I wrote an article a little over a month back on Daily Journal Corporation here. In the article I talked about valuing the business using only a yellow pad. I got the idea from watching the Glenn Greenberg talk at Columbia Business School in 2010 (link).
When I first watched the video I thought I was doing pretty much as he suggested. I was reading 10-Ks and manually entering numbers into a spreadsheet that calculated the figures I liked to look at.
I felt like I was still missing something, so with the Daily Journal post, I used only a legal pad. Read the 10-Ks and calculated a few ratios out. I thought I was then on the right track, thinking more about the business and less about numbers.
However, I still wasn’t happy. I didn’t think I was looking into the numbers enough. I’m not sure if this was because I had looked at numbers for so long and subconsciously thought I needed more numbers in my analysis.
I decided to take Birner Dental Management, the company I felt I knew the most about, and using only a legal pad, analyze the company. I had numerous spreadsheets on BDMS, and I knew most of the figures, but I wanted to better understand the numbers. As Greenberg put it, I wanted to “internalize” the numbers.
So I went through all the 10-Ks again, reading them and calculating what I wanted to look at. I was amazed at what happened. I started to internalize the numbers. When I got up to grab a drink or eat something quickly, I had these numbers in my head that I was thinking about.
These thoughts weren’t “ROC was 52.x% last year and revenues were down 1%, etc.,” the thoughts were, “Well ROC is very good, and what can the company do to increase/decrease/maintain this figure, revenues have been somewhat flat but the company has been opening de novo offices which take more time to generate substantial revenue compared to buying existing offices, etc.”
The amazing thing to me, was these thoughts were almost subconscious. I was having these thoughts while doing everyday activities and every once and awhile a light bulb would go off in my head when I had a meaningful thought.
The whole process had me thinking more about the business rather than a spreadsheet full of numbers. I think that’s what Greenberg meant when he said:
“One thing that’s changed a lot is that we were much more qualitative, we didn’t have PCs to do these fabulous, complex multi-variable models, but I don’t think we lost anything by not having that available. It forced you to think more clearly about the quality of the business and what would give it legs as an investment, as opposed to tweaking models...”
I found myself thinking about aspects of the business I hadn’t thought of before.
I wasn’t looking at a page of numbers where I knew what they meant but didn’t fully understand the finer points of the business.
I don’t think this is something everyone would like to do, and I don’t think many people will even attempt it. It took some time. It would take me about an hour to enter 15 years worth of data into a spreadsheet, it took me about 5 hours doing 10 years by hand, and I didn’t track nearly as many aspects.
I looked at the same amount of figures, but I was focused. I was looking at the bigger picture, not that receivables were up 3.2% year over year. When something caught my attention with what I was calculating, I would investigate.
What this lead to was a deeper understanding of the business, in my opinion. I found myself thinking long term. Not long term as in FCF/share should be x next year but long term as in thinking about how de novo offices consume part of the cash from operations but earn very acceptable returns on capital as they build a patient base and therefore should be welcomed by investors because management has proven they can allocate capital in a smart way. I found myself looking at the relationship between BV and buybacks.
I was thinking about where growth will come from. Again, not in terms of the company has grown x% over the last decade and should do so over the next five or so years, but the avenues available now and where management seems to be directing the company. How revenue per office can be misleading. If they’re buying offices you expect to see revenue per office steady or growing but when they develop an office the revenue per office falls until that offices can support itself.
In a sentence, I found myself thinking about the underlying business, not numbers on a screen.
I’m sure some investors think about these things when they use some type of automated spreadsheets, but I believe all investors would think and learn more about the business using a yellow pad to analyze a company.
Below are some screenshots of what I was using and then the yellow pad approach.
The first two pictures are the spreadsheets I used when I manually entered the data from the 10-Ks and the computer made the calculations.
The third is work done on yellow pads, and the fourth is the information I entered from the legal pads. The fourth is just a collection of numbers I calculated myself. I put them in the spreadsheet so I wouldn’t lose the information.
I came to the same conclusion using each approach. It’s a good business selling for less than it’s worth. Using the yellow pad, however, got me thinking on a deeper level and I’m better off for doing the analysis.
