Saturday, December 31, 2011

Diary: Magic Formula Investing

I follow the Yahoo Group magicformulainvesting. Here's a snippet from an interesting post:
I understand there is a general lack of enthusiasm for the Magic Formula in this group.  But I'm wondering if this is just some short term blues. Isn't the whole point of the system to stick with it even through some years of underperformance? Maybe it works better in a bull market than it does a bear market but long term it will do right, no?

--- In, "marsh_gerda" wrote:
> Clearly MFI has been struggling for the past 18 months.  I have
> identified 4 clear groups that have gotten crushed:
>    1. Chinese RTOs
>    2. Education
>    3. Nursing Homes
>    4. Solar-Related Stocks
> That raises the question, should an MFI investor be thinking hard about
> being diversfied and not having too many eggs in the basket of any
> single industry/sector?

Another  poster said:

>Arbitrage trading platforms and high frequency trading algorithms by the big firms are dominating the scene (especially in the last 6 to 9 months) AND with the addition of ETFs (now representing over $1 trillion in U.S. dollars (not to mention the ability for hedging, and trading leveraged products in IRAs and other retirement type accounts (short and ultra short ETFs included)) which used to be unheard of, it is my opinion, that fundamentals have a low level of influence on modern markets.

>This is making investment grade stocks from a value perspective very hard to find (but not impossible).

In the first paragraph, you seem to be saying that the ETFs, short-termism and suchlike are causing erratic stock movements and a disconnect between price and value. Surely that should make value stocks easier to find, not harder.
That last paragraph was my own response .

My own feeling is that MFI is the right idea, but it has a tendency to pick up junk. A lot of junk. I take Greenblatt's point that there's usually going to be something nasty-looking at the stock and there's a chance to earn asymetric returns. But it was ever thus on contrarian stocks - and we get back to the usual argument that just because something is cheap, doesn't mean it's cheaper than it should be.

It seems that the whole idea of broad diversification isn't working out too well on these stocks. It should be remembered that diversification diversifies away unsystematic risk, not systematic risk. Indeed, it appears that the MFI has been concentrating that systematic risk, because it a poster has noticed its propensity for homing in on Chinese RTOs, and the like.

I'm not sure that there's an easy solution. Stay away from any Chinese RTO would probably be a good start. Sector diversification is also likely to be beneficial, even if the company ranking doesn't look as good. I also think 30 shares is likely to be over-diversified. I'd just choose one share per sector; you don't need a whole bunch of them in the same sector.

Here is good old Blighty, I notice that there were a lot of companies floated around about the year 2006. I'm seeing suspensions, serious trading difficulties and fraud accusations galore in these kinds of stocks. In fact, now that I think at it, I'm seeing a heavy clustering of problems in stocks that have been listed for less than a decade. Simply by avoiding these unseasoned stocks, I think investors are saving themselves from a lot of headaches.

I've got a couple of other pointers that I think would be helpful.

Firstly - and this applies mainly to smaller cap companies - check the level of insider ownership, and the growth of the number of shares in issue. If insider ownership is low, and the number of shares outstanding keeps ratcheting up through continual fundraising (you don't need to worry about share splits, for example, there's nothing wrong with those), then be on high alert!

Secondly, compare net cash flows to net profits. The former should be consistently higher than the latter, because the latter will usually include non-cash charges like exceptionals and depreciation. Take a look at GNG (Geong International), for example, a company that is drawing debate on the boards over the legitimacy of its accounts. During that last 5 years, it's net profit has totalled £7.2m, yet it's net cash flow has only been £0.1m. The company is not generating nearly as much cash as its profit and loss account would seem to imply. Buyer beware!

I'm actually beginning to think it is highly instructive to study companies that go wrong. I've got at least one such company in mind. That's for another post.

Have a happy and prosperous new year, folks.

Friday, December 30, 2011

Diary: SHFT

Very insightful post written about Shaft Sinkers on the Motley Fool for those thinking about grabbing the falling knife:
Without knowing the contract terms in detail it is impossible to know how much protection they offer. When this thread first appeared I nearly responded on the basis of many years working in the civils industry, but didn't as I knew little about the company in question.

However, the RNS fits the pattern of my expectations very well, so I would now make those points.
During the last 4 decades I've never known a specialist tunnelling / shaft sinking contractor that has survived more than a few years.
It is almost inevitable that such a company will hit unbelievably bad ground conditions, not anticipated by the contract, at some stage. The norm then has always been that they run out of money, regardless of their eventual contractual entitlements.
The end game is then usually receivership, with the contractor being bought from the receiver by a big contractor with plenty of cash, for almost nothing. When the contractual issues are eventually settled, the large contractor makes perhaps a 10,000% return on his purchase cost, and retains a small core tunnelling division of a size which doesn't ever threaten his survival.

Much the same situation has always prevailed with muckshift companies, for much the same reasons.

Diary: Private investor calls

Six months ago, I listed some shares that private investors considered buys and sells - a mechanical strategy based on looking through the stats published by TD Waterhouse.

So, how did investors get on?

On the buys, the returns were: CWC 0.94 NG. 1.01 PIC 0.67 VOD 1.09. The mean is 0.93. So the portfolio lost 7%. The All-Share lost 8%. So, about neck-and-neck. Too bad about the selection of PIC. Camalot94 will be happy with his decision to sell NG and buy VOD. He'd be up 17% against the index. Mustn't grumble at that! VOD's got a special divvie coming up in February 2012, too. Very nice.

On the sells, the returns were: ANTO 0.86 EO 1.26 SOLO 0.43. That's a mean of 0.84, so the portfolio lost 16%. EO was a bit of a sell mistake, but the mean is pretty good.

The buys didn't prove to be especially inspired, although, like last time, private investors were good at spotting at the dogs on the sell side.

Thursday, December 29, 2011

Diary: SHFT

Sheesh, value investing is tough. On 08-Oct-2011 I mentioned SHFT (Shaft Sinkers), which sinks shafts for the mining sector. It was picked up originally by Stephen Bland (aka Pyad) on The Motley Fool at 139p. It had a PTBV of 1.4 and a historical PE of 4.7. His conclusion:
Shaft looks interesting, but it's not without particular risk from a value viewpoint, arising from both to its geographical operational areas and on the numbers, a lack of trading below tangible book. If you can live with that and, as always with value have the patience to hang on for as long as it takes, this share may have some worthwhile mileage in it.
When I picked up the story in October, I had noticed that  the share price had slumped 23%, putting it on a PER of 5.1 (rolling basis) and ROE of 26%. I noted it was a potential "magic formula" company, and cautioned against potentially buying at a cyclical high, and that I had no plans to buy the share.

I mention this now because I have just seen that the stock slumped 32% today, alone. The share price now stands at 57.50p. That's a drop of 59% since Mr. Bland first highlighted it. Ouch! It just goes to show how risky the value game can be. There is, of course, a reason behind the decline. It reported:
Shaft Sinkers Holdings, the international shaft sinking and underground construction group, has confirmed that due to the continued slow progress resulting from extremely difficult ground conditions, it has entered into discussions with its client EuroChem with a view to amend or terminate the contract. Sinking works have now been suspended and the parties are in negotiation on the way forward.
There was no great insight into my scepticism on the share at the time, just a sense that there was something "up". My caution on the possible cyclicity of earnings was not the cause of further downfall, for instance. So I was right, but for the wrong reason. So it doesn't count.

Just goes to show - the magic formula is no panacea. What is very interesting to note is that the share has been in steady decline late April. It's one of those cases where the market "knew" that there were going to be problems. Whilst we did experience market turbulence - a lot of turbulence! - over that period, the markets had staged something of a recovery. This one kept going down.

It'll be interesting to see how this one fares 6 months down the line.

In the meantime, "but for the grace go God go I", and a happy and a prosperous new year to you all. Be careful out there!

Diary: GNG followup

A couple of days ago I wrote about GNG, expressing my suspicions about the company. There is a thread on TMF where a conference call was written up.

despite the SaaS contents supposedly imrpoving cash collection, debtors and accrued income has been increasing at every set of results for the last 2 or 3 years and is now at 18 months turnover.

 Accruals increasing is an effect of mix of business ie IaaS where one-third of accrued income is past due more than 365 days and 60% more than 180 days. If (say) contract length is 12 months from start to finish, then quarterly entries are made as key milestones achieved - work has been paid for GNG's end, income accrued but no cash received

 given this lack of top line growth, earnings have stalled.

 This is end of Year 2 of a 3 year strategic plan - to improve SaaS to 40-50% (with its faster cash collection and higher margins). On track to deliver.

 I also dont see how they can grow through acquisition

GNG Mgt seem to have understood they need to stick to the knitting for the next year or so. They foresee no need to issue equity in the near future.

the corporate governance also stinks and shows no sign of improving. The farce surrounding the release of the FY11 results is a case in point - they waited until the last day before they would have breached AIM rules before releasing them! I know this was complicated by the failed acquisition however once that deal was binned they should have released the results the next day. 

