I am a great admirer of Richard Oldfield - read his book to understand why. This is the first of his letters which I have read, but I was immediately struck by his humility and ability to praise his competitors:

... past decade has been grim in relative performance. We do not usually mention other investment firms, but this time we will: we take our hat off to those who have captured the wave, with prescience and boldness, such as Baillie Gifford; and to firms like Ruffer which stuck to its cautious guns for several years and this year consolidated an excellent long-term record by imaginative positioning 
On value (their bent) vs growth:

Our experience is that this tends to be a tail-end stage and suggests that we are drawing very close to the time when once more valuation matters. 
On growth stocks fuelled by low rates:

..after 40 years of more or less uninterrupted declines in interest rates we feel that we are in a multi-year period in which they will bottom out and begin to rise, accompanying a rise in inflation 
And on how we got here........

As Ruffer have pointed out, since 2007 the MSCI World Index excluding the US returned 0.8% per annum, while the MSCI US Index returned  8% per annum..........corporate profits in the US have been flat since 2011. Earnings per share have risen because of share buybacks – ...Most of the recent years rise in the US market has therefore been due to a rerating – ever higher valuations – benefiting from zero interest rates and quantitative easing.  We may enter soon a new phase in which valuation matters. 
If this resonates, we have linked one of his video interviews in another post.  To see the full letter, check Investor Letters Q3 20 - there are lots of good ones.
One of the investment themes in our How to Pick Winning Stocks and Analyst Academy courses is Investing with Billionaires. We highlight the risks and the opportunities. The latest edition of the UBS Billionaires report is just out. It includes some interesting stats on the development of this elite global group:

"..billionaire wealth grew fastest of all in Asia. By early April 2020, there were 389 Chinese billionaires, worth a total of USD 1.2 trillion. Their wealth had grown by almost nine times, compared with twice in the US. "

Worth a few minutes for a quick scan.

ubs-billionaires-report-2020-UBS.pdf 7.27 MB



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.

This is the first in a series of tips, taken from our new course How to Pick Winning Stocks. I will follow up with more in coming weeks. 

If a company is worth the sum of its future cash flows, then it’s obviously helpful to have an idea of what it is producing today as a sustainable level of cash generation – of course, this may grow in future, but using a sustainable free cash flow measure gives you a more powerful valuation multiple than using the P/E, without the need to do a full- blown DCF.

I am a bit geeky so you would expect me to make a lot of modifications to the reported numbers, for things like tax settlements, pension top-ups and other non-recurring items. You don’t need to go to this level of detail – if you make two simple adjustments (well they are simple in theory but not always in practice), you will produce a reasonable number.

1                     take out growth capex
2                     adjust for stock-based compensation
 

There are other adjustments you can make, but these are two of the most important, especially for modern tech stocks. The theory is quite simple:

1                     to the extent that a company is investing or future growth, incremental capex to build a new facility is a cash spend over and above what is required to achieve a steady state of revenue. Some companies will explain what their growth and maintenance capex is, the latter being the figure which is required for a steady state valuation.
2                     Stock-based compensation is generally added back to “adjusted” earnings, but it’s often a large item and it’s not as if this is cost-free to shareholders – there is a dilutive impact. This cost needs to be reflected in the sustainable cash flow calculation.

As I mentioned, the practical implementation is more difficult, but there are a couple of simple tricks that you can do to get a rough feel of the approximate level of sustainable cash flow. And these are short-cuts, only rough and ready indicators. In practice I would generally do a lot more work, but sometimes I will use these to give an initial view, for example when initially deciding if an idea is worth pursuing.

1                     use the depreciation and amortisation number if there is not a better way of determining growth capex. It sounds slightly counter-intuitive, using a depreciation figure to derive a cash flow estimate, but I have found that it can often be a reasonable substitute. The amortisation is only that which related to capitalised intangibles – software and R&D usually.
2                     For the stock based compensation, this is much harder, and if this method gives an unusual result, I may take the average over several years or refine the calculation further – this is a complicated subject and worthy of a blog on its own. Again this may raise some eyebrows but I look at options granted last year times the average share price – this gives me an approximation of the equivalent cash cost of buying back the stock to offset the dilution. It’s not perfect but it’s better than ignoring the cost, in my view.

 
HINT: If you do want to calculate sustainable free cash flow, you need to have a sensible capex number. Don’t make the mistake this hapless Alphabet analyst did:

This analyst has forgotten capex entirely! Sentieo puts this number at $25bn in 2018 and $24bn in 2019 (and depreciation and amortisation at $9bn and $12bn, respectively). This makes quite a difference to the valuation. I actually feel slightly sorry for the analyst and I am not sure which firm is responsible – I picked this up from Twitter and forgot to note the name of the person (please let me know so that I can credit you!).
I use this quick estimate of sustainable free cash flow to give an indication of the steady state FCF yield, which is one of my initial checks as whether an idea is worth investigating further.

