Distilled: The Education of a Value Investor by Guy Spier

Distilled Series Introduction:

Welcome to the Distilled series where I’ll take some of the most influential and powerful books and concentrate their core ideas down to their most essential points.

The first book in this series proved to be quite influential on my life in 2015.  For that reason, I’m excited to present The Education of a Value Investor by Guy Spier, Distilled.

Distilled: The Education of a Value Investor

The Education of a Value Investor Distilled Virtuous Cycle & Tilt the Playing Field:

The following section expands on the ten core elements.  When reading, keep in mind that although these core elements are listed as discrete and definable concepts, they are not entirely independent of each other.

Each element interacts with the others in the form of a virtuous cycle.  Meaning that when you make a positive change in one point, it will positively influence another point, which may then positively influence another point, and so on through the whole system.

Additionally, Guy emphasizes the importance of doing things that tilting the playing field in your advantage.  Like a casino, you only need to have an imperceptibly small advantage.  But given that enough ‘bets’ are places over time, you will come out far ahead.  These ten points capture the general process Guy used to tilt the playing field in his advantage.

Expanded: The Education of a Value Investor

  1. Commit Yourself Completely

Guy doesn’t embrace ideas with half measures.  He has shown that whether it came to both his academic and financial pursuits early in his life, or a Value Investing career later in life, he takes things to the nth degree.

“Life can change in a heartbeat.” A goal that seems impossible can become entirely possible if we’re willing to commit every ounce of energy to it.

This is certainly one of his main strengths.  Few possess the capacity to commit themselves so completely to an idea or a pursuit.  We should strive to do the same.  For as W.H. Murray wonderfully stated;

“Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness.  Concerning all acts of initiative, there is one elementary truth the ignorance of which kills countless ideas and splendid plans: that the moment one defiantly commits oneself, the providence moves too.”

  1. Imagine Your Future

This point was only briefly referenced, but it’s certainly a critical element to both his re-education process and pursuit of an investing career.

I’ve often found that we have to imagine our future before it can happen

  1. Brainwash Successful Habits

Guy talks favorably about brainwashing  successful habits.  Specifically he talks about needing to re-wire himself after his brief career at D.H. Blair.

This re-wiring process, by way of brainwashing successful habits, can aid the switch from a life dictated by an external scorecard to one defined by an internal scorecard.  Guy calls these positive habit changing techniques a powerful tool in reconfiguring our consciousness.

“When your consciousness or mental attitude shifts, remarkable things begin to happen.”

  1. Create the Right Environment & Network

Guy talks extensively about the importance of the Right Environment & Network.  Your environment has a massive influence on you, and the importance to set up a positive environment cannot be stressed enough. This includes arranging your work space, choosing the city where you live and work, and the people you associate with.

In fact, he left New York to go to Switzerland where his environment would be more insync with his personality, personal limitations, and career.

Our environment is much stronger than our intellect. Remarkably few investors-either amateur or professional-truly understand this critical point.

Guy says “Nothing, nothing at all, matters as much as bringing the right people into your life.”  Specifically, he espouses the benefits of being involved in a Mastermind group.  Seemingly all influential people participate in one.  Benjamin Franklin had “the Junto”, Warren Buffett has “the Graham Group”, and Guy Spier has “the Latticework Club”.

More generally, he writes how critical it is to get into the orbit influential people and other like-minded, motivated, and giving people.

It’s really a question of choosing to have certain people in your life (however tangentially) who embody the values you admire… creating the right environment or network helps to tilt the playing field subtly in the right direction so that you can become far more likely to succeed.  Advantages are often created imperceptible step by imperceptible step, so it makes a difference to enter the universe of a firm like Ruane Cunniff.

Furthermore, he stresses the value being a giver, as well as the need to surround yourself with people who are givers and matchers, while weeding out the “takers”.

  1. What Would Buffett Do?

Tony Robbins calls this process “modeling”.  A related process is known as “Matching and Mirroring”.  Guy said that sitting down at his desk and actively imagining what Warren Buffett would do if he were him was one of the biggest elements which helped him get unstuck early in his Value Investing journey.

“Desperate to figure out how to lead a life more like his, I began constantly to ask myself one simple question: “What would Warren Buffett do if he were in my shoes?…The minute I started mirroring Buffett, my life changed.  It was as if I had turned in to a different frequency.  My behavior shifted, and I was no longer stuck.

