From "Value Investing: From Graham to Buffett and Beyond" - Greenwald, Kahn, Sonkin, Van Biema.
government/federal debt
state and municipal bonds, bank savings, CDs, commodities, partnership in an enterprise, derivatives, mutual funds, stock, corporate bond, real estate. Spinoff warrants, preferred shares,
convertibles
Many funds cannot invest in small companies, so shares in smaller companies are cheaper.
Spin-offs are a wonderful opportunity for investors who are not constrained by questions of corporate size.
The end of the year is a good time to pick up stocks that window-dressing managers have tossed out to avoid listing in the year-end report.
If the industry is in serious decline, then the asset values of the company should be based on what they will bring in liquidation.
On the other hand, if the industry is stable or growing, then the assets in use will need to be reproduced as they wear out. These assets should be valued at their reproduction cost.
Inventory valuation : for a manufacturing firm, the more commodity-like the inventory, the less the discount necessary to sell it.
The would be competitor will have to spend heavily on research, advertising or customer relation in order to reproduce what we call hidden assets.
We need to add some multiple of selling, general and administrative expenses in most cases between 1-3 year's worth to reproduction cost of the assets
Its good to specialize in complex companies that nauseate most investors.
It is a truth universally acknowledged that all sensible people abhor commodity businesses.
For the incumbent to have a competitive advantage, it must have access to customers that a potential entrant cannot match.
If the cost of searching for an alternative to an existing supplier is high, then new entrants have a difficult time attracting customers who are not actually dissatisfied with their current arrangements. e.g. residential insurance market.
High switching costs are the most common cause of customer captivity. e.g. when one company provides software systems for payroll, benefits, HR etc.
Captive customers are the source of competitive advantages :
By raising switching costs (adding features/services)
Consumer franchises that are sustainable over decades must have a competitive advantage in recruiting new customers as well as retaining existing ones.
To sum up, the value of the franchise is very important in modern value investing. A franchise only exists where a firm benefits from barriers to entry that keep out potential competitors or insure that if they choose to enter, they will operate at a competitive disadvantage relative to the incumbents.
Brands are identifiable product images that exist in the minds of consumers and affect their behavior in ways beneficial to the company that owns the brand.
The history of the luxury car market suggests that this kind of mediated pricing power does not create a significant barrier to entry by itself that would protect Daimler from the ravages of competition.
Why not? As long as competitors have equal access to the means for creating a premium image-advertising, endorsements, PR, high quality, innovative technology, luxurious dealerships, extraordinary after-sales and high prices-at costs equivalent to that of Daimler, they will enter this profitable market. The Mercedes-Benz brand does not maintain itself ; it needs to be replenished with fresh advertising and image-burnishing expenses. This drives up costs for Daimler making it more costly and consequently less profitable for Daimler to maintain the brand. The brand may be an essential element of the perceived value of the product but does not construct barriers to entry.
The aspects of consumer behavior that do create franchise value are : HABIT, SEARCH COSTS, SWITCHING COSTS. - as leading to customer captivity. Also value of brands us greatly enhanced by economies of scale. e.g. Intel Inside is weak brand but when accompanied by economies of scale, even a weak brand becomes an essential part of a powerful franchise.
We estimate that the cash most businesses need to run their operations amounts to 1% of sales.
Continue from Part III. (Value Investing in Practice)
