How do you save $60k dollars

I am sorry to have such a spammy title – but in reality that is how much it costs per year to study MBA at Columbia University. As a serious value investor, I would rather put my money in investments and try to get what they teach at Columbia at Youtube. One of the reasons people go to MBA at Columbia is because of Professor Bruce Greewald. He is an authority on Value Investing. Columbia was also where Warren Buffett got his MBA and it was the same place where Benjamin Graham was teaching Warren Buffett about the fundamentals of investing.

Now, back to the title. There is a wonderful video about the philosophy of Value Investing by Bruce Greenwald. You have two options here – spend 60 grand per year and study at Columbia or watch this 1.5 hour video. Please note that you will be given the right to spend that 60 grand only after you get admission at Columbia which I can confidently say is not that easy.

Spend the next one and half hours learning about the fundamentals of Value Investing. I have posted many videos before about Value Investing but this one is special because Professor Greenwald addresses some of the myths about Value Investing, especially in the areas of what it is and what it is not. I am thanking Google and Youtube for saving me so much money and helping me learn so much online.

The often forgotten but most necessary skill of a CEO

The job of a CEO is very often lonely within a company. He has to cater to the masses ( the employees ) and talk to investors, customers and prospects to ensure the company grows and does a healthy business. But a third and often most important skill of a CEO is Capital Allocation.

It is a forgotten skill, but it makes all the difference in a company being a successful one.

A CEO can delegate certain responsibilities depending on the status of the company.

  1. In a startup, the CEO’s role is mostly raising more money and ensuring that money is spent prudently. Any dollar spent in a start up should bring in more than a dollar in value. Taking care of employees is not a necessary thing in startups. In small companies, employees need to be very much self-motivated on a daily basis, if not, they are not fit to be working in a startup. Capital Allocation skills play very essential role in the success of a startup. To raise more money, the CEO should have a great salesmanship and be able to articulate why his business has better potential than others. Expenditures when done optimally, can ensure that the money raised gives a very long run way. A company that grows without much of a revenue in a long run will cease to exist eventually.
  2. In mid sized companies, the CEO cannot afford to have a COO, but he certainly can afford a HR person to ensure employees are motivated. Increase in sales, solely falls on the lap of the CEO, but the more important thing of Capital Allocation i.e) funding new projects to expand growth, lies within the CEO. The mid-sized company will remain a mid-sized company without growth and eventually a smarter competitor will take it down. Again, as you see here, the CEO needs to have two skills and can effectively outsource the third to a HR person.
  3. Today, in public companies, it is very common to have a COO, i.e) the Chief Operating Officer. He can take care of regular company operations and do much of the sales. Of course, there will be a full fledged HR department whose goal is to keep happy and motivated employees. The CEO would time-time work on sales for big accounts but the biggest ever responsibility of a CEO is to ensure Capital Allocation is done correctly. Without it, he will have very unhappy shareholders. Unhappy shareholders will yield to an unhappy board, which will replace the CEO eventually. Capital Allocation in a public company doesn’t end at right amount of money is spent on building new products and acquiring new customers. It also involves in analyzing/ acquiring other companies, spinning off divisions, closing divisions if they are underperforming and even sale of the company if somebody is willing to provide a very higher price than what you think the company is worth. A public company CEO has a fiduciary duty towards the shareholders.

As we have seen above, Capital Allocation is the most important skill any CEO will need to be successful.

 

 

 

Moats and Apple – Part 2

I have been very vocal about Moats in technology companies and have written that Apple has a small moat. Recently I learnt about a Moat that Apple has and it is not a technology moat but of financial and supply chain.

There is a whole article about it but I want to summarize it here.

A company like Apple buys electronics spares from a manufacturer in China, asks another supplier to make their iphone and finally puts it on sale on the Apple Store.

Note: The below quoted lines from the newsletter linked below.

“Assuming company takes 50 days to sell a new product and another 10 days to collect cash from the customer after the sale but pays its suppliers 20 days after first purchasing the product to re-sell. In this example, this hypothetical company has a cash conversion cycle of 40 days (50+10-20).”

This is a common scenario and for a company like Macys this is about 50-60 days.

Now, imagine a company which pays their their supplier 50 days after your customer has paid them. That means, this company without spending any money gets a product from the supplier, sells it to the customer, collects the cash and after 50 days of collecting cash, pays their supplier. That is a dream company. These companies are said to have a negative cash conversion cycle.  Interestingly, Apple is one such company.  You can see how Google, Microsoft and Walmart’s Conversion cycle numbers.

This capacity to make money without spending any money could be called a Moat. Can this Moat deteriorate ? Yes, but not that quickly.

Now after learning this, I must be really dumb not invest again in Apple at the current prices and given that the markets are going down as we speak.

So yours truly is again an Apple shareholder.

Here is the complete article  about Apple’s Cash Conversion Cycle.

Alternative Investments – Crowdsourced Lending

Peer to Peer lending is a way to give loans to people who need them at better interest rates than credit cards and pay day loans. Credit Cards charge about 19 % interest and Pay Day Loans charge about 100% interest over the course of an year.

I heard about this phenomenon in 2006 and it is getting big time nowadays.

The way it works is that usually a company like “Lending Club” finds people who are ready to invest money and connect with folks who need them. They do background verification and all kinds of credit checks on both sides to ensure the loan is safe and given to the correct folks. Lending Club has a website – www.lendingclub.com where one can borrow money as well as invest money. Lending Club acts like a broker and they take a small loan origination fee.

There are indeed a lot of restrictions on how you can invest in this Peer to Peer lending. I want you to read them first.

Here are some of the restrictions from Lending Club, the #1 Peer to Peer vendor.

“I currently reside in one of the following states: CA, CO, CT, DE, FL, GA, HI, ID, IL, KY, LA, ME, MN, MS, MT, NH, NV, NY, RI, SD, UT, VA, VT, WA, WI, WV, or WY;

I have an annual gross income of at least $70,000 ($85,000 if residing in CA) and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000 ($85,000 if residing in CA); or a net worth of at least $250,000(determined with the same exclusions) ($200,000 if residing in CA), OR, if I live in Kentucky, that I am an “Accredited Investor” as determined pursuant to Rule 501(a) of Regulation D under the Securities Act of 1933, AND,

I will not purchase notes in an amount in excess of 10% of my net worth, determined exclusive of my home, home furnishings and automobile and if I live in California and do not satisfy any of the above tests, I will not invest more than $2,500 in Notes”

Prosper is another website that does the same. They were one of the first ones to get into this business although lending club is the biggest one today.

Compare Lending Club vs Prosper 

The website  - www.lendingmemo.com has lot of information about such Peer to Peer lending. I suggest you spend some time to understand the risks before jumping into invest in any of the Peer to Peer lending websites.

This is certainly an alternative investment compared to stocks and your “nothing-paying” savings account.

I haven’t researched much into this but will do more as time goes by. Of course, I get better return rates in my investments in stocks so this is not so lucrative for me. But for others, who are hesitant to invest in stocks, this is relatively a better alternative.

Again, please read more before you invest in anything. It is only in a slot machine in vegas, where you could make money by spinning a wheel, in all others you will have to do your groundwork before jumping in.

	

Intelligent Investing & Power of Compounding