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If I Ran a Value Investing Business School

March 16, 2014 | About:

“If I ran a business school there would be only 2 courses. How to value a business and how to think about markets. No modern portfolio theory, no beta, etc. You don’t have to be right on 4,000 or 400 businesses - not even 40. Circle of competence. Start with a small circle and slowly expand. Don’t spend time on companies that don’t lend themselves to valuation. Accounting is useful, but sometimes it is not meaningful. Durability of competitive advantage is the key. And market fluctuations. The market is there to serve you - not instruct you.”

The following quote led me to think about my current education and how almost everything that is taught is a waste of time and ironically what is neglected is worth the most time examining. Luckily you can also receive a Masters degree from the Buffett-Munger Business School.

What is the curriculum of the BMBS?

Well if I was responsible for teaching the classes I would recommend a serious student of business or investing study the following:

(All classes, readings, case studies and videos would be mandatory)

1st year classes would be:

Introduction to Mr. Market and How to Think About Markets

- Chapter 8 of Intelligent Investor (Mr. Market)

- Case Study of Tech Bubble (1999), Junk Bonds (Drexel Burnham Lambert and Michael Milken 1980s), Housing (Eisman 2000s), Nifty-Fifty “Blue Chips” (1960s), Tulips (1630s), South Sea Bubble (1711-1721) Salem Witch Trials (1689-1692)

- 1929 Depression and speculation prior

- October 1987 Flash Crash (20%+ loss in a day)

Warren Buffett (Trades, Portfolio)

Ben Graham

Charlie Munger (Trades, Portfolio)

Peter Lynch

Balance Sheet, Income Statement and Cash Flow Statement

We would accomplish through reading 10-Ks, and the books creative cash-flow reporting, financial shenanigans and Quality of Earnings.

1) What does each accounting sheet/statement hold?

2) Learning the components that make up each line item

3) How each line item can be manipulated for better or worse

We would conclude the accounting lessons with case studies on Enron, WorldCom and Tyco as well as review Berkshire letters.

Intrinsic Value

  • NCAV
  • Discounted Cash-flow
  • Book Value
  • NPV
  • Going Concern versus Sum of the Parts
  • Margin of Safety (Ch. 20 Intelligent Investor)
  • Owners Earnings (Appendix 1986 Shareholder Letter)

That would conclude the first year classes for BMBS.

2nd year classes would be:

The classes would mainly be cognitive psychology, decision-making and behavior studies. The classes would be focused on writings from Kahneman and Tversky, Pavlov’s association experiment, heuristics, biases, persuasion, and other behavioral finance based experiments. Some of the required material would be:

- Thinking Fast and Slow

- Influence

- Nudge

- Predictably Irrational

- Mind over Money (Video)

- Schiller: The role of psychology (Video)

- Cognitive psychology textbook by Goldstein (Yes, I am recommending ONE textbook)

I would add a desire for continuous learning about heuristics, the subconscious, cognitive biases, behavioral economics and anything related to Kahneman and Tversky for the remainder of your studies.

A bulk of the time would be spent examining sentiment, individual investor behavior and the more important component, institutional herding. How professionals act out of line with your interests due to incentives and job security.

We would focus on absolute targets not relative ones, aiming for a simple 15-20%.

Nassim Taleb would also be introduced in the second half of the year and the ideas of the Black Swan, Antifragility, being Fooled by Randomness, the signal and the noise, statistics, decision trees and probability (Pascal and Fermat) would all be the focus in the second half of the year. Various interviews with Nassim Taleb would also be watched or conducted. [Another Here] We would conclude the year with a case study on LTCM, the perils of leverage and not knowing what you don’t know.

Some videos that would be required are,

[Daniel Kahneman Speaks to Yale Students] – Thanks VGM

Taleb and Kahneman Interview

Jason Zweig and Daniel Kahneman Interview

3rd year classes would be:

We would introduce the rest of the famous value investors [Gurus] and examine past holdings of the investors. We would start the year with five important books.