 They realise they should have done more to speed up the publication of results, which as you note was complicated by various factors. Next results promised for last week in June, first week in July ie 3 months earlier.

 I know the auditors said that there was nothing apparent going wrong at GNG, but maybe they werent getting access to the level of info which they needed to answer their questions?

 Mazars have no China presence and farm out China audits. This is messy and cumbersome. GNG decided to change them for a set of auditors with local presence.


We shall see. Just as a sidenote from me:  "farming out" - doesn't that mean that the reputation of Mazars means nothing at all? I've heard of other big firms farming out audits in China. What a terrible idea.

Someone found their Chinese website version: . Seek and ye shall find, and all that; although why it's tough to find it is an open question. Then there's a further mystery. In the GEONG SmartBox Saas Login, it says "Please select your region". "China" is the default selection, but there's HongKong and Canada, too. I can click the "Go" button, but nothing happens. Wanna know what I think? I think their software doesn't work for shit. That's why they're not being paid.

Wednesday, December 28, 2011

Diary: PTEC

In an earlier post, I mentioned about PTEC being up today. The source of the excitement has been explained:
U.S. Department of Justice legal opinion expected to open the door to Internet poker
Bronson estimated online poker in the U.S. to be a $6 billion industry annually. As poker becomes legal in more states, revenue would double, to $12 billion , he said.

Diary: PIC

I see Pace was mentioned in The Guardian today as a share tip for 2012 by Rupert Neate, whoever he is:
After four profits warnings in a year, surely things cannot get much worse for Pace, 71.5p. On the plus side the company's disastrous year allows you to pick up the stock at less than half the price it was this time last year. Back then the Yorkshire-based set-top box maker was a stock market darling, and most of its underlying potential is still there (albeit a little more underlying). Pace makes set-top boxes for most of the world's biggest satellite and digital TV providers, including BT and Virgin Media. As TVs get cleverer (think HD, 3D etc) Pace can charge more for its boxes, and it has plans to help integrate TVs and other household items with the internet. Also history shows that consumer spending on pay-TV subscriptions actually increases in difficult times, so if Eurogeddon does happen Pace should be better placed than most as people would rather forgo nights out on the town than access to the Premier League or the latest movies. The analysts seem to have faith in new boss Mike Pulli, who, as president of Pace America ,expanded its US customer base.

As ever, journalists have a way of putting things more concisely than I ever seem to be able to manage. Gotta love the phrase "albeit a little more underlying". I hear that one!

Diary: PTEC

I see PTEC is up 15% in early morning trading today. There's no news that I can see, nobody is talking about it, volume doesn't look much to write about, so it's a puzzle as to what's going on.

I own some shares in PTEC, am I am torn over it. On the one hand, it looks cheap, and seems to have good prospects, but on the other, as I posted recently, I have concerns over corporate governorship. My gut is telling me to pull out. Let's see if it's right.

Tuesday, December 27, 2011

Diary Bill Miller quote

“The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won’t work. When the markets start up and the economic forecasts begin to be revised up — where we are now — the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained.”

Diary: Does Berkowitz actually know what he's doing?

It's been a bit of a bad year for Bruce Berkowitz. BoA  (Bank of America) has had investment pumped into it by Warren Buffet, and  I see on CNBC has reported that BoA "mulls more asset sales to boost capital". Hmmm. If Berkowitz really is a genius, then he's certainly a very astute one, seeing what no-one else can see. Either that, or he's a bit of a gambler.

Moynihan, the CEO of BoA, said "the bank's capital levels are now at an all-time high". Great. He continues: "asset sales and other actions in the fourth quarter of this year will further boost those measures". Hmm. Why would you need to boost them if they're at an all-time high? "The company will continue to 'drive high-quality capital growth' and to 'shed non-core assets'". Makes sense, I guess. Sorta. Maybe I'm just being too cynical.

Diary: GNG

GNG - Geong International - Software and computer services - 15.2p/£5.8m

This one is something of a cautionary tale. In order to save any potential embarrassment, I'll mention no names. There's an investor I like to follow who seems like a source of good investment ideas. He has a knack of winkling out some interesting growth plays. GNG is certainly "interesting", but for completely the wrong reasons. Let's take a look at its sorry story.

GNG is a Jersey-based company providing ECM (Enterprise Content Management) solutions to companies of all sizes. It does a bunch of other software stuff, but let's not get bogged down in details. Importantly, Geong (sounds oriental to me right off the bat) has operations in Bejing, Shanghai and Guangzhou in China, and in Canada. The directors surnames are Wang, Thakar, Miu, Zhu, Guan, Hak-Yan. So, all very Asian, except for a guy named Stuart Christopher Lane, who sounds as British as cricket and afternoon tea.

To my mind, we immediately have red flag number one: a Chinese company with a UK listing. We also get a Canadian connection cropping up, which seems interestingly coincidental to anyone who is aware of the Sino-Forest Corporation debacle. Highly-respected investor John Paulson lost a packet on that investment; so it's worthwhile reiterating Jim Chanos' admonishment that just because a stock is owed by a great and glorious investor, doesn't mean they're not wrong.

GNG is only quoted on the LSE, and not dual-listed on the HK exchange as I half-expected. I'm not saying that it means anything, just that I thought that there'd be every chance it was dual-listed. It was floated in 2006. I guess we should pass on the issue as to why a Chinese-based business is floated on a UK exchange.

For the y/e 31-Mar-2011, the company was audited by Mazars LLP of London, who gave the accounts a clean bill of health. According to their website, they are ranked as the ninth largest UK partnership by audit fee income. On 05-Dec-2011, GNG announced a change of auditors, appointing UHY Hacker Young following a competitive tender process. According to their website, Young is an ambitious [their words] group of auditors. Looking at Accountancy Age, I see that both companies are in the top 20 group of auditors. Mazars confirmed "that there are no circumstances connected with their ceasing to hold office as auditors that should be brought to the attention of members or creditors".

OK, big problem here. I do not like seeing changes to auditors. The market doesn't, either. Yeah yeah, competitive tender, I heard you. I think that foreign companies are far too eager to change auditors, and that they would be better advised to stick with the ones they already have, even if it costs a few bucks more. Changing auditors sends a really bad signal.

OK, so maybe it's not bad as it looks, maybe they're just trying to save a quid. Still, little details are accumulating in a bad way. Let's move onto the stuff that will make you laugh, and make you cry.

Geong does, of course, have a website. It's in English. Hmmm, predominantly Chinese customers, with a website written in English. There are some Chinese symbols in the top right-hand corner, but it doesn't take you to a Chinese version of the website. Considering that GNG states that it caters for all sizes of business, you'd think that a Chinese version would be mandatory and easy to find. Hmmm. The website does quote an enquiry line: 86-400-6500447. The good news is that 86 really is the dialing code for China.

Taking a look at their half-yearly report on 20-Dec-2011, the company reports PBT up 6.0%, gross margins edged up, but fully diluted EPS down 7.7%. Their net cash has increased to £18.7m from £14.8m. Key highlights: "Smarter Internet Platform with IBM and Oracle in Asia Pacific market progressing well", and "Continued success in promoting SaaS solution".

Directors holdings don't seem high. Wang, the highest holder, owns shares to the tune of £772k. Total director holdings are £1.5m, although I must admit that looking at the absolute size of their holdings might not be too meaningful considering that the market cap is only £5.8m.

OK, let's look at some good and bad stuff from the financial records that I found on Sharelock Holmes. Number of shares in issue has expanded at a rate of about 9.5% pa - so the company isn't shy of pumping out more equity, as seems to be the style of a lot of Chinese companies. That's something I don't like to see. Revenues have increased at a rate of about 28.7% pa, and operating profits at a rate of 34.7% pa. Adjusted EPS has grown at a rate of about 20.2% pa.

Company has net cash of £5.4m, z-score of 3.28, and negative gearing. It has a NCAV of £16.9m. Compared to a market cap of £5.8m, it's a net-net, and then some!

Looks pretty good on the surface. But not so fast! It had a ROE of 28.9% in 2007, and then reduced each year to where is stands today, at 11.7%. It is on a PER of 2.49. PER has gone from 20.4 in 2007, to 2.49 today, having decreased year by year. Things are smelling fishier and fishier.

And the net-net thing? Well, the problem here is that receivables account for £17.6m. Its revenues were £11.2m for the year, meaning that it's taking over 18 months to get paid. That is just wrong! I read that some poster brushed it off by explaining that that's how they do business over there. Sorry, I don't buy it! Surely there must be some renewal fees, licenses, or something like that? Personally, I don't care why it takes them more than 18 months to collect on their debts, I just care that it does take them more than 18 months to collect. If you look back at 2007, debtors days was less than 8 months.

Another thing: look at the net cash flow to  net earnings ratio. That figure has never gone above 1. The median since flotation is 0.31. This suggests to me that much of the earnings simply aren't real.

Needless to say, I view this share as a massive avoid, even though it's a net-net, and ostensibly a growth company. I have too many doubts about the integrity and competency of management, and about the validity of the reported figures. What a real stomach-churner.

