Category: Concepts

  • The high street

    The burden of pain

    I try not to spend too much time talking about economics on the blog; I'm often reminded of the description of philosophy being a pursuit for people with 'too much time and not enough to do with it'. The field of making predictions in economics strikes me as much of the same sometimes; in fact, I often wonder if philosophy derives more worth from its contemplative and numinous aspects. On occasion, though, I strike upon a thought which tempts me to indulge - to cast aside my better judgement and put finger to keyboard on something which does pique my curiosity about the future. Since this is an investing blog, it is - naturally - related to investment. I'll throw my musings out there, some potential equity 'plays' and my esteemed readers can judge the validity of the logic for themselves.

    Here's my basic principle, then - the Internet is siphoning trade from the high street. Individuals have bought more and more of their everyday goods from the internet over the last decade, as the efficiency - and therefore cheaper prices - that online operators (like the behemoth itself, Amazon) can bring lures them away from their brick-and-mortar tendencies. I can't remember what the first good to be bought primarily online was; it seems likely to me that it would have been something relatively homogeneous, easy to send/deliver and which requires no physical inspection on part of the buyer. CDs and DVDs seem to fit that bill quite nicely. Now people are buying groceries, celebration cards, phones, white goods... more or less everything is available on Amazon. The limit, simply, is what you feel comfortable purchasing online. Some people, understandably, want to see and touch a product before buying. Some of these people then go and shop online (a lamentable habit, as far as I'm concerned).

    Either way, if we accept that the young have a higher propensity to shop online than the old - a fairly undemanding assumption - and that the overall propensity of everyone to shop online is increasing over time, as people become more comfortable with the notion, it paints a pretty bleak picture for the high street. The death of the high street, you hear people lament mournfully, usually while angrily waving their proverbial fist at one of the corporate giants of this world. That's that, then. Where are the investment opportunities here? (more…)

  • Supermarkets (TSCO, SBRY, MRW)

    Some figures

    I like the supermarkets. I like the supermarkets because they're the best example I can think of of capitalism in action. They're relentlessly profit driven machines in constant competition; they expand everywhere there are consumers and they compete for said consumers on, more than any other sector I can think of, price. They represent, to me, the ultimate embodiment of the 'vote with your money' mentality. Anyway, before I get all misty eyed and reverential (as an economist (of sorts) you don't tend to find many industries which act anything like the textbooks say they should), I just wanted to share a couple of stats I put together. The supermarkets are all trading at quite depressed prices historically at the moment, and my gut feeling was that they were undervalued. Here are a few figures, then:

    Headline metrics


  • Investing metrics

    Why returns matter

    Since it's something I get asked a lot - understandably, since I never used to use return metrics at all in my investing immaturity - I thought I'd do a quick post on why returns metrics matter so much, how I calculate returns, and what they mean. I use return on capital on more or less every company I look at, with a few exceptions, as I think it's a figure which tells us a lot about how the company is positioned and what we can expect.

    Returns on capital

    Return on capital matters because it's the metric which makes the most economic sense. Bear with me as I whizz through the economic intuition. Every (good!) investment - we'll take a widget factory - earns a return. To calculate a return on capital, we need to know how much capital is employed in the business first, and secondly how much operating profit the business makes. If the business has a factory worth £5m and £5m worth of equipment and working capital (almost every company has to keep some stock around, for instance), it has £10m of operating capital. If it makes £1m a year in operating profit, return on capital is 10%. Simple enough.

    Why is this figure interesting? Well, more so than any other metric - a lot of investors like to use margins, for instance - return on capital tells us about the competitive position the business we're looking at is in. A high return on capital denotes, if it's sustained over a long period of time (and therefore not noise - data always has lots of noise!), a competitive advantage.

    It's not strictly the return on capital per se which denotes a competitive advantage, though; it's the difference between the return on capital and the cost of capital. The cost of capital is something of a more intangible metric, but it's easiest to think of it as compensation for an investor's risk. Utility companies tend to have lower cost of capitals because their returns aren't particularly volatile - come rain or shine, they have pricing power and a customer base which needs electricity and water. Debt holders (say, banks) and equity holders (us - shareholders) demand less return in exchange for less volatility. This partly explains why small-caps are usually cheaper (cheaper = higher returns, ceteris paribus) - they're more volatile.  (more…)

  • Pension Schemes & Investing

    Blast from the past

    I write this as a quick few thoughts on a really good read that was suggested to me by Jon on Twitter. I'll write up a longer post on portfolio matters tomorrow, but this deserves some airing!

