Friday, 23 August 2013

Industry Practice – Investment Rationale – Wise Words from the Leading Lights (Part 2)

Prior to the provision of 'Coupled Ratios' analysis reviewing the Q2 performance for the auto-majors, the second-half of this two-part web-log continues to view the learning and advice of the 20th century's investment luminaries.

This as conveyed via John Train's collating efforts in the 1980 book 'Money Masters of Our Time'; itself re-published in 2000.

Herein the perspectives of :

- John Neff
- Julian Robertson
- Jim Rogers
- George Soros
- Philip Carret
- Michael Steinhardt
- Ralph Wanger
- Robert Wilson
- Peter Lynch

[NB though the number of individuals covered is similar to part 1, the inclusion of John Train's own pertinent comments and the odd observation by investment-auto-motives extends the length of the text.

John Neff (1931 - ) -

As is so often the way, it seem that childhood, adolescence and early adult-hood shaped Neff's outlook, and whilst not from a wholly destitute background financial security was an issue, the 'poor boy' reality moulding a workaholic attitude which meant that he would gain financial literacy and handle money more astutely when the time came.

Keen to escape the confines of school for exposure to the real-world, it was time spent with his father in an industrial equipment supply business that created the foundations of his mentality.

“Merchandise well bought is well sold”

A short period in the Navy as an aviation electronics technician was followed by university, reading 'Industrial Marketing' so combining external and internal aspects of a generic manufacturing company operations, and also including corporate finance and a path was set. Thereafter various security analyst positions until running a fund within Wellington Management in 1964.

Endemic traits were that of a neo-Grahamite, so value-driven and a classic contrarian, though also noting that contrarians can be wrong if they can't appreciate the broader macro environment.

Thought of stocks as 'acting badly' (ie under-valued) or 'acting-strongly' (ie over-valued), preferring those which are relatively dull, “misunderstood and woebegone” which when bought cheaply did not have far to fall if it be the case, yet still paid a insisting on income from the items held.

“the market over-pays for the prospect of growth”...”so better to gain a total return from a slower growth company that pays a higher dividend”, so preferring a mixed basis of capital gain + dividend to the need for greater capital appreciation alone.

[NB John Train remarks that his is a classic 'institutional approach' often unrecognised by individual investors who tend to enjoy viewing the satisfaction of obvious capital appreciation, but less aware of the uncollected income that had been possible}.

“the best investments are the least understood”

He believed in a high concentration in relatively few industrial sectors, as when in 1984 he bought into Ford Motor Co at its $12 low, and by 1988 his portfolio comprising of 22.2% in auto-stocks.

“a few ideas backed heavily”

1. sound balance sheet
2. satisfactory cash flow
3. above average return on equity
4. able management
5. prospect of continued growth
6. attractive product / service
7. a strong market in which to operate

He created the idea of a calculated 'terminal relationship' value of a stock or group of comparative stocks, by which the capital growth rate + the yield rate was divided by the p/e value.

There was also a more 'pseudo-scientific' method used from which a buy-price was determined from earnings projections over a number of future years and a determined p/e value the market would put on those earnings, so giving a target price several years out, then calculates the difference between that hypothesised price and current market's price, so giving a notional 'discount percentage' of the present-day, and so potential for equal appreciation.

[NB this is obviously a subjective matter, quite similar to the modelling of DCF calculations, which can be over-emphasised].

Using the same principle he calculated a similar consolidated figure for the whole existing portfolio and considered this the 'hurdle rate'. If a prospective stock could not match or beat this 'hurdle rate' it was not bought.

Furthermore, extremely disciplined about buy and sell price-points, and would wait for the intra-day market-strength.

“sell a stock before it has achieved its full potential, leave enough incentive for the next buyer”...which also indicates that he did not want to be left holding the baby once a stock peaked and dropped thereafter.

He would hold a company's stock for years even if it did not move, as long as it remained cheap compared to the rest of the portfolio and the outlook remained positive.

Julian Robertson (1932 - ) -

Exposed to the stock market at an early age by his father, so not of the typical 'born poor' type who chases security by understanding and so dominating the financial world as a relative loner. This more fortunate background then allowed him to comprehend the markets at an earlier age and so better interweave social and managerial skills when running the Tiger Management fund.

Started 2 other funds (Jaguar and Puma) devoted to invoke greater global macro perspective yet retaining specific stock-picking criteria, so not complete 'country bets'

He stated that “it is amazing how in the rest of the world (ie non-US) no-one seems to care about profitability!”

[NB this undoubtedly highlighting what even management in the rest of the world views as the 'narrowness' of American absorption in commerce verses a more rounded quality of life perspective. (Finding a way to both via self-education is vital)]

In the USA he sought-out well managed firms (eg Harley-Davidson of the time)

He operated the then classic hedge fund model (now thankfully far less prevalent) which itself had its assets leveraged by 2 - 2.5 times, so increasing mistake exposure, using stress tests to appreciate the impact of a 10% cross-portfolio loss.

