If there is an opportunity for arbitrage between debt (long) and equity (short), realize that the smart money has an incentive to bring about bankruptcy. There are very genuinely good thinkers in the world of finance (despite hiring lots of people with shiny degrees) but Warren Buffet is one of them (Nasim Nicholas Taleb is another). In effect, we are voluntarily paying more for energy (in terms of government subsidy) than we ordinarily would, because we think it is a good thing to do. Also, I think I was wrong and need to set the record straight. It would be easier to brainstorm with friends than to think alone. I think contrarians should keep that in mind. Having said that, do keep in mind that some types of distressed situations involve potential financial problems that are hard to discern. This way, you can keep yourself updated with the data analytics on how the schemes are performing.

You can see the disadvantage of financial statements in this example. Ambac was vulnerable to huge financial losses but it wouldn’t be too obvious looking at financial statements. Since Lexmark had strong historical numbers while the present market position looks poor, value investors relying heavily on financial statements may be vulnerable to downward surprises. In contrast, operational problems may take longer to play out but the end-result is similar. It may be the case that LXK is a once wide-moat company now in constant decline. As for LXK alone, I don’t know if it will be a success because that depends on a lot of qualitative judgements I can’t make. Countrywide will be a decent asset, but they have to deal with all the loans (mainly HELOCs) that they gave to people who can not and will not be able to pay it back. Buffett thinks that Berkshire (BRK) is worth much, much more than book value and he will be aggressive at buying back stock at the 120% level from any shareholder willing to sell. If you pay a low enough price for a sound enough balance sheet you will rarely suffer really large permanent losses.

I usually just take normalized earnings and multiply it by some low P/E multiple (usually between 8.5 and 10) but Gannon uses more of a classic value investing technique that averages various sources. Book Value Per Share) you’d find that most stocks do NOT trade below the low end. A lot of contrarian, or beaten-down, stocks have serious financial problems. Gannon makes the very insightful point that value traps tend to have financial problems on top of operational problems. Yep. As Gannon alludes to, Lexmark clearly isn’t a Graham-type investment. In my rough estimate from a while ago, I came up with Lexmark as being around 30% undervalued. All cuisine are tasty, but sometimes, for example, French cuisine are more popular while at other times, Italian cuisine are in favour. And these are the 6 best Forex Markets. The Best Guide to Getting Started Investing You’ll Find Anywhere What Does Your Retirement Look Like?

I’m ok with this but classic value investors in the Graham mold will likely ignore situations like these. 10. But the most important question is DO YOU LIKE THE ARTWORK, because it will be hanging on your wall for sometime. I actually like his thinking and feel that he has unique skills. For what it’s worth, I’m trying to be more of a Buffett-type investor so I have been trying to improve my skills on qualitative business analysis. Similarly, anyone investing in GE, Morgan Stanley, Wells Fargo, American Express, and the like, have to make a judgement call about the financial strength. And that’s really a personal call. 5B in 2007, its probably worth substantially less now but its also worth noting that The Wall Street Journal has also grown its circulation by 8% CAGR during that time (graphic below), when most other newspapers have been struggling. In particular, I have been reading up on competitive advantage, moats, brand creation, barriers to entry, consumer perceptions, and so on.