For more than fifty years, great "value" investors — Warren Buffett, Benjamin Graham, Charlie Munger, Seth Klarman, to name a few — have been touting the benefits of investing when there is blood in the streets, buying businesses when they are on sale. At each turn, somebody would ask them: Aren't you concerned that, by constantly talking about how you became so successful, you'll create a following that will, in turn, increase competition and reduce your potential investment returns?

It is said that value investing is more popular today than ever before. I tend to disagree.

Continue Reading Value Investing vs. Value Pretending ››

At the end of this post, you'll find a "Buy Now" button to purchase a 20-page report comparing Free Cash Flow to Warren Buffett's owner earnings. Though the two terms (free cash flow and owner earnings) are often used interchangeably, they are not always the same. Confusing the two can have a dramatic effect on your intrinsic value calculations.

Continue Reading Free Cash Flow vs. Owner Earnings ››

Jeff pointed out that the overwhelming majority of the posts on F Wall Street have discussed the "buy side" of being an investor. (And, of course, psychology and when not to buy.) Okay — now we own businesses. What's the next step? (Grab some coffee; this is a looooooong post):

Continue Reading The Art of Selling Your Stocks ››

Folks — it's great to be back. A lot has happened over the past few weeks; then again, you should not have been surprised by any of it. The airlines are shutting down (you could have seen it coming from a mile away — serious note: my heart goes out to the employees); Bear Stearns has fallen (someone had to — serious note: my heart goes out to the employees...again); GE missed Wall Street's optimistic earnings estimates (with more than 35% of 2007 revenue from GE Money and a sever credit crisis? No way!)

(Oh, and someone stole my identity. Moving on.)

With the markets in a dizzying undulation — not quite ready to plummet, not quite ready to soar — it's common to ask yourself, "Did I make the right decision? When should I reevaluate? If it's going to get worse, should I stand on the sidelines for a while and look for a bottom or the signs of a recovery?"

Continue Reading Your Commitment to Business Investing ››

A few weeks back, I sent an e-mail to our advisers talking about the "no-brainer" type investments we are looking for. I wrote a nice, long e-mail (in true Joe fashion) about discounted cash flow and valuing businesses, about speculation versus investing - it was practically a novel in and of itself. Then, I deleted the whole thing, and started from scratch.

The way I figured it, you shouldn't have to be a rocket scientist to understand "no-brainer" investing. Here's a recap of what I wrote:

Continue Reading What is a No-Brainer investment? ››

I don't want to focus this blog solely on workout situations; still, I think a majority of visitors never even dreamed of finding workouts until we walked through the various steps, the timeline, and the potential profits and risks. So, let's add another chapter to the workouts/arbitrage discussion. Question: Should you consider buying workouts before regulatory approval goes through — when the potential profits are greater?

Continue Reading Pre-Regulatory Workouts ››

A common question among investors — both conventional and non-conventional — is: How should I allocate my portfolio so I am best prepared to capitalize on (or protect myself from) the coming years in the markets? Mutual fund, which were designed to, in part, shield people from volatility, aren't living up to their promises and even "well-diversified, long-term" mutual fund investors are finding it difficult to "stay the course" like their advisers instructed.

Here's how to do it.

Continue Reading What Is The Best Asset Allocation Strategy? ››

Sorry all — the Chicago cold kicked my butt for two days. Let's get back to business. The Federal Reserve cut the federal funds rate by 25 basis points (0.25%) and pumped $41 billion of short-term reserves into the markets — the biggest liquidity infusion since September 11, 2001. One would have expected stocks to do anything but drop — the Dow having lost 360 points (2.6%) yesterday.

So...

Continue Reading Noise vs. News: Fed Meetings and Rates ››

Shortly after posting the biggest quarterly loss in the company's history, Merrill Lynch fired CEO Stan O'Neal. On the news, shares of Merrill Lynch (MER) dropped 2.1% before today's opening bell — immediately wiping out $1.2 billion of market cap.

Come on — did Merrill's business really take a $1.2 billion hit this morning? Or is this noise that looks like news?

Continue Reading News vs. Noise: Board Changes ››

We all know that the markets are driven by fear and greed. We know that, on a daily basis, we are bombarded with information and news about stocks and the markets. As investors and casual internet surfers, we are flooded with information and advertisements about "The Ten Best Stocks For 2008," "How To Retire Wealthy," and "Oil Sets New High—Stock Market Outlook Is Gloomy (or Rosy)."

In the end, the news sources, the advertisers, the brokerages, etc. have one goal: They want to sell you something. The company with the scariest or most optimistic news will likely attract our attention, and hopefully our dollars, to buy their "protection" or their "solution".

How do we sift through the garbage to find real gems of information—the edge we need to profit greatly?

Continue Reading News vs. Noise: Sifting Through News Advertisements ››

The value of a company lies entirely in the future, and it is our job to predict that future with a degree of accuracy and confidence. To choose a growth rate, we must delve into the inner workings of a company and see how quickly it will grow internally.

Enter CROIC.

Continue Reading Choosing A Growth Rate: CROIC vs. FCF ››

If you aren't familiar with beta, it is the measure of a stock's volatility in relation to the rest of the market. If a stock has a beta of 1, it tends to move up and down at the same pace as the markets. Stocks with a beta greater than 1 move more quickly (up and down) than the markets as a whole.

Though conventional wisdom and Wall Street say high beta means high risk, well, "F" that. High beta is your friend. Let me explain.