Preferences / Criteria :

- 'monopolistic and oligopolistic firms (eg De Beers diamonds when listed)
- little noticed out-performers, well positioned and stability
- great value based upon detailed examination of company's books
- management devoted to the bottom-line
- a firm that has regulation assist its competitive position
- recognition of 'upstream needs' ie serving a whole sector (eg palladium)

- a steady flow of ideas rather than relying upon a single 'home run'
- growth orientation (presumably as opposed to turnarounds)
- big core positions (tried and true companies ie US blue-chips)

However, eventually the fund's initial stellar performance shrank markedly as the 1990s IT based 'new economy' took hold, with leverage-effect a major cause.

[John Train stipulates...”when you are a mega-buck hedge fund investor and the stock you own too much of is leveraged, the negative effect is magnified”]

Jim Rogers (1942 - ) -

Still a well known face on the likes of Fox TV, Bloomberg TV etc, Rogers today runs two interests, but previously became well known as a co-founder of a 1969 fund with George Soros (see below), and the desire to alter from a US domestic viewpoint to that of 'global-macro'. Today focused upon a commodities focused resource fund.

A 1980 'retirement' saw him travel around parts of the world on a motorcycle to view first hand worldwide economic dynamics, this followed-up in 1990 with a motorcycle tour of China, and later in 1999 in a similar manner, but more comfortably in a modified Mercedes SLK sat upon on a 4x4 G-Wagon chassis pulling a trailer with support crew.

Ultimately, best known for his “big bets in unpopular countries”


1. must be economically much better than previously
2. must be better-off than generally realised
3. the domestic currency must be convertible
4. the investment must be liquid (so as to escape if necessary)
5. recognise that any prospect is useless if no other foreigner can buy
6. entry via conventional channels
7. recognise that supposed people of influence are not always so

Past Case-Studies :

Seeing the socio-political shifts of the mid 1980s.
A. Portugal, as socialists were ousted by the right
B. Austria, as misleading published intelligence blurred 'on the ground' opportunities
C. Sweden, market-shorted after explosive rise in market prices
D. Norway, market-shorted after oil revenues shrank with collapsed global oil prices
E. Singapore and Malaysia, 'perfect storm' of regulatory reforms, market contraction and emergency measures halting new IPO issuances so supply availability.

Thoughts :

“there are lots of countries where things are cheap, and will stay that way”...”need to know why they are cheap”...”and what reasons for change”.
“risks and opportunities are understood through travel, history and philosophy, not in business school”
“what I liked about it [the investment world] was not so much investing money, because at the time I didn't have any, but that if you were smart, used your wits and paid attention to the world, it was all you had to do”
“You need to understand how broad PESTEL factors will alter the destiny of an industry or stock-group for some time”
“everybody dreams of making a lot of money, but let me tell you, it is not easy”
“I'm very much a loner, a maverick, a misanthrope”

[NB investment-auto-motives understands that this is often the case. Possibly resulting from the mix of suffering through tough times, sense of responsibility previously and that they naturally seek the truth in things to be sure; given insecure backgrounds. Obvious regards company assessment, but also the case with much else, especially so analysis – conscious or otherwise – of people's behaviour and attitudes (similar to themselves or not) and so trustworthiness. As seen by comments regards mass-culture in the Soros synopsis, the comfort and distractions of the 20th and 21st centuries effectively made western people more shallow, irresponsible and inconsistent, hence Rogers' 'misanthrope' reaction]

- to bet on whole industries much like whole countries
- develop a 'massive investment concept'
- buy as much stock as possible in a 'turnaround industry'
- look for major secular change, ignoring fluctuating business conditions

Types of Changes:
- 'disasters', when an entire industry is in crisis (eg Chrysler and Lockheed in late 1970s), with a number of large firms at or near bankruptcy, as long as structural fundamentals can be changed.

[NB this the case for US Autos post 2008, though with the accordant Ch 11 bond and stock-holder losses at GM and Chrysler. But the emergence of MLC selling 'old assets' to 'New GM' and a restructured FIAT-Chrysler providing the new buy opportunity, as seen by Buffet's increased sector spending]

- 'changes for the worse', expected when an industry is so popular that investing institutions own 80% of the available stock, so “over-valued” and viewed as a shorting opportunity
- 'new trends' (then and partially now), such as: 1960s japanese motorcycles, 1970s women's use of less cosmetics, day-centres, hospital chains, garden centres, various treatment centres, mobile homes.
- 'governmental initiatives', then “throws money at the problem”, such as: when in the 1973 Arab-Israeli war the US was forced to spend on defence electronics to assist Israel so as to match the Russian systems in Egyptian hands. The stock of all such defence companies rose massively.

