Spinoffs: A Quick Summary

June 25, 2008

Below is an excerpt about spinoff investments from Joel Greenblatt’s You Can Be A Stock Market Genius.

1. Spinoffs, in general, beat the market.
2. Picking your spots, within the spinoff universe can result in even better results than the average spinoff.
3. Certain characteristics point to an exceptional spinoff opportunity:

    • Institutions don’t want the spinoff (and not because of the investment merits).
    • Insiders want the spinoff.
    • A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g. a cheap stock, a great business, a leveraged risk/reward situation).

    4. You can locate and analyse spinoff prospects by reading the business press and following up with the SEC filings.
    5. Paying attention to “parents” can pay off handsomely.
    6. Partial spinoffs and rights offerings create unique investment opportunities.
    7. Keep an eye on the insiders.

      This points are useful when looking at investment opportunites like EMC and SATS.


      Good to Great by Jim Collins

      June 16, 2008

      I have just finished reading Good to Great by Jim Collins and was going to post a brief book summary. But a quick search reveals a mindmap of the book and WikiSummaries already has a chapter by chapter summary.

      Getting To Yes

      June 4, 2008

      Below is a summary of the book Getting to Yes.

      The book talks about principled negotiation. Which is looking for mutual gains and where interests conflict using some fair standard to solve the issue.

      This contrasts with positional bargaining where people bargaining over positions (I offer $10, they want $20, I offer $12 etc), which can create incentives to stall and endangers the relationship.

      Four main steps in using principled negotiation:

      • People: separate the people from the problem.
        • Put yourself in their shoes.
        • One strategy is to listen quietly while they let off steam.
        • Communicating loudly and clearly things the over side wants to hear can be one of the best investment to make in a negotiation.
        • Agreement easier if both sides feel ownership of the ideas.
        • If you want the other side to accept a disagreeable conclusion then involve them from the start => so they feel ownership of the idea.
        • Avoid misunderstanding => interrupt with “Did I understand you correctly that you are saying … “.
        • Note that understanding is not agreeing.
        • Speak about yourself not them => “I feel let down… “.
        • Ben Franklin => asked to borrow a book off an adversary to make them more comfortable.
        • Try to structure negotiation as a side by side exercise.
      • Interests: focus on interests, not positions.
        • Look at underlying positions.
        • Identify interests => ask why, and ask why not.
        • Each negotiator has a constituency to whose interests he is sensitive too.
        • Be hard on the problem, soft on the people.
        • Convert interests into concrete options => if they agrees tomorrow what do I now think I would like them to go along with.
        • Combination of support and attack works best, alone they are likely to be insufficient.
      • Options: generate a variety of possibilities before deciding what to do.
        • A good negotiator is a creative at inventing options.
        • People see their job as narrowing the gap between the positions not broadening the options available.
        • Obstacles stopping people from inventing options: premature judgement, searching for the single answer, assumption of a fixed price, think that ‘solving’ the problem is their problem.
        • To create more options: separate the act of inventing options from judging them, broaden options available rather than look for a single answer, search for mutual gains and invent ways of making their decision easy.
        • Key to wise decision making is selecting from a great number and variety of options.
        • Invent agreements of different strengths => in case you need a weaker version, or can put forward a stronger version depending on the situation.
        • Look for mutual gains, both sides can always be worse off then they are now.
        • Always look for solutions that leave the other side satisfied as well, if the customer feels cheated in a purchase then the store owner has also failed.
        • Making their decision easy => however complex the other side’s decision process is look at it from the view of the person you are dealing with => what would strengthen that person’s hand or help them persuade others to go along.
        • People are strongly influenced by notions of legitimacy, one way to develop solutions easy for the other side to accept is to shape them so they appear legitimate.
        • Making threats is not enough, offers / warnings tend to be more effective.
        • Final test of an option is to write it out as a “yesable” proposition – a draft proposal to which the other side can respond with a single word “yes”.
      • Criteria: insist that result be based on some objective standard.
        • Interesting concept of “one cuts, one chooses” for dividing up an object or entity.
        • Introduction of an objective standard or model to use can lead to the situation where no-one has to back down or appear weak – just reasonable.
        • Negotiating with objective criteria: frame each issue as a joint search for objective criteria, be open to which standards are most appropriate, never yield to pressure only principle.

