Tuesday, October 31, 2017

Boyles Asset Management – Q3 2017 Letter Excerpt

Classifying, Cataloguing, Collecting…and the Capital Cycle

“The stamp collecting is important.  ‘Even Darwin’s Journal was just a scientific travelogue, a pageant of colourful creatures and places, propounding no evolutionary theory,’ wrote David Quammen.  ‘The theory would come later.’ Before that came a lot of hard graft. Classifying. Cataloguing. Collecting.” 

Warren Buffett has compared the investing process to investigative journalism, and it is that process of learning, collecting facts (and opinions), and trying to tie a story together into a theory about a business and its valuation that makes the effort an enjoyable one for us.  The investing business is one in which the knowledge that a person learns on a given day may never be put to practical use; but it’s also one in which the lessons a person learns have the potential to be put to use continually throughout one’s career.  Done correctly, the learning process is one of continuously classifying, cataloguing, and collecting information in a way that allows one to eventually connect the dots that lead to useful insights. 

One of the things about which we continue to study and collect information is how the capital cycle has worked in various industries over time.  The best treatments of the capital cycle that we’ve come across (though we’re open to other recommendations) are the letters of London-based investment firm Marathon Asset Management.  There are two books containing the selection of letters we’ve read: 1) Capital Account, which covers the period leading up to and following the Technology, Media, and Telecom boom and bust of the late 1990s and early 2000s; and 2) Capital Returns, which covers the boom and bust leading up to and through the Great Financial Crisis that hit its apex in 2008.  Ed Chancellor, editor of the collections of letters, provides a good summary to Marathon’s work:
“The key to the ‘capital cycle’ approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side.”
So the key to capital cycle analysis is to focus heavily on the supply side within an industry, as opposed to the drivers of demand that normally get most of the attention.  This dynamic is especially important in capital-intensive industries; and among companies that can be good businesses in the right part of a cycle, but that don’t have the wide-moat characteristics that are most desirable—and rare to find, especially at an attractive price. 

While we enjoy the cataloguing and collecting of historical examples of things such as the capital cycle to help us navigate the future, the lessons that one experiences first-hand usually stick the best.  And during the quarter, we exited our investment in Mastermyne Group Limited, which we have both followed and owned during the bottom portion of the current mining cycle.  As we’ve followed it over the years, and had conversations with management—from the tough times on through the tougher “darkest before dawn” times—we’ve gained a vivid example of how the capital cycle can unfold in the real world. 

We bought shares of Mastermyne at various points from the middle of 2014 through December 2016, and sold the last of our shares in September.  The average cost on our Mastermyne holding was approximately A$0.24 per share, and our average selling price was approximately A$0.53 per share, with dividends received pushing our average exit price up close to A$0.55 per share.  Our initial interest in the company was driven largely by a valuation that had the company trading at a discount to book value, a business that was still profitable, high insider ownership, and the mining services industry (especially underground coal mining, in Mastermyne’s case) becoming unloved.  Companies throughout the industry were trading at close to 52-week lows, with many down 50-75% from the highest share prices they had reached during the boom that had peaked a couple of years earlier.  As an illustration of how boom can turn into bust, the market cap of Mastermyne at its low point during 2016 was below its net income achieved in each year from 2011 through 2013. 

As is often the case with value investors, we likely bought too soon, and sold too soon.  The lack of interest from the investment community was evident last year as the stock price was trading in the range of A$0.11-A$0.23 per share from January 2016 through the end of September 2016, and the volume of shares traded was quite low.  But just more than a year later, as there was some improvement and a little light at the end of the tunnel, the company was able to increase its share count by about 11% by issuing 10 million new shares of stock at A$0.60 per share in a placement that “was heavily oversubscribed.”

Some new work, a better business pipeline, and some renewed interest in coal from China this year on the demand side helped lead to the improvement in the business.  But the catalyst for the dramatic change in sentiment and stock price for Mastermyne has its roots in the capital cycle.  While the company has a number of competitors in different areas of its business, it had four main competitors in underground coal mining services, which comprise its core.  One of those competitors left the industry a couple of years ago early in the cycle due to problematic contracts; another started to shift away from underground work as conditions became difficult; and yet another is fairly small and has become less active in the tendering process for new work.  But the last of the four competitors served as the key catalyst to Mastermyne’s improving fortunes, as that competitor, after a period of struggling, went into administration (Australia’s equivalent of bankruptcy) earlier this year.  Besides the decrease in competition, Mastermyne was also able to take over the work that this bankrupt company had been performing for its key remaining project. 

The word “compounders” is the term often used to describe the types of businesses we prefer to own: high-return-on-capital businesses with reinvestment prospects and competitive advantages that protect those high returns on capital.  But, we firmly believe that almost everything can be a good value at one price and a bad value at another, and that the best opportunities often come by looking at things that are unwanted and unloved by most.  So, we’re willing to venture into other areas and “non-compounder” types of businesses, especially when attractive prices are combined with well-incentivized management teams and conservative balance sheets to create situations in which significant upside might be available with little or no ultimate downside.  We believe this mental flexibility can be an important advantage to us as investors.  We hope that our experience with Mastermyne and observations about how the management team was able to navigate the extreme lows that followed an extreme boom will help us going forward.  And while it would be nice to see the cycle starting to turn before investing in similar types of businesses, the market often re-prices things before one has a chance to see the turn.  Or as Warren Buffett wrote in October 2008, about five months before the U.S. stock market hit its low, “...if you wait for the robins, spring will be over.”