Investing Process:
“I never talk to security analysts or brokers”
“develop a way to think independently”
“talking to people just muddies my thinking”
“just sit back, read, and figure things out”
“don't use inside information, even if legal, nine times out of ten it is wrong, garbled en route”
“I look down before I look up”, meaning that stock must be so cheap that even if it does fall the capital invested will effectively sterile for a while before re-climbing.
“don't lose money, if you don't now the facts don't play”
“I don't use computer databases since the figures may be unreliable”
“better to have no information than the wrong information”
“avoid second-hand figures from information providers”
“study annual reports and (SEC) 10Ks/20ks” (or similar elsewhere)
“the balance sheet is more important than the income statement”
“the cash from depreciation and amortisation could help a 'bankrupt' firm survive, since they are book-keeping, not cash going out the door”
“truly understand why results and are good or bad”
“buy when things are bad, just about to get better”

Ratios Assessed:
1. capital expenditure in absolute terms
2. capital expenditure as % of depreciation
3. capital expenditure as % of gross plant and equipment
4. capital expenditure as % of net plant and equipment
5. sales to receivables
6. debt to equity

“when there is almost no inventory, when receivables are low, when the profit margin is 20%, when the pre-tax return on equity is 25%, when capital expenditures are growing at 40-50% a year I begin to smell a classic top, and go short”
“business school graduates crowding into an industry can also signal a top” (eg Atari's implosion)
“I like tried and tested ratios to see how bad things can get...when they reach their lower limit the typically move the opposite way”
“with a relaxation of regulation so capex needs fall”
[NB this seen in US autos in the 1970s regards emissions and safety, and in nuclear power after '3-mile island' incident].

Back in the late 1990s he was also obviously keen on Chinese growth, “the 21st century will be China's”, on African development as democracy, security and new wealth assisted 'pioneer-markets', and on commodities such as tea and sugar, with regional commodities markets integrated into global ones.

1997 he said “scout for nations that are living up to the ideals and principles that made our country great, namely those with unshackled economies and free markets”.

George Soros (1930 - ) -

Whilst the likes of Buffet appear 'home-spun' in preferring a simple approach tied to long-terminism, in direct contrast Soros appears all together 'worldly' with capability to act as a short-termist trader and speculator.

From a wealthy and informed Hungarian-jew background – his father said to have managed that group's assets under German rule during the WW2 occupation – he moved to London in 1947 to study at the LSE, then onto jewish owned investment firms in London and New York, before creating the self-run Quantum fund in 1969 with Jim Rogers.

He predicted and gained financial rewards from the meteoric rise and fall of REITS in late '60s / early '70s America, also moving into Japanese equities in 1971.

Quantum undertook 'multi-directional' speculation across commodities, currencies, equities and bonds. It recognised the then early value of defence stocks (as seen) and that of bigger named firms within the technology sector; though made and lost money on oil services.

The fund then re-organised to include greater team participation of mini-account managers and researchers.

Soros is renowned for his 1992 play on shorting the UK pound during the ERM related 'Black Wednesday' crisis, collecting a reported $1.5bn in doing so (partly assisted by a weaker dollar); riding a pan-markets belief that the UK government could not substantively support the pound given its ramifications on its foreign currency reserves.

This win followed by a $400m loss when he wrongly predicted that US-Japanese trade talks would falter.

Russia was seen as a natural interest in the mid 1990s, the telecoms sector specifically given its utility function and 'defensive' character, so $980m was provided as part f a bigger consortium. However in 1997 the Russian crisis brought about a $1bn loss, though the fund ended up 15% by year end.

An early exit of the technology stock boom of the late 1990s a year prior to its peak was reversed and then caught-out by the collapse.

Thereafter the original Quantum fund was consolidated with another to form the Quantum Endowment Fund.

- little time spent on economic study
- does not read Wall Street research
- reads newspapers and general dispatches from around the world
- talks to well placed people / sources around the world
- participates in foreign relations boards, so access to foreign governments
- the ability to process raw intelligence quickly
- highly intuitive, that intuition based upon strong knowledge
- constantly honed skill, applied daily, unremitting concentration
- no discernible specific methods

- start small and build-up a position as stability increases
- don't try to be 'all knowing' about the complete market
- speculation: define the level of risk that is dared to assume
This the most difficult judgement.

Market Theories:
- falsity of 'efficient markets hypothesis', shown by superior performance
- technical analysis is theoretically feeble, so inconsistent
- fundamental analysis determines stock price, but prices also change fundamental values, via a firm's re-purchases or mergers and acquisitions.
- “reflexivity”, perceptions changes events which in turn changes perceptions (ie feedback)

[NB Here Train well notes that 'contrarianism' is the hallmark of the good long-term investor, but can be very dangerous for the short-term margin (ie borrowed finance) trader].

[NB The Soros Foundation highlights the worldwide need for an 'open-society', as opposed to 'dictatorial' system, to promote democracy and capitalism. However, its affiliated NGOs seen as ideologically problematic by some CIS countries given his wealth and power.

As an aspirational philosopher he should well understand that 'open societies' can be even more tightly controlled than dictatorial counterparts, which often see major power shifts from one regime to another. Open societies controlled through far subtler sociological, psychological and psycho-analytical methods: see the early 20th century connections between Freud's psycho-analysis and mass-advertising. The basic aspects of which could be said to have become the tools of mass-culture, whilst more insular high-brow culture expands as necessary to equally mould and control].