He suggests using matching and mirroring to bring mentors into your life which you may not have immediate access to.  You can do this by imagining them in as much detail as possible, even down to how they’d breath, walk, and act.  This involves gaining a detailed understanding of them.

Choose teachers that have come to learn the truths that you still need to learn. “If you apply this lesson, I’m certain that you will have a much better life, even if you ignore everything else I write.”

  1. Play the Value “Lottery”

Guy really prescribes a lot of value to this concept.   He has described how most people misattribute his success, preferring to believe that it came from the elements like the fact that he went to Harvard & Oxford.  Instead, Guy prescribes a large portion of his success to playing the Value “Lottery”.  Guy describes this process as;

Doing something with an uncertain but potentially high upside. The payoff may be infrequent, but sometimes they’re huge.  And the more often I pick up these lottery tickets, the more likely I am to hit the jackpot.  Doing this will subtly tilt the playing field in your advantage.

The payoff follows an exponential path.  At the beginning, it looks like you are accruing no value, but in the long run, you experience large benefits.  He says that you often have to do these things for 5 to 10 years before you start to see the true benefits from them.

“Over a lifetime, a myriad of simple actions like these can accumulate to create big reputational and relationship advantages. It’s not about luck.  It’s about working harder to get these things right so that it becomes more likely that something good will happen.”

The value lottery generally involves taking small actions which will benefit you on the margins.  By far his favorite way to play the value lottery is through writing thank you notes.   Guy started this program over a decade ago where he forced himself to write three thank you notes a day, five days per week.   He now estimates that he’s written over 30,000 thank you notes in his life.

Every letter I wrote was an invitation for serendipity to strike. To many people, it might seem like a waste of time.  But I couldn’t win the lottery without a ticket, and these tickets were almost free.  In a sense, this is a value investing approach to life: pick up something cheap that may one day prove to be precious.”

For more on this topic, you can also listen an interview with The Investor’s Podcast and a talk at Google where he elaborates further.

  1. Take the Inner Journey: Be Authentic & Use an Inner Scorecard

It’s like that Guy focuses on this concept the most.  It’s a critical concept if you hope to be a successful investor.  He attributes temperament to being the main reason for his investing success.  Likewise, Warren Buffett says that investing is 90% temperament, and that if you had an IQ of 160, you can sell 30 of your IQ points because you don’t need them.

One of my favorite quotes of the book falls under this section of the book.  It explains the need for investors to undertake this inner-transformation quite elegantly:

The goal is to become more self-aware, strip away your facades, and listen to the interior.  For an investor, the benefits are immeasurable because this self-knowledge helps us to become stronger internally and to be better equipped to deal with adversity when it inevitably comes.  The stock market has an uncanny way of finding us out, of exposing weaknesses as diverse as arrogance, jealousy, fear, anger, self-doubt, greed, dishonesty, and the need for social approval.  To achieve sustainable success, we need to confront our vulnerabilities, whatever they may be.  Otherwise, we are building our success on a fragile structure that is ultimately liable to fall down.

Guy states that it’s not only important to becoming a good investor, it’s reward is something greater.

But the real reward of this inner transformation is not just enduring investment success.  It’s the gift of becoming the best person we can be.  That, surely, is the ultimate prize.

  1. Know your limitations & work around them

The element of knowing your limitations comes from both an understanding of ones self, as well as a general acceptance of the short-comings of the human mind.  Only then can an investor structure a process to work around these flaws.

“The real challenge, in my view, is that the brain itself-which got us to where we are-is the weakest link. It’s like a little boat, adrift in a sea of irrationality and subject to unexpected storms.

Specifically, this involves creating the right environment where you can think rationally and developing an investment process using checklists that can help you avoid making classic (subconscious) mental mistakes.

The goal isn’t to be smarter. It’s to construct an environment in which my brain isn’t subjected to quite such an extreme barrage of distractions and disturbing forces that can exacerbate my irrationality.  For me, this has been a life-changing idea.

  1. Pursue Practical Knowledge

Guy learned about many sophisticated economic and financial models during his time at Harvard and Oxford, but he found them to be totally inadequate at explaining how the real world works.  Beyond entertaining people at dinner parties, they were essentially useless.

“The trouble is, economic theories like these tend to be based on intellectually elegant assumptions about how the world operates, not on the messy reality in which we actually live.”

