Category: Concepts

  • 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. (more…)

  • 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. (more…)

  • Dividends are overrated

    A couple of weeks ago an interesting article was posted on Stockopedia:

    'Dividends are more reliable than accounts' 

    This is a pretty bold statement and, having ruminated on it a bit, one I can't help but disagree with. I started typing a comment by way of response on there, but having got a bit long, I figured I'd move it over here with a suitably gauntlet-laying title. My teachers always did say I was prone to exaggeration! Click through and read the article for yourself if you want to get it from the horse's hooves, but I'll attempt to summarise the author's argument here as fairly as I can:

    Active management is bad because it's difficult to spot profit warnings coming, and difficult to discern future profitability. It is better to base investment decisions on a 'fundamental measure, like dividends'.

    On unreliability

    The charge that accounts are unreliable is one that comes up quite often. I note one thing to start with; if you like investing in AIM-listed Chinese companies, or exciting little oil & gas plays, I sympathise with you - you might well find published accounts a decidedly questionable source of information.  (more…)

  • You can’t trust EBIT (AMZN/ASC)

    The other day I was discussing with one of my colleagues the differences between tech valuations in the UK and in the US. There's a good reason the real tech giants in the world are US companies, as far as I'm concerned, and you see a reflection of general investor sentiment in that respect when you look at the pricing of the stocks and the attitudes of management teams.

    The simple fact is that US public equity investors seem to have more of a stomach for ongoing losses in exchange for top-line growth. Is this a good thing? Clearly, as a value investor, you wouldn't expect me to say anything other than the usual spiel about racy tech stocks and their absurd valuations. One thing I do buy, though, is that the distinction between operating expenses (opex) and capital expenditures (capex) isn't quite as solid as line as many investors seem to think. (more…)

  • Portfolio

    Some shuffling

    The markets have been pretty volatile recently, and the year-to-date has been one of my longest periods of underperformance vs. the market for a couple of years. I use the term 'underperformance' loosely - it's more or less in line with the All-Share percentage wise, which isn't particularly worrying nor worthy of note. It is interesting, though, if you're a story person. We all are to some degree; whenever the market twists and turns people start talking about the 'fear' biting into the bull run, or conjure up images of that great unwieldy behemoth - market sentiment - swinging round at last. In that vein, one thing I can say I am very interested in is how my portfolio performs in different scenarios. An element of counter-cyclicality and relatively smaller losses when the market is tanking appeals to me as an investor, because I'm trained to believe that protecting downside risk is paramount, and that probabilities in the minds of market participants tend to be skewed to unduly penalise 'boring' shares.

    Does my portfolio fit that nice, broad aim? Unsurprisingly, I don't think it's really possible to say. I'd like to think I have 3 years of data - I have been running the portfolio for nearly 3 years, now, but that's not really true. I would have 3 years of data if my strategy had stayed the same, and if I had not evolved as an investor; but there are companies I like the look of now that I never would have considered 3 years ago, and vice versa. Sure, there are broad similarities - so one can draw broad conclusions - but markets are noisy.

    Really, I'm just saying what I always say, here - people aren't conditioned to understand the nature of results in an extremely high volatility environment like the market. The same was true when I played poker, another extremely high variance game. Solid, winning players could be down money over tens of thousands of hands - even though they made the correct decision in every scenario. Terrible players sometimes enjoyed the opposite effect. Naturally, the good player is left questioning himself, and the bad player thinks he's the next Phil Ivey. (more…)

  • On Intangibles

    Why I don't buy goodwill

    On Friday I'll be posting on the printing group, Grafenia - who've recently changed their name from ''. You may have heard of them, as they've been around a few of the small cap blogs, but they caught my eye last week. Today, though, I'm easing back into things after a brief hiatus with a talk about a slightly more abstract topic - goodwill, and the accounting interpretation of it. I realise when I write some of my blog posts that I tend to say some things ad infinitum  - like my refrain on capitalising operating leases or why I think returns are important. Often, I don't spend much time explaining these things. In this post, then, I'll put a brief explanation behind my thoughts on goodwill - which I nearly always exclude from any calculation involving any of the company's figures. It's pratically an non-entity for me.

    What is goodwill?

    Goodwill is essentially an accounting creation to make sure the books balance. When a company acquires another, they'll often pay more than the actual assets inside that business are worth; to be horribly trite, think of Facebook's acquisition of WhatsApp, the messaging service. They acquired it for about £10bn; clearly, the assets inside WhatsApp - produced by a team of something like 30 people - are not worth (on book) £10bn. Heck, if we were to draw a line from £0 to £10bn and place a dot where WhatsApp's actual assets sit, I reckon it'd be fairly indistinguishable from zero.

    It has its purpose, though. Old accounting rules saw goodwill getting immediately written off in profit or against reserves, which seems in some way to equally fail to capture the essence of what's happened. Companies acquire for a variety of reasons, and acquiring because it makes good strategic sense - buying one of your key suppliers and thus being able to strip out a number of costs, for instance - can be a great boon. There is obviously something value-creating going on in this case, and slapping the accounts with a big charge doesn't feel right or accurate.  (more…)