Disclosure: I am a portfolio manager at Boyles Asset Management, LLC ("Boyles") and the fund managed by Boyles may in the future buy or sell shares of any stocks mentioned above and we are under no obligation to update our activities. This is for information purposes only and is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

Monday, October 30, 2017


Video - Cohesion with Ben Darwin [H/T Tamás] (LINK)
Earlier this year we introduced Ben Darwin’s insightful work on how relationships within teams (‘cohesion’) are important drivers of success or failure, and often overlooked in most conventional analysis which tends to study talent and leadership.
The Fairness Principle: How the Veil of Ignorance Helps Test Fairness (LINK)

Lessons for 2017 from a Man Who ‘Called’ the Crash of 1929 - by Jason Zweig (LINK)

30% of Your Assets in Bitcoin? - by Jason Zweig (LINK)
Fund manager Bill Miller, who beat the market for 15 years in a row only to lose 55% in 2008, is bullish on bitcoin. 
The former manager of the Legg Mason Value Trust mutual fund, Mr. Miller now runs his own investment firm, Miller Value Partners LLC, in Baltimore. Among its $2.3 billion in assets is a $154 million hedge fund, MVP 1. The fund is up 72.5% so far this year, Mr. Miller said in an interview. It has about 30% of its assets in bitcoin, he said, up from about 5% ​in 2016.
How I Built This podcast -- Chipotle: Steve Ells (LINK)
In 1992, Steve Ells was a classically trained chef working in a high-end restaurant in San Francisco. But after eating a burrito at a local taqueria, he got an idea: to sell burritos and earn enough money to open his own gourmet restaurant. The first Chipotle opened in Denver the following year. Bringing his culinary training to taqueria-style service, Steve Ells helped transform the way we eat fast food. 
Grant’s Podcast: The stability paradox (LINK)

The David Rubenstein Show: Satya Nadella (video) (LINK)
Related book: Hit Refresh
In case you missed this earlier...  An interview with Tamás Vincze, author of "Eighteen and Cancer"


Investing quote of the day, via Benjamin Graham's The Interpretation of Financial Statements:
If the market price of some issue appears out of line with the facts and figures available, it will often be found later that the price is discounting future developments not then apparent on the surface. There is, however, a frequent tendency on the part of the stock market to exaggerate the significance of changes in earnings both in a favorable and unfavorable direction. This is manifest in the  market as a whole in periods of both boom and depression, and it is also evidenced in the case of individual companies at other times. 
At bottom the ability to buy securities—particularly common stocks—successfully is the ability to look ahead accurately. Looking backward, however carefully, will not suffice, and may do more harm than good. Common stock selection is a difficult art, naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future. 

Valuations, interest rates, and corporate profitability...

As I was re-reading some old letters from Seth Klarman, I thought the below paragraphs were worth sharing once again. Given Mr. Buffett's recent comments about interest rates and valuations, and how those comments have been discussed in the media, as well as Berkshire's growing cash balance and difficulty finding bargains in today's market, history seems to be rhyming a bit. The paragraphs below from Klarman were published in June of 1998. 
You might think that the increasing percentage of investor funds managed by professional ("professional"?) money managers would serve as a check on market excess. If you did, you would be seriously wrong. Very few professional investors are willing to give up the joy ride of a roaring U.S. bull market to stand virtually alone against the crowd, selling overvalued securities without reinvesting the proceeds in something also overvalued. The pressures are to remain fully invested in whatever is working, the comfort of consensus serving as the ultimate life preserver for anyone inclined to worry about the downside. As small comfort as it may be, the fact that almost everyone will get clobbered in a market reversal makes remaining fully invested an easy relative performance decision. Isn't this what always happens at the top of historic bull markets? The answer, of course, is of course.  
Investors and the financial media, always eager to grasp at straws, however slim and brittle, jumped on the year-end shareholder letter of legendary investor Warren Buffett as fodder for the bull case. The Dow immediately rallied 200 points. What Buffett, Chairman of Berkshire Hathaway, said is that at today's level of interest rates, and assuming prevailing levels of corporate profitability, in his view U.S. equities as a whole are not overvalued (and, just as assuredly, not undervalued.) Virtually no one explored his real message, equally prominent, suggesting that today's unprecedented level of corporate profitability may well be unsustainable; future profits may fall far short of today's lofty expectations. The U.S. stock market is extremely vulnerable to disappointments; nothing short of perfection is built into today's prices. And Buffett confesses that it has become increasingly difficult for him to find bargains in the current market environment. 
And the comments referenced above from Buffett in the 1997 Berkshire letter (published in February of 1998) are below: 
Though we don't attempt to predict the movements of the stock market, we do try, in a very rough way, to value it. At the annual meeting last year, with the Dow at 7,071 and long-term Treasury yields at 6.89%, Charlie and I stated that we did not consider the market overvalued if 1) interest rates remained where they were or fell, and 2) American business continued to earn the remarkable returns on equity that it had recently recorded. So far, interest rates have fallen -- that's one requisite satisfied -- and returns on equity still remain exceptionally high. If they stay there -- and if interest rates hold near recent levels -- there is no reason to think of stocks as generally overvalued. On the other hand, returns on equity are not a sure thing to remain at, or even near, their present levels. 
In the summer of 1979, when equities looked cheap to me, I wrote a Forbes article entitled "You pay a very high price in the stock market for a cheery consensus." At that time skepticism and disappointment prevailed, and my point was that investors should be glad of the fact, since pessimism drives down prices to truly attractive levels. Now, however, we have a very cheery consensus. That does not necessarily mean this is the wrong time to buy stocks: Corporate America is now earning far more money than it was just a few years ago, and in the presence of lower interest rates, every dollar of earnings becomes more valuable. Today's price levels, though, have materially eroded the "margin of safety" that Ben Graham identified as the cornerstone of intelligent investing.
And for a more extensive analysis and opinion on valuations and interest rates, see John Hussman's Why Market Valuations are Not Justified by Low Interest Rates.

