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Geoff Gannon April 26, 2011

My Investing Checklist


  1. Catastrophic Loss
  2. Failure to Snowball


  1. Altman Z-Score
  2. Piotroski F-Score
  3. Free Cash Flow Margin
  4. Return on Capital
  5. Free Cash Flow Margin Variation
  6. Return on Capital Variation
  7. Enterprise Value/10-Year Real Free Cash Flow
  8. Enterprise Value/10-Year Real Earnings Before Interest and Taxes
  9. Price/Net Current Asset Value
  10. Price/Tangible Book Value


  1. Is it crazy cheap?
  2. Has it been profitable for a long, long time?
  3. Does it do the same thing year after year?
  4. Are folks who use the service happy to leave some cash crumbs on the table?
  5. Is the value the company provides intangible?
  6. Will existing customers stay even if a competitor lowers its price?

Talk to Geoff About His Investing Checklist

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Geoff Gannon April 25, 2011

Stock Analysis Process – How Geoff Researches Stocks

Someone who reads the blog sent me this email:

I’m interested to know when you analyse a company, do you follow a particular order? Do you always start from a screen? Do you look at its overall business and competition landscape before diving into its financials? And when you look at its financials, do you follow a particular order? Do you look at its income statement first and then balance sheet?

I don’t have a particular order for finding a stock/company. I do screens and stuff like that. I read blogs. I look at company’s competitors. I just go through some foreign stock exchanges from A to Z. Or some states from A to Z. Or some industries from A to Z.

Basically, I’m looking through lists of companies the way I figure Warren Buffett flipped through Moody’s Manuals. I’m moving quickly to see if the company is really cheap compared to past earnings and current tangible assets and current sales. But I’m not doing any math, I’m just using websites like GuruFocus or Morningstar or MSN Money or the stock exchange sites, or the company’s 5-year or 10-year financial summaries. You can find something like that online for a lot of companies and then you quickly just run your eyes over those numbers. Are they pretty ordinary looking? If so, just move on. If something pops, stop and look at the stock.

If any number catches my eye – like a ton of excess cash, or low p/b, or low p/s, or low EV to past EBIT, FCF, etc. I look at the company description. Usually I’ll use Bloomberg for this or the company’s own website. What does the company say it does? If it says it invests in real estate, copper mining, is an investment bank, etc. I drop it there. If it says it does something I think I can visualize if I work real hard at it, then I keep going. I look for words like “niche”, “specialized”, etc. I look for business descriptions that sound non-capital intensive. Do you test or monitor or score or report? That’s good. Do you make capital goods? That’s bad. Do you make something cheap and repeat purchased, that’s good? Do you distribute? Good. Produce? Bad. Do revenues sound recurring? Are you a one of a kind company? A possible “hidden champion“?

This is all from the one paragraph description. Some are pretty inaccurate. But a lot aren’t. You get interested in Bunzl real fast when you read about it, because of what the business does. This is the Bloomberg description for Bunzl:

Bunzl plc is a distribution group supplying a range of non-food consumable products for customers to operate their businesses but which they do not actually sell. The Company partners with both suppliers and customers in providing outsourcing solutions and service oriented distribution. Bunzl’s main customer markets include grocery, foodservice, cleaning and safety.

Really, those are the only words I saw. They distribute. …

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Geoff Gannon April 17, 2011

Why Don’t You Write About Spin-offs? – Why “You Can Be a Stock Market Genius” is So Great

Someone who reads the blog sent me this email:

I know you called “You Can Be a Stock Market Genius” the best investment book ever written awhile back on your blog, and now you’re saying it again, so this has me wondering why you don’t discuss similar ideas (or his/your framework) on your blog?  I understand you like the book because it’s about a mental framework for investing / hunting for ideas, but still, a little surprising.

Also, I understand your view on why Greenblatt’s latest book isn’t practical (I somewhat disagree as I know several passive investors who simply stopped looking at their accounts during the downturn, yet they never once thought about selling), but is Stock Market Genius really practical anymore to the enterprising investor? Yes you like his book for the framework, but investors will read the book and then overpay for spinoffs, etc because that is what Greenblatt says to own. Every idea in that book is now a much more efficient market (in general) than it once was, with exception to the very small spinoff. Not saying money cannot be made in his ideas, but it is much, much tougher.

I know you’re into your high quality small caps and net-nets (at present) but it would be interesting to see you discuss special situations if you ever look for/find them.


“You Can Be a Stock Market Genius” is probably the most practical investment book out there. I’d say the 1949 edition of The Intelligent Investor – which includes a section on valuation – and Peter Lynch’s books are probably the other practical books. Phil Fisher’s book is also practical. But I don’t think many people are going to actually adopt his approach. Almost no one I talk to is willing to limit themselves to just a handful of stocks that they research for hours and hours and hours before they buy and then hold for a long time. Even though I think – both for value guys and growth guys – that is by far the best way to go.

Back to “You Can Be a Stock Market Genius”. I’m not sure why you think the spin-off market is much more efficient than it once was. It may be by some measurement. But all the estimates I’ve seen – there were some really good ones over at a now defunct blog called the special situations monitor – show that spin-offs still do better than the rest of the market. In addition, spin-offs (like net-nets) aren’t that hard to separate the possible very, very bad performers from the rest of the pack ahead of time.