Philip Carret (1896 – 1998) -

If Benjamin Graham was the grand-father of investment analysis, then Carret was the great grand-father of common-sense investing strategies.

He launched the Mutual Trust in 1928 which became Pioneer Investments and latterly Pioneer Fund, and managed it for 55 years.


“instinct – the subconscious – is much more reliable than should follow one's own convictions”.
“in a business debt is quite reasonable...but 'margin debt' – stock market debt -is terribly dangerous, because it is so easy to get....a businessman has to explain all to his banker, whereas an investor just has to pick up the telephone.”
“I like over-the-counter stocks. And yet I'm more conservative than most people; people think conservative means GM, IBM etc, but I've always been in off-beat stuff...there less subject to manipulation by NYSE companies and are less affected by crowd psychology”...
“I remember the popularity of Winnebago, Coachman Industries and all the other 'rec vehicle outfits...but to justify their peak prices half the population would need to abandon their houses and ride around continuously...I avoid fads”.
“when I invest, I gamble with a certain amount of my capital buying dogs, the usual way I lose is when buying concept stocks...they rarely work”.
“I don't know if over-the-counter is better than listed stocks, all sorts of junk is is sold, but also some crown jewels”
“if a company has increased earnings for fifteen years, it is probably about to have a bad year”
“I do like a very good balance sheet”
“If I see the equity ratio is low, or the current ratio is low, I don't go any further...I want no term debt and a better ratio than 2:1 current ratio”
“I want to see management own a significant amount of stock”
“an officer should have at least a year's salary invested in his/her company...if he does not have that much faith in the company he should not be a key executive of it...if they don't own a lot of stock why should I own any?”
“business principles are just that...principles. One deviates from sound principles at his peril, some people are smart enough to do it – to dart in and out – but they are few and far between”.
“I'm always turned off by an overly optimistic letter from the president in an annual report...if his letter is mildly pessimistic, to me that's a good sign”.

- never hold less than 10 different securities spanning five different sectors
- at least once every six months re-appraise each security held
- keep at least half the fund in income producing securities
- consider yield the least important aspect when analysing stock
- be quick to take losses, slow to take profits
- never put more than 25% of a fund into stocks without accessible regular information
- avoid inside information “as you would the plague”
- seek facts diligently, advice never
- ignore mechanical formulas for analysing stocks
- when stocks are high, money rates rising, and business prosperous, at least half the fund should be placed in short-term bonds.
- borrow money sparingly and only when stocks are low, money rates low or falling, and business depressed.
- set aside a moderate proportion of funds available for the purchase of long-term options on stocks of promising companies whenever available

“I bought my desk from my old employer for $ has served me very well for 60 years”

Michael Steinhardt (1940 - ) -

It is said that like many great investors, Steinhardt was said to be initially poor. But as the son of a (criminally associated) jeweller and given 200 shares in two companies for his bar mitzvah, things could not have been as financially problematic for his family as for the majority of truly poor.

Thereafter he was able to study broker's reports and frequently visited a Merrill Lynch office, again not typical of the 'unfortunate'. Good intelligence allowed him to graduate high school at 16 and graduate from Wharton School of Finance at 19, in 1960 taking his first job at a mutual fund, before others.

With 2 other partners, he started a fund in 1967, with amazing success in the initial 2 years more than tripling the asset-base, and thereafter a near decade of dedication. Taking a sabbatical in 1978 he used the time to create an Israeli property development company in the so called 'development towns' (which incoming jews from outside Israel), but its success faltered with bad business practices.

He returned to the New York investment scene, and by 1979 operated the firm alone.

“my principle role is that of guidance, managing passively, but if things are not working out I go over the (investment story) time and time again, determining our overall exposure and deciding what level of risk we can accept”
“I see my role as trying to achieve the best possible return on capital using a full range of techniques that will allow me to attain that goal, without commitment to any particular style”
“most of my long positions are chosen on the basis of long-term fundamental prospects...not that I necessarily hold onto them for very long...I work-out how the market will respond to a long-term conception, at least for a minimum period”
“strongly believe in company stock that has re-purchase programs”

[NB Train states that Steinhardt “being very active in the market is exposed to endless opportunities and focuses on whatever areas of the markets are moving at the time].

“I've a fascination for the S&P Futures Index, since they are a good measure of the essence of the market”...”but whilst over-valuation (of the 'premium') for short intra-day periods is favourable, if it lasts for days and weeks, that is a more bearish sign”
Positions / Concerns:
1. long term investments
2. new issues when attractive
3. loan of stocks to brokers to cover short positions
4. arbitrage, buying bankruptcies and trade claims
5. 'modern gimmickry – index futures etc”

Steinhardt comments that short-selling requires a metal change to overcome the feeling that 'one is against', plus the fact that a short-side can have infinite losses as opposed to 'going long' which can only loose 100% of one's own capital. But “you never make big money without getting in the way of danger”.

[NB Train states that this is the very opposite to the Benjamin-type bargain hunter investor].

