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I was thrilled to be invited as one of the first guests on a new TV channel from famed short seller, Carson Block. I spoke about the accounting techniques which one can use to detect frauds like Patisserie Valerie. My clip is here.

This will be something to watch I think, as the channel should attract some really high quality presenters (they had to start somewhere!), and it's incredibly professionally presented. Check out the graphic, translating my admittedly idiomatic chat.


This was filmed in my living room, using my iPhone, would you believe with a link to New York. They have zoomed right in, and while I thought I was standing in front of appropriate content - you can just make out Freakonomics over my right shoulder - I hadn't realised that Robert Parker's Wine Guide and BBC1 Formula 1 commentator Murray Walker's autobiography stood out quite so much.

This channel is one to watch I am sure and I imagine it will be free, but I am speaking to them next week so will learn more of their plans.
One would have thought that Covid and lockdown would have reduced the emphasis on this quarter's earnings. Not so, it seems.......

With 312 of the S&P500 companies having reported, 82% came in above expectations on earnings! Extraordinary, really. More realistic was the 68% beat on revenues.

Worst sectors were real estate, energy, and communication services.
Best were tech, healthcare and, surprisingly, industrials.

Q2 earnings growth was -34%.
Q2 revenue growth was -10%.

Full report attached.

earnings scorecard July 31.pdf 133 KB

 
The Lex column today highlights a troubling trend - the compression of company results into an ever shorter timeframe. This is just daft.


Clearly, it is in the interest of an orderly market that both sell-side and buy-side analysts have sufficient time to digest company results. Pity my good friend Chris Bailey who tweeted this yesterday:


Presumably many institutional investors will hold some combination of Alphabet, Amazon, Apple and Facebook, but if it's one analyst, they may not even be able to listen to the whole call live. And it's hard enough trying to analyse one set of company results in detail in a day, without having to do several. More so when we have had such an unusual quarter.

My solution to the problem when I was a practitioner was that I would focus my energies on the important holdings. This was easy enough when we had concentrated portfolios. For important positions, I would always try to attend the sell-side analyst meeting in London if there was one, as it gave me an opportunity to read the mood of the room, and to ask the Finance Director any urgent questions before going back to the office and spending most of the rest of the day checking my forecasts in the light of the new information and preparing a written summary.

But this level of detailed attention becomes impossible if multiple positions are reporting on the same day. Part of the reason for the truncation of the results season is a decision by the UK authorities a few years ago to impose a time limit on publication of results - no longer can you publish your June results in September when everyone is back from holidays. And of course this means that as an analyst, you likely cannot take holidays in July until the results season is over. 

The authorities should really do something about this. A computer has no problem analysing the data in seconds, but people need time to digest results and the current situation helps nobody, except those companies seeking to obfuscate. A longer period to report and a central timetable which allocates slots so that investors can cope would help market transparency. With accounting and reporting becoming ever more complicated, making analysts' lives easier would improve transparency.





I thought Shane Parrish's podcast interview with Patrick CoIlison, co-founder of Stripe was a classic. It was not particularly focused on investment but his use of mental models and general approach was something I found really insightful and readily applicable to investing.

Tech payments company Stripe has been extraordinarily successful and I was not surprised after hearing the podcast. Now I wish I could invest, as I have just listened to Patrick's brother, John Collison, on Invest like the Best with Patrick O'Shaughnessey. This is really worth listening to, and I would highly recommend it.

My main take-aways, and really you must listen to this in full, were:

  • the 1950s were the start of computing and look at where we are today - this is now to think of the internet today. We are just at the beginning.
  • the 1999 tech bubble is knows as the dot.com boom, but it was really a TMT boom - the telecoms companies were just as overvalued (think Worldcom etc) - something that's easily forgotten. (I cannot forget because I recall discovering that one of my new analyst colleagues at acquirer Chase was then getting paid $1m pa to cover the telecom stocks).
  • Collison highlights how important it is in your career to be able to write well. This is a philosophy adopted at Stripe, just as at Amazon - communication through written memos cuts a lot of wasted time. Writing is a really important skill and it will only grow in significance, I suspect.
Collison also talks at length about the failure of accounting to cope with modern tech companies and I found this conversation fascinating, as it's one of my pet topics.

Listen to the podcast - it's really good.


Here is a review and summary of the book,  7 Powers by Hamilton Helmer, by blogger florentrivello.com. I had read that Netflix CEO Reed Hastings was a big fan and I then heard Helmer on the Invest Like the Best Podcast and made a mental note to buy the book. This review and summary may well be a good short cut to the book which is on my list and I am grateful to my Twitter friend, Hurricane Capital, for highlighting.

One example: in our How to Pick Winning Stocks course (coming soon on our website), I was perhaps a tad dismissive of economies of scale as a moat, as I don’t see these as being necessarily enduring in most cases. The advantage conferred by truly large scale is obvious, particularly in the retail sector where Walmart naturally has a big buying advantage, but more broadly scale economies are usually replicable and don't meet my criterion for a moat, which should be enduring.

He also illustrates the weakening power of brands in the internet age. First, in the past, brands had the power to push retailers to allocate them scarce shelf space, whereas the internet theoretically has infinite shelf space. Second, brands assured consumers of quality by expensive advertising campaigns, whereas today the internet allows the direct connection of consumer to consumer, short-circuiting the ad spend. The nature of brands' moats is certainly changing.

I plan to buy Helmer’s book and review it later in the Book Club.

11 florentcrivello.com-Mind the Moat a 7 Powers Review.pdf 319 KB
The story of the Credit Suisse funds invested with Greensill Capital caught my eye. The WSJ summarised the situation:

Four Credit Suisse funds have $7.5 billion in assets in total and are sold to institutional investors and wealthy families as safe, short-term investments. They hold securities backed by loans made to companies to allow them to pay their suppliers more quickly.

