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The historic evidence is quite clear, listed corporations’ acquisitions on average destroy value for their shareholders. And companies that make large and infrequent acquisitions are especially efficient in transferring their hard earned wealth to the purchased company’s shareholders. Basically, all the value of the generated synergies and then some - on average – accrue to the...

September 06, 2018

Mr. Buffett Miscalculates

September 06, 2018/ Mats Larsson

How does one get the most bang for the buck? - The most future benefit out of ones present scarce resources? How does one decide between different options? In finance the way is often to compare the return on the various uses of ones capital and then select the one(s) with the highest return on equity, return on capital employed, return on capital invested, internal rate of...

September 01, 2018

Margin of Safety - From Engineering to Investing

September 01, 2018/ Niklas Sävås

Warren Buffett has often stated that the Intelligent Investor by Benjamin Graham is the best book ever written on investing. The two chapters that Buffett rates most highly are chapter 8, The Investor and Market Fluctuation where Graham came up with the metaphor of the manic-depressive Mr. Market, and chapter 20, "Margin of Safety" as the Central Concept of Investment. The focus for this brief and introductory text is the latter.

Margin of safety as a concept

"Long ago, Ben Graham taught me that "Price is what you pay; value is what you get" / Warren Buffett

Margin of safety is in investment terms often described as the difference between value and...

August 25, 2018

Utilities Primer

August 25, 2018/ Mats Larsson

A utility is a company that produces and/or provides electricity, gas or water or handles waste. Electricity utilities, more commonly called power utilities, generate power, manage power transport networks and supply end users with electricity. Prior to the deregulation of the power utility industry all this was handled by the same often publicly owned organization – an...

August 12, 2018

Edward Lampert

August 12, 2018/ Magnus Angenfelt

The idea of anticipation is key to investing and to business generally. You can’t wait for an opportunity to become obvious. You have to think, ‘Here’s what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?’

One of the things I try to advocate to other investors and companies is that if you can have a large long-term investor then you have the ability to run the company for the long term.

So much time and money ends up spent ensuring that the financial statements are immune from criticism that it can become much more of a distraction than a useful tool for investors and managers.

BORN New York, USA 1962.

EDUCATION Lampert graduated with a BA in Economics from Yale University in 1984.

CAREER After school he started as an intern at Goldman Sachs. Inspired by Warren Buffett’s letters to shareholders he left its risk arbitrage department in 1988 to start his own hedge fund ELS aged 26. He still serves as chairman and CEO.

INVESTMENT PHILOSOPHY Lampert defines himself as an “aggressive conservative” investor; one could also say a ‘concentrated value’ investor. He is uncommon for a hedge-fund manager in that he is a mix of investor and businessman. He is, among other things, CEO and chairman of Sears, the gigantic retailer store which is ELS largest holding and accounting for more than a third of the assets. Lampert focuses on finding companies that are seriously undervalued, and he is willing to target poorly run ones because they can produce greater returns if the right changes are made. As a result, Lampert is more hands-on with management, and the number of investments is normally below ten, although intimately known holdings are kept for several years.

Lampert’s style of investment requires a more detailed knowledge of the business, company management, and its values, than those who invest for shorter periods of time. He seems to prefer mature and easily understandable companies that generate lots of cash. He thinks past performance used as a measure of quality is wildly overrated. When investing, he focuses intensely on how their companies allocate capital to maximize returns. Lampert has significant experience investing in retail, even if his first retail investment was only in 1997. He does not have any known shorting strategy.

OTHER Lampert has carefully studied Buffett for years. He went back and read annual reports in the couple of years preceding some of Buffett’s investments: ‘Putting myself in his shoes at that time, could I understand why he made the investments?’ He has also been nicknamed ‘the new Warren Buffett’. Lampert is most famous for forming and merging Kmart and Sears into Sears Holdings. He took control of Kmart (the third largest discount store chain in the US, then with above $20 billion in sales) by buying up debt during its bankruptcy, cutting costs and by then reduce the workforce by 34 000 employees. Due to underperformance in Sears the asset under management in ELS has recently dropped from 10 to around $2,5 billion. Lambert’s earnings in 2004 were estimated to be $1.02 billion, making him the first Wall Street financial manager to exceed an income of $1 billion in a single year. Forbes estimated his wealth to be $2.9 billion in 2013. In 2003 Lampert was kidnapped, but he managed to talk himself out of the situation and was released after two days.