Such a risk absorbing strategy though can fail dramatically, as when he shorted some big name growth stocks in the early 1970s at p/e of 35, to then rise to 45. Hedging such positions though was key, and the sale of other long positions at equally high p/e assisted.

“the stocks I'm short tend to be the reverse of my longs”...”but the perennial problem is the timing of such shorts”.

With regards to brokers reports...”people who's first interest is in commission (ie report writing commissions) are rarely great stock pickers. If someone is really good it makes no sense to sell his ideas, the rate of return will be too low”.

“Most brokers won't hold an opinion if the tide turns against them”

[The next portion demonstrates the increasingly 'hollow core' of the markets from early 1980s onward through to the 2000s].

“the two main reasons for the continued rise of the stock market [over this period] are lower interest rates and the 'leveraging' of America's industrial base...leveraged buy-outs and corporate re-purchase plans reduce free floats and boost stock prices...the new dominant element is debt”
“debt will be key to the economic future of the western world...the ethics surrounding debt are now different...Reagan doubling the debt level...debt (across: quality rating, consumer, industrial, municipal and third world) has changed so much as to create new patterns in our lives”.
“there has been enormous growth of debt, as compared to earnings or assets or anything else”.

[Tellingly....about 2008]

“it amounts to a leaning tower that will eventually topple, it cannot be sustained”
“the debt will eventually be repudiated and turned into equity, resulting in inflation”

He retired in 1995 to devote time to 'secular jewish' continued to 'hedge' even in personal life.

Ralph Wanger (1933 - ) -

One of the more theatrically minded investment gurus, Wanger enjoyed the use of metaphors when describing the different types of investor groups. Typically exotic African animals , whereby all investors were zebras - vs the markets' lions – yet highlighting that the zebra pack consisted of 2 types.

The first type the institutional managers who stay 'safe' tucked into the middle of the pack though eating only poor quality trampled grass (ie gaining poorer profits). The second type the self-determining higher return investor, more risk confident willing to stand at the edge of the herd and eat better quality untrampled grass, though more prone to external attack.

Both inner and outer locations have pros and cons, much depending upon market timing; what Wanger determines as the terrain, altering from wide open, clear view plain to closed-in, narrow canyon, and the behaviour of the lions.

Originally from Chicago, he had a post-graduate degree in industrial management, entering the investment field in 1960 with Harris Associates, half-pragmatically and half-jokingly stating that he enjoyed the work “because there was no heavy lifting”.He went on to run the Acorn Fund and became President in 1977.

- look for good small companies, which are more attractive than big ones
- identify a major trend, then pick downstream companies that will benefit*
(* this an alternative to T Rowe Price's preference for industry leaders).

“buy small companies below their economic value, let the them grow, and sell them as proven successes at full economic value”
“even armies of analysts at the large institutions neglect small companies”
“most institutional money managers say that Wall Street research is useless...but then take thirty calls a day from Wall Street”
“follow the trends to see who is likely to the trend for middle-aged people taking-up various fitness regimes, leading to older people with bad backs and knees, which require treatment”
Within this a preference for easily understood basic firms run by capable management, as opposed to the then emergence of new-economy semi-conductor companies, amongst which he believes only a hand-full did well.

“its like the oil business or railroads...they transformed the world, but only a few truly made money”.
“the capitalisation of American railroads was effectively a reverse wealth transfer, taking the savings of the English and Scottish trusts and moving the wealth over here into the US”

(This then presumably highlighting the disadvantages of earl-stage speculation where a plethora of companies emerge and the need to overcome the mid ad long-term haul).

“in a transforming industry, the big money is made outside the core business”

On the proclivity of IT to dominate processes...

“Index funds, data-bases etc..its scary, someday you'll be able to go into a computer store and pay $80 for a portfolio manager programme. You'll put in everything that's know, and I'll be out of business. An 'expert system' can probably do it better”

(This has indeed been the case with HFT programmes, but their disadvantages have been recognised spanning from overtly simplistic modelling techniques, often looking for arbitrage, to propensity for flash-crashes, hence calls for reform. Plus IT driven and dictated markets effectively shuns the many millions of prospective individual investors across the 'developed and EM worlds).

On Asia...

“the populations of some of those Pacific Rim countries seem to work a lot harder and have more sense than anyone else”
“if investing in an airline (as he did with Cathay Pacific, Singapore and Malaysian) one should seek a line with a very large route, structure, short-feeders, little discounting and high growth in traffic rate”
“tourism and hotels another opportunity, having seen the Japanese come to America en mass, the Taiwanese will be close behind [did not happen] and then the Chinese [as seen] the likes of Carnival Cruise Lines, Disney Corp, and through luxury products, such as Waterford Glass”


The ability to predict is not easy, futurologists make wholesale predictions but only a small number have any real meaningful impact. As importantly, they are wrong on many counts, and had missed important changes that had come about.

