If I Ran a Value Investing Business School

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Mar 16, 2014
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“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.”