Monday, December 26, 2011

Diary: Is David Einhorn getting this right?

Just having a look at PTEC (Playtech), capitalised at £699m. Brickington Trading Ltd. (Tedi Sagy) owns £291m (42%), whilst David Einhorn owns 8.9m shares worth £20.6m personally, with his hedge fund (Geenlight Capital) owning an identical amount. So the total holding is 6.2%.

But there are some things that worry me. Directors shareholdings are practically non-existent, totalling £56,300, for starters.

The company was floated in 2006, during which time revenues have increased at a rate of 35.6% pa. Operating profits have increased at a rate of 25.6% pa. Number of shares in issue has grown at a rate of about 4.5% pa - pre-placing. So far, so good (if perhaps a little too good). It has net cash of £56m, trades at a yield of 6.7%, and a PER of 6.6. The latter figure is a little suspicious considering it's such a rapidly-growing company. ROE is 28.9%, but it's a figure that's been declining every year since flotation.

The company recently had a placing, taking the number of shares in issue from 242.7m to 289.2m. That is to help its acquisition strategy. They seem to be undisciplined. Issuing shares when the price is cheap doesn't seem like a great strategy, especially in light of steadily declining returns on equity, and lack of insider holdings. Playtech does actually provide legitimate software, so we've got that at least.

Could be a "magical formula" company. I must say, though, that there's a fair element of doubt in my mind about what's going on here. I hope David Einhorn knows what he's doing.

Saturday, December 24, 2011


Famous last words

Tweets that I kept a note of. Let's see how they work out.

05-Dec-2011 Tweet MrContrarian Mr Contrarian
RT @economonitor: No country has had investment growth like China's & not had a debt crisis levels and stalled growth.

07-Dec-2011 paulypilot Paul Scott
#Fillyaboots time with £FCCN at 44p. Net cash 35p/share, great wholesale, o/seas & licensing. UK retail obv shit atm, but will turn asp.
[FCCN 47.00p -4.12(-8.07%)]

08-Dec-2011 MrContrarian Mr Contrarian
Sold Tullett Prebon (£TLPR) at loss on resignation of COO. No reason. Prob a row with Terry Smith or sacked. Also ebroking vol dn 7% in Nov.

15-Dec-2011 valuewalk VALUEWALK LLC
Oakmark's Bill Nygren: Large Cap Stocks Attractive, People Will Wish They Had Bought Financials $DJI $JNJ $KO $PG $XLF

Friday, December 23, 2011

Diary: NFLX

I don't follow US shares, but I kinda have this fascination with NFLX (Netflix), on account of Tilson's interest in it. Tilson made a bad shorting bet against it last year, but then decided to go long.

Jacaob Wolinksy reported that Tilson established a long position in NFLX on 26-Oct-2011. Tilson had good timing, and it seems that he must have gotten in at a price of around 80p - maybe a little bit less (77p min., say), maybe a little more (84p max, say).

My worry with Tilson's purchase is that on a PER of 16.8, it's not super-cheap. It has no barriers to entries. Content suppliers can simply up their prices if they see a successful model, and competitors like Google, Youtube, Microsoft and Apple might be tempted to enter the fray on streaming content. LoveFilm has been buying up DVDs-by-post operators. So NFLX faces competition on all its fronts.

Yesterday, for instance, LoveFilm announced signing a Sony deal for UK streaming. It will have premium TV shows and Hollywood movies on its service. “The number of recent high-profile deals we have secured means we are able to keep expanding the service.”
 Lovefilm who boast 1.8 million subscribers, recently launched a streaming-only service priced at £4.99 monthly, which will be a direct competitor to the streaming only Netflix product.
 Investing genius that he is, I think Tilson got this one wrong. I'll keep tabs on this one.

Diary: BSLA - dangers of turnarounds

This one just happened to cross my path today, as it's in the news: BSLA (Blacks Leisure). It has dropped 43% so far today on news that the struggling outdoor goods retailer said that it neither has nor expects to receive an offer for its equity.

Taking a quick look at the fundamentals, it aint pretty. Gearing is 48%, but that's an unreliable overall indicator of financial strength. It has net debt of 16.5m, against a market cap of 1.5m. Clearly, Mr. Market is telling us something! It has a PBV of 0.04. Alas, the company has been losing money for the last 5 years, and hasn't been able to cover its interest payments all this time.

It's interesting to look through the ADVFN bulletin boards. The page happened to open at 5 May 2011. Then, the price was at about 15p. It's now 1p. Ouchies. There were three analysts rating it as a "hold", with a forecast price of 40p. Hmmm. Not so prescient there, guys. What's impressive is the dissonance of what they're saying. Surely, if a company is selling at 15p and is really "worth" 40p, then it's a screaming buy, not a hold. Either that, or you really think that it's a piece of junk, it's worth 0p, and is a screaming sell.

It's also interesting to see the commentary at the time, which was completely wide of the mark. "looks cheap" was one comment ... with hindsight, no. "Blacks did well from the cold snap, unlike most retailers. The camping boom which is taking place now, will not have been picked up in these results." ... nice idea, but wrong.

One poster wrote "With the worst seemingly behind it, is Blacks set to multi-bag?" No, it wasn't. Motley Fool picked up the story at that time. BSLA had a corporate turnaround specialist (Neil Gillis) at the helm for 3 years. TMF says: "Blacks, in short, was once heading for the buffers -- and Mr Gillis has confounded many by managing to adroitly steer the business around the resulting trainwreck". TMF notes that despite the gloom, some stores have been closed, new stores have been opened, expensive leases have been renoegotiated, and the company has pulled through the worst recession for 60 years.

Mr Gillis ended his tenure, to be replaced by Julia Reynolds, CEO at Figleaves, and previously category director at Tesco. TMF expresses the opinion: "Blacks' worst days do seem to be behind it ... if you're looking for a retail multi-bagger that will hit paydirt over the next three or four years, you won't find it in Tesco ... you just might in Blacks"

A cautionary christmas tale.

Thursday, December 22, 2011

Diary: 6 months ago

Let's see what I wrote in June, and see if it was any good.

SN. - Smith & Nephew - I liked it - high ROE, high growth, good balance sheet, EPS growth of 13% pa over a decade (!).  Over 6 months, it is down 8.4%, compared to FTSE down 5.4%. Hmm.

Interestingly, I was reading about "Buffett's one dollar premise", which postulates that it was worthwhile a company retaining earnings if for every dollar it retained, it made one dollar in market value.

To see if this happened ....
SN.'s market cap is £5232m, or a share price of 592p, up 46.5% over the decade. That's an increase of 188p in the share price. Over the last 10 years, adjusted EPS totalled 269.91p, and divvies totalled 64.44p, so the totalled retained earnings was 205.47p. So, disappointing. BUT, to be fair, a decade ago the company was trading on a PER of 29.4, whereas it's currently trading on a PER of 12.6.  So it kinda gets there. You just have to not buy stuff on a PER of 29.

I also said I liked DNO - Domino Printing Sciences, trading at a PER of 18. Well, a PER of 18 is going to turn out bad. Over the last 6 months, the share price is down 23.0%. It's now trading on a PER of 13.4. Eat your heart out, Warren Buffett. But probably not.

Out of similar curiousity, I did the one dollar premise. Over the decade,it's up 297.3%. Crunching through the maths, at a current share price of 507.5p, that's a gain of 380p. Total adjusted earnings is 221p, and divvies is 99p, or a retained amount of 122p. So we have a winner.

Finally, I reported what I considered the laziest spammer ever:
From: Mrs helen cole
Subject: I am sick
I am sick.please contact my lawyer E-Mail (
 As far as I know, she's still the laziest spammer in existence. How's the spamming coming along, I wonder.

Still to come: a "what I learnt this year review". Stay tuned.

Wednesday, December 21, 2011

Diary: Lynch

Notes from a Motley Fool article on 21-Dec-2011, listing Peter Lynch's 25 rules of investment.

1. Investing is fun, exciting and, if you don't do any work, dangerous.

2. You can outperform the experts if you invest in companies you understand.

3. You can beat the market by ignoring the herd.

4. Find out what the company behind a share is doing.

5. Often, and for long periods, company performance can remain disconnected from its share price performance. Long term, there is correlation and the temporary disparity is the key to investment success. It pays to own successful companies, with patience.

6. You have to know what you own, and why you own it.

7. Long shots mostly miss the mark.

8. There needn't be more than five companies in a portfolio.

9. If there are no attractive companies, put your money in the bank until you find some.

10. Never invest in a company without understanding its finances, particularly the balance sheet.

11. Avoid hot shares in hot industries. Great companies in cold industries are consistent winners.

12. Wait until a company turns a profit before you invest.

13. Wait for troubled industries to show signs of recovery before investing in them. Even then, pick resilient companies and be aware that some industries never do recover.

14. It only takes a few big winners to make a lifetime of investing worthwhile.

15. The observant amateur may discover great growth companies long before the professionals.

16. Stock market declines are common: they are great opportunities to buy bargain shares.

17. Successful investing requires modest brainpower and a strong stomach.

18. Trade shares according to the companies' fundamentals and not according to wider concerns, as there's always a source of external worry.

