Excel spreadsheets and gather round the fire.

As Steve Jobs liked to say, “I’m going to tell you three things. No big deal. Just three things.”

That’s it folks.

Three Principles.

1. P/V
2. EVA
3. Rain Falls Down

( Bonus: They apply universally and are equally and importantly relevant to entrepreneurship as well.)

Before you swoon in admiration of my unparalleled genius, I want to be clear that these ideas and even the phraseology are not mine.

This is what I learned from my master, my Yoda. (Thanks Tom, for changing my life!)

Yes folks, this changed my life. If you pay attention, it might do it for you.

And then again for those of you too lazy to listen, it might not. YMMV.

 

Definitions first and details later. Ok?

 

1. P/V : Price/Value

The fundamental metric of all investing. The ratio of the price you pay for the value you get. This needs to be less than one at all costs and the lower it is, the larger your margin of safety (remember margin of safety?: https://unrepentantlyrecalcitrant.wordpress.com/2013/10/10/all-investing-is-value-investing-the-rest-is-speculation/).

All of Wall Street that makes money off of you, conflates price and value. It is the fundamental thesis of those that believe the markets are efficient.

(If you believe that, what in gods name are you doing on my blog? Go visit that fool Cramer on CNBC or something!)

Price is what you pay, value is what you get.

The lower the price and the higher the value, the better the deal.

Buffet talks about buying a dollar for fifty cents.

That’s a P/V of 0.5

Awesome.

I will discuss the estimation of value in some detail in a later post.

 
2. EVA : Economic Value Added

Also known as Abnormal Earnings ( Economists always think that profit is an abnormal situation!), EVA is defined as:

Return on Invested Capital – Cost of Capital = EVA

As an example, if your capital costs you 9% ( say a bank loan for your business) and you are able to generate 9.9% return ( savvy investing or your business profits), you have an EVA of 10%

Needless to say, it should be a positive number!

Before you laugh at that, I will in the future show you why most businesses (the majority) are not getting a positive number and as a result have a zero EVA (bad!) or even a negative EVA ( yes, they are destroying capital!).

If you are an aspiring entrepreneur, you must (MUST) have plans for a positive EVA! If not, don’t even bother. More on this later.

 
3. Rain Falls Down:

A little more fuzzy than the others, this statement underlines that certain things are an inevitability.

You must prepare for them and account for them in your estimation of value and decision to invest ( or grow your business).

Your resistance to rain clouds and gravity is useless. Rain will fall down.

 
Simple so far, no?

Remember, Value investing is simple but it’s not easy! Oh No!

I will take each of these points and expand on them in future posts.

I will review the only economic principle(s) that matter ( YES, most of economics is a massive waste of your time!)

The only thing I can’t help you with is mental toughness.

(You need to review Kipling’s poem again and internalize it!: https://unrepentantlyrecalcitrant.wordpress.com/2013/10/06/rudyard-kipling-was-a-value-investor/)

Oh, one last thing. You know that money you saved up to buy the latest Excel program?

Go get a great dinner instead.

You ain’t gonna need Excel anymore.

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Rudyard Kipling was a Value Investor

Those of you reading my blog for the last several columns have figured out by now that I believe that the traits and character required for an entrepreneur are very similar to those a good value investor should have.

I am going to add to that.

As you think deeply about the kinds of behavior, instincts and thought process that result in success in these areas, you will no doubt find that many of those ideas are transferable to life itself. This is something I have termed “Right Thinking” in prior posts (not my term, but one I think is appropriate).

Understanding this and applying this thinking to your project(s), you may find you are “doing better” in other parts of your life. (Oh the horror! I have become my mother!)

Think of this as a welcome side effect (As a doctor, I think in these terms…what can I tell ya!)

By no means am I a fan of Rudyard Kipling (I can tell you where he should stick his “White Man’s Burden”!).

But credit where credit is due. I believe his poem IF, reproduced below is a graphic and exact description of what you need to succeed as an investor, as an entrepreneur and at life.

I will discuss aspects of what he says in this column over time, but I am unable to summarize the whole as elegantly as he has done.

You can do much worse than read it carefully, ponder and apply to your situation! Rinse and repeat!

 
If

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don’t deal in lies,
Or, being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream – and not make dreams your master;
If you can think – and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build ’em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on”;

If you can talk with crowds and keep your virtue,
Or walk with kings – nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run –
Yours is the Earth and everything that’s in it,
And – which is more – you’ll be a Man my son!

 
Now tell me thats not the most amazing advice you ever got!

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