Monday, October 14, 2013

Mihaljevic, The Manual of Ideas

John Mihaljevic is a managing editor of the prestigious monthly journal for value-oriented investors The Manual of Ideas. Hence the title of as well as a major resource for this book, The Manual of Ideas: The Proven Framework for Finding the Best Value Investments (Wiley, 2013).

Even if you yawn at the very thought of yet another book on value investing you owe it to yourself to give this manual a try. It is a serious, thoroughly researched work that draws on interviews with top value investors, quantitative screens, and good old-fashioned qualitative analysis. It offers not only principles but actionable advice. And it reads well. In brief, its value far exceeds its price ($25.99 hardcover on Amazon).

The book covers a range of value investing styles and opportunities: deep value, sum-of-the-parts value, Greenblatt’s approach, jockey stocks (i.e., investing in companies with great management), following superinvestors, small- and micro-cap stocks, special situations, equity stubs, and international.

Let’s say that you want to track superinvestors. Mihaljevic offers some caveats when it comes to choosing whom to follow. These caveats should be fairly obvious, but investors often overlook them when looking for investment ideas, so they’re worth repeating. For instance, you should take into account portfolio turnover. Since a fund has to file a 13F-HR only quarterly and there is on top of that a 45-day filing delay, “the higher the turnover of a superinvestor’s portfolio the higher the chance that an investor is considering selling an equity by the time we consider buying it.” And if a superinvestor engages in a lot of short selling, “we cannot be sure whether a long position represents a high-conviction call on the merits of a specific investment or whether it simply represents the long side of a pair trade.” (pp. 161-62)

Mihaljevic lists some of his favorite superinvestors along with their CIK (Central Index Key) numbers, used when searching SEC filings. He also gives tips on how to track a handful of top investors who do not file 13F-HR forms with the SEC.

Those who are interested in investing in small cap stocks will find useful screens and, more importantly, ways to go beyond these “crude tools for finding interesting ideas.” (p. 197) The book offers, for instance, methods for deciding whether a fallen angel will fly again and for uncovering hidden inflection points. It encourages investors to ask whether a company passed the right screen for the wrong reason, whether the financial statements raise any red flags, who has been buying and selling the shares, what management’s attitude is toward outside shareholders, and where the shares are relative to their historical range.

For those with nerves of steel, an appreciation of the often destructive power of leverage, and a keen sense of risk management, equity stubs “can be one of the most rewarding pieces of a portfolio.” (p. 239) Successful investing in equity stubs requires sound judgment and experience. Even then, “due to the lopsided payoff in leveraged equities, the probability of winning on any one investment may be well under 50 percent.” (p. 264) For those determined to pursue this area of value investing, Mihaljevic suggests that “industry-wide sell-offs represent better hunting grounds for potential opportunities than do company-specific crises.” (p. 265)

An “intra-text” note from this reviewer who watched, and thoroughly enjoyed, the documentary “Note By Note: The Making of Steinway L1037”: As readers probably know, John Paulson recently bought Steinway, which Mihaljevic describes as a classic case of a company that “saw no urgency to unlock shareholder value.” Although “the renowned piano maker … also owns a band instruments business and valuable real estate in New York, … investors who bought Steinway shares based on a sum-of-the-parts appraisal would have witnessed years of inaction on monetizing real estate.” (p. 61) Well, if it takes about a year to make a piano, perhaps we can understand the frustratingly snail-like pace of Steinway’s board.

The Manual of Ideas is a book I can highly recommend to retail and institutional investors alike or, to slice the investing world another way, to beginners as well as old-hands. It has something to say to every investor, even those who don’t consider themselves true value investors.

1 comment:

  1. Thanks for this review. I just bought the kindle version on the strength of your recommendation and others on amazon.