Book Review: The Most Important Thing by Howard Marks

I was very fortunate to receive an advance copy of Howard Marks's new book, The Most Important Thing, directly from Howard himself. I then asked Howard if he would mind if I reviewed the book for my blog. Knowing how popular the memos he writes on behalf of Oaktree Capital Management are with members of the value investing community, I thought my readers would really enjoy learning more about his investment philosophy. Howard agreed to let me review the book on one condition: that I do so objectively and without hesitating from articulating any criticisms I had. The ultimate product is the following analysis of The Most Important Thing, in Scribd format because it is a little too long for a blog post. If you have any troubles with Scribd or would like a PDF copy, just email me at inoculatedinvestor@gmail.com and I will happily send it to you.

According to the link to the book on Amazon.com, it will be available on May 1st and can be pre-ordered now. I won't take any time here (read the review!) to explain why, but I highly recommend that readers with an interest in investing consider purchasing the book in order to further your own knowledge and gain a new appreciation for both Howard's writing and approach to investing.

Book Review- The Most Important Thing by Howard Marks

Stay Tuned for the Best Posts of the Year

Dear Readers,

I certainly have a busy few weeks coming up. No, I am not talking about the last 6 weeks of school work that are required for me to actually graduate in June. I am talking about the equivalent of Super Bowl week for value investors. Specifically, over the next 3 weeks, I will be attending the following events:

1. April 30th: Berkshire Hathaway Annual Meeting in Omaha

2. May 1st: Markel Breakfast in Omaha

3. May 3rd and 4th: Value Investing Congress in Pasadena

4. May 12th: 2011 South Central Scholars Value Investing Idea Dinner in LA- I am co-hosting this event with Alex Rubalcava and we are donating all of the excess proceeds to South Central Scholars, a nonprofit that helps kids from South Central LA realize their dreams of attending college and grad school. If you would like to learn more or make a donation, please visit the organization's website at: http://www.southcentralscholars.org/

As in previous years, I plan to blog about all of these events and hope that I will be able to produce my usually comprehensive notes for the Berkshire meeting and the Value Investing Congress. If you are planning to be at any of these events and want to meet up, feel free to email me. I would love to meet more of you in person. However, if you are not able attend, I hope my notes will serve as a good substitute. So, stay tuned for a series of posts that should be the best ones of the year.

Thank you for following my blog and I look forward to sharing my content with you.

Sincerely,

Ben

Equity Research Piece: Sterling Construction Co. (STRL)

I came across Sterling Construction Co. (STRL) after running a screen on Capital IQ for companies with: low debt levels, market caps between $100M and $500M and trailing EV/EBITDA multiples below 7x. I happen to believe that there is a lot more inefficiency in the small cap space and thus I often dig in that arena. What I quickly saw was that companies reliant on government infrastructure spending were trading at very low EV/EBITDA multiples. In fact, during my research I also came across Orion Marine Group (ORN), a company that operates in similar markets to STRL. At first I was intrigued by the valuation of ORN, but after more digging, STRL became the more compelling research candidate.

Unfortunately, I discovered the company a few weeks too late. On March 14th, 2011, the stock closed at $12.48, a price that implied a trailing free cash flow yield over 18%. Since then the stock has jumped to a price above $16 and no longer offers a sufficient margin of safety for my taste. However, I do think the stock bears watching because of the uncertainty surrounding state infrastructure spending. It is possible that the pessimism regarding states' ability to fund capital expenditures will drive the stock price down to a level that more than compensates for the inherent risks. Plus, I believe that STRL is a takeout candidate because the larger players such as Fluor and KBR may only be able to achieve growth through acquisitions over the next few years.

I should mention that this is my own personal research and the analysis and opinions presented should not be attributed to West Coast Asset Management. I hope you enjoy the piece as a I think it is representative of the type of research I like to do. For those of you who do not have time time read all 12 pages, I have included an executive summary in the first two pages of the write up. Please feel free to make comments or suggestions. I am always looking for feedback on my research, both positive and constructive.

As usual, I have put the write up in Scribd format to preserve the formatting of the charts. However, if you have trouble downloading the piece, feel free to email me and I will happily send you a copy.

Sterling Construction Co. Write Up

Please Help Japan

Readers,

For anyone who has been following the events in Japan over the past week, it has been a very painful time. But, there are people there who are really suffering and need as much help as we can provide. I happen to be a member of the Japan America Business Association (JABA) at UCLA Anderson. As such, I know many students who are from Japan and are likely going to return there after graduation. Sadly, I find myself not knowing what to say to people or how to console them. How can you really convey how sorry you are after watching the images of the tsunami wiping out everything in its path? The before and after pictures of the Sendai area are breathtaking in their brutality. Personally, I feel helpless to extent that it causes a sort of paralysis. So, I have been trying to find a way to help that has the greatest potential impact. Therefore, I am hoping to use my position as a very minor celebrity in the value investing world to raise money for those affected and increase awareness of the ongoing situation in Japan.