An interview with Tamás Vincze, author of "Eighteen and Cancer"

My friend Tamás Vincze has written a short book, Eighteen and Cancer, about his experience with cancer. I first saw him write about his experience in a blog post last year, and given that he decided to also write a short book about it, and given that it's a disease that will touch many of us in one way or another, I thought I'd also ask him a few questions to post publicly here. As you'll probably be able to tell from his replies below, Tamás is a learning machine, and there wisdom in his answers and recommendations that also go beyond the topic of the book. 


To start, can you discuss what drove you to write the story about your battle with cancer?

Why write a book about my cancer story? Especially well after 10 years? Good question. I must have asked myself that a thousand times. 

During the early part of 2016, I read Peter Barton’s story in a book titled Not Fade Away, which he wrote with Larry Shames. It details the story of Peter who after retiring in 1997 at the age of 46 from the world of media and business (he worked for John Malone), to spend more time with this family, unfortunately passed away in 2002 after a battle with stomach cancer. It is a gem of a book about the shortness of life and inspired me to start thinking about my own story and how might I tell that. 

I always enjoyed journaling and keeping notes. The process of having thoughts crystallized on paper is very valuable. I kept piles of notes in different places, a lot about what cancer meant to me, and to be honest it was getting a bit out of control keeping track of it all. Writing a short book seemed like a good way to summarise everything.

In your book, you described the process of waiting for the doctors to give you the plan to help you fight your cancer as if you were "awaiting the verdict from a judge, feeling hopeless, lost and helpless." I'm guessing you also felt a little like that when you were initially awaiting the results of your scans, and then later as you were awaiting to the results of your post-chemotherapy scans. Can you talk a little bit about how you were able to get through those feelings, get back to focusing on the present moment and, as you put it in the book, have a better dialogue with yourself?

First, it was pure agony. Every piece of mindfulness, spiritual and religious teacher and book tells you that life happens here in the present. It is the truth and it is great advice but when you are in a terrifying situation that is the last place you want to be. So much fear, so many unknowns with my life and health at risk. The past or the future can seem way rosier than the present and it is easy to let your mind wander.

But the more I sat with the fact that I have cancer, this is my reality, this is happening whether I like it or not, day by day it became easier to accept it. The magic pill (or the ‘how to’) is acceptance and surrendering but unfortunately it’s a process and doesn’t happen overnight. What I later learnt is that there was so much value in staying present. Often we need something extreme to catch our attention, shake us out of our comfort zone and centre us. Cancer at the age of 18 definitely did.

There are two books from Michael Singer that I found great on this topic, which I’d highly recommend: Untethered Soul and the Surrender Experiment. Both blew my mind when I read them many years after cancer.

Given all the things you've learned since you got the initial diagnosis in 2003, what do you think you know now that, had you known it back then, maybe would have helped you get through those initial feelings a little easier at the time, even if the help would have only been a minor improvement to the difficult situation you faced?

For sure, that I’m not alone in this. It might sound strange but cancer is a team sport (much like writing a book). It sounds very heroic to say “I’m fighting cancer” but the truth is nobody does it solo. I was reluctant to accept this. For instance I never let anyone visit me while I was in the hospital going through chemotherapy (truthfully it’s a terrible place to invite guests) but in hindsight it was really dumb and I'm not sure what I was trying to prove.

Cancer takes a huge toll on your life and having a great support group of friends and family is crucial. Technically speaking you still have to go through chemotherapy yourself but knowing that you are not alone makes the whole process much easier. My lesson from this was: let others in your life – talk, share, laugh or cry but do whatever it takes to surround yourself with a great group of people.

Asking for help or support is not a sign of weakness; rather it’s a strength. I learnt that if I tried to do everything myself I’d make myself miserable.

Can you discuss a little of what you learned about ego and the desire for control during this time? As you mention in the book, ego can mean different things to different people with different beliefs, but what did you learn about how ego can affect one's thoughts and behavior?

Marianne Williamson, whom I greatly admire, has many great ways of describing the ego but here is one that I particularly like (it’s paraphrased): “The ego is the one who sets you up for failure then punishes you for having made that mistake.”

A discussion about ego could turn into a whole interview, so I’ll keep this short. The more I was able to sit with my having cancer the more I could see that the initial resistance of not being able to look at it objectively or accept it came out of some version of fear. The fear of the unknown. The fear of giving up control. To me ego is just that, a feeling or behaviour driven by fear. Ego kept me trapped in the past (and comfort zone) or focused on how much I’d rather be somewhere else, while I was having cancer in the present. It’s a dangerous game. Often it totally clouded my judgment and lead me to make many mistakes, which I detail in the book.

Ultimately the question I had to ask myself was what did I tie my self-worth to? Was it some lie I told myself about the importance of this false sense of control or was it being able to honestly see my situation and the truth? If it was staying in control then what happened when that went away? It was an eye-opening realisation, especially so young. Healing had to be my main objective, not staying in control (whatever that really meant). The good news was that I certainly didn’t have all the knowledge of how to get there so it allowed me to be curious once again and open to new ideas. It was a shift in perception.

As the legendary basketball coach Phil Jackson put it my ego had to be benched. What I learnt is that once I let go of this desire to control how something should happen I allowed in all the other possibilities I couldn’t even have imagined in the first place. 

You unintentionally found your way to meditation and mindfulness throughout your journey. Can you talk a little about how these helped you along the way, and how you continue to utilize them today?

It ties back to your first question a bit about staying in the present and meditation is one method that works for me. While I was going through cancer I accidentally discovered a very simple technique of just paying attention to my breath to anchor my mind and not let it run wild. Back then I only used it around the time of chemotherapies but about 10 years ago I started a regular daily practice and for the last few years I’ve been practicing Transcendental Meditation, which is a mantra based meditation.