“we are in a world where the environment changes at an increasingly rapid rate, I think concentrating on smaller companies improves the chances of catching the next wave”

[NB investment-auto-motives pertains that to date futurologists have overtly focus upon the 'technology story' that has emerged from the 'laboratory fringe', itself often remote from industry and with little relevance to companies or people; so theoretical solutions looking for a real-world problem. (Perhaps the only 'direct plug' being portions of IT research)

Whilst this 'fringe work' is usually aligned to prevailing macro-issue concerns, the fact is that the real drivers behind improvement are the profit motive: competitive advantage / performance improvement, cost-benefit, better satisfying an individual's need, the social desire, near-term political policy. But if technology - even 'white-heat','whiz-bang' - ads no or little true advantage it has little real impact and so little profit potential.

One electro-luminescent material seen recently on a BBC1 show and touted as 'the future' has existed for 25 years with little true impact. Whilst in the UK (unlike USA or Germany) the house bric, and related high labour content, has remained, the brick and the 'brickie' the economic model

Thus, feasibly migratory research must be coherent within the specific existing economic structure.]

Wanger uses the “tripod” of:

1. Growth:
growing market, good design, efficient production, sound marketing, healthy profit margin

2.Financial Strength:
low debt, adequate working capital, conservative accounting
a strong balance sheet enables working cap without need to dilute current equity

3. Fundamental Value (Price)
a good company with unattractive stock
(“institutionals often confuse a company with its stock”)

The Quit Game:
Wanger plays the 'quit game' whereby he hypothesises that an eccentric banking fried is willing to lend him all the money required to buy a company's whole stock issuance at 10% interest. If that appears a tremendous bargain (euphemistically) “I'll quit my job and go run that company”. If that 'eureka moment' does not exist, he looks elsewhere for better bargains
(Basically an imaginative 'stress test').

Stock valuation based upon future earnings for two years ahead, or for an asset divestment the break-up potential, also two years ahead. A future p/e figure is ascertained based upon the dividend discount model, so determining a set price. Next it calculates the expected rate of return if the stock advances to that price from current market price. Wanger uses this to view the discrepancy between his analysts expectations and market expectations.

“an attractive investment area must have favourable characteristics that should last five years or longer”, his portfolio turnover low at about 25% each year, so selling one-eighth the holding to buy other things. If the specific stock's purchase raison d'etre remains, it stays. Thus, as with other long-termists, the low turnover reduces trading commission expenses.

Real vs Unreal Banking:
[Tied to Steinhardt's prediction of the debt-tower collapse to come], Wanger highlighted the schism of 'real vs unreal banking'; that is when ever-rising accumulated debts (of badly administered uneconomic countries) [and subsequently sub-prime property purchasers] look good on a bank's balance sheet but in reality are never actually collectable.

This fear by the markets makes some banks under-valued, especially so small regional ones...”but we try to find the ones run by [credible and conservative] bankers”...since the term 'aggressive banker' is ultimately in practice an oxymoron that creates 'fantasy-debt' problems.

Government's Costs:
Wanger believed that in the US that social programmes such as social security, medicare, medicaid had become little more than ponzi schemes...”both politicians and would-be pensioners are worried” with the realisation that necessary national wealth created had slowed to a point where the government could not support the weight of financial obligations.

“one answer is to privatize the US pensions presented for Congress' consideration in 1997”...”as individually funded pension plans diversify they will buy small caps”.

Robert Wilson (unknown) -

Wilson acted in a typical 1990s / 2000s hedge fund manner holding both long and short positions, describing himself as a “long-term trader”

As regard shorts...

“There's always a new fad running about, crazily over-priced Net companies, hot new pharmaceuticals, something with no numbers attached is going to change the world”
“As the speculators rush-in the price increases, those speculators re-enforced by their in their enthusiasm buy more, putting the price higher still. New speculators rush-in. Soon the whole self-confirming perpetual motion machine is grossly over-inflated beyond any reasonable investment value. The 'rubber' begins to stretch taut. I take a short position. Thanks to brokers' enthusiasm, retail investors run the stock to its peak”
“I explain to others why the stock is absurdly over-priced: the management insincere, the plant antiquated, competition intensifying, costs rising, the market drying-up, a better product from Japan, debt to bankers or regulatory problems ahead”.

Train explains that for Wilson the brokers who puff-up concept stocks act like beaters at a European shoot, pushing the birds toward him.

After a two-year spell in the Army during the mid 1950s he went to work for various New York investment firms, managing his own money in the process. Unlike other wholly obsessed investors he has interests in the opera, horticulture and history, and though highlights the vital importance of wealth and making money actually lives rather simplistically, recognising the need for 'time out':

“I can do a year's work in 9 months but not in 12 months!”

As seen 'shorting' is a far more dangerous approach than 'going long', and this came to pass in the late 1970s when he set against Resorts International, before himself heading on an extended worldwide holiday. The company went from “one phony $1m to $50m over eighteen months; a momentous climb in business folk-lore. By the time the price had reached $120 per share he had lost $10m, and by $190 he had to close all of his long positions to cover himself. He put the failing down to a misunderstanding of company fundamentals itself not the market dynamic.