    Buffet on pensions

    Find the full piece here - it's quite a long read, but worthwhile.

    I don't count myself among the fanatical Buffett fans (I don't really follow any investors religiously, to be honest), but I do very much appreciate both his exceedingly well-tempered viewpoint on companies and the success he's had pursuing it, and the broadly quality/value based approach that I find myself inching further and further closer to, though from a admittedly distant base. At the moment I'm enjoying reading his letters to shareholders, handily compiled at £2 via eBook, and which I consider an absolute steal for the thoughts its provoked - even though I'm only a little way through.

    If you haven't the time to read the piece, I'll pick out a few choice quotes that made me chuckle, or think, or both. Buffett is writing specifically on pension plans and how they should be managed to best meet their (scarily advancing, as we see now and have seen) liabilities, but the points are relevant to investing generally. After all, investing for a pension pot is simply a long-term investment strategy. Not that you'd believe it with some companies! (more…)

  • Hindsight Bias

    A note on fallibility

    A short piece I've been meaning to write for a while now is less on the specifics of investing, but is still very relevant to the practice.

    Hindsight Bias

    Hindsight bias is the way in which, when things have already happened, they appear to be obvious - or, at least, more obvious than before. Most of us are guilty of it; I often find myself saying things were obvious when looking back, while at the same time being all too aware that when needing to make a firm decision - perhaps on a potential new buy - I'm rather edgy. To say this is very relevant to investing is an understatement; if someone asked me to outline how I think about the markets, I'd probably start by scrapping most of the assumptions underlying classical economics and EMH - that of rational economic man. Investing, to me, is like other games; a constant struggle with, firstly, your mental capacity to assimilate and correctly analyse information, and the more nuanced side of whether you correctly apply your knowledge. I don't think splitting them up is too granular. The famous economist, Keynes, spent much of his life rewriting the economic rulebook and talking about the unpredictability and inherent humanness of markets - only to almost blow up in the 1929 stock market crash by ignoring his own wisdom and trying to, essentially, speculate.

    In short - I think careful self-analysis and the ability to be honest with onself is absolutely crucial. I don't think it's a secondary factor in investing, I think it is the primary factor - being an excellent stock picker is precisely like being a fantastic mathematical poker player, with the ability to analyse and compute probabilities in any situation - it is entirely worthless if your emotional and mental control means you never correctly apply it. I guess that's part of the reason why, while you'll struggle to find anyone who doesn't think 'buying low and selling high' is smart - come on, it's obvious! - history tends to suggest that most people don't actually do it. Momentum would seem to refute that. (more…)

  • Governments and Investing

    Awkward bedfellows

    A one-way relationship

    I get the feeling - both from talking to other investors and trying to objectively read my own posts - that the opinion toward the government by investors is almost unambiguously one way; negative. That's not to say that all investors are laissez-faire libertarian types (though it does seem to attract that sort!)  but rather that upon seeing any sort of government interference in the company under the spotlight, it's an immediate turnoff. In some ways that is to be expected. There are two main reasons I can rationalise for disliking government intervention, the first of which is far more prevalent in my mind:

    - It obscures the underlying economics. Governments are always distortionary. Government intervention in itself is distortionary by definition - they wouldn't choose to intervene unless they wanted to change something, an outcome which the free market had come to by itself. This is why the rail industries and other transport industries are so inextricably linked to the state; for all sorts of social and political reasons, we want both broader and cheaper services than the rail companies themselves would otherwise provide. There are swathes of historical reasons too, of course - frankly, it all seems a bit messy to me - but the outcome is clear; it becomes far more difficult to tell what's happening underneath the intervention. Which might not be a problem if the status quo existed for ever, except..

    - It adds uncertainty. This is always the first thing that comes to mind when I see renewable-related companies, for instance. In some cases, they appear to be set up to take advantage of an industry which is somewhere down the line heavily subsidised by government and hence not economically viable without support. This isn't a bad thing in itself, of course - if money keeps flowing in, there's profit to be made. What it does, though, is changes you taskmaster from the ruthless, efficiency driven free markets to the rather more whimsical and unpredictable politicians. The part-nationalised banks suffer for this. While the previous and current administration have (to their credit) adopted a hands-off approach, there's still a stifling force. There is a requirement to act in a certain way, for example with respect to wages. Government support for solar power a few years ago was rather nice, too, but what happens if a more economical and environmental power source comes along - hardly an impossibility, given the amount of money getting pumped into research? All cards are off the table, then.  (more…)