Can you talk about the role gratitude played in helping you through cancer? And did what you learn about gratitude during the toughest of times affect the way you live your life today?

That if you can’t find a way to be grateful for what you have you are guaranteed a miserable life. It was hard to see it that way but even in the most trying days I had small things to be grateful for: today was a new day, I still had a chance to keep on fighting, there was one less chemotherapy session left once the current ran it’s course, there was a cure for my disease and so on. 

It’s actually not that difficult but we often make it complicated. We often think that we need more than what we have but it’s a lie. Having perspective helps and cancer definitely gave that to me. There is no such thing as a bad day, it’s all relative. The mental model I now run when something goes wrong is simply ask myself if I can die from this. Usually (…almost always), it’s not and then I move on. It ties a bit to mindfulness – being content here in the present. Everything else flows from that.

In a September podcast, Siddhartha Mukherjee, author of the biography on cancer (The Emperor of All Maladies) mentioned that about 1 in 2 men and about 1 in 3 women will get cancer in their lives, and also recommended the article by Stephen Jay Gould titled "The Median Isn't the Message." So given that a significant number of people reading this will be touched by cancer in one way or another throughout their lives, and as a final question, are there any other books or other resources in addition to your own book that you could recommend to readers?

I’ve read a lot of books about cancer but most inadvertently ended up turning into a misery memoir, which I was conscious to avoid when writing my own. Not too many books talk about what happens in your mind when facing something so serious. How do you process the news of cancer? How do you get out of the feeling of hopelessness that’s there initially (for some it stays for the entire journey)? These, amongst others, were some I was trying to answer in this short book.

I guess it won’t surprise you that I’m recommending books along those lines, where I think there are concrete takeaways one can apply in their lives. The few that I thought were great are Not Fade Away (the book I referenced above), When Breath Becomes Air (this is extremely well written and I read it in one go), Dying to Be Me (about a near death experience) and the Top 5 Regrets of the Dying (you’ll stop wasting time after reading this).

One area that I am very interested in is diet and nutrition post-cancer. The area is still under-researched but there is often a lot of conflicting analysis and recommendations. Some of the people I’ve been following on this topic are William Li of the Angiogenesis Foundation, Dom D’Agostino or Michael Greger. I know that it is a very emotional topic for many of us, and I’m not recommending any particular approach, but highly encourage everyone to read about it because it can possibly play a large role in prevention as well.

Besides the books, if I could make one request of your audience, whom are somehow affected by cancer, it would be to talk to current or former cancer patients. There is so much value in these conversations that you simply won’t get from reading a book. If I can be of any assistance please feel free to reach out: you can find me here.


Finally, I’d like to thank you Joe for this interview and acknowledge you for the value (no pun intended) you bring to this intellectually curious community. I really appreciate you finding great and useful interviews, articles and posts and bringing these to our attention.


You can find out more about the book on the website HERE. And you can purchase it on Amazon HERE. If you like the book, consider leaving a review, as customer reviews can be a big help for writers, especially first-time authors like Tamás.

Tamás also asked me to include some information on where 10% of book sales will go, and provided me with the following: 
10% of the net proceeds from the book sales will go to support the amazing mission of Bátor Tábor (“Camp Courage” in English), a philanthropic organisation in Hungary where I was born, that runs therapeutic recreation camps for cancer-afflicted and chronically ill children and their families. 
Take a few minutes to watch this video and get an insight into their great work: https://www.youtube.com/watch?v=GmRkvnasfZk 
Link to their website: www.batortabor.com

Sunday, October 29, 2017


What Amazon Means For The Rest Of Us (LINK)

Transcript of David Einhorn's CNBC appearance last week [H/T Linc] (LINK)

A Dozen Business Lessons from Waffle House - by Tren Griffin (LINK)

Billionaire GOP Investors Are Privately Trash-Talking Trump [Klarman, etc.] [H/T Will and Linc] (LINK)

Bitcoin Backlash: Back to the Drawing Board? - by Aswath Damodaran (LINK)

Masters in Business podcast: Scott Galloway on The Four (LINK)
Related book: The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google
Exponent podcast: Episode 129 — The Disruption Antidote (LINK)

a16z -- The Future of Money: Banking on Fintech (video) (LINK)

Dan Carlin: "The New Golden Age of Oral Historical Storytelling" | Talks at Google (LINK)

Wednesday, October 25, 2017


"My favorite quote comes from a British author named Christopher Morley, 'There's only one success: to be able to live your life your way.' I believe you shouldn’t let society determine what your way is, and you shouldn’t let money determine what your way is." - Howard Marks (Source)

Howard Marks on CNBC (Video 1, Video 2)

The Bitcoin Boom: Asset, Currency, Commodity or Collectible? - by Aswath Damodaran (LINK)

How America’s pensions crisis could erode its ability to compete globally and exacerbate its domestic wealth divide (LINK)

Framing (LINK)

The Rules of the Doctor’s Heart - by Siddhartha Mukherjee (LINK)

Is It Possible to Predict the Next Pandemic? - by Ed Yong (LINK)

Einstein's Note On Happiness, Given To Bellboy In 1922, Fetches $1.6 Million (LINK)
So on a piece of hotel stationery, Einstein wrote in German his theory of happiness: 
"A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness." 
On a second sheet, he wrote another message: "Where there's a will there's a way."

Figuring out why you’re right and the market is wrong...

