Value Ideas Blog
Value Essentials: Financial Shenanigans

Welcome to a further piece of our ‘Value Essentials’ series. ‘Financial Shenanigans’ is written by Howard M. Schilit, PhD, CPA and Jeremy Perler, CFA, CPA. It presents an empirical journey through many accounting tricks in an entertaining way while teaching its readers what to look for when analyzing balance sheets. This blog post is by no means a summary of all the facts given in the book. It is merely meant to give you an idea and remind you of the key lessons. I would highly recommend reading it as soon as possible, as it is also part of our recommended reading list that you find on our website. After all, there are passages that show the recklessness of managers and the absurdity of huge frauds (that have stayed unnoticed for decades) which makes the reading experience quite joyful.

  financial shenanigans  

NOTE: In this post we directly quote the book. If you find this interesting, please consider buying it (e.g. via this link).

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After I spend a week in Omaha to attend a German value investor conference and the show of Buffett and Munger, we have a couple of more ideas to work on and even more valuable readings. Overall I can say that this week was a unique experience and I have to be deeply grateful to the organisations of the event and particularly to two persons from which I learned the most and have such a great personality. The two guys I owe so much are  M&MMI, thank you guys for all the lessons which you have taught me.   Created with Nokia Smart Cam   I bought Berkshire Hathaway`s letters to shareholders from 1965-2013  for 12 Dollar in a book form, which is a pure bargain for a guy who does not like to read so much on a screen. I will try to summarize them all (after I have finished my studies) and upload them.   Furthermore I`d like to highlight the book “Dream big” which was highlighted by Warren Buffett at the end of the Meeting. You can read a summary here.   You can read the notes of the Meeting here, I would like to highlight WBs answer to the Cost of Capital.   Additionally I would recommend the lessons of failure from the really good moatology blog. As a person who admits to have failed a couple times I can recommend to use such an approach.   Due to the fact that I like entrepreneurship and like to spend my leisure time on edx courses I only can recommend to read about entrepreneurship, strategy  and learn something new in an edx online course! And last but not least I have learned how important a franchise is, so go out and lean-to account for it! (We will try it as well)   And always keep in mind that the intelligent investor estimates likely returns, and invests if the returns are worth the risk.  Most profitable investing takes an uncomfortable view versus the consensus, and buys when the market offers good deals.  If there are no good deals, profitable investing sits on cash, and waits for a better day. Have a great week!    
This post originates by a comment of reader S., who has mentioned the book “the Outsiders, Eight unconventional CEOs”. Actually the book review was  my first blog post which I ever had accomplished, and MMI was so kind to publish it in his outstanding blog. As this book is really worth reading here is the old post again with some extensions which I have learnt in the year after having read the book. Especially I could recommend the links at the end of the post which will help you to achieve a deeper understanding of “Outsider thinking”. Perhaps William N. Thorndike Jr. itself is an outsider, he is the founder and managing general partner of Housatonic Partners a private equity firm. After Motley Fool Housatonic Partners has returned around 25% in the last 20 years, the approach of Thorndike is to spend 30% of his research time on the CEO and management of a company,   So first of all, let’s start with the book review and the wrap up of the idea. read more
VALUE ESSENTIALS: MARGIN OF SAFETY (SETH KLARMAN)   This post is essentially going to cover the most important points of the well-known “Margin of Safety” by Seth Klarman. It might be just as useful for people new to the topic as to those who have read it several times and would like a short summary.   The first chapters basically explain how institutional investors can cause market inefficiency or, in other words, says why value investing works. To keep the length of this post appropriate and not to go into every detail (we do still recommend reading the book!), we would like to jump to the overview of value investing that Klarman gives. Three elements are crucial:   The bottom-up strategy separates the value investor from others; the investment focus should lie on specific investment opportunities. Know a few companies really well instead of knowing little about very many. In the best case, you can focus on just one company at a time, by trying to buy a bargain and to wait.   Focus on absolute instead of relative performance. You cannot beat the market every year. In fact, most of the time you are going to be wrong. But every investment that has been valuated correctly has the potential to help you beat the market in the long-term, which are you are very likely to do. It is necessary to tolerate long periods of underperformance. Cash reserves are crucial when no bargain is available. If the portfolio is fully invested and an opportunity comes along, get rid of companies closest to being fully valued.   read more