Business-valuation

I think the book's treatment of valuation is too academic. The author should use more practical examples.

I've been looking for a practical step by step book on equity analysis from a practitioners viewpoint. This is it. Other books try to take shortcuts. This book does not take short-cuts, but neither is it bogged down with unncessary academic exercises. If you really want to understand how to do valuation and applied equity analysis I can't recommend any book more highly. It is head and shoulders above anything else out there. Penman's book (from Columbia Business School) is also good but it is a VERY serious and weighty book that probably should only be attacked after you have read this one. Get this book by English and you will not be sorry. I have spent way too much time reading hundreds of other books that weren't nearly as educational. Again, however, it is only for the serious investor.

James English's "Applied Equity Analysis" is a how-to manual on evaluating stocks based on his 20 years of experience at JP Morgan. The book is very well-written and readable since the author employs plain english (no pun intended) to make his three major points: 1) accounting numbers--while by no means perfect--are excellent tools in evaluating stocks, 2) accounting-based stock valuation is superior to (but does not neccessarily supplant) cash flows, and 3) competition ensures that eye-popping financial performance doesn't last forever.

Contrary to another reviewer, English employs excellent examples to clarify and explain his points. Some examples: Gateway 2000's earnings history was used to explain how to find and interpret non-recurring items (NRI) on financial statements. Ratio analysis was demonstrated by looking at the PC industry in 1998. Emerson Electric was the company chosen to show why mature companies were still good buys. Many other examples abound, and English does a successful job in tying their relevance to his arguements.

But successful use of examples is not just the only strength of the book. The author also tackles a range of topics complete with insightful and clear discussions: the flaws of the Efficient Market Hypothesis (EMH), Economic Value Added (EVA), financial statement analysis, fundamental analysis, etc.

A quick glance at the table of contents below gives you an idea of the scope of English's book. I highly recommend this book to not just Wall Street analysts, anyone who is interested in finding fundamental value in evaluating stocks instead of following the crowd.

Pt. 1Getting Started
Ch. 1A Day in the Life
Ch. 2Fundamentals of Equity Valuation
Ch. 3Strategy and Competition I: The Firm's External Environment
Ch. 4Strategy and Competition II: The Firm's Internal Competitive Resources
Ch. 5Fundamentals of Stock Behavior
Pt. 2The Basic Tools
Ch. 6Reading a Financial Statement: The Accuracy, Sustainability, and Predictability of Financial Information
Appendix 6-1Gateway Financial Statements
Ch. 7Reading a Financial Statement: the Composition of Returns
Appendix 7-1Comparative Financial Analysis: Personal Computer Industry
Ch. 8Reading a Financial Statement: Early-Stage Companies and Investment Capacity
Ch. 9Reading a Financial Statement: Later-Stage Companies and the Transition to Maturity
Ch. 10Economic Value Added: An Alternative to Traditional Analysis Techniques
Appendix 10-1Gateway's Cost of Capital
Pt. 3Financial Models
Ch. 11Financial Modeling: Base Case Assumptions and Model Design
Appendix 11-1Dell Computer Corporation Consolidated Statement of Income
Ch. 12Financial Modeling: The Income Statement and Balance Sheet
Ch. 13Financial Modeling: The Statement of Cash Flows
Pt. 4Equity Valuation
Ch. 14Valuation: Foundations and Fundamentals
Ch. 15Combat Finance: Relative Methods and Companion Variable Models
Ch. 16Hybrid Valuation Techniques
Ch. 17The Quirky Price/Earnings Ratio
Ch. 18Valuation of Speculative Stocks
Ch. 19Equity Analysis and Business Combinations
Pt. 5Getting It Down on Paper
Ch. 20Financial Writing: Don't Bury the Lead
Bibliography
Index

There have been so many good books written about the yield curve that it is hard to imagine why this one was written. It is actually very similar, if not remarkably the same, to a couple of other books previously published. If you have the better written books on this subject, there is no need to buy this. If you don't have them, buy them instead.

There have been so many books about the yield curve, and all of them so mediocre. It is good to finally have one that describes and analyses the curve for everyone - money managers, bankers, investment analysts. Written in the author's trademark accessible style, this book is like nothing out there, highly recommended.

Yield Curve modeling is on of the major subjects of fixed income, a subject of great power and benefits. As the author explains eloquently (page 56) that the yield curve is very easy to grasp the basics, but difficult to become expert at. It is linked by countless equation with vast underlying framework.

