December 15, 2011

I went to an interesting conference the other day, titled, “Graham and Dodd and Modern Financial Analysis.” Presented and written by Joseph Calandro, Jr. I enjoyed the event a great deal. It was a real interesting and worthwhile few hours.

“Gut instinct is not sustainable as a successful long term investment strategy.” He said this as he talked about Buffett not being lucky, but that his quality of application of Graham Dodd is what is responsible for his tremendous track record.

He mentioned to read about “Mitchell Julis is co-founder, co-chairman and co-CEO of Canyon Partners LLC,” I was not familiar with that name, and he mentioned him in the same context as Buffett, Klarman and Cooperman. I will look to read any work I can locate. I looked at Canyon Partners 13-F for 9/30/11. The top 3 holdings are LOW, CHMT and CCO. These make up 26% of reported assets.

He discussed a quick thesis on why he thinks Berkshire paid ~$70 per share for GEICO in 1995. He suggests using various methods of valuing a company (basic stuff, right?); these include asset values, earnings values as well as determining worth of intangibles. He claims the valuation of the franchise of GEICO is what Berkshire saw that others didn’t.

He discussed Klarman frequently. I think they know each other, and are friends. He stated that Seth Klarman wrote in Margin of Safety, 1991, p. 124, “…the future is not reliably predictable.”

He listed “Critical Valuation Errors to Avoid” by Professor Ruback

1. Forecasts are aggressive.
2. Cycles are ignored.
3. Forecasts are not consistent.
4. Terminal value timing.
5. Inconsistent assumptions.
6. Long-term growth rates are aggressive.
7. Discount rates are conservative or aggressive.
8. Changing capital structure is not considered.
9. Control premiums.
10. Multiples are inappropriately applied.

How to avoid These Errors:

1. Focus on common sense economics.

2. Use more than one valuation approach.3. Don’t be mechanical.

He presented a recommended reading list

Security Analysis 6th Ed. –

Margin of Safety

The Intelligent Investor (Zweig edition)

Benjamin Graham: Building a Profession (edited by Zweig)

Financial History Magazine by the Museum of American Finance (Suggests all value investors should subscribe to this, and they will find its value immeasurably positive.)

Money ball

Value Investing: From Graham to Buffett and Beyond (Greenwald, etal)

Applied Value Investing – the presenter Joseph Calandro, Jr.

He claims “Know Your Worth: Critical Valuation Errors to Avoid,” HBS Press – Faculty Seminar Series, August 1, 2004 – by Richard S. Ruback is the most important read, although expensive, it is a must.
He mentioned that his papers on SSRN website were worthwhile reads.

Here are some I found:

Applied Value Investing

Suggestions for Modern Security Analysts

Taking Burlington Northern Railroad Private
Turnaround Value & Valuation: Reassessing Scott Paper

The Margin of Safety Principle and Corporate Strategy

Strategic M&A: Insights from Buffett’s Midamerican Acquisition

Taking Clayton Homes Private

Super Cats as Alternative Investments: an Overview

Respectfully submitted,