I introduce readers to Lawrence A. Cunningham's "How To Think Like Benjamin Graham And Invest Like Warren Buffett."
Takeaways from 'How to Think Like Benjamin Graham and Invest Like Warren Buffett'
- Salvage value will virtually always be inappropriate for valuing a productive asset, business or share of stock. Market-based valuation techniques that consider what other willing buyers had offered will be helpful only if the property under consideration or similar properties are regularly traded in reasonably well-developed markets. Even then, it is circular. Capitalizing earnings and discounting cash flows made the most sense for valuation.
On Circle of Competence
- Omit from your circle businesses that are too hard for you to understand or that change too rapidly for you to keep up with. To define your circle of competence, start with your own industry. Think also about the things you buy and use and how you do so. If you simply took what you knew about an industry you worked in 10 years ago and used that knowledge to evaluate a company in that industry today, you would be at a severe disadvantage. Those who can discern trends in their industries are better able to ascertain which businesses in an industry are likely to remain or emerge as leaders. Equally important is recognizing that industries you know can be affected by other industries about which you know less.
On Accounting Shenanigans
(1) A big bath lumps major events adversely affecting income in current periods to facilitate improved financial appearances in succeeding periods.
(2) Merger magic allows buyer’s manager to allocate some or a lot of goodwill to other things to minimize reduction in earnings.
(3) Cookie jar reserves entail the overestimation or underestimation of things such as sales returns by publishers, probable loan losses of lending institutions and warranty obligations for manufacturers.
(4) Materiality principle requires the reporting of items that are material and allows the nonreporting of items that are not.
(5) Wine before its time reflects the premature recognition of revenue.
On Management Compensation
- Investors should pay close attention to potentially piratical executive compensation. Many corporations give their managers stock options which increase in value simply through earnings retention, rather than because of improved performance resulting from superior deployment of capital. These awards also exacerbate the misalignment of interests between corporate option holders and other workers