19. Ignore economic predictions and follow what's happening in the companies you own.

20. There's always an over-looked company on the stock market, where share prices are undervaluing its prospects. All you have to do is discover it.

21. If you don't study the companies behind your investments, it's gambling.

22. Time is on your side when you own shares in great businesses.

23. If you do not have time to invest actively, buy a few share funds with differing strategies.

24. Overseas focused funds can provide access to faster-growing economies.

25. In the long run, a portfolio of well-chosen shares and/or funds will out perform most assets classes. However, a portfolio of badly chosen share investments underperforms cash under the mattress.

Tuesday, December 20, 2011

Diary: spinoffs

Sketch notes on a webpage discussing spinoffs.

3 periods when an investor can get involved:
  1. pre-spin period - spinoff is announced. The decision to buy stock in the corporate parent may be desirable if it enables the investor to purchase both entities at a lower combined price that the two separate post-spin companies.  But, this can be difficult without definitive knowledge of the spin-off’s balance sheet, asset base and normalized earnings power.    Typically, the market reacts positively to announcements of spin-offs.  Often there will be an initial jolt to the price of the stock, as investors anticipate increased operating efficiencies that are consistent with these transactions. As the initial euphoria subsides, the stock often settles into a narrow trading range until the actual spin-off takes place.  This can be as long as a year or more. This can be an attractive time to get involved with the spin-off if one is patient, and believes both parts are attractive investments. 
  2. initial trading period -  spinoffs often drop initially. those who are adept traders may wish to consider selling (the spinoff) as soon as possible (assuming you hold), then repurchase the shares as the selling subsides.
  3. seasoning periodThe seasoning period starts from the moment the spin-off is announced and can last up to several years.  The better the spin-off is understood and perceived the faster the seasoning period. During this time more information becomes available, management tells its story to Wall Street, and more realistic appraisals of the company’s prospects can be made.  Depending on how much structural selling the spin-off endured, this period can have the greatest mispricing of a given stock as well as the best opportunity to profit from that market inefficiency.  One must be patient and selective when sorting out attractive spin-offs. 

buying most spinoffs in the early weeks of trading due to the intensity of artificual selling pressure was generally the best strategy. "Now" (2000 - when there were lots of spinoffs), much greater discernment required

Monday, December 19, 2011

Diary: Phases of Buffett

In a post on 07-Dec-2011, "Can Turtles Fly?" talked about the three investment styles of Warren Buffet. Sketch notes below.

Phase I - Classic Value - 1950's and '60's

strongest return period. during period 1957, Dow compounded at about 7.4%. Buffett managed 29.5% pa nad 23.8% pa in two separate partnerships. focuses on balance sheet instead of income statement or earnings power. buys assets at below (33-55%) intrinsic value. sells at IV. higher diversification. companies often secondary/weak or small (although this was not necessary in 30's and 40's). also did things like risk arbitrage.

Phase II - Buffet Prime - 1970's to '90's

bought large dominant companies like Washington Post, American Express, and Geico. influenced by phil fisher and munger - growth investing. look at earnings power and qualitative elements. moats. great companies at reasonable prices, and hold them for long periods of time. concentrated bets.

Phase III - Modern Buffett - 1990's to date

needs to deploy large amounts of capital, within circle of competance, at attractive valuations. now looks at capital-intensive businesses (e.g. utilities and railroads), foreign companies, accepts lower return on equity (e.g. from ROEs of 15-20% to ROEs of 10%). more willing to inject emergency capital in which he doesn't have a long-term interest (Tiffany, harley Davidson, Bank of America)


choose to emulate phases 1 & 2 as your goal. don't try phase 3 unless you have little time, don't want to put in the effort, or can't handle too much risk. author reckons most amateur investors are persuing phase 3, which he classifies as a "mistake"


in phase 1, buffett sent people out with cash to collect stock certificates of blue chip stamps, so his success might not have been due to stock picking in the marketplace. it also coincided with a big economic and stock market boom, particularly after 1954. the boom became increasingly concentrated.

in the 1970's, public companies were very cheap due to adverse macro factors. he made his moneywhen stocks were cheap. they have been expensive since about 1994 (except of 2008/9), so it was almost impossible to replicate the earlier returns.

the float on his insurance company had a layer of financial engineering to i. it is not clear if assets were so badly priced for OPMIs

very small stocks are often cheaper, but more prone to big mistakes (competitive strengths, hard to unlock value, corporate governance, etc.)

6(?) investments account for 70% of berkshire's lifetime returns

Diary: NJWO

About a year ago, I selected a portfolio of shares based on the idea of choosing a PER <15, and "well capitalised" according to Ben Graham. It returned +0.5% over the year, compared with FTAS of -4.4%. Far short of "outstanding", although I guess I shouldn't grumble because it did beat the index by nearly 5%. You can see the entire thread over on Motley Fool.

I'm disinclined to repeat the experiment.

Sunday, December 18, 2011

Diary: Driehaus

Some sketch notes on an article about investor Richard Driehaus.

Investors buy stocks with the intention of holding them for 1 to 5 years based upon information that really only applies to a short-term time horizon. While the information they are using to invest may be valuable, it is often the wrong information for their investment timeframe. If people invest in a company based on current information, they have to be prepared to act on any changes in that information in a much shorter time frame than most investors are prepared to do.

Driehaus rebuffs a lot of paradigms:
  • "Buy Low and Sell High" - I believe that more money can be made buying high and selling at even higher prices.  I would much rather be invested in a stock that is increasing in price and take the risk that it may begin to decline than invest in a stock that is already in a decline and try to guess when it will turn around.
  • "Just Buy Stocks of Good Companies and Hold onto Them" -  I would say: buy good stocks of good companies and hold on to them until there are unfavorable changes. Closely monitor daily events because this will provide the first clues to long-term change.
  • "Don't Try to Hit home runs" - I couldn't disagree more. I believe you can make the most money hitting home runs. But, you also need a discipline to avoid striking out. That is my sell discipline. I try to cut my losses and let my winners run.
  • "You Must Have a Value-based Process" -  I'm convinced that there is no universal valuation method. In fact, in the short run, valuation is not the key factor.
  • "The Best Measure of Investment Risk is the Standard Deviation of Return" - volatility only measures risk over the short-term. We are discussing long-term objectives. For most investors, a major long-term risk is portfolio underperformance, due to insufficient exposure to high returning, more volatile assets. In my opinion, investment vehicles that provide the least short-term volatility often embody the greatest long-term risk.

Diary: Taleb

I'm just reading through a PDF written by Taleb. Mind-blowing stuff. I really ought to read from this guy.

He recounts the story of Thales, a philosopher. His mercantilist friends jibed him as to how he was poor, an how philosophy was useless in practise. Tired of this accusation, Thales did something remarkable. During winter, he had looked at the stars, and determined that there would be a prosperous summer. So he made a down payment on the use of every olive press for that season. Sure enough, there was a bumper crop, there was a big demand for olive presses, and he realised large sums of money letting out the presses on his own terms. All hail the genius. Aristotle clearly stated that it was Thales' superior knowledge that led to his fortune.

According to Taleb, though: this is the wrong lesson. The basic premise is this: things are inherently unpredictable. "It is, rather, the skilled expression and exploitation of ignorance, not knowledge".
Thales put himself in a position to take advantage of his lack of knowledge —and the secret property of convexity effects. The key to the message of this book is that he did not need to understand too much the messages from the stars. Simply, he had, an option, “the right but not the obligation”, which hebought cheap: there was no need to be right on average —so long as you pay a low price that allows you to have greater upside than downside. His payoff was so large that it could have afforded him to be wrong very, very often and still make a bundle in the long run.
This stuff is getting my head spinning. Geoff Gannon has written an article on net-nets recently. It got me to thinking that it is entirely possible that net-nets exploit this effect.

My shares in PIC (Pace) sprung to mind wrt Taleb's writings. During the year, it has been affected by a delayed customer order, Japanese Tsunami, and flooding in Thailand. This has of course sent the stock reeling, driving it down to a PER of 4. These event were unpredictable, and renders analyst forecasting meaningless.

So, the real takeaway would appear that it's not that the analysts are stupid, but that they're trying to predict the inherently unpredictable, and hence are doomed to failure.

The good news is that making above-normal returns in the market is not a doomed exercise due to unpredictability. You need to look for the "cheap options with large upside and low downside". Actually, Greenblatt already alludes to this in his preference for value investing: "it gives you  asymmetric returns". Perhaps what value investors do is to distill their investment choices further, and see how they can fit in more with the Taleb model.

Talking of philosophers ... I was reading a blog the other day that was talking about "Philosopher Kings". The theory is that since philosophers are the best thinkers, they would make the best kings. The author said that if you look at the kind of politics that are played in university philosophy departments, you would soon realise that this idea has no merit.

Happy investing, all.