      But what if:

      • They are more powerful:
        • Protect yourself by setting a bottom line (with some margin of safety) before starting the negotiation.
        • Generate the best possible BANTA: invent a list of actions you could take if no agreement is reached, improve some of the more promising ideas and convert them into practical alternatives, select the best option.
      • They won’t play:
        • Three approaches to focusing their attention on the merits: concentrate on the merits hoping they will then follow your example, focus on what they can do (direct their attention to the merits, do not reject their position, just side step their attack and deflect it against the problem), use a third party to focus the discussion perhaps using the one-text tool.
        • One-text tool is an iterative process where each side can say yes or no part of the agreement one issue at a time, as the plan takes shape each side tends to raise only the issues that are most important.
        • This shifts the game away from positional bargaining as it simplifies the process of both inventing options and deciding jointly on one.

      Here are some useful links to other blog posts that discuss the book:

      Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

      December 7, 2007

      Here are a few quotes from Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman. 

      Seth Klarman is a value investor and Portfolio Manager of the investment partnership The Baupost Group. Founded in 1982, The Baupost Group now manages US$5.4 bn, his Baupost partnerships have averaged returns of nearly 20% annually since their inception [bio from GuruFocus]. 

      Value investing is the strategy of investing in securities trading at an appreciable discount from their underlying value. 

      Value investors have as a primary goal, the preservation of capital. 

      Once you adopt a value-investment strategy any other investment behaviour starts to look like gambling. 

      Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available. 

      Value investing is simple to understand but difficult to implement. 

      The number of securities that should be owned to reduce portfolio risk to an acceptable level is not that great; as few as ten to fifteen different holdings usually suffice. 

      My view is that an investor is better off knowing a lot about a few investments that knowing a little about each of a great number of holdings. 

      Buying a partial position leaves reserves that permit investors to “average down” lowering their average cost per share, if prices decline. 

      Here are a few links to other posts and an article about the book: 

      Trump Strategies for Real Estate

      December 6, 2007

      Amazon says Trump Strategies for Real Estate, by George Ross (from Apprentice fame) offers unbeatable insider advice for every serious real estate investor – beginners and old pros alike.

      I enjoyed the book; here are a few quotes and lists from the book.

      There is a huge difference between the legal aspects of real estate and the business of investing in real estate. Most lawyers simply advise their clients not to do a deal if they find legal problems; lawyers cannot or will not make business recommendations for their clients. Goldman forced me to think like a businessman, not just a lawyer, and realize that almost every problem has a price tag.

      • On working for Donald Trump: Trump has been a great man to work for. In 10 years, he has never once asked me where I’m going or what I’m doing.
      • Look at problem properties as opportunities.
      • Always try to anticipate problems and questions other people will ask.
      • Ziff ’s principle of least effort: people will put the least amount of effort in a transaction that they can in order to proceed.

      Principles of negotiation

      1. Create the aura of exclusivity.
      2. Don’t be misled by the aura of legitimacy.
      3. Every negotiation requires preplanning.
      4. Avoid a quick deal: the reason is that satisfaction of the egos on both sides of a negotiation is essential to a mutually agreeable conclusion. Remember that the word negotiation has “EGO” in it. Each participant must feel he has won a number of hard-fought concessions from his adversaries to satisfy his ego that he has done his job well.
      5. The invested time principle: the more time a person has invested in a transaction, the less likelihood he or she’s going to give it up.
      • Insist on negotiating directly with the decision maker, not a representative.
      • Importance of doing a post negotiation review.

