The Manual of Ideas

Idea generation for value-oriented investing, from the top names in finance

The Manual of Ideas is the indispensable resource top investment firms like Berkshire Hathaway rely on for cutting edge research and investment ideas. As the definitive source for value investing opportunities, this book takes you inside the minds of the world's top money managers to learn how they generate the bright ideas that lead to big profits. This new second edition includes insights from more than 100 exclusive interviews with leading fund managers to give you access to the thought processes of super value investors including Warren Buffett, Tom Gayner, and Joel Greenblatt. Real-life case studies bring each approach to life, revealing key lessons along the way, and new tables and charts illuminate important concepts to provide a quicker, easier read.

Successful investing begins with idea generation. Following the crowd will only get you so far, and the most successful investors from around the globe have developed their own approaches to identifying the right opportunities at the right time. This book lays out a gold mine of a framework to help you generate your own new and profitable value investment ideas.

• Learn how the wizards of Wall Street find stocks
• Apply each approach appropriately and effectively
• Gain personal investing insight from leading fund managers
• Identify, analyze, and implement the best value investing opportunities

Creative thinking is the unexpected lifeblood of investing, which is why great ideas are the focus of this book. If you're ready to take investing to the next level, you're going to have to realign your thinking—and The Manual of Ideas is your roadmap to untapped opportunity.

Foreword to the First Edition ix

Foreword to The Manual of Ideas (Second Edition) xi

Preface xv

Part One MINDSET

Chapter 1 Identify as a Capital Allocator: Put Your Capital Where It Is Treated Best 3

Passive Versus Active Investing 4

Role of Capital Allocator 9

Owner Mentality 17

Stock Selection Framework 21

Key Takeaways 23

Notes 25

Chapter 2 Invert, Always Invert: To Finish First, First Finish 27

Following the Crowd 30

If You Don’t Blow Up 37

Ergodicity: Win Infinite Games 40

Entropy: A Lesson from Thermodynamics 43

Key Takeaways 46

Notes 48

Part Two IDEA GENERATION

Chapter 3 Ben Graham Bargains: Deep Discounts to Readily Ascertainable Net Asset Value 51

The Approach: Why It Works 52

Uses and Misuses of Deep Value Investing 63

Screening for Graham-Style Bargains 71

Beyond Screening: Working Through a List of Deep Value Candidates 74

Asking the Right Questions of Graham-Style Bargains 79

Key Takeaways 84

Notes 85

Chapter 4 Sum of the Parts: Investing in Companies with Multiple Sources of Value 87

The Approach: Why It Works 88

Uses and Misuses of Investing in Companies with Overlooked Assets 91

Screening for Companies with Multiple Assets 94

Beyond Screening: Proven Ways of Finding Hidden Assets 100

Asking the Right Questions of Companies with Hidden Assets 108

Key Takeaways 111

Notes 112

Chapter 5 Compounders, GARP, and Greenblatt’s Magic Formula 115

The Approach: Why It Works 116

Uses and Misuses of Investing in Good and Cheap Companies 123

Screening for Good and Cheap Companies 131

Beyond Screening: Hope for Improvement Springs Eternal 135

Asking the Right Questions of Greenblatt-Style Bargains 139

Key Takeaways 146

Notes 147

Chapter 6 Jockeys: Great Managers, Owner-Operators, and “Outsiders”: Making Money Alongside Great CEOs 149

The Approach: Why It Works 151

Uses and Misuses of Investing in Jockeys 154

Screening for Jockey Stocks 164

Beyond Screening: Building a Rolodex of Great Managers 174

Asking the Right Questions of Management 179

Key Takeaways 185

Notes 186

Chapter 7 The Smart Money: Finding Opportunity in Superinvestor Portfolios 189

Superinvestors Are Super for a Reason 190

Uses and Misuses of Superinvestor Tracking 193

Screening for Companies Owned by Superinvestors 196

The Superinvestors of Buffettsville 198

Beyond Screening: What Makes a Company Attractive to Superinvestors? 205

Key Takeaways 209

Notes 211

Chapter 8 Diamonds in the Rough: The Opportunity in Underfollowed Small- and Micro-Caps 213

The Approach: Why It Works 214

Uses and Misuses of Investing in Small Companies 219

Screening for Promising Small- and Micro-Caps 223

Beyond Screening: Other Ways of Finding Compelling Small- and Micro-Cap Ideas 231

Asking the Right Questions of Small-Cap Prospects 241

Key Takeaways 246

Notes 247

Chapter 9 Special Situations: Uncovering Opportunity in Event-Driven Investments 249