I've been slowly reading through the book Pitch the Perfect Investment by Paul Sonkin and Paul Johnson, and have been enjoying it. The authors discussed the book in the latest issue of Graham & Doddsville and I wanted to highlight this exchange, and then briefly comment on some related thoughts:
G&D: What are the big mistakes that young people make when they pitch stocks? 
PJ: A couple of things. Number one is overconfidence, which is a little tricky because you need to be confident in this business. 
PS: We have heard countless students say, “I know the value of the company. In fact, I know the company better than the analysts following it because I’ve worked on it nonstop for an entire two weeks!” We were both judges at a stock pitch competition earlier this year. We were sitting next to each other during the presentations and whispering back and forth about how awful the pitches were. We were shocked at how bad they were. 
The biggest mistake we see is that students spend 90% of their time figuring out what they believe is the intrinsic value of the company. Maybe 95% of the time. And they say, “Okay, I think the stock is worth $50, it’s trading at $42, therefore it's a buy.” They spend 95% of their time explaining why it’s worth $50, but don’t address why it’s trading at $42. They do not explain what the market is missing. They don’t explain why the mispricing exists. 
PJ: One of the key messages in our book is that if you inverted the time allocation and spend 90% of your time explaining what the market is missing and why the stock is mispriced, rather than 90% of your time trying to justify your valuation, we believe that the portfolio manager will listen intently and, might, in fact, clear his desk to eagerly research your stock. If you start your pitch by saying, “The stock’s trading at $42 because investors believe X, Y, and Z are true. I’ve done a bunch a work to know why X, Y, and Z are not true and here is why consensus expectations are wrong,” the portfolio manager is going to give you his full attention. You then need to walk through why X, Y and Z are not true. If you take that approach, the portfolio manager is going to get highly interested in your recommendation and they’re going to say to themselves, “If he’s right, this stock's going to $50.” Now the focus is figuring out why you’re right and why the market is wrong. 
And related to the above, the authors also write in the book:
If the idea offers sufficient return given the level of risk, there is a third factor that needs to be addressed, which reflects the portfolio manager's unease that the opportunity looks too good to be true. The question the manager asks himself at this point is, “Why me, O Lord?” and the analyst will need to convince him that a genuine mispricing exists to answer this question successfully. 
Once this concern is put to rest, the portfolio manager most likely will raise one final issue—“How and when will the next guy figure it out?”—knowing that he will  only make money if other investors eventually recognize and correct the mispricing.
I wanted to bring this up, firstly, because I think it's important and doesn't enough attention. Most of the ideas and pitches I see are based on a near-term story (every company has one) to grow earnings over the next couple of years and a multiple expansion being assumed to justify undervaluation. That's fine as far as a quick summary of something's potential goes, but it's not the thing that can consistently provide an edge without being able to answer the “Why me, O Lord?” question. 

And, secondly, I wanted to bring it up because blog readers occasionally send me ideas and write-ups, which I appreciate, though most of the time I filter things out pretty quickly. In a recent talk, I believe Mohnish Pabrai said something similar, where I think his filter was the intrinsic value estimate needs to be at least 5x the current price for the ideas sent to him, or else he filters it out. While I'm not quite that "unreasonable," discussing what I look for and giving a few examples of the types of valuations I like to accompany mispricing explanations may be helpful and, selfishly, lead to a few interesting ideas being sent my way

In his days running an investment partnership, Warren Buffett categorized investments as: Generals, Work-Outs, and Control situations. As another example, Chris Begg at East Coast Asset Management has categorized his firm's investments as: Compounders, Transformations, and Workouts. Drawing inspiration from them and others, I came up with a completely unoriginal (since I've seen other people use the same names) way to categorize the things I look at and look for: Category 1, Category 2, Category 3, and Category 4. I first mentioned these categories back in 2013 (with an important intro in 2014 to the topic), and while I've added quite a bit of nuance to them since then, the general overview as I described them back then were:
1) Competitively-advantaged, great business at an attractive absolute and relative free cash flow yield. [i.e. similar to Begg's "Compounders"]
2) Good business close to or below tangible book value (after adjustments) 
3) Below liquidation without giving much (or any) weight to fixed assets, especially if they are tied to commodities 
4) Good business, seemingly good price, run by people that seem to understand capital allocation, but where the sustainability of a competitive advantage is hard to determine [or it's still in the process of being built] and there is no downside protection in the asset values
I've updated things a bit since then, with a couple of notable changes being that I want to understand the capital cycle when investing in Category 3 investments, which I also want to be good businesses during the right part of the cycle, and mostly requiring that Category 4 investments be run by owner-operators that I think could potentially fit the intelligent fanatic mold. And before even considering what category an idea may fit in, I need somewhere from a good to great to perfect balance sheet as an initial filter, as well as a business that I can understand.

The key with categorizing things the way I have is that I want to focus on downside first, which for me is coming in either the form of a moat (Category 1) that protects earnings and returns on capital, asset values (Categories 2 and 3) or a lesser (or less predictable) moat protecting a reasonable level of earnings, even if it's lower than current earnings, but where there are also reinvestment prospects and a great owner-operator running the business with plenty of skin in the game (Category 4). And management, especially in smaller companies, is extremely important in all categories, not just the fourth category.