This is the first in a series of tips, taken from our new course How to Pick Winning Stocks.  The course is discounted by 20% until 10/10 as a special launch offer. More tips in my forthcoming book, available on Amazon - links for US and  UK.
This is a fantastic book for anyone who wants to improve the management of their personal finances. Housel is a brilliant writer, with an ability to illustrate a concept using memorable examples that is unmatched. This is Buffet’s folksy wisdom on steroids.

We all know about compounding, and it’s usually presented as Einstein’s eighth wonder of the world – not good enough for Morgan Housel. His parallel is the Ice Age – how did the thick layer of ice develop? Not through bitter winters, never seen before, but simply by cooler summers which failed to melt the ice and allowed it to build up over time. 

I received the book on Friday evening and had finished it by Sunday afternoon, my reading pile untouched and unnoticed. This is a brilliant book and the reason it’s so powerful for me is not that the concepts are new to me, but that the illustrations are so memorable that some of his suggested disciplines will stay with me. I should therefore see a fantastic return on investment from this book.

Yours may be better – the nice folks at Harriman House have kindly given my investment book club members a 35% off voucher – use the code at their checkout.

Or you can buy from Amazon.com or Amazon.co.uk (not as cheap today, but these things change).

The code is available to members only – click SIGN UP above and go to Book Club for the code.



Fantastic analysis of Spotify by Jake Rosser of Coho Capital - 13 pages of detailed analysis. His style of investing and long term approach is thoughtful and impressive. Worth 20 minutes of anyone's time. Article is in both the Tech Stocks area and in Q2 2020 letters. 

Don't forget to sign up to see this and much more.
I have a small confession to make - I went to school with Daniel's dad, and consider him a "friend", although I have only seen him twice in the last five years. Richard and Daniel jointly wrote a book which must have been a wonderful experience (my closest was my video with my younger boy when we went into lockdown (you can check it out on YouTube).

So I was always likely to enjoy this book, but honestly, it's a fascinating subject and extraordinarily well written. Everything is grouped in threes, so there is ane easy rhythm about the arguments (1,2,3 and you are done). And this is obviously an important subject so no surprise that the book has been long listed for the FT Business Book prize this year.

I don't see the point in summarising the book here, its sub-title, Technology, Automation and How We Should Respond is clear and while it's not a book intended of investors, anyone with an interest in macro-economics will find this fascinating. The book is in three parts and looks back in time and then forward to the future and along the way I found some fascinating facts:

  • in HR, 72% of applications are not seen by human eyes
  • curiously, the US Bureau of Labour Statistics believed in 2015 that retail sales assistants would be the 5th largest category of new job creation in the following 10 years, which tells you something about how in tune governments are. And of course all the anxieties pointed out in the book are only accelerated post Covid.
  • there is an important section on inequality and the author points out that JFK's comment that a rising tide lifts all boats is less apt today. He believes that studying the development of inequality in different countries will yield clues as to how to tackle technological developments.
  • one of the solutions suggested is a cap on working hours and working days - 4 days per week is one suggestion from the TUC. 
  • future technological development will depend on a combination of data, software and hardware - big tech obviously has a big advantage and he makes the case for controlling their economic dominance.
  • he suggests that work which provides a social benefit should be revalued in the new world and that growth of the economic pie will become less important than its division. 
This book has a lot of ideas and I found it well worth reading, both as an investor and as a human being. I suspect that even as investors, we shall increasingly be talking about the social implications of economic policy.
 
The sub-title of this book tells you that this book is made for investors:

Making smarter decisions when you don't have all the facts

I really enjoyed this book. Obviously there is a lot of similarity between managing an investment portfolio and poker - David Einhorn, founder of Greenlight Capital, won $4.35m in the 2014 World Series of Poker in Las Vegas, finishing in third place. (He donated his winnings to charity.) It's betting on the cards you hold vs opponents whose cards you cannot see. 

Some of my favourite takeaways:

  • the smarter you are, the more likely you are to delude yourself. A test on the blind-spot bias (the "irrationality where people are better at spotting bias in reasoning in others but are blind to bias in themselves") showed that "more cognitively sophisticated participants showed larger bias blind spots".
  • use confidence levels when making assertions - a more sophisticated application of my technique to use profit estimate ranges rather than a single point estimate. As an analyst, you would tell your PM "I am 60% confident that this stock will double in the next 24 months". To be fair, one of my bosses would test this by asking how much I would bet. This has its downsides; once when I asserted significant confidence, he took this as a bet so large that I did not sleep that night.
  • there are some great stories and great characters. My favourite was Ira the Whale who won a bet with fellow players that he could eat 100 White Castle burgers ina single sitting. After the first 20, he ordered a milkshake and fries.
  • emphasises the power of a group with diverse viewpoints. Confirmation bias  prevalent even among truth-seekers like judges and academics.

This book is a must read for every portfolio manager. You will learn a lot and it's really enjoyable.