Saturday, December 17, 2011

Diary: Value shares are for speculators

When I was doing my Masters course, one of my lecturers, Mr. Hanson, was explaining the coursework we had to do for a module. It accounted for 20% of the final result. He jokingly remarked that we didn't have to do the coursework if we really didn't want to, and that if you merely wanted a pass grade you only had to score 50% .... starting out from minus 20.

This brings me onto value investing. Take a look at Bruce Berkowitz's fund, Fairholme, down 34% YTD, compared to +2.5% for the DJIA. Morningstar rates his overall return as above average, but with high risk. Over 10 years, his fund is up 56% against the DJIA of 18%. He's been outperforming the benchmark by about 2.8% pa - hardly an outstanding achievement, especially considering his fund is rated as having a high risk profile. It would be difficult to say if the outperformance was the result of luck, or skill. Berkowitz is a smart guy, and his all-in on banks may well work out, but as my introductory paragraph alludes to, he's going to have to start out from minus 20 to find out. I'm confident that private investors could have replicated his entire decade performance using simple low/no-analysis value criteria. A brief perusal of my own records seems to indicate that this is the case.

Alternatively, look at Whitney Tilson's Tilson Focus fund, down 22.8% YTD. It is lagging the DJIA since inception in Jan 2007 by a big margin. Morningstar rates its return as low, and risk as above average. Far far far from ideal.

I see that both Berkowitz and Tilson own fair chunks of BRK (Berkshire Hathaway). Berkshire? You guys are getting paid to own Berkshire? For real? What is this, some kind of "fund of funds"? I bet Tilson is even raking in 2 and 20 on his hedge fund for holding Berkshire. The performance from these guys is far from an early Buffett or Greenblatt.

Now let's continue my theme as I talk about RIMM (Research in Motion), NFLX (Netflix), and IMN (Imation).

Let's start with NFLX. In my opinion, it's a value trap, and Whitney called it wrong. Twice. Well, at a PER of 15.9, it's not an outrageous valuation, for sure. It's big problem is that the content providers can squeeze it - which they seem to be doing - and at the merest hint of solid returns you've got operators with deep pockets (Google, Amazon, the dreaded Apple, maybe Microsoft if they feel like doing a cloner) will try to muscle in. I don't like the way Tilson has flip-flopped on NFLX. In his short position, he said that he was short because it was a great company that was too highly valued. Whoah there, cowboy. I distinctly remember him saying that it had structural weaknesses. He seems to have forgotten that. He is now long on NFLX, pointing out its remarkable attributes. Tilson is a very smart guy, and his theses are wonderfully clever, much smarter than I would produce, but in the end they ended up contradicting themselves. Which one is right, the one with the structural weakness, or the one where it's a great company at a good price? For all the cleverness, they can't both be right. The problem is (and I think Tilson's long position is wrong), it's all rather "binary". You're either right or your wrong, and you can't be sure which. If you look at it that way, Tilson's position is effectively a punt. The problem is, if you're wrong, you're going to find it difficult to generate a Greenblatt-esque return. This is why I think value investing is so difficult, and gives only marginal returns. You are essentially betting on things that can go either way. Also, I think if Tilson wanted to invest, he should wait. The current PER is not especially attractive given the risk involved. Maybe single figures would be a more appropriate place to have another look, assuming that it drops that far - which of course you don't know.

IMN the DVD manufacturer, has been subject to a lot of very good discussion lately. It has a good cash position, but it's in a declining market. It's on a PBV of 0.3, but is making losses.  Cash per share is 6.11, and share price is 5.98. So, it's interesting from a value investor perspective and the net-net types. There's a big big but, though. Management is been hell-bent on throwing the cash on non-profitable acqusitions rather than buying back shares. There was an excellent exchange between an analyst and directors (alas, I can't find the link), who brought all the agency problem out into the open. So IMN is not necessarily an attractive investment, unless there is some kind of activism.

Last, but by no means least, is RIMM. It fell 11.2% today, and is now trading at an eye-popping PER of 2.5. Damodaran wrote an interesting article on RIMM yesterday. In brief: their Blackberry is a cash cow whose market share is being corroded by Androids and iPhones. They can either invest the cash in product development and hope for a breakthrough, or attempt a graceful liquidation process where you're trying to maximise shareholder return by milking value. Damodaram actually works jots down how the latter scenario might play out. He comes up with a value of $8.125b, against an EV  of $6b. So, it's not a compelling disparity. If you accept his valuation, then it seems that even at a PER of 2.5, there's nothing compelling about it. There's also a considerable amount of "ifs". As Damodaran points out, if RIMM continues to plough back money into development, that $2b margin can easily be wiped out.

What's interesting is that I notice a speculator, who looks to be pretty successful, take a long position in RIMM. It's obviously a contrarian play, where he expects the stock to at least double - although it could take several years. It should be interesting to see how this one plays out.

Finally, to the title of my post: "value shares are for speculators", which is this: most value shares, are they really investments, or are they just gambles? I suspect that day traders will make lots and lots of profits out of these companies - for those of them that know how to play the game. Patient thoughtful value investors are in a rather trickier position.

Friday, December 16, 2011

Meet the Footsie


The setup

I was interested to see if I could put together a little portfolio that seemed reasonably safe. It's not a "beat the" portfolio, it's hopefully a "meet the" Footsie.

In this portfolio, I merely want to "not do too bad" against an All-Share index. I have ignored yield, and required that to be included it has a PER < 15 and PER >0. I have also insisted on a "Graham Gearing" ratio of at least 50%. For those not knowing what I'm talking about, in the words of Ben Graham: "I favor this simple rule: A company should own at least twice what it owes. An easy way to check on that is to look at the ratio of stockholders' equity to total assets, if the ratio is at least 50%, the company's financial condition can be considered sound."

The result

A year ago I chose VOD, BLT, MRW, KGF, SGE, 3IN, LRD, CWK, SBT to "meet the Footsie" with hopefully lower risk. They had PER < 15, and were chosen for low gearing according to Ben Graham's method. Here's how the shares did in percentage terms over the year:
VOD 4.1 BLT -26.4 MRW 18.2 KGF -6.3 SGE 1.5 3IN -1.7 LRD -10.5 CWK -13.3 SBT -46.0

That's a mean performance of -8.9%. The mean for the Footsie was -8.4%.

I was hoping for better. Some of this stuff is now pretty cheap, mind. SBT is on a PER of 5.8, for example.

Diary: Improving your decision-making

I'm reading "59 seconds" by Prof Richard Wiseman. Page 245 begins the chapter "Never Regret a Decision Again". It looks at complicated decision-making processes, and how we can improve them.

Chapter starts with a quote by Freud:
When making a decision of minor importance, I have always found it advantageous to consider all the pros and cons. In vital matters however ... the decision should come from the unconscious, from somewhere within.

Dijksterhuis and Olden looked at three decision-making strategies. The study was about getting people to select a work of art for an office, and then seeing a few months later if they regretted their decision. In this way, they wanted to see which strategy was the most effective.

The following separate strategies were investigated:
  1. study poster for 90 seconds, list key likes/dislikes, carefully analyse thoughts, then make a selection
  2. glance at posters, then choose the one they liked best
  3. see the posters quickly, spend 5 minutes solving difficult anagrams, briefly examine the posters a second time, then make a choice
Participants were given their choice of poster. A month later, they  were asked how satisfied they were with their choice, and how many euros they were prepared to sell it for.

The study concluded that those in S3 (strategy 3) wanted significantly more for the poster than the other groups. The researchers concluded that S3 was the superior strategy. The research was repeated on other complicated decisions (which apartment to rent, car to buy, shares to invest in), and S3 was the consistent winner.

The point is this: people who are shown the options but then kept busy working on a difficult mental activity make better decisions than others. The researchers claim that it is about harnessing the power of your unconscious mind. When having to decide between options that differ in one or two ways, your conscious mind is a good arbiter. It can only juggle a small number of facts, though, and is not good when things are complex. In the latter case, the mind tends to focus on the most obvious elements, and miss the bigger picture. Your unconscious mind is much better at this.

Thinking too hard about an issue is in many ways as bad as making an instant choice. It is all a question of knowing what needs to be decided, then distracting your conscious mind and allowing your subconscious mind to work away.

(My own observation: I have seen a lot of very clever investors argue backwards and forwards over the many merits and demerits of a particular company. There seems to be a stage where everyone knows what the factors are, but it's difficult to know which factors are the significant and correct ones. So I can well see that S1 and S2 are likely to be suboptimal).

Gilovich studied regret. He asked people to look back over their lives and describe their biggest regret. He found that 75% regretted not doing something, rather than doing something. It's like the poet Whittier said: "For of all sad words of tongue or pen, the saddest are these: It might have been".

