Value Investing Lessons From Reality TV (Seriously!)

I just penned an educational/informative article on my Forbes Column, “Value Investing Lessons From Reality TV (Seriously!)“, wherein I discuss some of the most important value concepts like always having a Margin of Safety (as described by Baupost Group’s Seth Klarman in his book by the same name), whether you’re bidding on abandoned storage units, stocks, or any other asset.

I also discuss some of the most common mistakes investors make; abandoning their discipline, chasing returns, following the herd, overconfidence, etc.  I humbly suggest giving it a read, whether you’re a novice or seasoned professional.

Newsflash: Chinese Co’s are Being Forced to Falsify Data

I wasn’t the first (nor second, nor anywhere near the first wave) of those warning about China investing, but over the past year+ I’ve tried to provide some healthy skepticism over many things that seem too good to be true (because they often are).

I just wrote a new post over at Forbes wherein I break down the problem, what the Chinese are doing about it, what they should be doing about it, and what investors/traders can do themselves.

Check it out here!

My First Forbes Column – So What if Apple Has A Chinese Labor Problem?

Since I haven’t seen it anywhere else (not that it doesn’t exist), I’ve gone and estimated the impact of increased labor (wage and other) costs on Apple’s gross margins in the face of increased public attention on labor practices in China. I’d summarize it, but then I’d be doing you a disservice. Go check it out here!

How Much Is Donald Trump Really Worth?

This is a question I have never really pondered for more than 5 seconds, because frankly, I don’t care, or at least I didn’t until I read this Forbes article that explained how they go about estimating his worth.

For our upcoming Celebrities issue, FORBES estimates Donald’s licensing income to be approximately $60 million. This includes earnings from books, ties, cuff links, mattresses, speeches, Apprentice producer fees and royalties, and earnings from the Miss USA, Miss Teen USA and Miss Universe. This does not include any of the licensing deals from real estate, which we are in the process of investigating. By such estimate, Donald’s brand is worth $120 million. Note that the number will likely rise by a few hundred million when we account for his real estate licensing earnings.

I’m not going to dispute that $60 million number because again, I don’t care that much.  What I would like to dispute is how they get from $60 million/year in non-real estate licensing income to a $120 million valuation for the brand.  This is not exactly rocket science.  If you look at the $60 million as a simple stream of cash flows, pick a discount rate, and say it lasts 10 years (not totally unreasonable), and discount it back to present value, the value of the brand is around $350-$400 million.  If you jack the discount rate up to 15%, assume each successive year that his licensing revenue is going to drop by 25% (I think an extreme assumption), that annuity stream is still worth over $225 million!  Even if we only assume cash flows will last for 5 years instead of 10 (using the same, very conservative assumptions), the value of the $60 million/year comes out to over $130 million!

Where Forbes gets $120 million from $60 million/year is really beyond me.  I’m not an intellectual property valuation expert, but if I could buy all the licensing rights to The Donald’s various crap collections for $120 million – and I can’t believe I’m actually saying this – I’d jump at the chance!

This is to say nothing of his various real estate holdings and real-estate licensing income.  I’m not even going to attempt to ballpark either of those numbers, since they are not easy to find, and taking Donald’s word for it would be akin to taking ethics advice from Charles Rangel. The numbers may sound good, but they might be completely made-up.

UPDATE: A comment on Business Insider brought up that this quick back of the envelope number crunching exercise doesn’t consider taxes.  I left them out because I assume the licensing revenue comes into a corporate (or several), which is not necessarily (all) on-shore, making it difficult to estimate the effective tax rate at which the income is subject.

But, for fun, let’s give it a shot and assume the effective tax rate is 25%, and the income declines by the same amount each year, with the same assumptions mentioned above.  Using these numbers, we get a value of $126 million, still above the number used by Forbes, but only slightly.  The point is we can massage the inputs to get any output we want, and unless Forbes starts learning how to be transparent (doubtful), we can do nothing besides question their assumptions and methodology, especially when they seem suspect.

Pageviews Are NOT The Answer, Or: An Undesirable Endgame

That, or maybe I’m inventing a lesson learned in the fallout from the web 1.0 bubble.  I could have sworn one of the most important things we learned was that valuing firms (people, etc) based upon page-views was a fantastically stupid idea.  This is because contrary to popular belief and practice (thanks Mary Meeker, et Al.) all eyeballs are not, in fact, created equal. If I’m buying web ads, why do I want to pay based upon how many people visit a site when they may click-away a few seconds later?  If I’m paying content-creators, why do I care how many people initially visit their content if they’re not looking at/clicking-on the massively-annoying banner ads scattered all over the site?

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