  1. Competition Demystified
  2. You Can Be a Stock Market Genuis
  3. Innovators Dilemma
  4. The Most Important Thing
  5. Fooling Some of the People All of the time

We would then introduce Howard Marks (Trades, Portfolio), David Einhorn (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) (although they would have briefly been introduced to the readers of their books) and assign reading of all of the Oak Tree Capital memos (1990-2013).

We would go on to introduce Henry Singleton, Walter Schloss, Prem Watsa (Trades, Portfolio), Mohnish Pabrai (Trades, Portfolio), Seth Klarman (Trades, Portfolio), Bill Ackman (Trades, Portfolio), Peter Cundill, Keynes, Templeton and Jim Chanos (Trades, Portfolio).

We would also throw in George Soros (Trades, Portfolio), John Paulson (Trades, Portfolio), Carl Icahn (Trades, Portfolio) and Dan Loeb briefly to examine past track records and large investments that got them there. We would also talk about survivorship bias and introduce both the famous Adam Smith and John Maynard Keynes. Wealth of Nations, Essays In Persuasion and The General Theory of Employment, Interest and Money would all be required reading.

The Dhandho Investor and Mosaic would be recommended reading of Mohnish Pabrai (Trades, Portfolio) as well as his interview with Boston College students and Columbia compounding presentation.

The bulk of the time would be focused on reverse engineering famous investments of the Guru Investors like the shorts in Allied Capital, Enron, or Lehman Brothers and the longs in General Growth Properties, Washington Post, American Express, Coca-Cola, and other large concentration holdings from the past. We would talk about investment “style” and the paradoxes of value investing between various strategies (although all have similar components).

Greenblatts class notes would be required reading.

All of the Fairfax financial annual reports and chairman letters would also be required reading.

We would also examine case studies from the innovators dilemma and competition demystified with more rigor, eventually creating our own case study of a fallen angle or outdated industry. We would do a few more case studies of this nature and that would conclude our year except for a brief study of business and individual taxation policy.

4th Year classes would be:

The entire fourth year would be spent reading 10-Ks, 10-Qs, 13-Fs, 8-Ks and other filings. We would stay within our circle of competence, slowly expanding, as all knowledge is cumulative. We would conduct our own analysis and put together our own investment portfolio. We would judge others investment processes, as the classes would not last long enough to truly judge performance.

The days that we are not watching a pitch we would be talking in a group about how to spot durable competitive advantages and what kinds of competitive advantages there are. Durable meaning an ability to keep current market share or continually expand in the future. We would talk about the qualitative side of the business including management, the brand and the culture of the business.

This would be a weekly assignment for the entire year, no quizzes or finals. We would look at bonds, spin-offs, mergers and acquisitions, convertibles, other special situations and any other security within our circle of competence offering an attractive return.

Also during the final year, studies in the history of commerce and money from 1600 till present day would also be required reading. The Ascent of Money would be the first book (or 4 hour documentary) that we would read followed by other books authored by Niall Ferguson. That would conclude your studies at the BMBS and we would recommend a continual attitude toward life long learning and as a bonus would recommend reading philosophy as well as business biographies.

“Live as if you were to die tomorrow. Learn as if you were to live forever.”

About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website


Rating: 4.7/5 (34 votes)

Voters:

Comments

gerrydjr
Gerrydjr - 6 months ago

Print..going on wall in home office.

TannorP
TannorP premium member - 6 months ago

Thanks for reading Gerry!

Most of the topics have links attached as well that are definitely worth watching and reading multiple times as well as printing. I’m glad you enjoyed the article, now if only we can convince business schools to pick up the curriculum and scrap CAPM haha. 



Cheers,



-Tannor

vgm
Vgm - 6 months ago

Inspirational post Tannor! A course with that content and philosophy could spawn a new generation of value investors.

Based on Buffett's praise last week for Tim Geithner's forthcoming book, Stress Test, that would be mandatory reading too.