Instead, his “Second MBA” focused on pursuing practical knowledge that explained how the world actually works.  This concept was likely formed out of Charlie Munger’s concept of a Latticework of Mental models.  Charlie states that this kind of education isn’t rewarded in the academic world, but is invaluable when it comes to investing.

“For a while, these books (Think and Grow Rich, How to Win Friends and Influence People, Tony Robbins) became my life instruction manuals.  I wasn’t reading them to sound intelligent at dinner parties; I was mining them for useful ideas to implement in my life.  They provided me with critical first steps in my education as a value investor and businessman, exposing me to a more practical way of thinking about human nature and how the world really works.”

  1. Just Do It.

Guy only briefly talks about this topic, but it was a key element to his success.  Continually throughout the book, Guy opted to take action rather than “pontificate in the library”.  This is an important lesson for for anyone else who struggles with perfectionistic tendencies and/or procrastination habits.

“Robbins hammered into my head the idea that, if you want to get somewhere, anywhere, and you’re stuck, “Just Do It! Just make a move. Any move!” This might be obvious to many.  Hell, it was obvious to me.  But my bias toward analysis-paralysis meant that it was easier for me to pontificate in a library than to act.  Robbins convinced me that I had to break the patterns of negative thought, push through my fears, and get moving.”

Reviewed: The Education of a Value Investor

The Omaha Effect:

On May 2nd, 2015, I attended my first Berkshire Hathaway Annual Shareholder’s Meeting in Omaha, Nebraska.  I happily flew 1,300 miles and committed 4 days of my time and money for this moment.  Why would I do this?  Simple.  I read The Education of a Value Investor by Guy Spier.

The Education of a Value Investor by Guy Spier

My admiration for Warren Buffett stretches back to the mid-nineties, where Berkshire Hathaway’s lofty share price first caught my attention and imagination.  And yet, even after two decades of admiration for Buffett, I never foresaw attending the Berkshire Annual Meeting.  That changed after I read The Education of a Value Investor.

This book caught my imagination, much like BRKA’s share price in the mid 90’s.  As a result, I  began to change the way I thought and acted.  This included my attitude towards attending the Annual Meeting.  It was no longer an intriguing idea, but rather a necessity.

In this matter, I was not alone.  While in Omaha, I attended the Yellow BRKers meeting at the DoubleTree hotel.  In his book, Guy affectionately writes about Yellow BRKers and the influence of this endorsement was immediate felt.  Alex Bossert, the host of the event, stated that 2015 was Yellow BRKers largest crowd to date.  He went on to directly link Guy Spier’s book as the likely cause.

Upon talking with Yellow BRKer attendees, I found that there was a general air of reverence surrounding The Education of a Value Investor.  He had obviously struck a cord.  I even encountered several people who, like myself, after reading Guy’s book, were inspired to attend the Annual Meeting for the first time.

It’s not often that you find a book that influences people in this way.  Here in Omaha I’d found a group of people that were inspired enough to act on the the advice and insights they’d read.  This group of value investing enthusiasts and professionals were the best endorsement a book could receive.

This year, I will be returning to Omaha to attend the Berkshire Hathaway Annual Meeting for the second time, and it all started with reading the Education of a Value Investor.

Honesty, Influence, and “the Value Investing Life”:

How then does a book make such a big influence on so many people?  Likely in the same way that both Tony Robbins and Warren Buffett managed to influence Guy Spier so effectively.  Honesty.  Guy embraced the teachings and values of both of these men because they were honest and authentic.  Now, Guy has managed to resonated with his readers by following the same path.

Accordingly, the book addresses the importance of taking the “inner journey”.  About playing by an inner scorecard and being authentic.  But these elements aren’t simply about how to live a better life.  Instead, they are essential for anyone wishing to become a successful investor.  That’s because you cannot hope to outperform the market if you live your life defined and dictated by external forces.  You must first make an internal change, and only then are you prepared to be a successful investor.

Warren Buffett Insights:

Guy provides unique insights into the investing genius and life of Warren Buffett.  He was able to accomplish this because he approached Warren with great reverence.  He paid close attention to even the smallest details and mined Warren’s life for the elements of success which he could then mirror in his own.

As a results, reading this book will introduce the reader to insights which most people tend to overlook.