Continue Reading Market Multiples: Looking At Beta ››

When buying a business, you are essentially becoming a silent partner in that business. Sure, you have a say in the meetings and you get the annual reports; still, you don't have any real control over the day-to-day operations or the allocation of the company's (your) cash.

When a company buys back stock, it is using your cash to increase your ownership by reducing the number of outstanding shares. You end up with a bigger piece of the pie. That's a good thing, right?

Continue Reading Stock Buybacks: What That Means For You ››

The decision to buy stock in a company is fairly straightforward. Is it a great business? Is it trading at a significant margin of safety (MOS)? Am I confident in my valuation and assessment? Answer "yes" to those questions and you're on your way to business ownership.

But when do you sell?

Continue Reading When Should I Sell My Stock? ››

Let's get back to the basics—Warren Buffett and his teachings. We know that every company has an intrinsic value. Calculating that value is simple—it is the discounted cash that can be taken out of the business during its remaining life. In fact, that calculation can be used to value everything—businesses, CDs, bonds, cars, real estate, the list goes on and on.

Continue Reading Just Because You Know The Value... ››

Analyzing companies is fairly straightforward. Finding companies to analyze is a different ballgame. In the U.S. alone, there are more than 10,000 publicly traded companies. With the power of the internet, we can now invest worldwide—bringing the number of available investment options to staggering proportions.

Let's narrow it down a bit.

Continue Reading How To Find Companies Worth Analyzing ››

80 degrees. Sunny. I'm getting a killer tan. And that's about all I'm getting because the fish aren't jumping in my boat the way I had hoped. In fact, we've caught nothing but two small perch for the day, and nary a nibble more. Some guys are sleeping; some are getting frustrated and angry. I'm standing at the back of the boat, sipping a glass of wine and watching the water.

Then it dawned on me: I know exactly how these guys see investing and the markets, and they fish just like they invest.

Continue Reading Fishing For Profits ››

Perhaps you've noticed that I switch between discount rates. Maybe you've seen me throw the past out the window and use future owner earnings assumptions that differ from past median growth rates. Or, you may have noticed that I'll use 8-year timeframes on some companies and 15 year timeframes on others.

I think it is human nature to seek out the perfect spreadsheet or formula to predict the future of the markets. It doesn't exist, so it is best to understand various methods and assumptions so you can draw your own rational conclusions based on reasoning and data.

Continue Reading Do The Math In Your Head ››

In 1934, David Dodd and Benjamin Graham (Buffett's teacher) wrote what would later be known as the foundation for value investing. Security Analysis knocked Wall Street for focusing on reported earnings and pointed the finger at the brokerages for dismissing their fiduciary responsibilities to clients, ultimately causing the Crash of 1929.

(In reading the latter section, if you didn't know the book was from 1934, you would think he was describing the dot-com boom and bust of the early 2000s. It's actually scary.)

Continue Reading The Graham And Dodd Method ››

If your business doesn't have a moat, it is unpredictable at best. Can money be made in no-moat businesses? Absolutely—but it is a gamble at best. Ben Graham, Warren Buffett's mentor and friend, stated:

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Though a small- or no-moat business may offer a "satisfactory" return, it does not promise safety of principal. So, we invest in wide, deep, shark-infested moat businesses. But, how do we put a value on that moat and factor it into our price?

Continue Reading The Value Of A Moat ››

When a business changes your language, it likely has a good moat. Still, plenty of businesses have huge moats—and it is just a matter of understanding and uncovering them. Why do you need a moat? As Buffett says,

to protect you from the guy who is going to come along and offer [your product] for a penny cheaper.

Continue Reading Big Moat Business Part II ››

Moat—one of the most important concepts in value investing. Every company has a value; but, the companies with big moats are generally less sensitive to outside forces which means you can invest with more confidence and comfort.

There are a million different types of moats. Some are economic; some are brand; some are position. Some are right in front of our faces; some require a bit of digging.

Continue Reading How To Find A Stock With A Moat ››

Hope. It can kill a portfolio. The more rational, cold, and calculated you are in your investing, the more confidence you can have in your portfolio. Each emotion you introduce only digs you further into the hole. You can hold a company because you love their products; but, you better be sure that the business is generating enough cash to keep those products rolling off the lines.

Continue Reading How To Recover Losses ››

In his 1996 Letter To Shareholders of Berkshire Hathaway, Warren Buffett offered investors some pretty rational advice. I'll take you through it, but let's paraphrase his first words of caution: If you aren't going to own individual stocks, buy index funds—not Wall Street's mutual funds. Considering that most of Wall Street's mutual fund managers lose to the markets in the long-term, and if you don't want to own individual stocks, that's pretty sage advice from the Sage Of Omaha.

Continue Reading Buffett's Timeless Advice To Stock Investors ››

Perhaps one of the most important, and least used, numbers on Wall Street is CROIC—Cash Return On Invested Capital. A Google search for "earnings in investing" brings up some 7 million results. "CROIC in investing" brings up 47, of which 5 belong to F Wall Street (probably six after this post).

As I promised Oliver on July 13th, let's explore CROIC for a minute.

Continue Reading What The Heck Is CROIC? ››

Earnings. The Golden Child of Wall Street. You can't talk about a "growing" company unless you qualify your rant with a discussion of earnings. In fact, earnings are the basis of nearly every one of Wall Street's tests to determine whether a company is healthy and whether or not it belongs in your portfolio.

F Wall Street...and their earnings.

Continue Reading The Importance Of Earnings ››