It’s Not Easy


I’ll start this post with a quote from Howard Marks, who himself is quoting Charlie Munger. I never said I was original:

In 2011, as I was putting the finishing touches on my book The Most Important Thing, I was fortunate to have one of my occasional lunches with Charlie Munger. As it ended and I got up to go, he said something about investing that I keep going back to: “It’s not supposed to be easy. Anyone who finds it easy is stupid.” As usual, Charlie packed a great deal of wisdom into just a few words…

… what Charlie meant is this: Everyone wants to make money, and especially to find the sure thing or “silver bullet” that will allow them to do it without commensurate risk.

The talk of the town is the Globo situation. I have nothing to add on that front, so I won’t presume to try.

One thing I do like to watch, though, is investor behaviour in the wake of events. Many chalk losses up to bad luck, or attribute the blame to some external factor beyond their or the company’s control. Sometimes this is reasonable; often it is not. Others look to their process – how they are selecting securities – and then try to figure out what can be fixed to make sure they do not fall victim to the same mistake again.

This is a noble endeavour – a bit like the race driver who figures out, through repetition, that he needs to swing a little bit wider on the second corner to avoid clipping the dirt. There’s an appealing sense of progression in self improvement; a logic that, if you can just fix what you did wrong with every misstep, you’ll end up being a consistently profitable investor.

Quarto: Déjà vu all over again

Disclosure: I have an interest in Quarto shares


Quarto reported results today. For those wanting some background, I’ll requote what I first said when I looked at the company:

Quarto are in publishing, but with a few key differences from firms that may immediately spring to mind. The most important one is probably the type of books they are producing. Instead of focusing on fiction, a rather hit & miss affair that hopes to churn out a few bestsellers every year to compensate for some of the flops, Quarto have a varied portfolio of books with very narrow remits and niche audiences. Perhaps I could best illustrate this with their best selling book in 2010: ‘Complete Guide to Wiring’. By focusing on books for such small groups of people and keeping such a wide portfolio, Quarto remain fairly insulated from the more brutal swings in consumer spending.

Over two thirds of the group’s sales come from backlist – titles published in prior years. No title accounts for more than 1% of group revenues in any given year; last year, the biggest was around 0.6%, the second around 0.4%, and the tail develops after that. I repeat those facts as a sort of mantra when people ask about Quarto, because when I tell them it’s a book publishing company I always get the same blank stare. Investors remember Quercus, which blew up after over-stretching itself after the success of Stieg Larsson. Investors remember Bloomsbury, which saw its revenues double and then drop by 33% in consecutive years thanks to Harry Potter. 

I think it’s undeniable that Quarto are fundamentally different. 


The market is cheap (but specify your inputs)

Lots of people think the market is dangerously expensive. They take a look at the S&P 500 graph, which looks like this:


And they’ll point out that we’re now about 50% higher than we were in 2007, just before the last crash. Has there been a stupendous improvement in the real economy since then? No, they’ll argue, and so the index level must have been frothed up. You’ll probably hear something about printing money at this point.

But the graph in itself doesn’t tell us a great deal, since it’s raw data without any comparator. Much better to look at how the companies making up the index are doing, and how they are valued in aggregate relative to a proper measure, like earnings. At this point the Shiller PE graph often gets trotted out. It is basically a ‘normalised’ price-to-earnings graph, which shows the current multiple you’re paying for the average last-10-years earnings for the companies making up the index.

Hogg Robinson: Waiting for the Smoke to Clear

Disclosure: I have an interest in Hogg Robinson shares


I classify investments into ‘themes’ in my head. The theme explains why or how the market is mispricing a security. It might be that the asset is in a sector or geography which is particularly unattractive for whatever reason, but the company involved is more insulated than a casual glance would betray. It might be that the company has a number of very valuable assets which are obscured by fluff, by investment in the future (opex as capex), or by loss making divisions which drag down the group picture while allowing management a clear remedy, should they choose to take it. Either way, it helps me if I can see why smarter people than me might be unable to see the attractiveness of an asset.

Hogg Robinson, thematically, fits in with Quarto in my mind. Every investment is different, but the premise is similar:

The business is being attributed a very high cost of equity – similarly a very low P/E – because the market thinks that the business has a combination of declining cashflows from a dying business and substantial cash obligations. One of these factors alone is a cause for concern. Both, together, raise fundamental questions about the value of the equity.

In Quarto’s case, their supposed millstone is the debt pile. In Hogg Robinson’s case there is also a touch of debt, but a much more sizeable pension deficit. In both cases, the black mark – QRT’s debt and HRG’s pension deficit – in combination with one’s inner reaction to the business they’re in – is prominent enough to turn the vast majority of investors off before getting to know the company.

The market view

To set up the mental model before we knock it down, then, here is what the market sees when it looks at Hogg Robinson:


Judges Scientific: A Textbook on Value Creation

Disclosure: I have an interest in Judges Scientific shares



Judges Scientific – in your author’s humble opinion – is one of the best companies on AIM. How do we define ‘best’?

Here’s the share price performance over the last 10 years, overlayed with the normalised diluted earnings-per-share. The first measure shows how the market perceives the company. The second shows their delivery in growing shareholder wealth in a more tangible way.


As the caption at the bottom shows you, Judges has a phenomenal track record. I spend most of my waking hours looking for companies that compound wealth in this way, and I don’t find many. Assuming that the history of the company has whetted your appetite, we’ll go a step deeper.

Political Odds

I have more of an interest in all the kerfuffle leading up to the election than the actual election itself… which is either a sad reflection on political apathy, or of my love of markets and probabilities. I’m not sure which.

That interest was somewhat dampened, it must be said, by having had the misfortune of watching the BBC Panorama program a couple of weeks ago where Nate Silver (the renowned US statistician) trucked around dreary English towns in a pantomime-esque attempt to drag out a forecast of the UK election.

That aside, the game of trying to figure out what will happen in the next election is a fascinating one from the point of view of a market watcher. London related shares moved when Labour announced their proposals around res non-doms (a nice tax structure for wealthy ‘foreigners’, basically), which investors saw as a threat to the status quo at the top end of the London market. The journalists also have a field day, since it gives them a nice event they can attribute market movements to – ‘the FTSE dropped 20 points as fears of a Labour-led Government grew..’ and the like.

So how to think about what is likely to happen?

As always, the best thing to do is probably to follow the money. For those who aren’t familiar with Betfair, it’s a betting site whereby the bets you place aren’t taken up by the house (which is adversarial - when you win, they lose), but instead by other people. It’s a functioning market, where the opinions of participants are aggregated to create at price at which you can back the bet – take the bet on – and a price at which you can lay it – bet that the outcome will not happen.