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Geoff Gannon December 31, 2011


Someone who reads my blog sent me this email:



Reading your articles. I am confused between standard deviation and coefficient of variation. Standard deviation itself shows how much variation exists from the average then what does coefficient of variation tells us?



Standard deviation shows the amount of variation. Not related to anything. The variation coefficient shows the relative amount of variation. The standard deviation related to the mean. You should always relate the standard deviation to the mean. Otherwise, you will think height varies a lot among NBA basketball players because they are all tall while height varies little among children because they are all short.

Standard deviation is not a number that ports well. The variation coefficient is. It’s a way of seeing how big the swings above or below the average have been in terms of the average. Have they been one-third of the average? Or have they been the same size as the average?

For example, two companies can both have a standard deviation of 10% in their operating margins over the last 10 years. If one company has an average operating margin of 10% and the other has an average operating margin of 30% – that same 10% swing is going to feel very different. The variation coefficient tells you this. The standard deviation does not.

I need to make two points here. One, I use stats to describe. Not predict. Two, I use stats to compare. To rank. Different people have different reasons for measuring the things they measure.

If your goal – like mine – is to describe the past and compare different company’s pasts to each other, the variation coefficient is the right number to use.

Talk to Geoff About Variation

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Geoff Gannon December 24, 2011

Faith in Net-Nets

My latest net-net article over at GuruFocus includes my clearest explanation of what to look for in net-nets – and more importantly – what it takes to make money investing in net-nets:

If the balance sheet is very liquid and insider ownership is very high – there’s a good chance something will happen. I have no idea what. And I have no idea when. But someday, something will happen to increase the return on those assets…Sometimes it’s as simple as returning the assets to shareholders, using net cash to make a management buyout super cheap, or using net cash to buy a totally different business…When you buy a net-net you are not buying future earnings. You are buying future assets. What I’m talking about here is asset conversion. At some point, you are expecting today’s assets will be converted into something you can profit from. Something a control investor will pay for. Or something the market will reward.

It’s very hard to imagine these events ahead of time. But you can still bet on them:

That’s the uncertainty in net-nets. Most of the best net-nets have this certain/uncertain duality. It is certain the stock is selling for less than it’s worth. It is uncertain how the stock will ever sell for what it’s worth.

Remember what Ben Graham told the U.S. Senate:

The Chairman: When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about – by advertising or what happens?

Mr. Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it one way or another.

Talk to Geoff about Faith in Net-Nets

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Geoff Gannon December 24, 2011

Investor Questions Podcast: All Interviews and Episodes

Someone who reads the blog sent me this email:

Hey Geoff,

Thanks for posting up your old podcast episodes!  Any chance you can put up the interview series episodes as well?  Thanks!


Sure. Here are links to all the interviews and episodes. Remember, they are old. So any references to stock prices, market conditions, etc. are out of date.


Tariq Ali of Streetcapitalist (Interview/Site)

George of Fat Pitch Financials (Interview/Site)

Asif Suria of SINLetter (Interview/Site)

Jon Heller of Cheap Stocks (Interview/Site)

Toby Carlisle of Greenbackd (Interview/Site)


Episode 1

Episode 2

Episode 3

Episode 4

Episode 5

Episode 6

Episode 7

Episode 8

Episode 9

Episode 10

Episode 11

Episode 12

Episode 13

Episode 14

Episode 15

Episode 16

Episode 17

Episode 18

Episode 19

Episode 20

Talk to Geoff About the Podcast

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Geoff Gannon December 2, 2011

3 Net-Net Articles

Here are the 3 net-net articles I’ve written over at GuruFocus:

When Is a Bad Business a Good Net-Net?

Risk in Net-Nets

How Many Net-Nets Are There?

Expect a new net-net article each Friday. The net-net newsletter comes out once a month. The next issue is set for January 6th. The newsletter picks one net-net a month. And holds each pick for one year. Starting in April, I’ll be writing about the performance of each net-net as it exits the portfolio. So you’ll get to judge the newsletter’s results for yourself.

So far they’ve been ugly. 2011 was not a good year for net-nets. At least not in the U.S.

On the bright side, it looks like one of my Japanese net-nets – Sanjo Machine Works – is going to be bought out. 

Even though Sanjo is just one-fifth of my Japanese net-net portfolio the 140% return on Sanjo will end up making 2011 a good year for the group despite my other four Japanese net-nets doing absolutely nothing pricewise.

Talk to Geoff About Net-Nets

Check out the Newsletter

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