Diary: charlie479

The posts on csinvesting are all excellect - well worth checking out. I'm running a backlog in my reading so I'm going to write some sketch notes on his reactions to the reader discussions on "charlie479". He talks about the level of concentration/diversification, and what you should pay. Here goes ... all  emphasis mine ...

key to long term wealth creation is to invest in compounders. special sits may give you return uplift, but you still face capital reinvestment risk as you attempt to redeploy capital.

great performance results come from investing in compounders at a valuation as low as possible. compounders are rare but not cheap, true compounders even rarer. this means you have to be willing to look at ugly situations (e.g. European stocks) or try to identify them before anyone else.

concentration:  5-10 in compounders  that can redeploy capital at high rates is nirvana, but exceedingly difficult and rare to do, and is volatile.  if buying net-nets, own 5-10 companies in a sector, because you're playing a numbers game.

if buying a stable franchise then buy 20-25 names because you have no edge other than price. be quick to sell if price closes to intrinsic value. i am taking a long track record of stability as my benchmark rather than my edge in understanding of how long the company can maintain its competitiveness. i assume the company will onto it while i am the owner (the odds favor the strong) but i will be wrong occasionally, as franchises (nokia, newspapers, radio) get breached or destroyed.

munger quote: our most important asset is our limitations ... [if] we respect our limitations we don't suffer from them

Diary: TLPR

TLPR - Tullett Prebon - Financial Services

Oh, how fickle the markets are. On 18-Oct-2011, Kelpie Capital wrote a piece on TLPR at a price of 365p. He notes: second largest inter-dealer broker, attractively valued, positive catalysts, headwinds, oligopolistic, Asian potential, cash generative, little in the way of capex, director Terry Smith buyer of shares

Terry Smith is well-known to many UK investors, and there is likely to be some buzz around the company given his reputation.

Recently, things have become spicy. On 08-Dec-2011, the operating chief resigns. Speculation is that he had a run-in with Terry.

What prompted me to write about this share is seeing a Twit from spbaines today that Citigroup downgrades TLPR from buy to neutral. I see that in early trading TLPR is down 1.1% to 266.5p - presumably the consequence of the downgrade.

Looking at Sharelock, I see that based on yesterday's close it is on a YLD of 6.2% PER of 5.9. These are decade high/lows. Median decade PBV is 2.57, current is 1.28. It has £48m net cash. Dividend is covered 2.74X, and what a whopper of a yield it is, too. I'm not aware of anything that would suggest the dividend is under threat.

Net profit margins have averaged 11.8% over the decade - which is where we stand now.

Given that the shares are on valuation levels not seen for at least a decade, I can't help thinking that Citigroup is wrong.

Should be interesting to see how this one plays out.

Thursday, December 15, 2011

Diary: Even Bill Gates didn't understand Microsoft's franchise

Very quotable item from csinvesting:

According to Bill Gates 'first book, --The Road Ahead,' he and Paul Allen tried to sell the company to IBM some years earlier and they were turned down. And so...hindsight my inescapable conclusion is that neither party of the proposed transaction understood what was valuable about Microsoft. In my mind it?s a huge irony at least because in my point of view Microsoft became the most valuable toll road in modern business history. But here again, even the people running the company at an early stage did not understand what it was that made it valuable. And it wasn?t even visible to them. So my point here is simply that the source of a business' strength may not always be obvious.
The speaker offers some additional insights:
my biggest investment mistake was not buying enough ofthe ones that were really good.
We saw Warren spend much of the last two decades acquiring businesses which were designed to benefitfrom GDP plus growth in large scale consumer businesses, whether housing materials, or furniture, orall kinds of things like that, and it appears that he shifted now to buying industrial and, that sort of stuff, he?s had a whole... but we all go through those things, and you know, none of us are very good at predicting in advance where we ought to be
Charlie has commented in print in last year?s meeting that we were within daysof a total collapse of the financial system worldwide. None of us can protect against that, and so when Robert was talking about Buffett?s call in the market bottom of October of 2008, and it kept declining, the analysis is simply, these things are so cheap that I have to buy them here, and if I?m wrong, it?s because we?ve had a total system of collapse, and it won?t make any difference.
In life aswell as in business, which is every day, I?m lucky if I have learned something new, and I?m doubly lucky if it hadn?t cost too much.

Diary: Buffett, Greenblatt

Indecent Haste

Fascinating post on 09-Feb-2010 at Eurosharelab about Buffett's returns. I was vaguely aware of its existence before, and I was keen to get hold of the statistics, but could never seem to find them. Anyway, here they are:

Year             Value of $10,000 invested in             Value of $10,000 invested in   
                     Berkshire Hathaway stock                 the S&P 500 index

1971                       $10,000                                                 $10,000
1974                       $5,708                                                   $7,456
1975                       $5,422                                                   $10,229
1976                       $13,392                                                 $12,643
1991                       $1,361,805                                            $92,940
2008 (17 Nov)          $14,387,737                                          $259,068

Profit and Value Strategy

Sketch notes of article on 21-Jun-2011.

PAV (Profit and Value) Stategry differs from MFI (Magic Formula Investing) in its method of determining value and quality. PAV ises book-to-market for value, and GPM (gross profitability) for quality.

GPM = (revenues - costs of goods sold)/ total assets

PAV turns out to be a slight winner of MFI. Gross profits to assets is explored:
I think it’s interesting that gross proļ¬ts-to-assets is as predictive as book-to-market. I can’t recall any other fundamental performance measure that is predictive at all, let alone as predictive as book-to-market (EBIT / (NPPE +net working capital) is not. Neither are gross margins, ROE, ROA, or five-year earnings gains).
GPM and PBV produce volatile results. Greenblatt:
it is partially the leverage embedded in low book-to-market that contributes to the outperformance over the long term.
(Side note:  this is very interesting! It could mean that a lot of the outperformance by Greenblatt is simply due to taking on more risk. This could be one of those "it works until it doesn't" strategies).

O'Shanaughnessy is cautious on low PBV:
it’s virtually impossible to buy the stocks that account for the performance advantage of small capitalization strategies.
 A market capitalization of $2 million – the cheapest and best-performed decile – is uninvestable. This leads O’Shaughnessy to make the point that “micro-cap stock returns are an illusion”

Blogger concludes:
I’ve now abandoned book-to-market
Excellent post by Greenbackd.

Wednesday, December 14, 2011

Diary: IDOX, TCG


Nice finals from IDOX today. Nothing particularly unexpected. The market has been surprisingly restrained in its reaction. Revenues up 23%, adjusted EPS up 41% to 2.47p. Forecasts were for 2.11p according to Sharelock.

Looking at the debt situation:
  • EBITDA is £11.6m. Net debt is £2.4m. Looks fine
  • Operating profit is £5.8m. Net interest is £154m. Well covered.
Report on outlook:
The Group has started the current financial year with a very strong order pipeline across all businesses. The shift in focus toward long term relationships and recurring revenues in its Public Sector software market may marginally impact top line revenues in this business with a move away from pure licence based sales. The acquisition of McLaren Software and CTSpace has enabled the Group to extend its core technology skills into the private sector on a global scale, providing access to verticals including pharmaceuticals and oil and gas. In 2012, IDOX will streamline its development activities to ensure that each initiative has broad applicability across all divisions. This strategic initiative in development may result in a small increase in capitalised development costs in the year. Whilst the economic climate remains challenging, the Group continues to reinforce its position as the centre of excellence in its chosen domains. The Board is confident that its strategy of diversification of revenue streams both operationally and geographically will enhance the Group's resilience to current macroeconomic challenges and enable it to report good organic growth this year.  Trading in the current year has started in line with the Board's expectations.
 PER is around 12.8. Share price has barely moved on the announcement.

TCG - Thomas Cook Group

Finals released by TCG today has turned out to be another stomach-twister. TCG down 7% at time of writing, and not surprising. A slow motion train wreck. TCG splits its P&L summary in two: "underlying", which is presumably "what we want you to focus on", and "statutory", which is presumably "what it actually is". Looking at underlying, operating profit margins are down from 4.1% last year to 3.1% this year. Ouch. Looking at statutory, there's a loss of before tax of 398m, compared with a profit last year of 42m. Bumper writedowns will account for a big chunk of that.

Net debt is £891m, compared to £804m last year. That's going the wrong way! True, they are making asset disposals which will produce an esitmated net debt reduction of £81m. BUT, look at it this way, even if we lopped off the £81m, debt has still increased.

Here's an interesting bit: "free cash inflow improved by £50m to £18m despite the fall in profits". Hmmm, but let's look at that, shall we? Cash flow from operating activities actually decreased from 299m in 2010 to 288m in 2011. It is only because there was less net capex that we see such an improvement. What's worse, though, is that interest payments increased from 65m to 98m. Getting harder to breathe.

Well, that's about all I can be bothered with on TCG, as it's a pretty uninvestable company, so I don't want to dig too deeply. Maybe it can pull itself out of the mire, I dunno. But it looks like it might be in some kind of death spiral, disposing of assets at unfavourable prices. The outlook is none too frisky:
The first half of the current financial year and in particular the first quarter, is expected to be adversely impacted by the uncertain economic environment across Europe, input cost inflation and the ongoing disruption in MENA. In addition, the acquisition of the Co-op and Intourist will add to seasonal losses in the first half given that these businesses earn all their profit over the summer months.

