Book Review: “The Manual of Ideas,” by John Mihaljevic
The “Manual of Ideas” is a popular investing newsletter aimed at generating investment ideas by highlighting and discussing a handful of companies every month. Over the newsletter’s history, editor John Mihaljevic has also published interviews with numerous fund managers, whose styles range across the spectrum of investing. While individual approaches to investing are as varied as people’s personalities, these approaches are often distilled into a few descriptive categories.
In his new book, “The Manual of Ideas,” Mihaljevic provides an overview of several such categories and stock selection approaches that he has been exposed to in the course of producing his newsletter. The book offers a way for investors to get a broad sense for the investing landscape, as well as where some top managers fit in.
The book is divided into sections, with each describing a specific approach to investing
1. Deep Value
This describes Ben Graham, and his approach to “cigar butt” investing. In this analogy, a cigar butt may have only a few puffs left in it, but since it has been discarded there’s not much cost or downside to picking it up. Like cigar butts, Grahams “net net” stocks, which are those trading at a discount to net current assets – liabilities, are cheap and provide the downside protection of asset value. The approach focuses on liquid short term assets, and ignores long term assets whose liquidity is harder to assess, thus providing a margin of safety theoretically even in a liquidation scenario. It’s a time-tested concept, and still relevant today, although unfortunately for investors, there are not many true net nets left in the world.
2. Sum of the parts
The idea behind this approach is that the sum of the individual parts can be worth more than the market’s value for the whole. It’s well known, for example, that conglomerates can be comprised of multiple operating businesses, yet often trade at a low combined multiple, as the value of embedded, sometimes high growth, businesses remains obscured within the broader business. Firms can also have embedded real estate value, a large net cash holding, or net operating loss carryforwards that the market undervalues. This is definitely a valuation perspective worth understanding.
3. Good and cheap stocks
While Graham focused on cheapness, this section addresses the additional dimension of a firm’s “quality,” for instance as reflected in the styles of Joel Greenblatt in the Little Book that Beats the Market, or Warren Buffett’s concept of an “economic moat.” Under this approach, the firm should be cheap, but should also be a high quality business with a sustainable competitive advantage, such as brand, which enables managers to reinvest in the business at high rates of return.
This is a great investing concept, but it was perhaps rendered here a little simplistically. For example, there was not much discussion of the nature of moats, or of how high returns or other measures of quality relate to moats.
4. Jockey stocks
This section discussed idea that it can be smart to bet on good managers who, because of their skill, may be able to overcome shortcomings in the quality of the businesses they run and still achieve good returns. For example, they might have good capex discipline, making judicious investment choices even in a challenging environment. The author offers some metrics for measuring this, including a review of ROC, some asset turnover statistics, and capex trends, as well as a view of management incentives and compensation.
I found this section to be a little vague. Additionally, as a practical matter, it’s awfully hard to take a hodgepodge of objective measures of manager performance and turn it into a successful investing strategy, although perhaps some have done so successfully.
5. Following the superinvestors
This section discussed how to follow investors who have done well over time, and achieve success by investing in the same companies they do. The author has some good observations here on things to consider with respect to managers, such as how to assess investing style and portfolio concentration and turnover, and shares thoughts on evaluating a manager’s individual positions, such as position size, how long they have held, and whether they are accumulating or selling down. There is also a list of specific investors divided into several style buckets.
This section explores a sensible approach to investing, and was a good introduction, but was short on implementation details. For instance, 13F filings are a good way to follow superinvestors, but these include a 45 day lag. It would have been interesting for the author to have explored this issue. As an aside, the web sites www.gurufocus.com and www.alphaclones.com also provide some tools in this area.
6. Investing in small and micro caps
This section discusses the notion that because large companies have more attention and analysts, investors are more likely to find bargains in smaller, underfollowed stocks. Certainly, the size anomaly is well known in academia, and there was some discussion of several studies that measure it. This is not a very balanced section, however, as the author does not spend much time discussing one of the main problems with investing in small socks: the lack of liquidity.
7. Special situations
Special situations refer to stock investing opportunities where some unique circumstances are driving how the stock is being assessed by the market. The book refers to a number of special situations, such as spin-offs, stocks being removed from an index, liquidations, recapitalizations, or special purpose acquisition companies. The section is also a good list of blogs, which are fertile hunting grounds for good investing ideas. There are numerous additional resources for investors who are curious. Joel Greenblatt’s book “You Can Be a Stock Market Genius” is among our favorites.
8. Equity stubs
This refers to the concept that the equity component of a company can be very small relative to its debt position, which creates upside opportunity, since the equity can have asymmetric control of significant value based on this leverage. This is one variation on the many forms of distressed investing.
I thought this section felt out of place in this book. While leverage can create opportunity, it can also create bankruptcy. While this investing approach is certainly not for amateurs, this section seems to be written for the newcomer to the field. This is an incredibly volatile approach, and one in which you might find yourself on the other side of the trade from the smartest distressed debt investors on the planet. Never a good position to be in. This is probably not an area for even professionals to experiment with — that is if they enjoy compounding their capital at low risk adjusted rates of return.
9. International investing
This section referred generally to international investing, although ultimately, the author points out it is simply value investing applied abroad. The author discusses some broadly relevant issues, including ADRs, the nature of emerging markets, country concentration, and demographics, as well as specific risk considerations such as transaction costs, and the lack of transparency in some markets. There was essentially no discussion of currency risk, which was a disappointment.
At the end of the day, these are big broad areas of investing, and this book was more of a general overview of several approaches to investing than a detailed exploration of any one of them. Each investing category discussed has shelves of books devoted to it, and those who are curious can do further research.
While the discussion of these categories is not exhaustive, the author does provide some valuable insights and perspectives for thinking about the investing process and the different ways one can approach it. Just be aware that this book is a place where you will learn a little, but will have to dig deeper for a real understanding.
In the end, perhaps choosing an investment style is ultimately a matter of personal style or a question of individual curiosity. Certainly this book will provide a framework for how to apply those personal considerations when exploring the world of investing.***
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