Finally Bought The One Book That Will Plug The Hole In My Investment Analysis

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Mark Cuban says you should keep buying and reading books, you will get business ideas from them, you will learn a lot, you will read about other people's stories and learn, you will see opportunities other people are missing, and most importantly, when luck smiles on you, you won't be found unprepared. That you shouldn't be bothered that you will end up buying books that are almost a waste of money; someday you will come across a book that will pay for everything a thousand times over. And that book is just a book away.

For me, I think I have found that book. The book that will change my life, forever. It won't change it now or tomorrow or this month or even this year. But I have got big plans for the content of the book. It's the missing tool in my investment toolbox.

If you have been reading my blog since late last year, you would know that a big chunk of my stock investment is in GTBank shares. But in the stock analysis sheet I shared and said I use for my investment decisions, GTBank isn't in it. In fact, no bank is in it.

Banks' financial statements have very little in common with those of other companies. You can't just plug in the usual ratios. I remember spending over a week reading the GTBank 2012 annual report and financial statements, compared to the few days I spent reading Nestle's. Yet I could see that Nestle was doing better than Total, but priced much higher. I could compare Nestle, Total, Julius Berger, GSK, Dangote Cement and Mobil across all the basic investment ratios and even do a complete projection of the entire financial statements: Income statement, Balance sheet and Cash flow statement. But for GTBank, all the comparison I could do were in my head, not on Excel. I knew the revenue growth, the price to earning, the ROA and a couple other metrics, but they were all what was reported in the financial statements. I couldn't recalculate them using my own basis. I couldn't redo the balance sheet to even out the higher risks banks carry when been compared to a manufacturing company. I knew the general rule that a bank should not sell at a p.e. greater than that of the manufacturing industry average, but I couldn't figure out what was the fair price I should be willing to pay for a bank stock.

Now all that is about to change. I just bought The Valuation of Financial Companies: Tools and Techniques to Measure the Value of Banks, Insurance Companies and Other Financial Institutions (The Wiley Finance Series) by Mario Massari, Gianfranco Gianfrate & Laura Zanetti. It cost me over N9,000 and it's just a 256 page book. That's counting the title page, copyright page, preface, acknowledgement, table of contents, references and index. That's a sizable chunk of all the money I have made in the past 3 months.

It explains all that is unique about financial companies, their business models, the regulations that bind them and the right way to value them. It's not a beginner's book. And going by the preface, it's also not meant for intermediates. It's meant for analysts already familiar with the main corporate valuation models. Luckily, I've got an excellent (book) memory and have been betting my life savings on the practical application of what I stuffed in that memory. From the CFA books to expensive MBA books and to Securities Analysis books that I have given myself numerous headaches reading and understanding, I have managed to acquire the background knowledge needed to comprehend everything explained in the book. And then put them to practice. 

Too bad I'm short of cash. But I will make sure I'm prepared, put whatever I can spare into getting the invaluable practical experience and to test the verity of my analysis. Someday, a big window of opportunity will open and I will be extremely glad I have prepared for it.


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