Sources: Edward Lampert; CNNMoney; Bloomberg; Sears annual letter to shareholders, 2008; the Third Avenue Management Investor Conference and Luncheon, 18 November 2003; BusinessWeek, 2007; Wikipedia; online.wjs.com, the performance is estimated.

August 05, 2018

Best Practice Asset Managers

August 05, 2018/ Mats Larsson

If you are an active asset manager your raison d’être is to outperform the market, i.e. the other investors. Yet, many pension funds, insurance companies and mutual funds haven’t specified what their competitive edge is. Instead too many mimic what others do, hire qualified personnel and give them good remuneration, close their eyes and hope for the best. The result is almost...

July 24, 2018

Energy: An Oil & Gas Primer

July 24, 2018/ Mats Larsson

The US shale revolution is redrawing the energy map of the world. In 2014 the US replaced Saudi Arabia as the world’s largest producer of oil. The forecaster of such a development 5 years ago would have been taken away by men in white coats. The US has also overtaken Russia as the world’s largest producer of natural gas. This secular growth of this non-OPEC supply source...

July 14, 2018

Jim Slater

July 14, 2018/ Magnus Angenfelt

The first key point is to focus on a relatively narrow area and become very expert in it.

The second and most important thing is to cut losses and run profits. Most people do the opposite – they tend to snatch profits and hug losses. In this way inevitably they end up with big losses and small profits instead of the other way around.

The third point is to concentrate on growth shares with forward price earnings ratios less than their future growth rate.

The fourth point is that I am great believer in the importance of cash flow. I always make sure that EPS are exceeded by cash flow on a regular basis. In this way I eliminate potential Enrons.

BORN Chester, UK 1929.

EDUCATION Slater left grammar school at the age of 16 and became a Chartered Accountant when he was 24.

CAREER Slater spent his first nine years after school in industry, culminating in his appointment as deputy sales director of the Leyland Motor Corporation. After successfully writing an investment column under the pseudonym ‘Capitalist’—the ghost portfolio of ‘Capitalist’ appreciated by 68.9 % against the market average of 3.6 % – in 1964 he launched Slater Walker Securities, which collapsed in the wake of the secondary banking crisis of 1973–75. Slater famously found himself to be a ‘minus millionaire’, owing £1 million more than his assets. Within a few years he repaid all of his debts with interest. In 1976 he started to invest in property and later in the mining industry as well as biotech and agriculture. In early 1990 he devised a public company statistical guide, Company REFS, for investing based on his investment principles. Since 1975 Slater has been a very active stock market investor and remains so today.

INVESTMENT PHILOSOPHY Slater is a small-cap growth stock market investor. The key figure in his investment approach is the price–earnings growth factor (PEG). A PEG of below one, with earnings growth higher than the multiple, is attractive. His approach is similar to Peter Lynch’s, and there is some debate over which of the two devised the PEG. There is, however, no doubt that Slater popularized it in the UK. In addition, Slater demands that a company should show cash flow in excess of earnings and it must have been growing for at least the last three years. Also the company should not be over-geared. His preference for small companies is based on the conviction that ‘elephants don’t gallop’, an expression that he coined. Slater mainly depends for his investments on public data; however, he requires at least three analysts’ forecasts before investing. The management’s behaviour in terms of their buying shares and being optimistic in their annual reports are also important parts of his approach. Slater has a humble attitude to the market and does not attempt to forecast which way it is going at any point in time. He regards running profits and cutting losses as a key factor in successful investment. His investment style is probably one of the most accessible in the book.

OTHER Despite not managing other people’s money, there is a lot of evidence of Slater’s investment strategy being successful. His business column and recommendations over the years have proved to be very profitable. A public fund based entirely on his principles would be up 188 % against the market’s 73 % in the last three years, and 77 % up over the market’s 7 % during the last five years. Slater is first and foremost known in the UK for trying to help the man in the street invest successfully. He has written five investment books as well as thirty books for children. He is still a very active investor and still answers questions about investing on his homepage.