“to travel light”
- very rarely visits a company's management
- ideas generally come from stockbrokers
- use of concepts and perceptions rather than reality
- little concern for company details
- concern for what will push-up the price
- little general background reading
- only interested in intelligence on what he owns
- when he sells the stock throws away the accrued intelligence
- does not attend analysts meetings
- does attend US manufacturers sector gatherings
- indifferent to exact data (recognising its innate falsity)
- indifferent to corporate leaders
- wholly focused upon firm's general position
- the key changes in its circumstances
- don't theorize about a firm's competition
- wait for reality to emerge
- companies are often not destroyed by competition but complacency

[NB as an example of complacency he mentions the market share loss of US auto-makers during the 1970s, 80s and 90s, partially true, yet for investment-auto-motives, it could also be recognised that market expansion created room for 'imports' and the possibility that America itself sought Asian imports specifically to create trade and so political ties with Japan and S.Korea. The fortunes of domestic industries (cars, steel, agriculture etc) often have wider geo-political implications].

He buys unnoticed stock at low prices, and later when the market recognises its worth, will wait for a good market price “to let the public have the stock”, preferring what appear high risk companies since only such a stock is likely to strikingly head upwards.

Train states that it seems that his 'imaginative synthesis', unhindered by analytical detail, allows him to view the market outlook for a specific stock more easily than for a numbers orientated analyst, and that 'Wilson the speculator might well buy the same merchandise as Wilson the baloon-pricker'.

“buy companies that are doing something new and different, or in a different way”
“if you are betting on an election you don't bet on the best man, you bet on the man you think will win” reflecting his perception of the fact that he trades 'stock image' that will excite the public over the coming months of within the year, not 3 years out.

Key Rules:
1. find intelligent brokers
2. look for the fundamental idea in a stock
3. then keep a close eye on performance
4. seek uncommon insight about lesser known facts
5. look for pleasant surprises regards unexpected stock climbs
6. 'kick a dog when its down' about failing companies
7. don't act too soon even if you know you're right
8. beware of falling in love with a company
9. 'see the tree for the forest' regards company over-familiarisation
10. beware heavily researched stocks
11. beware popular stocks, for bloating value
12. it is better to sell a winning stock to late than too soon
13. a firm's sales market potential and management capability must be in sync
14. beware managements encouraging comments
15. beware windfall companies
16. accept taxes, do not invest to avoid
17. firms that weather recessions tend to perform better in good times
18. ignore the institutional level of the free-float
19. look for exec and mgmt personal share-holding as motivation

Peter Lynch (unknown) -

Son of a maths professor who passed-away very early, the younger Lynch experienced a change in his life's previously rosy outlook, and no doubt soon recognised the importance of financial security. Furthermore being born Irish-Catholic in 'establishment' Boston possibly either made him feel he had to always work harder, or chose to do so.
Working summer jobs he overheard golf course conversations that led him to bravely experiment early in the stock market with what for a young man is a sizeable sum, on a rarely known yet interesting stock. It rose enough (before being acquired by FedEx) to pay for his tuition at Wharton in 1966.

That golf world also assisted by providing a summer job at Fidelity when he caddied for its then President. After college he started at Fidelity as a full-time analyst and spanned various sectors before becoming director of research in 1974.

At this point Train summarizes a research department as an active think-tank, constantly visiting companies and concentrating intently on the most promising through individual peer reviews. In 1977 he took control of the small in-house Magellan Fund which later absorbed another internal fund, his 13 year tenure showing an impressive annual return. In 1990 aged 46 – the same age his father died - he resigned, recognising that “nobody on their deathbed wishes they'd spent more time at the office”. Perhaps equally he quit whilst still holding his champion reputation.


“my objective is to catch the turn in a company's fortunes...often there is a one to twelve month interval between a material change in a company's fortunes and the corresponding movement in its stock”.
“a lot of people I compete with seem to be looking for reasons not to buy...such as labour union existence, competitor actions, etc”
“to make money you must find something nobody else knows, or do something that others won't do because they have rigid mindsets”
“I've found on several occasions that the quiet facts tell a much different story to the ones being trumpeted”
“a technique is to wait until the prevailing opinion about a certain industry has moved from bad to worse, and then buy the strongest companies in those groups”
“its OK to make mistakes, the stock that goes from $10 to $20 pays double for the one that goes down $10 t $5”
“even when a company moves up from doing mediocre business to fair business, you can make money”
“my dream is a growth company in a slow growth industry, you know something has to be profoundly right about that situation”
“the best way to make money in the market is to find a small growth company that has been profitable for a few years and simply goes on growing”
“if you get the facts right you can make money on what seems a high p/e high growth company, assuming the price justifies its price”
“I can't say dividends are something I feature”
(gives little heed to possible dividend income)
“a horrible fallacy is buying a stock simply because it has gone down...'bottom-fishing'...if something was worth $50 six months ago and is $20 today it must be a bargain...but it was a bargain at $40 and $30, and might well be if it goes down to $ must have a clear conception of the true value and base decisions on that, not on the stocks recent performance history”
“you have to stay tuned”
“companies should complete stock buy-backs instead of undertaking non-synergistic acquisitions, where management's capabilities can be stretched beyond core competencies”
“if a company is successful for 20 years continually, the business model itself is strong, not necessarily the management”
“leveraged buy-outs are wholly unfair to the participating public, since a lowly valued listed company can be bought up by privateers tanks to a 'fair-purchase' note from a banker (for a fat fee)... to the detriment of minority share-holders...then dismantled to pay themselves and bankers bank...though the original company could well have naturally regained its previous higher valuation, so benefiting original share-holders and additional public participants”
“hi-tech companies may be just fine, but that doesn't do me much good if I can't understand them”
(meaning he would have to rely upon the judgement of industry specialists about technical issues, yet admits that he should have applied more thought relative to the majors, eg Microsoft etc)

