Good book on financial analysis through the eyes of an Intelligent Investor?

[WolfOfMainStreet]

So I've been reading "The Intelligent Investor" with commentary by Jason Zweig (about half done). Love the book, Graham's logic, and I enjoy the commentary. I have around 18 pages of written notes that I review from time to time. I noticed that roughly the first half of the book goes into the theory of being an Intelligent Investor and the second half goes into the more technical details. Graham refers to "Security Analysis" and "The Interpretation of Financial Statements" to answer the reader's more technical questions about financial analysis or to give a basic introduction to financial reporting. Both of these books were written in the 1930s and accounting methods and laws have changed. After describing the financial statement shenanigans that accountants can do Zweig suggests the following books:

 

Martin Fridson and Fernando Alvarez’s "Financial Statement Analysis"

Charles Mulford and Eugene Comiskey’s "The Financial Numbers Game"

Howard Schilit’s "Financial Shenanigans"

 

Before I even touch a single stock I promised myself that I would finish at least a couple of books with the caliber of "The Intelligent Investor" and that I would get a firm grip on understanding financial reporting. I've already taken a financial accounting course so I understand things like LIFO/FIFO, depreciation, capex/expenditures, basic ratios (ROA/ROE/PE/EPS), PS/CS/options/dilution, etc. at least on a basic level. Is there a good book out there on understanding financial reporting through the eyes of an intelligent investor? I don't want something like "Accounting for Dummies", more of a "Looking at financial statements through the eyes of Buffett" type of book. Also, has anyone read any of the texts Zweig suggested? Are they any good?

[jschembs]

I've read 2 and 3...most like 3, and it's also (or was when I took the exams) part of the CFA curriculum. Those, however, focus more on ways companies can and do manipulate financial statements to mislead investors. Certainly valuable knowledge, but not necessarily what it sounds like you're looking for. It's helpful to understand how the statements convey what is important to an investor (ROIC, FCF) - in that regard, I'd recommend McKinsey's Valuation and Stewart's The Quest for Value.

[Liberty]

I'd recommend McKinsey's Valuation and Stewart's The Quest for Value.

 

McKinsey's Valuation interests me... I've read a few reviews on Amazon, but I'd love to get your opinion (or anyone else here who has read it) on why you think it's good and useful, and the kind of stuff that it does well. Is the thinking in the book directly compatible with value investing, or is it more general tools that you can then try to transpose to a different approach?

 

Has anyone read Investment Valuation by Damodaran? Seems like another interesting one.

[thefatbaboon]

I studied Damodaran Investment Valuation when it first came out.  I found it a very good study book. 

 

I came out of college with a math background and while I liked Graham's Intelligent Investor and Security Analysis for the "philosophy" I really struggled with the P/E and book value approaches he used.  It all seemed so "rule of thumb" and derivative.  I wanted to know WHY such and such P/E or such and such ratio to book value was or was not appropriate.

 

Burr Williams "Theory of Investment Value" and Damodaran "Investment Valuation" were exactly what I wanted to show the actual link between a cash flow and a capitalized value.  (I've also read McKinsey and I think it's interchangeable with Damodaran).  But I would suggest reading Burr Williams first and then moving on to one of these study books.  And take your time with the study books working through the examples. 

 

I don't use dividend discount or discounted cash flow models very often anymore but I learnt a lot during the years that I did.

[WolfOfMainStreet]

 

Burr Williams "Theory of Investment Value" and Damodaran "Investment Valuation" were exactly what I wanted to show the actual link between a cash flow and a capitalized value.  (I've also read McKinsey and I think it's interchangeable with Damodaran).  But I would suggest reading Burr Williams first and then moving on to one of these study books.  And take your time with the study books working through the examples. 

 

I don't use dividend discount or discounted cash flow models very often anymore but I learnt a lot during the years that I did.

 

What are your opinions on McKinsey vs. Damodaran (general differences)? If you had to pick one starting out which would you go with and why? Just by glancing over the contents I am getting a feeling that Damodaran lays out the different valuation models and where to use what. It also looks like McKinsey builds on the idea of value and then branches off from there. Did I get that about right? Also, what models do you use more often? Thanks in advance, trying to build a good reading list for my weekends during the semester. I go nuts if I don't read a couple hundred pages of something every week  :)

 

P.S. McKinsey's latest version is 2010 and Damodaran is 2012, I know the meat of the text probably hasn't changed much but maybe some of the post recession examples have. Has anyone read the most recent editions of each? Any notable differences?

