Value & Strategy

Financial Analysis Lab: a treasure chest for analysts

At Georgia Tech professor Mulford has made available some great resources.

The spreadsheets with trailing data for various industries can help you back-up your valuation assumptions or provide benchmarking data.

Why do industry averages matter?

The pervasive effect of reversion to the (industry) mean is stronger than many good competitive positions as barriers to entry tend to get broken down. On the positive side, terrible businesses generally get a break when better management comes in. Terrible industries profit when raw materials become cheaper or technology makes capex less burdensome. As a result both negative and positive ROIC’s tend towards their cost of capital.

Extrapolating a firm’s current margins and asset turnover is a capital mistake.

Mean reversion

Change in Median ROIC by Quintile (2000 to 2010)


What can you find?

Per industry data on:

  • Operating cash margins
  • Free cash margins
  • Net margins
  • Capex/revenue
  • Cash as % of revenue
  • SGA as % of revenue
  • Cash cycles
  • Receivable cycles
  • Etc.

Follow the link, use and enjoy!

Lagarde, Dalio, Summers, Botin, Cohn in Davos

Macro shouldn’t matter to investors. However…sometimes its interesting. Unchartered territory and stuff…

  • Some economics lessons form Ray Dalio – monetary policy doesn’t work anymore/end of the debt supercycle/political extremism threat to economy
  • Botin (Santander): QE won’t work fully as banks need to hoard cash
  • Cohn (Goldman): more men in employable age, unemployed in US then France/new regulation stimulates banks to hoard cash
  • Currency wars, Europe’s erroneous approach to austerity etc.

An insightful interview with Warren Buffett

Great interview, especially his insider account of the crisis, helping out GE and Goldman and about cash as oxygen…

“After this, American industry literally stopped. George Bush said, “If money doesn’t loosen up, this sucker will go down” – I believe this was the greatest economic statement of all time. This is why he backed up Paulson and Bernanke. Companies were counting on the commercial paper market. In September 2008, we came right to the abyss. If Paulson and Bernanke had not intervened, in two more days it would have been all over. BRK always has $20 billion or more in cash. It sounds crazy, never need anything like it, but some day in the next 100 years when the world stops again, we will be ready. There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that time is like oxygen. When you don’t need it, you don’t notice it. When you do need it, it’s the only thing you need. We operate from a level of liquidity that no one else does. We don’t want to operate on bank lines.”

Warren Buffett’s Meeting with University of Maryland MBA Students – November 15, 2013.

The Future of Teaching, Free Knowledge, More Online Courses: Robert Shiller

I already wrote you various times about online courses. I do believe this is the ultimate phase of the renaissance, started in Europe (thanks to the Arab library’s and some Italian gamblers) and currently enlightning the entire world.

Keeping knowledgee within a small group of privileged people has proven to have horrendous effects and is a clear waste of potential. The unleashing of restrictions around knowledge is the most important driver for wealth, wellbeing and collective achievement.

Currently cost of education are high, to private individuals and to governments. I believe online courses are the beginning of serious potential to lower costs per student for governments and students.

How? Think about this…if the best classes and professors are freely available there’s no reason anymore to have so many universities. If I’d be a student I would ask my university to provide access to the best in a certain field of knowledge. If I would be a government I would ask the subisidised universities to rigorously cut teachings and link all students to the one top professor there is in finance, economics, biology. If I would be a company I would tell my people to follow online courses for personal development and if I would be a corporate I would cut reimbursement of MBA courses.

I believe knowledge and teaching in the future will be following the pareto law: 1% of the universities will teach 99% of the students or 1% of the universities and speciliazation will be the key driver for survival of universities. To use Taleb’s classification: eduction will become a clear case of extremistan.

Ín some time from now, initiatives like coursera will take a more formal role in university level education, youtube will take over from television etc. I spend more time on blogs and youtube than I watch television. My kid brothers don’t even bother to have a television. Knowledge is starting to be freely available. You just have to choose what you want to know more about. I love it.

Enjoy the best teachers from your relaxing chair, I’ve watched Robert Shiller behavioral finance classes:

An Interview with Jeremy Grantham on Natural Resources, Global Growth and Society

Listen to this brilliant interview (by Peter Day of BBC) with thinker/investor Jeremy Grantham (GMO)

Global Growth is Overestimated

Fertility rates in the developed world have dropped like a stone. Why does everybody keep their growth rate the same when the populations has dropped in man hours from 1.5 % to 0.2 %? This implies you should drop your growth rates with 1.3%. Because future working populations are known and people like Bernanke, the IMF and the World Bank keep their expected growth rates at the same level they are expecting a productivity increase of 1.3%. Why? Productivity has come down historically, because the service sector is becoming a bigger piece of the pie and the service sector is declining in productivity offsetting productivity gains in manufacturing.

Forecasting ‘Real’ GDP Growth

Contrary to the general 2.5%-3% GDP expectations, Grantham expects a 1.5% GDP growth but subtracts a component of 0.6%. 0.1% for the costs of more dangerous and expensive wheather (hurting crops, causing floods etc.) and 0.5% is for the increase in cost of resources.

The Error in GDP Calculations

GDP is more a description of costs than of utility of output. Grantham mentions easy Saudi Arabian Oil vs. Brazil’s deep sea deep salt layer oil. The cost to society of the latter one is much higher per barrel of oil (utility). Brazil’s GDP will rise, but how is this a win for World GDP?

Also the price of natural resources are counted in GDP. Between ’02 and ’08 natural resources tripled which was counted as a surge GDP growth. So Grantham and his team at GMO see GDP calculations as an inaccurate way to calculate economic gain, as it includes costs, which are obviously no virtue or gain.

The Fascinating Turnaround of Natural Resources

Natural resources declined for 100 yrs up to 2002. In 2002 we saw an incredible spike in prices, greater than in WWII. Up to 2002 natural resources had declined with 70% in real terms and all of a sudden natural resources are making up all their losses. Grantham thinks this is the effect of the compounded growth of China and India (10% p.a.) and their increase in demand for resources per capita adding up.

If China currently gobbles up about 50% of resources and it doubles again in 10yrs you’ll have to find another 45% in resources to keep prices at similar levels. The lack of new resources is going to break the bank. Especially oil price hikes will push everything up as it is half the costs of any other natural resource. One of the inevitable price pressures is the increasing cost of winning oil. Frecking perhaps will increase the availablity of oil, however the cost price is so high, oil prices aren’t expected to come down. 

The Quest for GDP Growth of Politicians is a Major Psychological Problem…

  • Decline in population is our last hope, not an economic crisis
  • Look at Japan: a perfectly functional society with an output per hour slightly higher than the US (since ’89) and 5% unemployment
  • Old people have to contribute to the economy and have to continue to work

Grantham: “In the long run you can not have physical growth in a finite world”

Also listen to this great interview for Grantham’s original views on capitalism, renewable energy and society.

The Pain of Paying: The Psychology of Money

And..another great video from Dan Ariely, James B. Duke Professor of Psychology & Behavioral Economics. During this session, you will learn: – why paying with cash for a nice dinner feels worse than paying with a credit card – how AOL underestimated internet usage with a change in pricing structure – how to get maximum enjoyment … Continue reading

The Surprising Truth About What Motivates Us

Enjoy this video by Daniel Pink: The Surprising Truth About What Motivates Us Financial rewards work for simple mechanical tasks, but do not work for cognitive tasks beyond a rudimentary level. Higher incentives lead to worse performance! Money IS a motivator, however up to a threshold. You should pay people enough to take the issue of … Continue reading