The Second MBA:

Guy’s journey to becoming a value investor was not a linear path.  Instead, he spent his youth and early career pursuing prestigious academic degrees, a prestigious wall street job, and the success that goes along with them.  His life only started to change after he experienced something of a career existential crisis.

Upon finishing his Harvard MBA  he began working for D.H. Blair, an investment bank which he later discovered was a morally compromising environment (akin to the infamous Stratton Oakmont).  Up until that point, he had been living his life dictated by an “external scorecard”.  For that reason, he lamented that he wasn’t able bring himself to leave his compromising employer as soon as he should have.  After 18 months, he quite his job and began what he referred to as his “Second MBA” (aka “The Education of a Value Investor”).

Spend a lot of time Sitting & Thinking. Warren Buffett ‘demands’ it!

Buffett ‘Demands’ It

The following quote is perhaps my favorite saying from Warren Buffett.  It’s a simple yet powerful formula that dictates most of his day.

I insist on a lot of time being spent, almost every day,  to just sit and think.  That is very uncommon in American business.  I read and think.  So I do more reading and thinking, and make less impulse decisions than most people in business.  I do it because I like this kind of life. – Warren Buffett

Read. Sit. Think.  It doesn’t get much more straightforward than that.   And yet, it’s easy to overlook this quote or simply take it as mere suggestion.  But the key word in his statement is ‘insist’.  That’s a far cry from an off-handed recommendation.  In fact, Websters dictionary defines ‘insist’ as, “to demand that something happen or that someone do something.”

In other words, Warren Buffett demands it.  He demands it!  For anyone looking to learn from the investing wisdom of Warren Buffett, this is a good place to start.

That’s why I made the picture below and hung it on my wall.  It’s a reminder every day that this isn’t a recommendation.  I must spend a lot of time reading and thinking.

Sit and Think
Sit and Think

Cloning and Greatness

There’s a second reason why I love this quote; it’s unoriginal.  In fact, you can trace the origins of this quote back through a long line of great men who unapologetically copied each other.

I like to imagine that Warren derived this insight from Ben Franklin, whom both he and Charlie Munger admire greatly.  A quote mirroring Warren’s is found in Poor Richard’s Almanac where Ben Franklin wrote;

Reading makes a full man, mediation a profound man, discourse a clear man. – Benjamin Franklin

But the wisdom copying machine doesn’t end there.  Ben Franklin openly admitted that most of his Poor Richard’s quotes were unoriginal.  His typically strategy was to rewrite classic wisdom and proverbs into catchy sayings.  In turn, Ben Franklin likely derived his famous quote from John Locke whose writings were a big part of Franklin’s self-education.   John Locke wrote;

Reading furnishes the mind only with materials of knowledge; it is thinking that makes what we read ours. – John Locke

Once again, John Locke likely derived this statement from influential thinkers he studied, such as Thomas Hobbes, Descartes, Cicero, Aristotle, and Plato.  All of whom wrote extensively on the importance of thinking and meditating.

There’s a distinct pattern to this.  Great men, copy the wisdom of great men who came before them.  Or as Charlie Munger puts it;

I believe in the discipline of mastering the best that other people have ever figured out. – Charlie Munger

This process is also known as “cloning”.   Warren is a Grandmaster at cloning.  In his life, Warren has notably;

  • Mastered the fundamental principles of value investing from Ben Graham.
  • Mastered the fundamentals of the insurance business from Lorimer Davidson.
  • Evolved as an investor by embracing the ideas of Charlie Munger and Phil Fisher.

Warren Buffett has an uncanny ability to learn the best ideas that already exist and adopt them completely into his own knowledge and philosophy.

This speaks volumes to the value of “cloning”.  As investors, we should endeavor to do the same and master the best of what Warren Buffett has learned.  We can start here.

Read. Sit. Think.

Yahoo Opportunity: The Market Thinks Yahoo Is Insane

“Sometimes I use to wonder if I was nuts.” – Warren Buffett

If the market is efficient, then Yahoo must be completely nuts. That’s the only way to rectify Yahoo’s (NASDAQ:YHOO) current share price. Given where Yahoo trades, the market believes that there is a ZERO PERCENT probability that Yahoo will successfully spinoff its Alibaba (NYSE:BABA) shares into Aabaco Holdings. To put this into context, a successful tax-efficient spinoff of Aabaco is worth upwards of $9 per share. But the market has placed exactly zero probability and therefore zero dollars of value to this outcome. In fact, to hold such a strong assertion, the market must think that Yahoo’s Aabaco hopes are merely hallucinations and nothing more. In other words, Yahoo is certifiably insane.