So, this is what I am asking from you:

1. Please help the MBA programs at UCLA Anderson, Pepperdine, and USC support the disaster relief effort by making a donation at http://socalmbahelpjapan.wordpress.com/. All of the proceeds will be donated to the the US Red Cross. The acute crisis may be nearing an end (at least we all hope), but the devastation is ongoing and, as citizens of the world, we can't just forget about the people of Japan once the news cycle shifts to another topic.
2. Keep informed about what is going on in Japan. Read newspapers, watch the news, keep up with your favorite blogs, follow Twitter. Do something to prevent yourself from moving on with your life just because the disaster didn't happen in your backyard. Because, especially if you live in California, one day it might happen here. The point is that the people of Japan deserve our empathy and for us to realize that we have an obligation to understand their plight.
3. Finally, reach out to anyone you know who has roots in Japan. I am living vicariously through someone who is very close to me and is currently in Japan. I have to say it is so difficult that I can't imagine how hard it would be if my family, friends, and the place where I grew up were going through so much turmoil. Believe me, they need your support.

Let us all hope that the earthquake and volcanic activity subsides and that the situation with the nuclear facilities becomes more manageable soon. The Japanese people need some indication of hope so that they can move forward. In the meantime, please help any way you can.

Sincerely,

Ben C.

The Inoculated Investor

Santangel's Review Strikes Again!

My friends at Santangel's Review are back at it again. Apparently, aside from working day and night on the upcoming newsletter, they somehow find the time to listen to the interviews recently conducted by the Financial Crisis Inquiry Commission and transcribe them for our reading pleasure. From the guys who brought us the transcript of David Einhorn's testimony, the newest transcription includes the wisdom of none other than the Oracle of Omaha himself. I don't want to spoil it for you, but I think everyone will want to hear what Warren Buffett said about what single act saved the entire financial system during the depths of the crisis. No, it wasn't the bogus bank stress tests or TARP. And is wasn't the FASB relaxing the rules on mark-to-market accounting. Have a read and see if you agree...

I also wanted to get in another shameless plug for Santangel's Review. I have inside knowledge regarding the subject of their soon-to-be-released newsletter. In fact, I expect to have a chance to read a draft this week. As such, for those of you who are high net worth individuals or who work for funds of funds, I highly recommend that you visit the website, read the free issue available there and strongly consider subscribing.

Now, without further ado, here is the transcript:

Transcript of Warren Buffett Interview With FCIC

Lance Helfert on CNBC Last Friday

My boss at West Coast Asset Management continues to be fixture on the TV circuit. Last Friday he was on CNBC discussing some of our research on rising input prices and the ultimate impact on clothing retailers. The question we are interested in answering is which retailers are going to be able to pass on higher input costs to consumers, assuming cotton prices stay at elevated levels for a while. Our thesis is that investors in clothing retail stocks should make sure the companies that they own have pricing power and are not dependent on discounting. See if you agree...

Introduction to Santangel's Review

Readers,

For those of you who are not yet familiar with Santangel's Review, now is a great time to become acquainted with the site. Santangel's Review is a quarterly newsletter that profiles emerging and undiscovered value investors. But, it is different from Value Investor Insight in that it is not focused on Q&A sessions with managers. Instead, the authors provide a narrative of the history of the firms, the people who run them, and the key investment decisions. In reality, the publication reads much more like a short story than a simple profile. However, since it is written by two security analysts, the descriptions of the investments are robust and very in-depth.

For anyone interested in understanding the investment process of managers who have generated exceptional returns over a long period of time (but who operate under the radar), I highly recommend going to the site and downloading the free copy of the first issue. If you like what you see (and I truly believe that you will), please click on the link provided on the site and think about subscribing to the newsletter.

In addition, aside from the newsletter and subscription materials, the site also has a blog that is now up and running. As such, I wanted to call your attention to a piece that was posted today on the site. The authors have transcribed the presentation to the Financial Crisis Inquiry Commission by David Einhorn of Greenlight Capital. I have not seen this posted anywhere else on the web and it is a fascinating read. Here is the link to the posting if you are interested: http://www.santangelsreview.com/2011/02/28/david-einhorn-financial-crisis-inquiry-commission-interview-transcript/

I suggest bookmarking the site as the authors have a knack for finding material that is not available anywhere else. I also hope that you will consider subscribing. You will not be disappointed.

Enjoy the site,

The Inoculated Investor

(Disclosure: I have a close friendship with the authors of the site. I also have helped in the editing of the newsletter. However, I have no financial stake in the endeavor and truly believe that the publication is like no other investment newsletter I have ever seen.)