Here are a few quick examples of things I've been a part of investing in post 2008 GFC, at either my previous firm or at Boyles, that I think fit the mold by category:
  • Category 1: Berkshire Hathaway in Q2 2012 at just under 1.2x book value and less than an average market multiple of after-tax earnings, and at a time when Mr. Buffett had openly stated he thought the company was worth much more than the 1.1x book value (later changed to 1.2x) at which Berkshire could start buying back stock. While I normally look at smaller companies both at my previous firm and now, our familiarity with Berkshire and its valuation drove us to buy some shares for the small separate accounts we managed at the time; though probably not enough, as that was a fat pitch down the center of the plate, and a big position size was likely warranted.
  • Category 2: Also at the firm I was previously at, we purchased Record plc in Q1 2012, at just about 1x tangible book value (which was mostly cash, though not all excess cash due to regulatory requirements), and about 5-10x our estimate of earnings (a wide range of estimates was necessary) as many European names were selling off. While there were scenarios where maybe the company could start losing money, they were still decently profitable, had a bunch of cash with no debt, and an owner-operator involved in the business. Charlemagne Capital Limited was another U.K.-traded asset manager with a similar story in 2012. 
  • Category 3: Mastermyne (Australia) bought at various points between 2014 and 2016. We're writing about this at Boyles in our current investor letter, so I'll try and post an excerpt when we're finished, but we bought shares at a big discount to book value, which then became an even bigger discount. But eventually capital cycle dynamics kicked in and things improved in both the business and the share price. Our investment in Thrace Plastics in Greece during Q1 2016 probably fits into this category as well, and it also had what seemed like a clear reason for being mispriced in the market. 
  • Category 4: In early 2016, we purchased shares in both BrainJuicer (renamed System1 Group) as well as Tucows (a small position that we, once again, wish would have been much larger). The market as a whole had gotten volatile, and we believed we paid decent multiples for the more predictable parts of their businesses and that we were partnering with exceptional owner-operators. For more on the former investment, see this excerpt from our investor letter at the time. 
So maybe the above is helpful for a few readers in thinking about your own way to categorize things, and maybe it'll help future readers who wish to pass along ideas....though to be clear, like Mohnish, I also don't mind you passing along the 5+ bagger ideas! I'd just prefer a decent case for downside protection and a reason for the mispricing to be there as well.


Disclosure: I am a portfolio manager at Boyles Asset Management, LLC ("Boyles") and the fund managed by Boyles may in the future buy or sell shares of the stocks mentioned above and we are under no obligation to update our activities. This is for information purposes only and is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

Tuesday, October 24, 2017


"I think 'virtue' sometimes gets a bad name, especially on the left, because it’s so associated with the Christian virtues and Christianity. But I think if we go back to an older Greek notion, where the virtues are excellences, arêtes. The arête, or excellence of a person is — well, there are many: to be hospitable, to be kind, to be honorable and honest. There are many virtues of a person. So I do think that virtue ethics is the only philosophical theory that matches human nature. I’d like to see us return to talking about virtues and teaching kids virtues." - Jonathan Haidt (Source ---- See also: Areté)

Further Analysis of Multi-Bagger Stocks (LINK)

Baupost's Klarman: Investors are asking the wrong question about the stock market (LINK)

Hedge fund Baupost snaps up claims against Toshiba [H/T Will] (LINK)

Horizon Kinetics: 3rd Quarter Commentary (LINK)

Vicksburg native meets Warren Buffett [H/T Linc] (LINK)
“The first question we asked was if somehow his worth was reduced to just one million, then would he be able to do it all over again in today’s environment because the environment has changed so much since he started investing and buying companies,” Rutherford said. “He said he would be able to. He said it would be very difficult. He wouldn’t be able to do it in the exact same way, but he said he would be able to he thinks because he gets his edge from being so interested in the subject.”
Reboot for the AI revolution - by Yuval Noah Harari [H/T Tamás] (LINK)
Related book: Homo Deus
The War To Sell You A Mattress Is An Internet Nightmare [H/T Matt] (LINK)

Young subscribers flock to old media [H/T Linc] (LINK)

The Art-World Insider Who Went Too Far (from 2016) [H/T @patrick_oshag] (LINK)

Invest Like the Best Podcast: Ladder: The Fitness Marketplace, w/ Brett Maloley (LINK)
This week’s episode is part of an experiment and so requires a longer than normal introduction. 
I’ve come to view this podcast as a learning tool, a means to understand a new topic in a short window of time. One of those areas is venture capital and startups—an area that one year ago was completely foreign to me. I think the best way to learn is aggressive immersion in a topic along with some consequences, what we often call some skin in the game. Accordingly, this is a conversation with the founder of a startup in which I am an investor.
Walter Isaacson talks with Kara Swisher on the Recode Decode podcast: What can Leonardo da Vinci teach us about tech? (LINK)
Related book: Leonardo da Vinci
The Deadly Panic-Neglect Cycle in Pandemic Funding - by Ed Yong (LINK)

Monday, October 23, 2017


"My perspective...is that we’re really not surprised nearly often enough, because one of the things that really happens, as soon as an event occurs, we have a story. That’s automatic, that System 1 generates stories. It looks for causes, it looks for stories, and it generates its tentative stories that, if endorsed by System 2, become beliefs and opinions. But the speed at which we find explanations for things that happened makes it difficult for us to learn the deep truth. And the deep truth is that the world is much more uncertain than we feel it is. We see a version of the world that is...a lot simpler and a lot more certain than the world really is." - Daniel Kahneman (Source)

How to Remember What You Read (LINK)

Our Biggest Economic, Social, and Political Issue The Two Economies: The Top 40% and the Bottom 60% - by Ray Dalio (LINK)

A Dozen Lessons from Megan Quinn about a Growth Mindset - by Tren Griffin (LINK)

Richard Bookstaber on WealthTrack (video) [H/T Will] (LINK)

Eddie Lampert and ESL's response to The Globe and Mail article about Sears Canada (LINK)

What Mongolian Nomads Teach Us About the Digital Future - by Kevin Kelly (LINK)

Why Facebook Shouldn't Be Allowed to Buy thb - by Ben Thompson (LINK)

Tim O’Reilly: ‘Generosity is the thing that is at the beginning of prosperity’ (LINK)
Related book: WTF?: What's the Future and Why It's Up to Us
EconTalk (podcast): Jennifer Burns on Ayn Rand and the Goddess of the Market (LINK)
Related book: Goddess of the Market: Ayn Rand and the American Right
Jonathan Haidt talks with Krista Tippett (LINK)

Jocko Willink guest hosts The Tim Ferriss Show, and discusses his book Discipline Equals Freedom: Field Manual (podcast) (LINK)

7 Lessons from the New Paleo (LINK)

Art De Vany's keynote and panel sessions at Paleo f(x) (LINK)

Robert Sapolsky’s Behave is a tour de force of science writing (LINK)

Sunday, October 22, 2017


Amazon is retiring the aStore feature on October 27th. So I'll be adding as many titles as I can between now and then to this page, which will serve as the new recommended reading page once the aStore is retired. While I may not have time to get them all moved over in time, I'll at least add some of my favorites from each discipline, as well as all the business biographies, and then add and update everything else over time.