Grim reading. They continue:
In the second half results should begin to see the benefits of the UK turnaround plan.
Frankly, I think that's just wishful thinking. A miracle could happen, but this is a very high risk share. Strong sell.

Tuesday, December 13, 2011

Diary: Bullish Insiders Point to One-Year Stock Gains

Video : Market insiders (such as executives) and their activities may have greatest sway as an indicator at the one-year horizon, not the three-month or six-month time span, according to Mark Hulbert.

Selling into a decline is a bearish signal. This didn't happen in the latest turmoil, which is a very bullish indicator.

Diary: AFF, CPP, DNO

I'll tell you this for nowt: the market knows how to seriously test your convictions. The last couple of days have been very, um, "exciting" for me.

Yesterday, DNO (Domino Printing Sciences) dropped 12% on anticipation of today's results. A sure sign that the results will be bad, right? Wrong! In the final results RNS, it announced underlying EPS up 9%, 33rd year of sales growth with record profit. Dividends increased by 20%, currently standing at a yield of 3.99%. Come to daddy! It's currently up 12% in trading today - although there's obviously volatility there. Poster on ADVFN writes:
I agree, impressive numbers, though the rate of growth in H2 did slow quite a bit. The main worry must be the segmental dependence on Europe, which seems determined to embrace austerity, and I think that is what is spooking the markets.

 AFF (Afferro Mining) is a minnow iron ore miner that's really been putting my portfolio through the grinder. I had bought after seeing reports about the likely NPV calculations on its resources, suggesting it was severely undervalued. People were getting puzzled about the directors quietness as to its funding arrangement, with everyone wondering if there'd be dilution of holdings, or liquidity problems. Anyway, all that got blown out of the water yesterday when it announced:
Afferro divests interest in the Putu Iron Ore Project for minimum US$115 million cash ... allows the Company to focus on its 100% owned flagship Nkout project and minimises shareholder dilution. With the focus and cash, Afferro will be extremely well placed to enter a new and exciting phase of growth.
115m USD is  64m GBP. The company has a market cap of £57m, plus a lot of resources to exploit. This company looks very undervalued. It rose about 38% yesterday (!), and is down 4% after such a massive runup. I have renewed confidence in this company. The company has a tendency to spike up on good news, but then sag down. I'm thinking of waiting for the dust to settle and top up. Riskier play, and it is a commodity company, but I think that topping up is the right way to go. Unless Europe and China slide into the sea, of course, then not so good.

CPP dived a lot yesterday - about 12% if memory serves. The trading statement made for unpleasant reading:
 The FSA investigation ... continuing to have a material impact... in the UK. A new, non-insured service product ... will not be adopted by business partner.  [In] 2012, there are good opportunities to achieve improved revenue growth compared to 2011. Underlying Group operating profit in 2012 is likely to be significantly lower than 2011
An ADVFN poster writes:
The bottom line is that they have lost millions already due to the lenght [sic] of the investigation and will then doubtless have to pay a fine on top of the lost business.
Stay tuned on this one. It still has high ROE and low price. 

Monday, December 12, 2011


Kelpie capital writes:
One of the most attractive sector of the market is still the large cap, high-quality defensive, global franchises. After a decade of de-rating they have had only a few months of outperformance relative to the cyclicals, the “rubbish” and the small caps.
AVOID THE FINANCIALS. Do not touch the banks. If Italy takes a haircut they all blow up.

Sunday, December 11, 2011

Diary: Grahntam on quality

Grantham Dec 2012 recommends:
Avoid lower quality U.S. stocks but otherwise have a near normal weight in global equities. Tilt, where possible, to safety. I like (personally) resources in the ground on a 10-year horizon, but I am nibbling in very slowly ... I believe chances for further price declines in resources are still better than 50/50 as China and the world slow down for a while


I'm scanning through a thread on TMF called "Who on earth would put 75% in an insurer?", where Stephen Bland (aka Pyad) is running a value portfolio consisting of a 72% position in Aviva, which he referred to as underweight. I don't want to revisit the whole concentration/diversification thing again, though.

eventdriven wrote on 12-Mar-2011:
technicals aren't limited to the bond markets. They occur in equities too: forced selling (buying) when a company leaves (joins) an index; post-bankruptcy "orphan" securities; companies awaiting material court decisions; spin-offs; rights issues; merger securities. These all create supply and demand technicals that will move price despite it not being linked to the underlying investment case. You're likely to get far more out of understanding these equities technicals than attempting to learn an entirely new asset class from scratch.

Spinoffs and rights issues are my core investment strategies; best bet is to read the book "You can be a stock market genius" by Joel Greenblatt (referenced previously).

But if you go here:
Scroll down to the "Why Spin-Offs Can Be Misvalued?" section and read it over and over again.

(I've never before been to that website btw, I just found it with a google search of "spinoff investing")

Saturday, December 10, 2011

Diary: Shipping

I've just been reading a PDF on the "Globalisation and the Long Shipping Cycle", published on 11-Nov-2009.

Ships have a useful economic life of about 25-30 years.

It concludes that the shipping industry has been driven by globalization since about 1944. It is a process that is likely to be far from over given that so far roughly one billion people have acheived high living standards, but there are another 3 billion waiting to join them.

There's a "but", though. Deep cycles have existed within this long-term trend, making shipping both difficult and risky. The great upswing during the 50's and 60's reached a peak in 1973 and moved into a downswing which lasted until the 1990s. Since 1997 the industry has been on an upswing, and arguably reached a peak in 2008, though the nature of these developments is such that there could easily be another way of growth ahead of us.

Whatever may happen to demand, there is likely to be shipping overcapacity due to the very high numbers of orders placed for new ship in 2007. So expect tough times for shipping.


Shipping has been attracting the attention of some value investors lately.

Richard Beddard discusses it on his blog, where he talks about CKNS (CLarksons). He makes the insightful comment:
The question is how sensitive is Clarksons to the shipping cycle? Certainly the share price performed very well in the 2000's which coincides with the shipping bubble he describes and was flat before that back to '94, which is as far as I can see

As for profits I just don't have the data going back far enough to see how the company performs during a down-cycle.

As Calum says, it's a broker so it's more dependent on international trade than the state of the market for ships, which is more critical for shipowners and shipbuilders. Even in the terrible 1980's shipping trade increased 1% pa so maybe the adjustment brokers are making is from high growth to stagnant growth. Clarksons could still profit in the doldrums, and make investors a good return.

All of that's predicated on continued globalisation though, albeit at reduced level until the global economic problems are resolved. If we went through a period of protectionism etc. then the whole thesis unravels and we have to look to the colonial period before the second world war for parallels.

Valuhunteruk has also written about Clarksons, the shipping services group. He provides an excellent overview of the company. It is a broker - i.e. buys and sells - ships and offshore rigs. It's main operating assets are its people. The only capex it needs is to buy property for operations. He suggests that earnings yield is the best way to value the business, rather than look at the balance sheet. The valuation suggests a decent, but not absurd, undervaluation (as at 31-May-2011).

Thursday, December 8, 2011

Diary: Just One Thing

I'm taking a squint at John Mauldin's book "Just One Thing" on amazon. I'm looking through the freebie stuff, I don't know whether I'll buy it. There's so many books I'm interested in that I don't know which one to get next. On page 162, it notes:
I published a short study in which I looked back over the last eighty years and asked the question, "How often does the number-one ranked company in market capitalization outperform the average stock of the next one year, three years, five years, and ten years?" The simple answer seems to be that on average, over time, about 80 percent of the time, the largest-capitalization company underperforms over the next ten years ... by 40 to 50 percentage ponts over the next ten years.
This comment chimes well with what I read from Peter Lynch: that by the time a company makes it into the top tier, it's half-way puffed out. Should I get the book - what do you reckon?

The top market cap stock in the S&P500 is XOM (Exxon Mobil), for the Footise, it's HSBA (HSBC Holidings).

Wednesday, December 7, 2011

Diary: Value investing - it's no panacea

Three buckets

There's a couple of interesting posts I want to touch upon. Valuhunteruk wrote:
To state it simply, it isn’t about just buying stocks with low P/Es or P/Bs. We have to keep an eye on risk and the fundamental quality of the business we are buying into.
My response was generally along the lines that it's a contradiction in terms.  Aswath Damodaran sums it up perfectly: the PE ratio is a combination of the risk-free rate, the expected growth rate, and the risk. In other words, TCG (Thomas Cook) isn't on a PER of just over 1 because the market somehow forgot the ticker symbol, it's on a PER of 1 because the economy is going into the tank, it's making losses, business is expected to decline, and it has being trying to prevent breaches in its banking covenants. So the question isn't so much "is it a business with a good fundamental quality", but "is it underpriced". The first question is easy to answer: no, it's a rubbish business with deluded rubbish managers. The second question is harder to answer. For all I know, the intrinsic value of TCG is zilch nada, making the share overpriced rather than underpriced.

