As someone who is relatively inexperienced, but educated, in finance, the concept of value has practical applications beyond the stock market. My favorite business books are useful and accessible to the manager, business owner, arm chair investor or seasoned investment pro:
Business Models – A 250-page checklist for anyone with a vested interest in the future of a business. Investors can use it to assess the qualitative characteristics of a business. Owners and managers can use it to make sure they are adequately covering the basics.
Value Investing: From Graham To Buffett and Beyond – This book does an excellent job of revealing how much the reader may not know about value investing. The more educated I become on the matters of investing in general, the better the book gets. It’s my favorite contemporary book on value investing by a long shot.
The Six Month Fix – Restructuring books tend to hone in on priority of legal claims in dizzying detail, but are curiously mum on matters related to salvaging a business in decline. The Six Month Fix gets to the heart of what it takes to turn around a fledgling operation. So you know what to look for in the next Starbucks and how to avoid Blackberry 2.0.
Built To Sell – A resource for recognizing a business that can “run itself” (the best kind to own) and perspective on risks and opportunities unique to smaller companies. Good insight for small and micro-cap investors. Jack Garson’s How to Build A Business is an excellent alternative.
Value: The Four Cornerstones of Corporate Finance – Emphasizes the importance of return on capital as a key value driver. An excellent resource for managers and owners unfamiliar with ROIC. Just as useful for investors who are interested in learning why the metric is so important. The authors also wrote a solid book on valuation.
As the novice, I’m also always looking for books that bring modern finance and valuation techniques “down to earth.” Or address the concept of value in a real world context. But I have a hard time finding substantive content on the following. If you have any suggestions, I’m all ears:
Value By The Balance Sheet – Theoretically, moats can be realized when competitors cannot replicate (or displace) assets of above average businesses with favorable economics. I’ve yet to find a book that covers asset replacement value in any detail, let alone ties the concept to competitive advantages or moats. Merge Bud Labitan’s Moats with a deeper, wider version of Value Investing’s Chapter 4(Valuing The Assets: From Book Value to Reproduction Costs), and you’d have something special.
Restatement of Earnings. Free Cash Flow Accounting. – Calculation of free cash flow and assessing quality of earnings is treated simplistically in school and via tutorials. But in practice the accounting seems anything but straightforward. Restating earnings and capital investments can be subjective, technical, and time intensive. Adjustments and considerations need to be made for economic depreciation, cap-ex, taxes as reported to shareholders vs. taxes reported to the federal government, actual vs. effective tax rate, deferrals, lifo reserves, excluding excess cash balance from changes in net working capital, etc. Given the effects of accounting for “actual” or “normalized” cash flows can have on valuations, it would be useful to find a book that covers the topic in detail.
Efficient Operations – Operations are the biggest recurring costs for most companies. Books on operations seem to either provide a hands-on perspective for managers who are “in it.” Or, they tend to be technical academic texts. As outsiders, investors are forced to use limited information to glean useful insights on company operations. Investors who can do so better than their peers may be able to unearth value others can’t see. For example, analysts who realized early on that Apple’s incremental costs decreased relative to revenues over time would have had a leg up on their peers prior to Apple’s recent surge in price. A book that teaches the outside observer how to glean clear, forward-looking insights on a company’s operations from a 10-K or other common documentation would be invaluable.
Sustainability and Growth – Most contemporary valuation models assume that future earnings will sustain specific margins and growth rates indefinitely. But how confident can we be that a company is likely to do so for even the next few years? A text on what is required to sustain margins and growth rates (including investment in related initiatives) from a manager’s perspective could fill the gap. One that does so in the context of margins and growth rates implied by market valuations would be even better.