      Four ways to be distinctive and add “sizzle” to your property

      1. Understand your buyers’ and tenants’ lifestyle.
      2. Know what your customers will pay extra for and what they won’t.
      3. Understand your buyers’ and tenants’ lifestyle.
      4. Know what your customers will pay extra for and what they won’t.

      How to motive people:

      One of Donald Trump’s greatest attributes is his willingness to bestow praise on someone in the presence of others.I have visited a construction site with Donald and he’d stop and say, “George, see that woodwork? This guy is the best woodworker in the entire city, maybe the world.” I knew that that was exaggerated praise but the broad smile on the worker’s face said it all. He will tell his friends and family what Trump said and you can be sure he will be a perfectionist in everything he does for Trump.

      Here is another review of the book by TheWildInvestor.

      My Life as a Quant

      November 20, 2007

      Amazon’s description of the book: In My Life as a Quant, Emanuel Derman traces his transformation from ambitious young scientist to managing director and head of the renowned Quantitative Strategies group at Goldman, Sachs & Co.

      Here are a few good quotes from the book, regarding software development, working at Goldman Sachs, working with Fischer Black and financial models.


      • Impossible for me to over look the difference that a simple and well designed piece of software can make to a business.
      • I always included a bit of code my models that kept a log of who used it and when, which provides documented proof of utility even it does attach a dollar value.
      • Perturbation theory: The approach by which you get the most critical feature done first, then each next step you tackle the next most important feature.

      On working with Fischer Black

      • Stickler for precision.
      • Liked to think everything through for himself.
      • Terse, good natured conversational writing style using clear but casual unadorned English.
      • Devoted to clarity and simplicity.
      • Rather guess what follows relevant assumptions than derive precise conclusions from less-relevant assumptions.

      On working for Goldman and Solomons.

      • At Goldman the enemies were the competing firms, at Solomons the enemies were competing colleagues.
      • Goldman was long term greedy rather than short term greedy. At Solomons I thought it was every man for himself and God against them all.
      • Goldman aimed to take the appropriate level of risk, not eliminate it. No risk, no return.


      • Models are only models, toylike descriptions of idealised worlds

      Slowly it began to dawn on me that what we faced was not so much risk as uncertainty. Risk is what you bear when you own, for example, 100 shares of Microsoft—you know exactly what those shares are worth because you can sell them in a second at something very close to the last traded price. There is no uncertainty about their current value, only the risk that their value will change in the next instant. But when you own an exotic illiquid option, uncertainty precedes its risk—you don’t even know exactly what the option is currently worth because you don’t know whether the model you are using is right or wrong. Or, more accurately, you know that the model you are using is both naïve and wrong—the only question is how naive and how wrong.

      I think this is the right way to use mathematical models in finance. Models are only models, not the thing in itself.We cannot, therefore, expect them to be truly right. Models are better regarded as a collection of parallel thought universes you can explore. Each universe should be consistent, but the actual financial and human world, unlike the world of matter, is going to be infinitely more complex than any model we make of it.We are always trying to shoehorn the real world into one of
      the models to see how useful an approximation it is.

      You must always ask: Does the model give you a set of plausible variables to describe the world, and a set of relationships between them that permits its analysis and investigation? You’re always trying to make a limited approximation of reality, using variables that people can comprehend, so that you can say to yourself or your boss, for example, “I was short emerging-market volatility, so we lost money when the crisis came.” Good theories, like Black-Scholes, provide a laboratory of ideas in which you can work out the likely consequences of possible causes. They give you a common language with which to quantify and communicate your feelings about value.

      Four Hour Work Week

      November 15, 2007

      A basic summary of the Four Hour Work Week by Timothy Ferriss is to get rid of all the unimportant time wasting tasks in your day. Then try to tele-commute or start a simple business that is highly automated. And use the spare time to do things you really want to do.

      Few random points and quotes I got from the book.

