Book Review – “Investing Between The Lines”

I just concluded reading a book called “Investing Between The Lines” by L.J Rittenhouse. It is an entire book that is dedicated to analysing Chairman’s Statements found in Annual Reports. This book is recommended by the Oracle of Omaha himself. In his latest 2012 shareholder’s letter, on Page 22, he says, “I also recommend… Laura Rittenhouse’s Investing Between the Lines”.

In the book, a model is shown on how to evaluate Chairman’s Statements. An effective communication by management is essential to the investors of the company doing well in the long run. How is this so? When management knows what it wants and communicates well to the employees, the employees feel passionate to work for the company and this in turn allows them to work/serve better. The customers then see that the employees are serving them well and tend to buy more of their products. This is turn gives rise to higher profits and this flows down to better share price performance.

This book is very thorough with many examples given, both with good and bad companies. People who were invested in Enron could have noticed from the statements itself that the company was engaging in something fishy. It also tells readers how to separate the PR fluff from the real deal.

This book is a must-read for anyone who wants to know how to evaluate management better. After reading the book, I highly recommended you to analyse a Chairman Statement yourself by using the framework given in the book. I did it and I could feel a paradigm shift in the way I looked at the statement.


Book Review – “Financial Shenanigans”

I just completed reading a book called “Financial Shenanigans” written by Howard M. Schilit and Jeremy Perler. It teaches readers how to uncover financial fraud in the financial statements – Income Statement, Balance Sheet and Statement of Cash Flows.

The book has three main parts. They are:

  • Earnings Manipulation Shenanigans 
  • Cash Flow Shenanigans
  • Key Metrics Shenanigans

It is a highly recommended book for those who want to take analysis of financial statements one step further. Learning to detect financial chicanery can arm an investor and prevent him from investing in fraudulent companies. The book uses case studies of various fraudulent companies that faced the music and teaches investors how not to fall for their trap.

Book Review – “Building Wealth through REITs” by Bobby Jayaraman

“Building Wealth through REITs” is a local book by Bobby Jayaraman which touches on the overview of real estate investment trusts (REITs) found in Singapore, how to read the financial statements of REITs and also how to value the REITs, among others. The book also includes interviews with the Chief Executive Officers of six REITs listed in Singapore. The interview section in itself is worth the money. I learnt a lot from the interviews alone.

I came across Bobby’s articles on REITs in the now-defunct Pulses magazine in 2010. The articles were well-written and I learnt a lot from those articles when I was just starting out on learning about REITs. This book actually takes readers a step further in looking into REITs. However, beginners need not fret as this book also divulges on the basics of REITs like the structure of REITs and how they grow.

There are only a handful of local books on REITs and this definitely is a must-read for all who want to know more about REITs and how to invest in them prudently. I feel beginners and advanced investors will equally learn a lot from this book.

Book Review – “The Warren Buffett Stock Portfolio”

Recently, I have been reading books on the basics of value investing to reinforce the ideas of value investing. It always good to read about the tenants of value investing again once in a while, so that I can keep my legs firmly planted into the world of value investing and not let my views be diluted by the masses. This book review covers the book called “The Warren Buffett Stock Portfolio” written by Mary Buffett and David Clark. It delves into some of the stock purchases of Warren Buffett under Berkshire Hathaway and why Warren bought them. The stocks covered in this book includes:

  • American Express
  • BNY Mellon
  • The Coca-Cola Company
  • ConocoPhilips
  • Costco Wholesale Corporation
  • GlaxoSmithKline
  • Johnson & Johnson
  • Kraft Foods, Inc.
  • Moody’s Corporation
  • Procter & Gamble
  • Sanofi
  • Torchmark Corporation
  • Union Pacific Railroad
  • U.S. Bancorp
  • Wal-Mart Stores, Inc.
  • Washington Post
  • Wells Fargo & Company
Warrren Buffett likes consistency in earnings in his companies. By buying a company with a durable competitive advantage with predictable earnings, the common stock equity is kind of a “bond”. He calls this equity bonds. Another value, the book value per share (BVPS) gives a rough figure of the company’s intrinsic value. Long-term growth in BVPS can be loosely used to measure long-term growth in intrinsic value of the business.
For each company analysed in the book, the industry the company is involved in and key snapshots like latest net earnings, earnings per share (EPS), BVPS, dividend and yield, etc are shown. Then, a brief summary of the business is given. Lastly, how the company is analysed is revealed. I will take one of my favourite companies, Johnson & Johnson as example and show you how to analyse it below as per the book.
  1. Look at the EPS from 2001 to 2011. For J&J, the EPS increased from $1.91 in 2001 to $4.95 in 2011. This is a 159% increase in EPS or a compounded annual growth rate (CAGR) of 9.99% for the last ten years. The after-corporate tax initial rate of return is then determined by using latest EPS divided by current share price of $65 at time of writing. ($4.95/$65) x 100% = 7.6%. The initial rate of return can grow at its historical annual EPS growth rate of 9.99%.
  2. Look at BVPS from 2001 to 2011. The BVPS in 2001 was $7.95 and in 2011 was $23.05. This is a CAGR of 11.23%.
  3. Determine how much the J7J equity bond will yield by dividing EPS and BVPS of latest year. ($4.95/$23.05) x 100% = 21.4%. However, one can’t buy the share at BVPS but at current market price of $65.
  4. Determine how much will a $4.95 initial after-corporate tax rate of return growing at a yearly rate of 9.99% look like in ten years. To do that, you can use the Future Value Calculator. Key in “Interest Rate Per Time Period” as 9.99, “Number of Time Periods” as 10 and “Present Value” as 4.95 to get a future value of $12.83. This means that in 2021, one will get an after-corporate tax figure of $12.83, which is a 19.7% return for a $65 purchase price.
  5. How much will a EPS of $12.83 be worth in 2021? It depends on the price-to-earnings (PE) ratio of the stock in 2021. Use the ten-year historical low PE ratio of 12 to be conservative. $12.83 x 12 = $153.96 a share in 2021.
  6. If one bought J&J in at $65 and sold it off at $153.96 in 2021, the total return will be 136.8% or a CAGR of 9.01%.
  7. J&J has raised dividends every year for the last ten years. Conservatively, if J&J maintains its 2011 dividends of $2.28/share till 2021, we get a total of $22.80 of dividends per share. $22.80 + $153.96 = $176.76. Thus, at the end of 2021, our returns from the total gain would actually be 171% or a CAGR of 10.52%.

This book makes a good read for anyone who wants to know how Warren analyses companies before purchasing them and those who wish to recap the value investing dogma.

Book Review – “The Little Book That Builds Wealth” by Pat Dorsey

This post covers the book review of “The Little Book That Builds Wealth” written by Pat Dorsey. Pat Dorsey is the Director of Equity Research at Morningstar. He has been instrumental in the development of Morningstar’s economic moat ratings. He is also the author of the renowned book, “The Five Rules of Successful Stock Investing”.

This book is all about uncovering economic moats in companies. According to the book, all moats can be divided into four categories and they are: intangible assets, switching costs, network effect and cost advantage. It explains each of this moat using real-life examples. If you find a company with solid returns on capital and with one of the four characteristics, you’ve likely found a company with a moat. This book makes discovering a company’s economic moat more like science than art.

Also contained in this book is a discussion on what are not economic moats. Great products, great size, great execution and great management do not create long-term competitive advantage unlike believed by many. I highly recommend this book to anyone who wants to learn more about uncovering economic moats easily.

Look at the video below by Pat Dorsey espousing the four categories of economic moats:

Book Review – “Markets Never Forget But People Do” by Ken Fisher

Markets Never Forget (But People Do) - Book Cover

“Markets Never Forget But People Do” is a book showcasing the historical perspective of the stock market. By re-looking into history, we can convince ourselves why this time is not different unlike what the media portrays when the economy is in the doldrums. Instead of me explaining further what this book is about, why not listen to the author himself explaining it?

A summary of the contents of the book:

  1. It’s not a new normal unlike what the media says and this time is not different. History tells us so.
  2. Stocks can rise even though unemployment is high
  3. Double-dip is always feared after a recession but rarely seen throughout history
  4. Why the V-shaped recovery happens after a recession
  5. Third year after a recession are usually ‘pause’ years where the market doesn’t rise that much
  6. Why volatility is good and why we don’t have to fear the ‘black swan’ events
  7. Government debt and how to see if a country is really in need of default. The way to see government debt is to determine whether the debt is affordable to be paid. Currently, the interest on the US debt is very affordable compared to history.
  8. US politics and investing
  9. It’s a global world and how countries affect each other
Below is a video on unemployment rate and the rising stock market after a recession.

Every serious investor should read this book!

Book Review – “Your Money and Your Brain” by Jason Zweig

How many of us investors actually pay attention to what goes on in our brains when, during and after we invest in a company? “Your Money and Your Brain” delves deep into an investor’s psychology and explains why we feel what we feel at certain times.

Content wise, this book talks about the different emotions such as greed, prediction, confidence, risk, fear, surprise, regret and happiness and shows us how to curb some of these excessive emotions.

This is the first book I’ve read on behavioral finance and it has opened up my mind on the biases I might have regarding to investing. All investors should read this book.