A Wonderful Company At A Fair Price

A Wonderful Company at a Fair Price: Brian McNiven

This book should up there on the essential reading list for serious stock market investors along with Benjamin Graham's "The Intelligent Investor " and "The Essays of Warren Buffett." McNiven is a disciple of Warren Buffet and quotes him often but also has plenty of his own insightful comments that investors would do well to take note of. McNiven skillfully leads readers through the process of uncovering the real value of a business by clearing away the obfuscation of creative accounting practices, poor management and popular delusions such as PE ratios and DCF valuations. McNiven insists that investors value a business as if they were buying it and look at the underlying growth in equity value rather than earnings. As McNiven clearly demonstrates a company may grow earnings year after year yet the value of the business may still decline if the Return on Equity is poor.

McNiven is particularly critical of modern day managers who often act in direct opposition to the interests of shareholders. He devotes substantial time to identifying both good and bad management practices and urges shareholders to exercise their right to question management decisions. One theme he continually drives home is that of capital allocation. Basically if equity growth can be achieved by reinvesting profits back into the business then managenment should refrain from paying unnecessary divindends. Whilst this seems like common sense McNiven points out that many companies often don't adhere to this simple principle of efficient capital allocation and squander shareholder wealth through token dividend payments.

McNiven is also the creator of Stockval - a valuation tool that utilizes McNiven's valuation method and is the valuation tool of choice of listed investment company Clime Asset Management(ASX code CAM). At $1,595 for individual investors Stockval is not exactly cheap however it contains the data of over 400 ASX listed companies meticuously input from annual reports. Subscribers can fiddle with the valuation inputs and even input the data for companies not already in the database. Whilst McNiven gives the basis for his valuation methodology in the book he is careful not to give too much of Stockval's intellectual property away.

I've tried to replicate McNiven's valuation method but seem to be missing some essential ingredient in the magic formula. Thus I'm toying with the idea of purchasing the keys to the Stockval Program not only for the valuation tool but for the wealth of data that comes with it. The Stockval website is full of useful information and the articles written by Roger Montgomery - Managing Director of CAM are worth reading as are his NTA reports released monthly to the market.