(PS An excellent Kahneman video: http://contrarianville.com/a-psychological-perspective-on-rationality-daniel-kahneman/ )

AlbertaSunwapta
AlbertaSunwapta - 6 months ago

Consider adding the various Warren E. Buffett articles in Fortune especially "How inflation swindles the equity investor" and his writings in other periodicals particularly "How to tame [Reforming] the casino society"

Valu2day
Valu2day premium member - 6 months ago

Terrific article. One of the best I have read here recently. I think your class may also benefit by reading a 10-K, which I know you mentioned, but there are few books that take you straight through. Perosnally, I love Thorton O'Glove and Howard Schilit. They are definitely recommended reading. However, if there is a book that takes you through an annual report and 10-K that give you a better behind the scenes understanding, I would appreciate it you could mention one or two. Thanks! I've been thinking of picking up the book by Fridson, but I am not sure if it fits the bill.

One more thing, a book on evaluating banks, specifically small community banks would be great too. Any advice there?

Sorry for all the questions, but I really enjoyed your article and all of the links. I am familiar with many of the books and some of the links, but I will certainly check them out in more detail

Well done!

TannorP
TannorP premium member - 6 months ago

Thanks for the kind comments and reading everyone.



I have updated the article with "How inflation swindles the equity investor" it should definitely be on the list. Thanks for the video link VGM, it has been added. There is a great interview with Jason Zweig and Daniel Kahneman as well as Nassim Taleb and Daniel Kahneman that are great as well. Any thing else that I have missed please recommend as I would love to have the resources as complete as possible for others to use.

[Daniel Kahneman Speaks to Yale Students] – Thanks VGM
http://contrarianville.com/a-psychological-perspective-on-rationality-daniel-kahneman/

[With Taleb] https://www.youtube.com/watch?v=MMBclvY_EMA

[With Zweig] http://www.100womeninhedgefunds.org/connect/video/20121016ny.html

[How Inflation Swindles the Equity Investor, 1977]

http://features.blogs.fortune.cnn.com/2011/06/12/warren-buffett-how-inflation-swindles-the-equity-investor-fortune-1977/

Howard and Thornton both have articulate books that cut right through to the important metrics in a simplistic manner. I have never came across a book that teaches you to read a 10-k better than actually reading one. "Investing between the lines" has a intangible view at the language used and is an eye opener, or was at least for me. The best resources (outside of ones already listed) I know for banks, specifically small community banks, in a very simplified manner, would be Khan Acedamy.


http://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/banking-and-money/v/banking-2--a-bank-s-income-statement

In his examples he uses gold to help conceptualize the problem simpler. Bank notes, reserve ratios, customer deposits and loan book are the areas that should be scrutinized in my opinion.

Cheers!

-Tannor

vgm
Vgm - 6 months ago

Tannor,

I really admire what you're trying to do with this. Given that Buffett devotes significant time to educational activities - and as you point out has told us what he would teach - have you considered the possibility of sending him your final document (or summary format) and asking for his feedback or comments or guidance? Worst case he says no. But the upside would be huge if he responded.

PS Here's the link to Geithner's book on the crisis which Buffett praised:

http://www.amazon.com/Stress-Test-Reflections-Financial-Crises/dp/0804138591/ref=sr_1_1?s=books&ie=UTF8&qid=1395098272&sr=1-1&keywords=geithner

eliasgut
Eliasgut premium member - 6 months ago

Just one word: Awesome

TannorP
TannorP premium member - 6 months ago

Thanks VGM and Eliasgut,

I have been meaning to write him a hand written letter (I heard he reads them) thanking him for everything he has done for me (and all value investors). I also wanted to ask to have my personal copy of Intelligent Investor or Security Analysis hand signed. I like your idea VGM as you miss 100% of the shots you do not take. Anyway, I hope everyone has enjoyed the post and look forward to further recommendations to add.

Cheers and happy hunting!

Eben
Eben premium member - 6 months ago

That was fantastic.

Thank You

Prislapp
Prislapp - 1 month ago

Where can I sign up? Great post!

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