Despite its forbidding nature yield curve modeling is vital component of the fixed income market. It has wide range of applications and practical importance. However, the lack understanding so often encountered leaves students and market investors with a gap between able to use the theory and being able to do so. One way of promoting understanding and bridging this gap is the method this book follows. The way of this book is to make the reader understand the subject by providing detailed explanation with carefully selected examples, show how principles and concepts may be applied to particular problem. And then offering the reader examples that differ slightly but which can be tackled by an extension of the approach that have been used previously. All this is evident in chapter one. In chapter two the author selects well motivated examples to demonstrate specific principle and concepts.

The book starts with an overview of the concept of bond yields and bond yield measurement. It then discusses the basic terminology of the yield curve. The core topics of classical yield curve are then examined in chapter two. It includes brief introduction to each topic where important results are stated and sometimes derived or reference given, followed by a number of practical example worked out in detail. Part two of the book deals with the very practical topic of yield curve modeling.

One of the powerful features of this book is that it provides relationship between theory and market practice. To sum up, the author explains all the components of the yield curve modeling at the atomic level.

Mo

If you know who Joel Stern is, you may want to read this book. If you do not, you will probably not enjoy the book.

If you know and love Mr. Stern, the book will add many amusing anecdotes to your story of tales about this peripatetic self promoter.

Mr. Stern was originally known for visiting CEOs and telling them that "earnings per share don't count." That was a novel message to CEOs who usually got their bonuses for meeting budget targets for earnings. Intrigued by the comment, Mr. Stern would usually go on to explain that the stock market was highly efficient and followed the lead of "steers" like Warren Buffett who knew how to assess the economic effectiveness of an organization's performance. The book contains a copy of an early op-ed piece he wrote to explain his ideas.

What Mr. Stern wanted people to do was to focus on making the cash flow of their organizations that they did not have to reinvest grow ("free cash flow"). Turned into English, he wanted companies to make more money with their investments and invest as little as possible. He now characterizes that concept as "heresy." That's strange since businesses have been employing discounted cash flow as a discipline to making new investments since around 1890.

Since then, Mr. Stern has worked with his colleagues at Stern Stewart (his financial consulting firm) to turn these concepts into elaborate measures of economic performance called EVA and MVA that adjust for the cost of capital (something that has been around since the Capital Asset Pricing Model was introduced many decades ago). Mr. Stern also thinks of this as "heresy."

Few others than CEOs would have heard of Mr. Stern if he didn't constantly teach, speak and write about his work. The book has some elements of Adventure Capitalist as he describes his nomadic life.

His main prominence occurred after 1993 when Fortune Magazine made him the feature of a cover story. Why did Fortune do that? The book doesn't tell, but I once asked a friend who is an editor there. Stern Stewart was a tiny firm at the time, and barely breaking even (as Mr. Stern acknowledges in this book). The ideas were ones that had been around in academia for decades. What was so special? The editor told me that Roberto Goizueta, then chairman and CEO of Coca-Cola, had written to suggest the idea. Since Fortune had never received a letter like that from a CEO, they felt that they had to write the article. The Wall Street Journal later reported that Mr. Goizueta typically spent more than half his day writing letters to analysts and publications to get more exposure for his company's stock. Since then, Mr. Stern's firm continues to be published annually in Fortune, and prominent Fortune editors appear at his marketing conferences.

In that story, you get the essence of the book. Mr. Stern is a genius at persuading high profile people to endorse him and his work and help promote his career. This began while he was at Chase Manhattan Bank. I first met him in 1975 after the lending officer to our Fortune 200 company suggested we hire Mr. Stern to come speak to us. At the end of the presentation after Mr. Stern left, his internal sponsor in our company noted that Chase Manhattan did not use his concepts.

Not surprisingly, Mr. Stern eventually left Chase to start his own firm in 1982. Since then, his contribution has been to take the two groups of executives in our society who read the least (CEOs and CFOs) and teach them about the financial theory that is taught in every business school in the world. Before you dismiss that contribution, remember Peter Drucker's advice: There is no single measure of company performance that is any good. You should add more and use them all. In that vein, Mr. Stern has helped. He now has many competitors who provide reasonably similar versions of the same measurements.

If you want to know more about these measures, read The Quest for Value by Bennett Stewart rather than this book.

The most controversial part of his work is a compensation method based on EVA. I was amused to find out from this book that Stern Stewart does not use this method for its own compensation, although EVA is one part of the compensation determination.

If you are interested in how to be a high-profile consultant in the world of finance, you will get a good sense of the type of networking among academia, finance and senior executives that is required. If you want to live that nomadic life, cut off from your family, then the world is yours.