SoftBank plays three roles in the Credit Suisse funds: it is invested in the funds; it is invested in the company whose loans are held by the funds; and the funds own securities backed by loans made to other companies that SoftBank has invested in.
This type of circularity is not unusual for Softbank - for example, it encourages its employees invest in its Vision Fund with money lent by Softbank. In my experience, this type of arrangement usually causes financial structures, when they falter, to unwind faster than might otherwise be the case.



I expect this may be true for Greensill too. UK Investors may recall supply chain fallen angel Tungsten whose share price soared until it didn't. Tungsten, founded by Eddie Truell, had no backing from Softbank of course. 

Greensill is a curiosity so I decided to download the accounts. You can find them here. You will also see two changes of accounting reference date within 21 months - usually not a great signal. But what piqued my curiosity was the change of auditor in mid-2015. Grant Thornton resigned and you would imagine that a company which was about to receive an injection from Softbank and to run multi-billion dollar funds on behalf of Credit Suisse would be changing to one of the big 4.

Er, no.

Saffery Champness, actually.

Not heard of them? They had turnover of £71m in the year to 3/19 vs £491m (y/e 9/19)for Grant Thornton  (the Patisserie Holdings "auditor"). Perhaps Greensill had some misgivings about Grant Thornton so they were replaced? Saffery Champness, a much smaller firm, does not seem the most obvious choice.

Saffery Champness audited Greensill Capital UK Ltd's 2014 accounts, turnover Aus$26m and charged A$40k (no fee for the previous audit by GT). By 2018, revenues had mutiplied to $234m (real dollars) but the audit fee had only climbed to $98k.

I emphasise that I have done no work on Greensill, and have not attempted to check the accounts  - they have gone into my rather long to-do list and I shall return to this subject at a later date.

But the accounts are there if anyone is interested in taking a closer look. I suspect that it would be a rewarding foray.
 
I wrote a blog in the summer of 2019 about issues with auditing and making some suggestions as to how they could be fixed. The blog was read by a few people and generated a small current of interest in a very narrow circle, until Investors Chronicle magazine suggested publishing it.

I was delighted to get the exposure for this important subject and Algy Hall did a great job of laying the piece out, creating some tables and graphics and asking me to add some charts. The article is in the accounting section of our Library and is attached here in pdf form.

investorschronicle.co.uk-Four simple ways to fix audits.pdf 401 KB

Imagine my surprise when Algy emailed me to tell me that courtesy of that article, I was now an award-winning journalist! He tweeted this:

The award is in the Value and Transparency category of the  CFA UK Journalism Awards 2020. This amuses me for two reasons:

  1. I am not an award-winning journalist. I am not even good enough to be considered a journalist, and I am full of admiration for them, as it's a really difficult job to execute well.   
  2. I have been trying to persuade the CFA Society in London to let me do a follow on course for their members, without success. It's my belief that the CFA is a really tough course, but it needs more analytical training content - my Analyst Academy will equip you to be an equity analyst - I am hoping people will say that it's even better than a CFA, as this ad explains:



Anyway thanks to the CFA Society, and please lobby the FRC in the UK to implement my suggestion on publishing their comment letters. They are listening to me, but the more people who support this initiative, the more likely it is to happen. 

I had a most enjoyable Zoom call with a US professional investor who writes a blog under the pseudonym The Science of Hitting. We met on Twitter and I have a healthy and growing respect for FinTwit - check out his feed and the article below, published on GuruFocus. He argues that Microsoft is a great company but questions its valuation.

gurufocus.com-When Is Microsoft a Sell.pdf 224 KB

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Legendary investor Jeremy Grantham speaks  - this is unmissable...

  • We have the most uncertain economic outlook in history
  • We have the highest stockmarket valuation in history

  • oh, and we have the highest debt in history.

He is a legend at spotting bubbles but even he admits that

- this time is different and
- that there is extreme uncertainty about how it pans out.

But he makes some great points on current actions by the authorities:

- Stimulus does not create jobs. You can print $2tn of money or 10% of GDP but it won't reduce the double digit unemployment rate.

I only partly agree with this - they have to do something and some jobs will be created or at least not lost, but see the next point:

- if you print money without creating more output, you have the same amount of services and products floating around the system and more money - the price of those services or products will rise and that means inflation. That is the inevitable end game.

Grantham is  a generational thinker: On commodities, he thinks about three groups:

  1. Oil: we have passed peak oil demand, and shale has had a massive and fast ramp-up but there is not enough of it to keep prices low (demand will help).
  2. Metals: the real price of most metals has fallen in the last 100 years. That decline is over, apart from plentiful iron and aluminium. Other metals will be increasingly scarce and more expensive in the next generation. 
  3. Food: It will be increasingly difficult to feed the planet and not enough is being done about soil erosion, insect destruction and many other issues.

On the virus, Grantham points out that developed countries have done an awful job. Taiwan, New Zealand, S Korea and many other countries in Asia have handled it well. Elsewhere, only Germany gets a pass.  UK performance was woeful and he highlights that Massachusetts and New York are as bad as England. A lack of joined-up thinking is the main culprit - a lesson there for investors.

Vote with your feet
Grantham may have been one of the founders of GMO but his foundation is 60% invested in venture capital and his target is 70%. Asked if he would recommend a career in public equities, he was unequivocal: public equities is a zero sum game, venture capital is an additive game. Insightful.

Don't miss this podcast!

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I would agree with most of this.  However the problem is timing.  If the problem is not manifesting itself in the next few years, the markets will likely ignore the message.  

Food security has been a major issue for mankind since we appeared on the planet.  The likely victim of food insecurity is Africa, which also doesn't have the money to drive the price up.  People will simply starve.