Yahoo Certified Insane

Such a strong conviction by the market must be supported by equally powerful evidence. If it turns out that the market has mis-weighed the facts, then a profitable opportunity likely exists.

This article will examine the sanity of Yahoo and the resulting investment opportunity. There are three stages to this assessment:

  1. A Yahoo Sum of Parts Analysis: A sum of parts analysis will reveal how much value the market places on the probability of a tax-efficient spinoff, and the value of Yahoo’s core business.
  2. Analyzing the Evidence: We will contemplate the evidence required to be 100% certain and then juxtapose that against the evidence which the market has at its disposal to form an opinion.
  3. Investment Opportunity: Given the article’s findings, we will examine the investment potential of Yahoo and the best way to maximize value.

Sum of Parts Analysis:

Given that Yahoo is primarily composed of actively traded securities and other highly liquid assets, a sum of parts analysis is a highly useful tool for examining Yahoo’s market valuation. By stripping out the after-tax stakes in Alibaba and Yahoo Japan as well as Yahoo’s net debt, we are left with $585 million, or $0.62 per share.

This remainder of $585 million, or $0.62 per share, is the total value that the market has assigned towards two assets:

  1. Yahoo’s core operating business
  2. The value of a tax-efficient spinoff of Aabaco

To determine how much of those 62 cents are attributable to the Core business and how much to the tax-efficient spinoff, let’s estimate the value of Yahoo’s core business.

The general consensus among industry analysts is that Yahoo’s core business should trade between 3 to 5 times EBITDA. Using the middle ground of 4x EBITDA, that gives us a value of $3,440 million, or $3.64 per share. At that valuation, we’d have an 83% margin of safety.

Valuation Analysis

If you assume that the entire residual value of $0.62/share is attributable to Yahoo’s core operating business, that means it’s trading at only 0.68x its 2016 EBITDA estimate. To put that into perspective, Verizon recently acquired AOL for 8x EBITDA.

With such a generous margin of safety when looking at Yahoo’s core business, we can be assured that the market is assigning no value to a successful spinoff of Aabaco. Now that we’ve verified that the market thinks that Yahoo’s management, board of directors, and tax lawyers are all insane for going ahead with the spinoff, we can analyze the evidence and issue a second opinion.

Analyzing the Evidence:

As stated earlier, in order to make such a bold assertion about the impossibility of a successful Aabaco spinoff, the market needs to have equally compelling evidence. To assess the market’s opinion let’s run a thought experiment. Let’s imagine what evidence we’d actually need in order to arrive at a zero percent probability and then juxtapose that against the evidence which we’ve actually seen.

There are three major elements which we will examine in this manner.  They are an IRS Private Letter Ruling, any IRS Guidance, and the professional consensus.  Let’s take a look.

#1: IRS Private Letter Ruling regarding tax-free status of Aabaco spinoff.

Evidence we’d need: The IRS would have issued a Private Letter Ruling denying tax-free status to the Aabaco spinoff.

Evidence we’ve actually seen: The IRS declined to give a Private Letter Ruling on Yahoo’s proposed tax-free spinoff of Alibaba. Although the IRS did not indicate whether it was ruling against the request. As described by Tony Nitti, “No, it’s not dead…It just means that the IRS didn’t have the decency to tell Yahoo whether it’s dead or not. This means if Yahoo wants, it can still move forward with the transaction, but with no assurances that the spinoff will be tax free….It appears they have faith in their tax attorneys, and will move forward with the spin.

#2: IRS Guidance.

Evidence we’d need: The IRS would have issued new guidance thereby eliminating the possibility for tax-efficient spinoffs.

Evidence we’ve actually seen: The IRS has not issued new guidance to date, but it did formally announce on July 31, 2015 that it was studying potential new administrative guidance with respect to spinoffs.

#3: Professional Consensus:

Evidence we’d need: Tax Lawyers & Analysts would be in consensus that the tax-efficient spinoff will fail.

Evidence we’ve actually seen: Tax Lawyers & Analysts are generally more positive than not that the tax-efficient spinoff will go through successfully. Two such examples:

  1. FBR said its latest comment on Yahoo assumes that the company will succeed in the push to spinoff the stake in Alibaba Group Holdings Ltd in a tax-efficient manner.
  2. “I believe the spinoff will proceed as planned and, in the final analysis, will be found to be tax-free,” said Robert Willens, a New York-based tax consultant.

