In one sentence: After a first half on running a business like a Domino's franchise and waiting patiently like Munger, Phil values the lemonade stand as if it were dead: assets of $11 minus $1 of debt is $10 of book value, and minus $1 of goodwill gives a zombie value of $9, far below the other three methods.
Key ideas
- Start with one business you know. Like Chipotle starting with burritos, you learn one area and expand. Phil's friend Brent Hamill went from Domino's delivery driver to manager to owning 42 stores. [00:00–05:30]
- Investing and business-building share principles. Pabrai's The Dhandho Investor treats stock buying as buying a business. Phil calls buying with no knowledge speculation. Danielle defines investing as having data you trust, knowing why you buy and when you will leave. [05:30–09:00]
- Two books to read. Guy Spier's The Education of a Value Investor and Pabrai's book. Phil calls both a guide to the head game. [09:00–12:00]
- Munger's patience. Phil says Munger, 92, hasn't bought a stock in about two years and avoids areas he doesn't know, such as oil and coal. This is Phil's account, not a Munger quote. [11:00–14:30]
- Timing is a relief. If markets are not cheap, a beginner has time to learn. When they are cheap it will feel terrifying, as in 2009, when Buffett and Munger bought. [14:00–16:00]
- Your surroundings change your decisions. Spier moved his family from New York to Zurich to escape the crowd's stress. Follow great investors' calm, not CNBC's noise. [16:00–20:00]
- Zombie value: treat the company as dead. You don't look at cash flow. You list what it owns and what it owes. This is Graham's 1930s approach, similar to winding up a company. [20:00–23:00]
- The balance sheet. Cash $3, receivables $1, inventory $3, plant $2, equipment $1 and goodwill $1 is $11. Debt is $1, so equity (book value) is $10. [23:00–30:30]
- Goodwill and intangibles. Cost in excess of book value after an acquisition. It can hide real value (brands, patents) but is hard to audit, so zombie value removes it: $10 − $1 = $9 tangible book value. [24:00–33:00]
- Banks trade near tangible book. Phil says Wells Fargo traded at about 1.5–2× tangible book in 2016. Graham bought below it. Phil says some coal companies traded near 30% of tangible book, partly because their assets may be worth far less than stated. [33:00–37:00]
- Net-net screen. Buy below cash plus receivables plus inventory minus all obligations. These finds are in the same spirit as zombie value. [37:00–38:30]
- Four methods, one picture. The stand shows $80 (10 cap), $93 (margin of safety), $115 (8-year payback) and $9 (zombie). Phil seeks "six-inch bars, not six-foot bars": if it doesn't jump out as on sale, move on. [38:30–41:00]
- Methods can disagree. At about $400, Chipotle looked on sale by margin of safety but not by 10 cap, which needed under $300. Next episode compares 2009 and 2016. This is Phil's 2016 view, not advice. [40:00–42:00]
How it maps to RuleOne
- Stock pages show book value per share. Compute tangible book by subtracting goodwill and intangibles from the 10-K balance sheet.
- Price-to-book below 1 can be a Radar flag after an event, but check what the assets are worth.
- Screens relying on earnings miss distressed companies. A net-net or tangible-book screen is a different lens, and the site does not have one yet.
Buffett, Munger and Graham links
- Graham's net-current-asset ("net-net") buying is in Security Analysis and The Intelligent Investor (ch. 15 and 7 of the 1973 edition).
- Buffett's 1989 letter describes moving from cigar butts to wonderful businesses.
- Munger's "know what you don't know" is a recurring theme. Phil paraphrases it here.
Words to know
- Zombie value / tangible book value: equity minus goodwill and intangibles, a floor value if the business were wound up.
- Goodwill: purchase price above the book value of what was acquired.
- Net-net: price below working capital minus all liabilities.
Try this
On /stocks/, pick a bank and a retailer. Find total equity and goodwill on the latest balance sheet, compute tangible book per share, and compare with the price. Notice which sector sits closer to it.
Check yourself
- How is zombie value computed?
Answer
Assets minus liabilities gives equity (book value), then subtract goodwill and intangibles. The stand has $11 − $1 − $1 = $9. - Why is $9 so far from the other methods?
Answer
It assumes the business is dead and ignores earning power. Only deeply distressed companies sell near it. - What does "six-inch bars" mean?
Answer
Invest only when the discount is obvious. If you must strain to see the bargain, skip it.
Short quotes
"We're looking to jump over six inch bars, not leap over six foot bars." (Phil, ~40:00, auto-transcribed)