I imagine there’s going to be some opposition to this article, but I encourage you to try it out for yourself and I’d like to hear how you make out.
When I first watched the video I thought I was doing pretty much as he suggested. I was reading 10-Ks and manually entering numbers into a spreadsheet that calculated the figures I liked to look at.
I felt like I was still missing something, so with the Daily Journal post, I used only a legal pad. Read the 10-Ks and calculated a few ratios out. I thought I was then on the right track, thinking more about the business and less about numbers.
However, I still wasn’t happy. I didn’t think I was looking into the numbers enough. I’m not sure if this was because I had looked at numbers for so long and subconsciously thought I needed more numbers in my analysis.
I decided to take Birner Dental Management, the company I felt I knew the most about, and using only a legal pad, analyze the company. I had numerous spreadsheets on BDMS, and I knew most of the figures, but I wanted to better understand the numbers. As Greenberg put it, I wanted to “internalize” the numbers.
So I went through all the 10-Ks again, reading them and calculating what I wanted to look at. I was amazed at what happened. I started to internalize the numbers. When I got up to grab a drink or eat something quickly, I had these numbers in my head that I was thinking about.
These thoughts weren’t “ROC was 52.x% last year and revenues were down 1%, etc.,” the thoughts were, “Well ROC is very good, and what can the company do to increase/decrease/maintain this figure, revenues have been somewhat flat but the company has been opening de novo offices which take more time to generate substantial revenue compared to buying existing offices, etc.”
The amazing thing to me, was these thoughts were almost subconscious. I was having these thoughts while doing everyday activities and every once and awhile a light bulb would go off in my head when I had a meaningful thought.
The whole process had me thinking more about the business rather than a spreadsheet full of numbers. I think that’s what Greenberg meant when he said:
“One thing that’s changed a lot is that we were much more qualitative, we didn’t have PCs to do these fabulous, complex multi-variable models, but I don’t think we lost anything by not having that available. It forced you to think more clearly about the quality of the business and what would give it legs as an investment, as opposed to tweaking models...”
I found myself thinking about aspects of the business I hadn’t thought of before.
I wasn’t looking at a page of numbers where I knew what they meant but didn’t fully understand the finer points of the business.
I don’t think this is something everyone would like to do, and I don’t think many people will even attempt it. It took some time. It would take me about an hour to enter 15 years worth of data into a spreadsheet, it took me about 5 hours doing 10 years by hand, and I didn’t track nearly as many aspects.
I looked at the same amount of figures, but I was focused. I was looking at the bigger picture, not that receivables were up 3.2% year over year. When something caught my attention with what I was calculating, I would investigate.
What this lead to was a deeper understanding of the business, in my opinion. I found myself thinking long term. Not long term as in FCF/share should be x next year but long term as in thinking about how de novo offices consume part of the cash from operations but earn very acceptable returns on capital as they build a patient base and therefore should be welcomed by investors because management has proven they can allocate capital in a smart way. I found myself looking at the relationship between BV and buybacks.
I was thinking about where growth will come from. Again, not in terms of the company has grown x% over the last decade and should do so over the next five or so years, but the avenues available now and where management seems to be directing the company. How revenue per office can be misleading. If they’re buying offices you expect to see revenue per office steady or growing but when they develop an office the revenue per office falls until that offices can support itself.
In a sentence, I found myself thinking about the underlying business, not numbers on a screen.
I’m sure some investors think about these things when they use some type of automated spreadsheets, but I believe all investors would think and learn more about the business using a yellow pad to analyze a company.
Below are some screenshots of what I was using and then the yellow pad approach.
The first two pictures are the spreadsheets I used when I manually entered the data from the 10-Ks and the computer made the calculations.
The third is work done on yellow pads, and the fourth is the information I entered from the legal pads. The fourth is just a collection of numbers I calculated myself. I put them in the spreadsheet so I wouldn’t lose the information.
I came to the same conclusion using each approach. It’s a good business selling for less than it’s worth. Using the yellow pad, however, got me thinking on a deeper level and I’m better off for doing the analysis.
I imagine there’s going to be some opposition to this article, but I encourage you to try it out for yourself and I’d like to hear how you make out.
