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Tuesday, 4 June 2019

Falling Retail Rents: Double Whammy

I found this article below very interesting:

https://www.thetimes.co.uk/article/look-after-the-rents-and-the-rates-will-look-after-themselves-xwcgdfjzk?shareToken=d1d4fb3f8a16cbed33083a03bfa3baf4

It seems to me that for those retailers that survive their "apocalypse" some relief may be on hand in the form of lower rents.

As well as the link above, I recently listened to the Pets at Home call, where they were talking about achieving 30% rent reductions, and others are achieving similar numbers.

What I hadn't appreciated is the additional benefit that when rents come down so, at some point, do business rates.

If you own a business where the shops remain profitable today, it seems to me there may tailwinds for years to come...

Sunday, 2 June 2019

New Investment: Howden Joinery at 14.5* forward earnings

New Investment: Howden Joinery

My last post was full of pessimism but owning a piece of Leaf Clean Energy has helped me to recover from a crisis of enthusiasm and confidence. It’s gone up around 600% since I bought it and this has been in my ISA, which is extremely helpful:




The lesson learned has been to slow down, work towards the minimum return I need to achieve the life I want (8%) and try and apply principles which were obvious and what I knew anyway, which is that I shouldn’t invest in anything I don’t understand, that are “safe” and have a high quality and somewhat unique business model.

My problem with the above is that as I have a strange anchoring bias to low P/Es, I have struggled to convince myself to pay the extremely high multiples on offer for high quality businesses.

But I do need to force myself into this world and I’m going to start with what I think is a high quality business, returning bundles of cash, where the P/E is not sky high.  That’s probably because the growth prospects are not proven and stellar but I’m happy to own this low risk stock with no debt.

Howden Joinery – the annual report lays out the business model very well and the investment case is well known to the value investing community:


Howden Joinery screens very well as a Magic Formula stock.  As a believer, I should be happy to buy it “blind”.

But it’s so much more than that.  It’s a wonderful shareholder friendly business with a unique, hard to replicate, business model, where all parties in the eco system benefit.  It’s debt free, ROCE is high, and kitchens aren’t going to become obsolete any time soon.  At 14.5* forward earnings, coming off a decent trading statement, it just needs to keep doing what it’s doing because.

The key risks to the investment are an erosion of competitive advantage – see the performance indicators below.  A UK recession will reduce profits and share price but one should really be prepared to buy into that.

What are the performance indicators I need to watch?

-      Gross Margin as an indicator of pricing power. If margins are falling, it could be an indicator of increased competition.  If they are going up, it could be an indicator that revenue increases are coming via pricing, not volume, which may not be sustainable in the long term.

-      Any change in metrics like working capital to revenue or receivable to revenue.  This is especially interesting because the business extends credit to its customers. Could this have the potential to blow out during a recession?

-      Any information on the roll out into France. It’s good that the group has settled on France as the next country to benefit from its full attention in terms of a growth strategy.  It’s still not at all clear what sort of runway or economics it might benefit from.  

-      Evidence of competitors evolving their business models such that they can erode Howden’s competitive advantage.  Key ones are Benchmarx (owned by Travis Perkins), in particular, and Magnet (owned by Nubia).  Benchmarx appears to be struggling to grow its branch network at the moment.

-      While the new CEO appears to have the right background and qualifications, any sign of a deviation from model or strategy.



Friday, 17 May 2019

Amazing Grace: Aretha Franklin sings live Gospel




If you're a fan of music, history or just like observing genius at work, check out this movie - it captures a timeless moment in Aretha's life and is full of personalities, the likes of which we don't seem to see these days.

Monday, 29 April 2019

Poor Investment Portfolio Performance.

It’s time to talk about my investment performance, something I’ve been putting off for too long.  It was always my intention, with this blog, to document a journey but, also, to have a means of sharing my thoughts and research with the world, with a view to generating good contacts and idea flow.  It would also be an educational tool where people who 

I had powerful weapons on my side, I thought.  I am unconstrained by mandates or the performance imperative.  I can invest in any micro-cap I please, and take extremely large positions.   I also thought I had the long term, calm, thoughtful temperament that a value successful investor required.  Finally, I thought I might be quite a good analyist.

Flybe was my biggest position and is now a zero.  Clearly my risk management skills are appalling and I’ve broken every rule in the value investment book.  Losing approximately 16% of my portfolio is embarrassing, but has also seriously set back my thought of one day being able to retire early as a wealthy man.  It’s clear, also that Flybe, has not been a one off.  For example:

Emeco: I bought this because I thought it was a cyclical net-net but I’d done no more than rudimental work into the actual economics of the business and industry.  

Coty:  I bought into a story stock – that of cost cutting and consolidation and clever management – while ignoring the fact that it is extremely indebted and without understanding the actual drivers of the business. 

It’s pretty hard to make decent returns when you have multiple big losers and I think my issue has also been selling too early because I am too anchored to P/E ratios and thoughts about what might be “expensive” Hence I sold Avesco, which was a multi bagger, as well as solid compounders like Markel and Johnson and Johnson.