Sources: Jim Slater; www.jimslater.org.uk; MFM Slater Growth Fund.

July 08, 2018

Primer Accounting Warning Flags

July 08, 2018/ Mats Larsson

“At any given time there exists an inventory of undiscovered embezzlement in […] the country’s businesses and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there...

June 27, 2018

Software & IT Services Primer

June 27, 2018/ Mats Larsson

We have arrived at our concluding and in our view arguably most interesting piece on information technology. Software & Services is the third of the industry groups that constitutes the Information Technology sector. The other two, Technology Hardware & Equipment plus Semiconductors & Semiconductor equipment, have been covered in previous issues of The Companion. Software & Services is further broken up into three industries, namely 1) Software...

June 18, 2018

Michael Steinhardt

June 18, 2018/ Magnus Angenfelt

Just as outright euphoria is often a sign of a market top, fear is, for sure, a sign of a market bottom. Time and time again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors. When the world wants to buy only Treasury Bills, you can almost close your eyes and get long stocks.

The only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit.

Beginning at a very early age, I have made cumulatively more judgments, and more investments decisions based on the same kinds of data, than almost anyone else. This process unconsciously leads to a sharpening, a fine-tuning, that, over time, results in fewer mistakes. In this repetitious behavior, a learning occurs that is not consciously understandable but allows one to develop ‘good instincts’. Often listening to an idea led me to an entirely different conclusion to that envisaged by the proponent of that same idea, whose knowledge was far deeper than mine.

BORN New York, USA 1940.

EDUCATION In 1960 Steinhardt graduated from the Wharton School of Finance at the University of Pennsylvania in only three years.

CAREER Steinhardt began his career on Wall Street in research and analyst positions with mutual-fund company Calvin Bullock followed by a similar position at the brokerage firm at Loeb, Rhoades & Co, before founding Steinhardt, Fine, Berkowitz & Co., a hedge fund, in 1967. He retired and closed the fund in 1995. In 2004 he made a comeback through Wisdom Tree, which is the seventh largest index fund in the US based on ETF.

INVESTMENT PHILOSOPHY Even if the fundamentals were the starting-point, he usually ended up being a short-term investor with the normal holding being no longer than a month. ‘Our investment style is four yards up the middle in a cloud of dust’ as he himself described his investment style with the help of a metaphor from American football. He invested in all forms of assets, but stocks were usually in the majority. In the final years of the fund’s existence he also invested abroad, but with dreadful results. In contrast to the other traders in this book, Steinhardt was the opposite of a trend-follower. He preferred to go against the market and short his favorite companies. Neither did he care for technical analysis and graphs. Contrarian is probably the best description of his style, but in large part he was highly individual, and hard to copy. He had no rules or valuation frameworks, but tried simply to think differently. Steinhardt was known for his ability to predict the direction of the stock market. In his time, he was said to have been the most demanding boss on Wall Street.

OTHER He was one of the first prominent hedge-fund managers. No one has been so successful (over 30 % annual gross performance in 28 years) or had that stamina using such an intense investment strategy as Michael Steinhardt. One dollar invested in 1967 in his fund would have grown to $481 in 1995, compared to $19 for S&P 500 in the same period. Having in mind that Steinhardt on average only was roughly 35% net long in his portfolio over the time tells you how good he must have been on both picking winners and losers in the stockmarket. In 2001 he published his autobiography: No bull: my life in and out of the markets. Since retirement he has managed his own money and collected art. He is also a major philanthropist, active in Jewish causes.

Sources: Michael Steinhardt, No bull: my life in and out of markets (2001); Investopedia; Wikipedia.

June 10, 2018

Investment Checklists

June 10, 2018/ Mats Larsson

In many professions experts face a constant rise in complexity due to increased domain knowledge. The traditional way to handle this has been to specialize into an ever-smaller niche to increase skill and to be able to keep the expert status. Besides creating the undesirable second order effect that too few have the ability to overview and understand larger areas, this strategy...