The Approach: Why It Works 250

Uses and Misuses of Investing in Special Situations 254

Uncovering Special Situations 262

Asking the Right Questions of Special Situations 266

Key Takeaways 271

Notes 272

Chapter 10 Equity Stubs: Investing (or Speculating) in Leveraged Companies 273

The Approach: Why It Works 275

Uses and Misuses of Investing in Equity Stubs 276

Screening for Equity Stubs 285

Beyond Screening: An Ambulance-Chasing Approach 288

Asking the Right Questions of Equity Stubs 291

Key Takeaways 298

Notes 299

Chapter 11 Global Investing: Searching for Value beyond Home Country Borders 301

The Approach: Why It Works 303

Uses and Misuses of Investing in International Equities 306

Screening for International Equities 314

Beyond Screening: Riding the Coattails of Regional Experts 320

Asking the Right Questions of International Equities 324

Key Takeaways 328

Notes 329

Bibliography 331

About the Author 343

Index 345

JOHN MIHALJEVIC, CFA, serves as Managing Editor of Latticework.com and Chairman of MOI Global, which he founded in 2008. Through invitation-only events and member publications, MOI Global fosters a community of intelligent investors united by a passion for lifelong learning. From 2005-2016, John managed a private partnership, Mihaljevic Partners LP. He is a winner of the Value Investors Club’s prize for best investment idea. John is a trained capital allocator, having studied under Yale University Chief Investment Officer David Swensen and served as Research Assistant to Nobel Laureate James Tobin. John holds a BA in Economics, summa cum laude, from Yale and is a CFA charterholder. He resides near Zurich, Switzerland.

The definitive source for value investing ideas from the brightest minds in the business

Considered an indispensable source for cutting-edge research and ideas among the world’s top investment firms and money managers, the journal The Manual of Ideas boasts a list of subscribers that reads like a Who’s Who of high finance. Serving as an “idea funnel” for the world’s top money managers, the journal gives its subscribers a look inside the minds of the world’s most successful value investors, revealing how they generate the bright ideas that lead to big profits.

Now, this second edition opens up The Manual of Ideas for every investor, providing a proven framework for finding, analyzing, and implementing the best value investing opportunities. Based on interviews with more than 100 top fund managers, this gold mine of wisdom gives you unique access to the thought processes of such super value investors as Warren Buffett, Howard Marks, and Joel Greenblatt.

The Manual of Ideas, Second Edition includes:

• A variety of idea-generation techniques from the wizards of value investing, such as Ben Graham’s “Cigar Butt” strategy and Joel Greenblatt’s “Magic Formula” technique for finding good and cheap stocks
• Other techniques, including strategies for finding companies with hidden assets, investing in small- and micro-cap stocks, event-driven investing, equity stubs, and international value investing
• In-depth discussion of the uses and misuses of each idea generation approach, along with key questions to ask of potential investment candidates
• Real-life case studies that reveal key investing lessons and bring each distinct idea generation approach to life
• Expanded wisdom, insights, and ideas drawn from more than 100 new exclusive interviews with leading fund managers worldwide
• New tables and charts that illuminate key concepts and make the content more accessible

Great ideas are the lifeblood of investing and the exclusive focus of the second edition of The Manual of Ideas. Look inside and learn how to generate your own new and profitable value investing ideas.

PRAISE FOR THE MANUAL OF IDEAS

“From esteemed author and investor John Mihaljevic, this standout guide brilliantly illuminates diverse paths to value investing success with compelling examples from various investors, offering enduring relevance that empowers readers at every level.”
—Christopher Tsai, President and Chief Investment Officer, Tsai Capital Corporation

“John Mihaljevic is one of the all-time best thinkers about the philosophy and practice of value investing. The Manual of Ideas should be essential reading for investors and scholars who want access to his opinions, as well as the opinions of the dozens of highly successful investors he references. It is a manual of exceptionally good ideas.”
—Edgar (Ed) Wachenheim III, Chairman, Greenhaven Associates

“John’s work has stood the test of time and has a permanent spot on my bookshelf in the canon of value investing. John has articulated a taxonomy of investing and how to navigate the world of financial markets. As a gifted writer he both educates those just learning the craft of investing as well as those who have made it their life’s work.”
—Scott Miller, Founder, Greenhaven Road Capital

“Most books that promise to teach you how to become a great investor overlook the crucial first step—how to find ideas worth researching in the first place. Leveraging his experience interviewing the world’s most successful investors, John Mihaljevic distills this wisdom into a practical, repeatable framework for generating investment ideas. Delving into some of the most effective value strategies, The Manual of Ideas will equip an investor with the tools to keep their pipeline full of compelling overlooked candidates ready to analyze.”
—Robert E. Robotti, President and CIO, Robotti & Company Advisors

“While value investing covers the full spectrum from growth to deep value, its core principles remain constant. In The Manual of Ideas, John masterfully distills wisdom from the community’s varied sources and schools of thought. It’s clear why he has built and nurtured MOI Global into the most diverse and inspiring value investing community today.”
—Elliot J. Turner, Chief Investment Officer, RGA Investment Advisors