Expecting Value also did a review of his value portfolio in December, and found underperformance. He sums up:
The fact I think the market is mispricing these companies is evident by me purchasing them; I wouldn't do it otherwise. Since it mispriced them then, there's no reason to think that me buying them will magically reconcile the price with the true value; that could take years.
 Value investor Richard Beddard also expressed his frustration recently. His T30 (Thrifty 30) invests in micro-caps. In the period from 09-Sep-2009 to 01-Dec-2011, his performance is a whisker ahead of the All-share. I hope Richard doesn't take it the wrong way when I say that, so far, his theory that micro-caps are under-researched and hence should produce a higher return hasn't been a convincing one so far. I'm also worried that he hasn't properly adjusted for the high spreads that are inherent in micros.

More bad news for value investors comes in the form of Stephen Bland (aka Pyad) over at The Motley Fool. I can't find the link, but at the latest update, he was underperforming the indices. I used to think that Stephen was an excellent investor, but he has decreased in my estimation considerably.

"OK Mr. Smartypants, how are you doing so far this year?", I hear you ask. My response is "Stay tuned". I'll write about it in another post.

I'm now tending more and more to think of the stock market as consisting of 3 buckets: a "value bucket", a "defensive bucket", and a "growth bucket" (my experiences with insurers and banks is particularly solidifying my view - but like I say, it's for another post). Out of mathematical necessity, one bucket has to underperform the averages, whilst another has to outperfrom. So far this year, we've certainly seem that the defensives have outperformed value, with growth being amongst the outperformers, too.

My view now is that in order to outperform, you either need to own the right bucket, or you need to pick the right companies within your chosen bucket. There are advantages and disadvantages with both approaches. "The right bucket" requires two things: that the bucket is wildly mispriced, and you can know it is mispriced. If you can settle that question, then you merely have to choose the contents of the bucket at more-or-less at random. It doesn't matter what you choose (within reason, of course), you just need to choose a selection of them. This is the easy approach. It requires little imagination, and the worst that will happen is that you'll underperform the market somewhat. If in doubt, just choose the value bucket, or possibly the defensive bucket. The other approach is to choose the right companies in whatever bucket is your preferred one. The problem here is that you'll need to be a genius-level Mike Burry insight with Aspergers to do that (don't leave out the Aspergers, that's your structural advantage!). Very, very, difficult, as the people I've mentioned above have discovered.

We've still got a question to answer: which bucket should I choose now? Well, it's tricky! Value has taken a pounding lately, so it's plausible to answer that they'll be a dash for trash, and you should choose the value bucket. I see that Barclays and Lloyds are up nearly 2% today (did you guys buy those banks?)  despite all the doom and gloom surrounding the financial situation in the Eurozone. Some of the really beaten-up stuff is making a strong recovery (Pace is up 30% over the last week or so, and it's up over 5% today).

But I don't think value is the right way to bet at the moment, despite this. I'm thinking of two factors here. For starters, take a look at AAPL (Apple). It is trading on a PER of 14. It has cash of £26bn against a market cap of £363bn, a forward PE of 10, massive returns on equity of 41%, and net income margins of 23%. That such a large, strong, profitable growing company is trading at these kinds of multiples suggests to me that growth is very cheap, and that we should buy growth. There actually seems to be some gross mispricings in the US markets, more obvious even than in the UK markets. MSFT (Microsoft) is on a PER of 9, yet it too has massive returns on equity, and even better margins than AAPL. I'm not saying that MSFT is a better growth company; but I seriously doubt investors will do badly buying into these kinds of companies. BRK (Berkshire Hathaway) is on a PBV of about 1, the lowest its been in way over a decade.

The second factor (all of the above was just the first factor, believe it or not), is simply an elaboration of the point above. In a previous post, I concluded that the relative PBVs of value and growth shares put the odds in favour of growth - with the caveat that I might have misinterpreted Grantham's method of measuring the values. In another post, I also said that the combination of VIX and the CBOE Put/Call ratio indicated that growth would be the more successful strategy - again subject to the caveat that I had misinterpreted information.

I'm also mindful of the fact that if economic conditions deteriorate, as is looking increasingly likely, then value is going to be the worst place to be. It's not all a one-way bet, of course, because the problems are well-understood, and if the Euro manages to magic away the problem "until next time", it's likely that all the junk will rise to the top.

Good luck one and all. I hope no-one has taken offense. If it's any consolation, it's been no picnic for me either. Happy investing, and let's hope Santa brings us a nice rally.

Tuesday, December 6, 2011


Been reading a scribd document of Michael Burry write-ups, courtesy of csinvesting (top quality blog). Not only am I not in the same ballpark as Burry - I'm not even on the same planet. I think it will be very difficult for most people to emulate him. Burry seems quite a short-term investor, spotting anomolies that he thinks the market will correct.The companies he selects don't seem to be great businesses - maybe Burry is "an early Buffett on steroids", although I am anaware as to how penetrating Buffett's early analysis is. His first recommendation, for instance is GTSI, which is down 32% over the last decade. It peaked at around $15 at the end of 2002. Burry wrote about it in March 2001 at $5. So clearly, a masterly shorter-term play, but not a long-term buy and hold. Contrariwise, the document doesn't give Burry's assessment of Apple, but if memory serves, he made about 30% on it - and we now all know just how well Apple went on to perform.

An interesting comment by him:
spin-offs  often  reach  a  price  nadir about one-year after the spin-off date

All hail to the Burry.

Monday, December 5, 2011

Job vacancies in Oil & Gas in Aberdeen

My employer, Smith Rea Energy Limited, is looking to recruit in the Aberdeen/Bridge of Don area in oil and gas. All levels of experience considered. Email me at in the first instance if you're interested.



Are markets/analysts too myopic, or just see the wrong things? Here's a couple of examples that readily spring to mind.

PIC is up 15% today - up 30% since the beginning of the month (!) - from very very low levels I might add - on news that its hard disk supplier, Western Digital, is restarting its operations after flooding of its factories halted production earlier this year. The point is, when you think about it, did the market really believe that production capacity for hard drives had really been wiped out permanently? Even if WD did go bankrupt as a result (it hasn't happened in the case, but catastrophes at factories can be a source of bankruptcies), it seems likely that some other manufacturer would be able to increase production, or bring new facilities online eventually.

Sunday, December 4, 2011

Diary: mai

MAI - Maintel - Support Services - 252.6p/£27m

I'm pretty sure I got this suggestion from S Baines at Cautious Bull, who unfortunately doesn't blog anymore. So here's a bit of a rundown.

Some stats: PER 9.5. ROE 78.5%, gearing £-120m, net cash £3.3m, z-score 5.58, yield 4.1%. EPS projections: 2011F 26.6p + 31%, 2012F 34.8p + 31%

Spread is 6.1%. AIM index.

What it does:
Maintel Holdings Plc is engaged in the provision of contracted maintenance services, the sale and installation of telecommunications systems and the provision of fixed line, mobile and data telecommunications services, predominantly to the enterprise business sector. The Company operates in two segments: telephone maintenance and equipment sales, and telephone network services. The maintenance and equipment division provides maintenance, service and support of office-based voice and data equipment across the United Kingdom on a contracted basis. It also supplies and installs voice and data equipment to maintenance customers. The network services division sells a portfolio of services, which includes telephone line rental, inbound and outbound telephone calls, data connectivity, Internet access and Internet protocol telephony solutions. Its subsidiaries include Maintel Europe Limited and Maintel Voice and Data Limited.
 Director holdings: Booth £7.0m, McCaffery £5.5m, others neglible.

Latest interim results for 6 m/e 30-Jun-2011 issued 12-Sep-2011:
 Underlying revenues up 10%. Dividends up 18%. While market conditions remain challenging Maintel continues to grow, with the equipment pipeline healthy and the maintenance and network services sales pipelines remaining strong in the medium term. With the market consolidating at a renewed pace, we continue to actively seek acquisition opportunities to enhance our service offering.

Fundoo Professor blog

Worth a read despite the goofy title. Seriously, forget what the blog is named, just soak up the quality of his writing. He doesn't post often.

An interesting point was raised in his post "Vantage Point":
”How is much its worth,” is tougher than the question, “Is this likely to be worth a lot more than my price?”
 This harks back to my observation that whenever I've seen Ackman being pressed for a value for a business, he never gives an answer X. This point was covered in a post by Geoff Gannon:
You don't need to use a lot of math to prove exactly what something is worth. You just need to present a convincing case for buying it.

 I jotted some tweets a week or so back of what some good private investors think. It'll be interesting to review this 6 months down the line.

27-Nov-2011 MrContrarian Mr Contrarian
French Connection (FCCN) article on Expecting Value "Even strong bal sheet doesn't give much of a margin of safety" I hold

 28-Nov-2011 MrContrarian Mr Contrarian
Thomas Cook Gp (£TCG) +8.4 on conf of re-fin to Apr 2013, relaxed covenants. Will seek 'more appropriate capital structure'. I have shorted.

28-Nov-2011 paulypilot Paul Scott
Back into QED at 34p. Seems a good price, deep discount to NAV. Quality lettings at London Outlet centre.