May 20, 2018

Tech Hardware Primer

May 20, 2018/ Mats Larsson

Technology Hardware & Equipment is one of three industries that make up the Information Technology sector, the others being Software & Services plus Semiconductors & Semiconductor Equipment. The Technology Hardware & Equipment industry further contains three sub-industries: 1) Communications Equipment, 2) Technology Hardware, Storage & Peripherals and...

May 13, 2018

Marc Faber

May 13, 2018/ Magnus Angenfelt

Be very careful of any forecast. Usually, analysts, fund managers, and strategists can foresee the future only when it coincides with their own wishes, whereas they ignore the most obvious facts when these facts are not welcome.

Watch day and night (the latter very important) with curiosity what is happening around you because the greatest investment opportunities are always hidden in the most unlikely places.

We all need to remind ourselves that we have no idea how the world will look like in five years, let alone ten. Therefore, some of our business or investment decisions will be very wrong. But, what we need to focus upon is what the consequences could be, if we are wrong.

Investors mostly fail because they find it very hard to do nothing. But by spending a day in a round of strenuous idleness without your mobile phone and Blackberry, you may see the future more clearly. Remember, patience is also a form of action.

BORN Zurich, Switzerland 1946.

EDUCATION Faber studied economics at the University of Zurich and, at the age of 24, obtained a Ph.D. in Economics.

CAREER Between 1970 and 1978, Faber worked for the investment bank White Weld & Company Ltd. in New York, Zurich, and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the managing director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, Marc Faber Ltd., which acts as an investment advisor and fund manager. In addition, he publishes a widely read monthly investment newsletter The Gloom Boom & Doom Report, writes books, and is a regular contributor to several leading financial publications around the world.

INVESTMENT PHILOSOPHY Faber invests and advises all over the world in almost all asset classes. He relies on his command of economic history as well as his time as a trader. He focuses on macro, strategy and gold. For people in the investment community, he is maybe known as the most notorious bear in the market and at the same time a contrarian investor. The first is not always true. He has made several bullish calls, of which Brazil stocks in 1990s and world stock market in spring 2009 are the most remembered. The following cornerstones advice gives a sense of his investment philosophy: (i) Everything comes to the investor who buys out-of-favour and neglected assets. (ii) The best way to make money is to buy value stocks: low price to sales, low price to book, low price to cash flow, high dividend yield. (iii) Never forget to diversify properly. (iv) Never get carried away by a lucky investment with outsized gains. (v) Stay single! Even if he digs into specific stocks and sectors he spends most time on the macro level. He is keen on the Austrian School of economics.

OTHER He is well-known for being prescient about the 2008 financial crisis; the Asian crisis months before it happened; warning his clients to cash out before Black Monday in 1987; forecasting the burst in the Japanese bubble in 1990; correctly predicting the collapse in US gaming stocks in 1993; foreseeing the Asia-Pacific financial crisis of 1997/98; and so on. His mantra is ‘Follow the course opposite to custom and you will almost always be right’. His book Tomorrow’s Gold was for several weeks on Amazon’s best-seller list. The Gloom Boom & Doom Report uses economic, social, and historical trends to warn investors when investment themes have become widely accepted and are, therefore, highly priced and risky, while it continuously searches for opportunities in unloved and depressed markets. Gold is the asset where he has been most successful. His web site is illustrated with 17th century paintings of “The Dance of Death” and he is nicknamed Dr Doom. He has a collection of a quarter of a million Mao badges and has a ponytail.

Sources: Marc Faber; gloomboomdoom.com; Wikipedia.

May 05, 2018

Primer - The Cost of Capital

May 05, 2018/ Mats Larsson

In this text we investigate if today’s lower interest rates motivate higher equity valuation multiples. We in this try to understand a stock’s estimated fundamental value and not necessarily forecast its future short to mid-term market price. The answer to the above question is no, and the reason is that lower cost of capital is counterbalanced by adjustments in factors like...

April 28, 2018

Semiconductor Primer

April 28, 2018/ Mats Larsson