In all three cases, it is impossible to arrive at a conclusion that approaches absolute certainty. Instead the current set of public information requires us to make a series of subjective judgments as to the likelihood of the IRS’s action.

The acid test for insanity is to either be hallucinating (i.e. perceiving something that’s not there) or delusional (i.e. false beliefs). As demonstrated above the IRS has made no definitive actions to close the doors on Yahoo. Meanwhile the general opinion of Yahoo’s legal counsel has a positive outlook towards the spinoff, as do industry analysts and tax lawyers on the whole.  While significant uncertainty exists, Yahoo is certainly not hallucinating about the chance of a successful spinoff.

For that reason, Yahoo can officially be declared “Not Insane”.

Homer Simpson "Not Insane"

(Source: The Simpsons)

As can be seen with Yahoo, the market often has a hard time distinguishing between insanity and uncertainty. From time to time Mr. Market misdiagnoses a stock with great uncertainty as being “insane”. Consequently he sometimes offers to sell these stocks at insane prices. As Warren Buffett has said, “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.

Investment Opportunity:

Value of the Spinoff:

How much is a successful spinoff worth? Even if the Aabaco spinoff is successful, it will invariably trade at a discount to Alibaba shares. To get an estimate for the discount assigned to the Aabaco shares, it’s helpful to calculate the Accrual Equivalent Tax-Rate (‘AET’) under a scenario where Yahoo holds onto their Alibaba shares for 50 years before selling.  Assuming moderately optimistic returns, Yahoo’s AET would fall to around 10%.

As a result, we will assume that the spinoff will trade at a price that accounts for a 10% Accrual Equivalent Tax-Rate.   At a 10% AET, shareholders would realize $8.63 of value in the event of a successful spinoff.

Return Profile:

A successful spinoff would be worth around $8.62 per share, and the intrinsic value of the core operating business is worth approximately $3.64 per share. These two assets are worth upwards of $12.24 per share, instead they are currently trading for $0.62.

There are two ways to gain exposure to these undervalued assets.

First, you can simply buy the Yahoo’s common stock, whereby you have a potential upside of 37% to its current share price. The risk under this scenario is that you retain significant exposure to Alibaba. Although for investors bullish on Alibaba that may be an attractive feature.

The second option is to invest in the “stub” stock of Yahoo. This involves buying Yahoo and subsequently shorting out the after-tax value in Alibaba. (This strategy is described further in the article Yahoo’s Tax Edge.) Investing in the “stub” stock increases your potential upside to 97% by both increasing your exposure to Yahoo’s undervalued core business as well as any future tax avoidance. At the same time, you eliminate most of your exposure to fluctuations in Alibaba’s stock price.

The scenario above examined the best case outcome.  Below you can observe the probability weighted returns under five different likelihoods.  It is important to note that there is an attractive return available at every probability weighted return.  This demonstrates just how attractively priced Yahoo’s shares are at the moment.

Probability of Successful Aabaco Spinoff

Final Look:

This article does not attempt to make a prediction about the probability of a successful spinoff. Such a prediction is outside of the circle of competence of this author. It does help however to know that no matter what the outcome, Yahoo is priced at such a level where the downside is limited and the upside is substantial. In the words of Mohnish Pabrai, this is an example of an investment where “Heads I win; tails, I don’t lose much.”

Risks to the Investment:

It’s important to acknowledge some risks which may be inherent within Yahoo:

1. If there’s a dispute over the tax status of the spinoff, there’s a chance that Yahoo could end up in a drawn out court battle with the IRS.

2. It’s possible that the market is discounting the cash held by Yahoo by a significant amount. The market may be using the assumption that any cash not assigned for share buy backs is as good as gone. Considering Marissa Mayer’s poor investment record since becoming CEO, it’s hard to argue against such a scenario.

Since becoming CEO, Marissa Mayer has spent over $5 billion on acquisitions and research and development. Today Yahoo’s core business is trading at $585 million.

3. A company is only worth as much as the present value of all the cash flows you expect to receive. By assigning a value of $585 million to Yahoo, the market may be indicating that they expect to receive very few cash flows in the future. They may be justifiably concerned if Marissa Mayer continues to invest operating cash flows without positive results.