      • New rich, their currency is time and mobility.
      • DEAL
        • D: definition.
        • E: elimination.
        • A: automation.
        • L: liberation.
      • Dreamlining
        • Goals can not be ambiguous they need to be defined.
        • Have to be unrealistic.
        • Focus on activities that fill the vacuum when work is gone.
      • Buy all the things you want vs. do all the things you want.
      • Different is better when it is more efficient.
      • People tend to overestimate the competition; as a result people tend not to try.
        • Doing the unrealistic is easier than doing the realistic.
      • Doing something unimportant well does not make it important.
      • Requiring a lot of time does not make a task important.
      • What you do is infinitely more important than how you do it.
      • Parto’s law of 80/20, 80% of outputs from 20% of inputs.
        • 20% of sources / things / tasks  can be responsible for 80% of unhappiness.
        • Eliminate the 20% that creates 80% of your unhappiness.
      • Working nine to five is not the goal, simply the structure that most people use. Work then expands to take up the day.
        • Parkinson’s law, a task will swell in (perceived) importance and complexity in relation to the time allowed for its completion. Two possible solutions:
          • Limit tasks to the important to shorten work time.
          • Shorten work time to limit the tasks.
      • Three times a day ask:
        • Am I being productive.
        • Am I inventing things to do to avoid the important.
      • Limit to-dos to a few items each day, use a small piece of paper to limit the ability to list a large number of items.
      • Learn to propose solutions, “Can I make a suggestion” or “Let’s try ….. and then try something else if that does not work”.
      • Don’t respond to emergencies, then emergencies will not come to you. (if people know you will not respond, they will try to solve the problem them self).
      • More is not always better, sometimes it is 10x better to stop something than to finish it.
      • Learn to be difficult, a reputation for being assertive can help you get better treatment with out needing to ask.
      • Check your email twice a day 12noon and 4pm. Use an auto responder to tell people you do this.
        • When sending emails use the if ….. then or else do ….. format, so people do not need to respond for further clarification.
        • Or for example you get a lot of emails about customer problems, send out an email stating if it costs less than $100 to fix the problem you do not need approval to spend the $100 and solve the problem.
      • Puppy dog close, just take it home and return it if you want.
      • Group together similar tasks and batch process them or automate them
      • Virtual assistants
      • Never delegate something you can automate and never automate something you can eliminate.
      • Income auto pilot – start a business
        • Can’t cost more than $500 to test the concept.
        • Should lend it’s self to automation.
        • Can’t take more than a day a week to run.
        • Need to find a market and define your customers.
        • $50 – $200 product price, this tends to reduce the customer service needs.
        • Information products can be low cost, fast to make and hard for competitors to duplicate. The example used in the book is a DVD on how to install a security system. The DVD sold for $95, but had a much lower cost.
        • Checklist:
        1.  Market selection.
        2. Product brainstorm.
        3. Mircotesting.
        4. Roll out and automation.
      • Absence of the CEO, makes a company process driven rather than founder driven.
      • Biggest time saver, customer filtering. Fire the 20% of customer that take up 80% of your time with complaints, customer service etc.
      • Question (for example): what is the meaning of life. If you can’t act on it or define then forget it.

      Top 13 mistakes of the new rich:

      1. Losing sight of dreams and falling into work for work’s sake
      2. Micromanaging and e-mailing to fill time.
      3. Handling problems your outsourcers or co-workers can handle.
      4. Helping outsourcers or co-workers with the same problem more than once, or with non-crisis problems.
      5. Chasing customers, particularly unqualified or international prospects, when you have sufficient cash flow to finance your non-financial pursuits.
      6. Answering e-mail that will not result in a sale or that can be answered by a FAQ or auto responder.
      7. Working where you live, sleep, or should relax. Separate your environments.
      8. Not performing a thorough 80/20 analysis every two to four weeks for your business and personal life.
      9. Striving for endless perfection rather than great or simply good enough.
      10. Blowing minutiae and small problems out of proportion as an excuse to work.
      11. Making non-time-sensitive issues urgent in order to justify work.
      12. Viewing one product, job, or project as the end-all and be-all of your existence
      13. Ignoring the social rewards of life.