I found this recent article in the Economist very interesting and I think it speaks perfectly to some of my issues: https://www.economist.com/finance-and-economics/2019/04/27/why-investors-are-careful-buyers-but-careless-sellers

I have always been a believer in a concentrated portfolio, as any good value investor should.  But that approach only works when you are an expert investment analyst and have the time to practice your craft.  That is not me, given I have a full time job that is not investing and, frankly, I have been a little lazy.

There’s one other thing – I may have been trying to be too “clever” in terms of worrying about taxes and trying to shuffle holdings between accounts, and sizing positions to try and avoid thresholds, and this probably led to me holding certain stocks for longer than I should and not buying other positions when I should.

Today, I have a portfolio that looks decidedly average, in terms of quality, and unbalanced.  I have c16% in Fiat, which does appear to be cheap, but can I really be confident the multiple will expand when it seems to have every long term trend against it?  I have over 10% in Jefferies, and we know that broker dealers are secularly challenged. 

Furthermore, we are facing one or both of a US recession at some point and a downturn in the long S&P bull run.  It would seem I am exposed to the falls without capturing much of the ten year gain.

So what now?  Well, I still believe in value investing to improve lives and I believe that investing in equities should work in the long run over bonds and property.  One has to believe in capitalism continuing to exist in some form although it’s going to be very challenged for quite a while.  I’m at the age now, where I need to own my forever home and I’m nowhere near the point where I can own it outright.  At some point I have to choose between putting my capital in a house, which I consider dead money, and trying to continue to grow my capital while renting.  I’m not quite there though yet, so here’s what I’m going to do going forward:

-      Target 9% as an annual return by buying stocks below intrinsic value.  I’ve calculated that this is the return I need in order to live the lifestyle I want and pass on something meaningful to my children.
-      Put another way, I won’t be trying to blow the lights out by being a superstar risk taker, and in years when I earn more than 9%, I will put cash aside as a buffer for bad years.  I can reconsider that approach in the future.
-      I will try and move up the quality scale and stop buying statistically cheap stocks, because my time horizon is long and buying quality should reduce the number of investment decisions that I have to make and will let me sleep better at night.  
-      Stop trying to be too “clever” in terms of my approach.  Terry Smith talks about “buying stocks that have already won”, rather than future winners and that is what I will try to do.  That said, I will still try and use the advantages that I have as a small investor to benefit from small cap or illiquid situations where the risk/return seems good.
-      Size my stocks far better so that a 10% position should only be appropriate if it doesn’t have much debt and the investment idea is strong and well researched, with minimal risk of losing money in the long term.  Good ideas with high levels of debt should get a much smaller position size.
-      Think more actively about selling.


It may take a few quarters to get to a portfolio that better reflects the above principals but I think it will make me a happier person. Life is a journey with many challenges, let us see what the next few investing years hold.

Tuesday, 23 April 2019

Quality Investing Lecture

This is as good a description I've seen of Terry Smith's investment style, which is passive investments in High Quality Businesses for the long term, a la Warren Buffett.

https://youtu.be/YZM9dhiDbzI

Monday, 1 April 2019

Q1 Portfolio Update

Bloomberg TickerPercentage
FIATFCAU16%
Rolls RoyceRR/15%
TripadvisorTRIP10%
JefferiesJEF10%
DignityDTY9%
COTYCOTY7%
Card FactoryCARD6%
Imperial BrandsIMB6%
FacebookFB6%
Bayer AGBAYER5%
SeritageSRG4%
AryztaARYN3%
OnthemarketOTMP2%
GBP Cash2%
Quarterly ReturnQuarterly Benchmark Return
-3.72%9.62%
Return Since InceptionBenchmark Return since Inception
9.78%118.48%
Annualised Return since InceptionAnnualised Benchmark Return since Inception
1.50%13.32%
Quarterly Leveraged ReturnAnnualised Leveraged Return
-1.18%3.03%
Gross Leverage28%
Leverage not Inc. shorts23%

Thursday, 3 January 2019

Q4 Portfolio Update

Portfolio as at end of December
Bloomberg TickerPercentage
Rolls RoyceRR/14%
TripadvisorTRIP11%
JefferiesJEF10%
FLYBEFLYB9%
FIATFCAU8%
DignityDTY6%
Card FactoryCARD6%
Imperial BrandsIMB5%
Bayer AGBAYER5%
IG GroupIGG5%
COTYCOTY4%
SeritageSRG3%
Onthemarket2%
GBP Cash13%
Quarterly ReturnQuarterly Benchmark Return
-22.20%-10.52%
Return Since InceptionBenchmark Return since Inception
14.03%99.30%
Annualised Return since InceptionAnnualised Benchmark Return since Inception
2.21%12.18%
Quarterly Leveraged ReturnAnnualised Leveraged Return
-22.03%3.53%
Gross Leverage46%
Leverage not Inc. shorts21%