[jschembs]

I'd recommend McKinsey's Valuation and Stewart's The Quest for Value.

 

McKinsey's Valuation interests me... I've read a few reviews on Amazon, but I'd love to get your opinion (or anyone else here who has read it) on why you think it's good and useful, and the kind of stuff that it does well. Is the thinking in the book directly compatible with value investing, or is it more general tools that you can then try to transpose to a different approach?

 

Has anyone read Investment Valuation by Damodaran? Seems like another interesting one.

 

McKinsey's book changed the way I thought about business performance. The book clearly articulated the rationale for ROIC, and, more importantly, understanding invested capital from both a financing and operating perspective. Further, the book clearly articulated the link between ROIC and FCF generation. It has the flaws of any academic finance book (building capital costs using the accepted methodologies), but if I had to recommend one book, and one book only, it'd probably be this one.

 

Now that I've just written this, I realized I gave my copy to a colleague/friend, but I don't recall who. This is a problem.

[thefatbaboon]

 

Burr Williams "Theory of Investment Value" and Damodaran "Investment Valuation" were exactly what I wanted to show the actual link between a cash flow and a capitalized value.  (I've also read McKinsey and I think it's interchangeable with Damodaran).  But I would suggest reading Burr Williams first and then moving on to one of these study books.  And take your time with the study books working through the examples. 

 

I don't use dividend discount or discounted cash flow models very often anymore but I learnt a lot during the years that I did.

 

What are your opinions on McKinsey vs. Damodaran (general differences)? If you had to pick one starting out which would you go with and why? Just by glancing over the contents I am getting a feeling that Damodaran lays out the different valuation models and where to use what. It also looks like McKinsey builds on the idea of value and then branches off from there. Did I get that about right? Also, what models do you use more often? Thanks in advance, trying to build a good reading list for my weekends during the semester. I go nuts if I don't read a couple hundred pages of something every week  :)

 

P.S. McKinsey's latest version is 2010 and Damodaran is 2012, I know the meat of the text probably hasn't changed much but maybe some of the post recession examples have. Has anyone read the most recent editions of each? Any notable differences?

 

Keep in mind it is more than a decade since I looked at either book.  Mckinsey, I only went through superficially as I found it was going over a lot of the same points.  With Damodaran I spent about half a year going through it, working through examples, re-reading etc etc.  I think either will suit you just fine....I focused on Damodaran but that was only because that was the book I had come across first.  Perhaps give a couple of chapters of both a read and see who's style you prefer?

 

I don't use any models anymore, but I spent nearly ten years doing so and the lessons were invaluable.  If you love investing I recommend taking the time to learn the valuation models.  You will learn a lot.

[WolfOfMainStreet]

I'd recommend McKinsey's Valuation and Stewart's The Quest for Value.

 

McKinsey's Valuation interests me... I've read a few reviews on Amazon, but I'd love to get your opinion (or anyone else here who has read it) on why you think it's good and useful, and the kind of stuff that it does well. Is the thinking in the book directly compatible with value investing, or is it more general tools that you can then try to transpose to a different approach?

 

Has anyone read Investment Valuation by Damodaran? Seems like another interesting one.

 

McKinsey's book changed the way I thought about business performance. The book clearly articulated the rationale for ROIC, and, more importantly, understanding invested capital from both a financing and operating perspective. Further, the book clearly articulated the link between ROIC and FCF generation. It has the flaws of any academic finance book (building capital costs using the accepted methodologies), but if I had to recommend one book, and one book only, it'd probably be this one.

 

Now that I've just written this, I realized I gave my copy to a colleague/friend, but I don't recall who. This is a problem.

Thanks, sounds like all the stuff I was looking for. When you said it's flawed in the sense of building capital costs using the accepted methodologies do you mean CAPM and WACC? What would you say gets over these flaws?

 

Also I found it here:

http://upload.studwork.org/order/9056/Valuation__Measuring_and_Managing_the_Value_of_Companies__5th_Edition__University_Edition_.pdf

[Liberty]

Here's a paper by Damodaran on return on capital and valuation:

 

http://people.stern.nyu.edu/adamodar/pdfiles/papers/returnmeasures.pdf

[Liberty]

I've read the first couple of chapters of McKinsey's Valuation and like it so far. Thanks jschembs for recommending it!