That’s similar to net-nets where a stock with zero retained earnings, losses in most of the last 10 years, and some leverage is a lot more dangerous than a stock with a history of profitability and almost no use of liabilities at all. It may work out. It may even turn out to be one of the

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Geoff Gannon April 17, 2011

A Different Perspective on Japanese Stocks

Someone who reads my blog sent me this email:


I came from Japan to US for business school in 2001. I became extremely intrigued by Buffett’s value investment philosophy. I wanted to read everything available about his philosophy and became more and more familiar with his investment philosophy. And I personally pick stocks too.

Anyway, about investment in Japan, I read your “Japanese stocks: Now 34% of My Portfolio – Plan to hold Them For At Least 1 Year“, I see one part in “Buy Japan“, you are talking about “Japan is barely a capitalist country.” I see that you see Japan pretty well. They care much less about generating profits to shareholders than people do here in US. I imagine, that US investors who invest in Japan would feel slighted. They should be the boss, but not in Japan actually.

Here is the key point why I wrote. You say “It’s definitely the most investor unfriendly place on the planet – excluding a few countries that seize private property”. In my view, Japan is a country that would seize private property away from you. Not by legitimate ways, but more subtle but practical ways. Who has the largest control over Japanese economy? The system of capitalism?  Absolutely no. Bureaucrats have. They have tremendous control over businesses with both explicit laws and implicit powers.

They have ways to drag down companies performance that they don’t like. If a business is strong enough and brave enough to openly fight against bureaucrats, like Softbank did in the past, there is chance to win. But most businesses are afraid of this structural, chronic bully that deprives Japan of economic flexibility over the years. But interesting thing to me is, this chronic inefficiency sometimes works well, but sometimes doesn’t. Like it worked in our 70s to 80s. But not in the later decades. My father always tells me that this is just like fascism that drove Japan in WWII all the way to final disaster. When it works well, we are invincible, but once the ship turns to a wrong way, we are unstoppable. Being said that, I wonder how, like you mentioned, pre-war southern states unraveled their woven bonds and connections and became part of the rest of the capitalism world. Losing the war changed their way of business life completely? Then, maybe Japan also needs dramatic change like that.

In my view, the Japanese have strong fear of sticking out. If you stay in a crowd, you are invisible and no one would say anything. But if you stick out too much, bureaucrats will get you. Rising stars in business are always the easiest to go after for bureaucrats who are influenced by competitors. In US capitalism holds the power. This is the rule of the game and it seems that even the government cannot defy this rule. In Japan, bureaucrats rule the market most definitely.

And most obviously, this system is not working for

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Geoff Gannon April 15, 2011

Japanese Stocks: Now 34% of My Portfolio – Plan to Hold Them For At Least 1 Year

Just a quick update on Japanese stocks.

A while back I wrote a post entitled “Buy Japan”. A little later, I put out a report on 15 Japanese net-nets.

Some readers are curious about whether I’ve been putting my money where my mouth is.

Yes. Over the last couple weeks, I’ve been buying some of the smallest, most obscure – and least liquid (that’s why it’s taken weeks) – Japanese stocks.

So far, I’ve put 34% of my portfolio into a total of 4 Japanese micro cap stocks. There’s a fifth Japanese stock I’d like to buy. I’m willing to put 10% into it. If I get that order filled, I’ll have about 45% of my portfolio in Japan.

No. I’m not revealing which Japanese stocks I bought. Over the last couple weeks, I’ve been buying most of the volume of these stocks. They don’t trade much. So I have to be very patient. And very quiet.

All 4 stocks had negative enterprise values. In fact, I got my shares in each of the 4 stocks for less than 60% of net cash. Over the last 10 years, 3 of the 4 stocks had no losing years. One of the 4 stocks had an operating loss exactly 10 years ago. None had any losses in the last 9 years. And 3 of the 4 stocks were bought at less than 10 times normal after-tax earnings. All pay dividends.

Despite my feeling that the Yen could be overvalued against the dollar by as much as 25%, I decided not to hedge the currency.

All my other assets are in U.S. dollars. And I have no view about inflation in the United States. So having anywhere from a third to half of my assets in another currency isn’t the worst form of diversification.

I’ll hold my 4 Japanese micro caps for a little over a year. I plan to re-evaluate them in July 2012. I don’t know enough about Japan to evaluate their business performance in between.

I think it’s probably better to impose a trading ban on myself for a full year so I’m not tempted to sell based on headlines. I didn’t buy these stocks because of headlines. I bought them because they are the cheapest stocks I’ve ever seen. It would be a mistake to sell on news what I bought purely on price.

If any fat pitches come along they’ll have to be funded through sales of the 50% of my portfolio in U.S. stocks (which is actually only 2 stocks).

Right now, having more ideas than money is definitely not my problem. There are almost no good net-nets in the U.S. I mean literally almost zero decent net-nets. Don’t believe me? Ask Jon Heller.

But nothing lasts forever. One day, American net-nets will return.

Until then, at least we have Tokyo.…

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