As of now, the order of the categories listed below are:

  • Investing
  • Thinking - Mental Models
  • Leadership
  • Business Biographies
  • Industry Books
    • Insurance
    • Banking
    • [more to come]
  • Psychology and Behavioral Economics
  • Biology
  • Physics
  • Chemistry
  • Probability - Math - Statistics
  • [more to come]



The Intelligent Investor

The Intelligent Investor (Revised Edition)

Security Analysis: The Classic 1934 Edition

Security Analysis: Sixth Edition

Berkshire Hathaway Letters to Shareholders (Kindle)

100 to 1 in the Stock Market

100 Baggers

Creative Cash Flow Reporting

Financial Shenanigans

The Art of Short Selling

Fooled by Randomness

Thinking - Mental Models

A Few Lessons from Sherlock Holmes


It's Your Ship: Management Techniques from the Best Damn Ship in the Navy

Plain Talk: Lessons from a Business Maverick

The Carolina Way: Leadership Lessons from a Life in Coaching

Business Biographies

Les Schwab Pride in Performance: Keep It Going

Men and Rubber: The Story of Business

Sam Walton: Made In America

Titan: The Life of John D. Rockefeller, Sr.

Andrew Carnegie

Buffett: The Making of an American Capitalist

Shoe Dog: A Memoir by the Creator of Nike

The Everything Store

Delivering Happiness

Creativity, Inc.

Hard Drive: Bill Gates and the Making of the Microsoft Empire

Steve Jobs

In The Plex

A Curious Discovery

Be My Guest

Half Luck and Half Brains: The Kemmons Wilson, Holiday Inn Story

The Spirit to Serve Marriott's Way

Without Reservations: How a Family Root Beer Stand Grew into a Global Hotel Company

Four Seasons: The Story of a Business Philosophy

Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It

Cable Cowboy: John Malone and the Rise of the Modern Cable Business

The King of Cash

Dream Big

Leading By Design: The Ikea Story

Sol Price Retail Revolutionary & Social Innovator

Maverick: The Success Story Behind the World's Most Unusual Workplace

I Invented the Modern Age: The Rise of Henry Ford

My Years with General Motors

On a Clear Day You Can See General Motors: John Z. DeLorean's Look Inside the Automotive Giant

Once Upon a Car: The Fall and Resurrection of America's Big Three Automakers--GM, Ford, and Chrysler

Shaw Industries: A History

For God, Country, and Coca-Cola: The Definitive History of the Great American Soft Drink and the Company That Makes It

Citizen Coke: The Making of Coca-Cola Capitalism

Grinding It Out: The Making of McDonald's

McDonald's: Behind The Arches

In-N-Out Burger: A Behind-the-Counter Look at the Fast-Food Chain That Breaks All the Rules

Minding the Store

The Making of Harcourt General: A History of Growth Through Diversification 1922-1992

Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time

A. P. Giannini: Banker of America

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

The Partnership: The Making of Goldman Sachs

American Express: The Unofficial History of the People Who Built the Great Financial Empire

Citibank, 1812-1970

What I Learned Before I Sold to Warren Buffett

Jim Clayton: First a Dream

The Pampered Chef

The Man from Zara

Confessions of an Advertising Man

Setting the Table: The Transforming Power of Hospitality in Business

Aiming High - A Biography of Masayoshi Son

Sons of Wichita: How the Koch Brothers Became America's Most Powerful and Private Dynasty

Y. K. Pao: My Father

The Billionaire Who Wasn't: How Chuck Feeney Secretly Made and Gave Away a Fortune

The Warburgs

The Last Tycoons: The Secret History of Lazard Frères & Co.

Why Should White Guys Have All the Fun?: How Reginald Lewis Created a Billion-Dollar Business Empire

Mellon: An American Life

The First Tycoon: The Epic Life of Cornelius Vanderbilt

James J. Hill & The Opening of the Northwest

The Maverick and His Machine: Thomas Watson, Sr. and the Making of IBM

Father, Son & Co.: My Life at IBM and Beyond

Who Says Elephants Can't Dance

The Farmer from Merna: A Biography of George J. Mecherle and a History of the State Farm Insurance Companies of Bloomington, Illinois

Simon Marks: Retail Revolutionary

Nuts!: Southwest Airlines' Crazy Recipe for Business and Personal Success

Ryanair: How a Small Irish Airline Conquered Europe

The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World's Most Important Company

Comic Wars: Marvel's Battle For Survival

Ling: The Rise, Fall, and Return of a Texas Titan

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone

The Great A&P and the Struggle for Small Business in America

Skygods: The Fall of Pan Am

Barbarians at the Gate: The Fall of RJR Nabisco

Conspiracy of Fools

Beam, Straight Up: The Bold Story of the First Family of Bourbon

Quench Your Own Thirst: Business Lessons Learned Over a Beer or Two

The Beer Monopoly: How brewers bought and built for world domination

The John Deere Way: Performance that Endures

Good to Great to Gone: The 60 Year Rise and Fall of Circuit City

Morgan: American Financier

The Rise and Fall of the Conglomerate Kings

The Making of a Blockbuster

Flameout: The Rise and Fall of Burger Chef

The King Of California: J.G. Boswell and the Making of A Secret American Empire

Built from Scratch: How a Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion

Invisible Giants: The Empires of Cleveland's Van Sweringen Brothers

Plain Talk: Lessons from a Business Maverick

Against the Odds: An Autobiography - By James Dyson

Alibaba: The House That Jack Ma Built

Habit of Labor: Lessons from a Life of Struggle and Success

Leadership Lessons from a UPS Driver: Delivering a Culture of We, Not Me

The HP Way

Bill & Dave: How Hewlett and Packard Built the World's Greatest Company

The Wawa Way: How a Funny Name and Six Core Values Revolutionized Convenience

Made to Order:: The Story of Sheetz

From Lucky to Smart: Leadership Lessons from QuikTrip

Daring to Succeed: How Alain Bouchard Built the Couche-Tard & Circle K Convenience Store Empire

Better Way to Build: A History of the Pankow Companies

Kiewit: An Uncommon Company

The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World

Spark: How Old-Fashioned Values Drive a Twenty-First-Century Corporation: Lessons from Lincoln Electric's Unique Guaranteed Employment Program

Junk to Gold: From Salvage to the World’s Largest Online Auto Auction

Let My People Go Surfing

Broadlooms and Businessmen: A History of the Bigelow-Sanford Carpet Company

The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World

Genentech: The Beginnings of Biotech

1,000 Dollars and an Idea: Entrepreneur to Billionaire

Startup: A Silicon Valley Adventure

Limping on Water: My 40-Year Adventure with One of America's Outstanding Communications Companies

Industry Books


Understanding the Insurance Industry (A.M. Best)

Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know

Theory and Practice of Insurance

Financial Statement Analysis for Non-Financial Managers: Property and Casualty Insurance

Basic Concepts of Accounting and Taxation of Property/Casualty Insurance Companies

Fundamentals of Risk and Insurance (Vaughan)

Insurance Theory and Practice (Thoyts)

Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry


The Bank Director's Handbook

A History of Banking in the United States (Sumner)

A Blueprint for Better Banking: Svenska Handelsbanken and a proven model for more stable and profitable banking

Biography of a Bank: The Story of Bank of America 

Analyzing and Investing in Community Bank Stocks 

The Principles of Banking (Choudhry)

Psychology and Behavioral Economics

The Undoing Project: A Friendship That Changed Our Minds

Thinking, Fast and Slow

Influence: The Psychology of Persuasion

Pre-Suasion: A Revolutionary Way to Influence and Persuade

Yes!: 50 Scientifically Proven Ways to Be Persuasive

Everyday Irrationality: How Pseudo- Scientists, Lunatics, And The Rest Of Us Systematically Fail To Think Rationally

Misbehaving: The Making of Behavioral Economics

The Crowd: A Study of the Popular Mind

Strangers to Ourselves: Discovering the Adaptive Unconscious

Thinking and Deciding

Explaining Social Behavior: More Nuts and Bolts for the Social Sciences

Biology and Evolution

For an intro to all of biology, as opposed to the evolutionary focus of the majority of the books below, I recommend checking out The Great Courses, and the course Biology: The Science of Life.

From So Simple a Beginning: Darwin's Four Great Books (Voyage of the Beagle, The Origin of Species, The Descent of Man, The Expression of Emotions in Man and Animals)

The Greatest Show on Earth: The Evidence for Evolution

The Selfish Gene

The Extended Phenotype

The Blind Watchmaker

River Out of Eden

The Ancestor's Tale

Climbing Mount Improbable

Unweaving the Rainbow

The Social Conquest of Earth

Journey to the Ants: A Story of Scientific Exploration

Evolution: What the Fossils Say and Why It Matters

The Emperor of All Maladies: A Biography of Cancer

The Gene: An Intimate History

The Double Helix: A Personal Account of the Discovery of the Structure of DNA

Genome: The Autobiography of a Species in 23 Chapters

The Vital Question: Energy, Evolution, and the Origins of Complex Life

Genetics: A Conceptual Approach

Behave: The Biology of Humans at Our Best and Worst

Why Zebras Don't Get Ulcers

The Song of the Dodo: Island Biogeography in an Age of Extinction

I Contain Multitudes: The Microbes Within Us and a Grander View of Life


VIDEOS: Lectures by Walter Lewin

Mr Tompkins in Paperback

Six Easy Pieces: Essentials of Physics Explained by Its Most Brilliant Teacher

Six Not-So-Easy Pieces: Einstein’s Relativity, Symmetry, and Space-Time

The Character of Physical Law 

QED: The Strange Theory of Light and Matter

The Feynman Lectures on Physics

E=mc2: A Biography of the World's Most Famous Equation

Get a Grip on Physics

Basic Physics: A Self-Teaching Guide

Seven Brief Lessons on Physics

The Laws of Thermodynamics: A Very Short Introduction

Thermodynamics For Dummies

Into the Cool: Energy Flow, Thermodynamics, and Life

Faraday, Maxwell, and the Electromagnetic Field: How Two Men Revolutionized Physics

Structures: Or Why Things Don't Fall Down


The Disappearing Spoon: And Other True Tales of Madness, Love, and the History of the World from the Periodic Table of the Elements

Probability - Math - Statistics

Taking Chances: Winning with Probability

Probability: A Very Short Introduction 

Probability: For the Enthusiastic Beginner

The Drunkard's Walk

How Not to Be Wrong: The Power of Mathematical Thinking

How to Lie with Statistics

Naked Statistics

Math, Better Explained: Learn to Unlock Your Math Intuition

The Theory That Would Not Die: How Bayes' Rule Cracked the Enigma Code, Hunted Down Russian Submarines, and Emerged Triumphant from Two Centuries of Controversy