Train highlights that Lynch trades between relative values of stocks, catching before the upside and downside turns, so not working with 'majestic conceptions'.

“you've got to go where other investors and especially fund managers fear to tread”
“my stock-picking method involves elements of art and science plus legwork and hasn't changed in twenty years”
“in a war don't back one side or the other, back the company that sells them both the bullets”
(like historical gold-rushes, where money was made by the out-fitters, food merchants, bars and bordellos)

1. growth companies that offer 2-3 times input investment over time
2. under-priced asset plays, 'value stocks' or smaller blue chips
(gain 33% or so and move on)
3. special situations and depressed cyclicals
4. defensive stocks, preferred to cash at 'bottom of the market'
(since cash cannot benefit from market rebound)

- numerous company visits both regionally and by country
(at its height 40 or 50 a month)
- an ability to 'read' execs personality types
(over-optimistic vs over-cautious vs honest and reliable)
- brevity in conversations to get to the crux
- attendance of regional brokerage conferences
- selective picking of corporate 'pitches'
- first-hand contact with firms, not wholly reliant upon desk research
- management is 'on-side' when you've done the homework
- ask management about the competition
(take note of all too rare praise)
- ask mgmt about suppliers and customers
(to gain additional exploratory possibilities)
- watch insider (exec / mgmt) 'insider buying'
- purchase of many sector inhabitants, later slimmed to favourite few
(like Jim Roger's approach)
- willingness to understand all sector and firm types
(a holistic outlook)
- take small positions in 'interesting' stocks
(to be reminded to follow them)
- constant shift of sector focus
- high turnover in portfolio
- small block trades
(most less than 10,000 shares)
- doesn't try to exactly 'time the market' for pin-point turns
- don't buy tips, least of all 'whisper' tips
- look at the world around you, shopping malls etc
(to see emergent trends)
- look for great company in lousy industries
(because the poor competition drops out)
- avoid the hottest stock in the hottest industry

Train makes an important observation about Lynch's broad outlook and wide spectrum of knowledge...

'he can evaluate and develop buying and selling targets all across the range of his huge repertoire of actual and possible holdings...he perceives far more opportunities than most investors since others reason that knowing more about a specific, limited field/genre than his/her competition will give advantage...but when that sector gets over-priced one is tempted to carry-on exposing the portfolio to risk, or branch out into some different under-priced sector where one can easily make mistakes out of ignorance'

Pertinent to the auto-sector in past times...

'detecting market inefficiency Lynch acts immediately...the domestic car companies seem cheap, he buys Ford, Chrysler and GM; they go up...he adds a collection of foreign ones – Volvo, Subaru, Honda, Peugeot and FIAT...the relative positions change again...he calmly reverses field'

- a firm selling at a low p/e which earns 10-20% on equity and 10% or so on revenues
- strong and understandable business franchise
- not after 'superstar' companies, simply 'good-enough' at low prices
- seek 'unit growth' to ensure physical growth QoQ and YoY
(not simply price hikes or income additive acquisitions)

Conclusion -

For the most part, these respective individuals were able to positioned themselves to ride the historical, though periodically volatile, boom that was the American 20th century.

From the re-bound the of the post depression 1930s to the post WW2 ferver of the 1950s and 1960s, to the exuberance of the financially deregulated 1980s and in some instances the technology boom of the latter half of the 1990s.

The people mentioned herein were and are seen as the upper-echelon of that broad investor group, people who became colloquially known as the 'Masters of the Universe'; as reflected by the 1987 film Wall Street, and even referred to in Pretty Woman of 1990. But whereas the former film's memorable quote was that “greed is good”, in many cases seen here the individuals involved have reportedly enjoyed a very comfortable yet relatively unaffected lifestyle.

The resulting riches for fund manager and clients were born from initial capital merged with an all important intellectual compulsion. A compulsion to for the most part find true 'value' in long-term money placement decisions, and in other 'shorting' instances, the recognition that greed-induced over-inflation of specific stock prices will eventually lead to a burst bubble.

Thus far from the 'more, more, more' attitude conveyed about money managers, the facts appear that most are, and indeed need to be, very level-headed, typically with a great sense of personal responsibility.

People often able to initiate new perspectives through deep and rounded thinking, so altering the broader investment community perceptions; which in turn changed the dynamics of capital markets themselves. Not hype mongers, but what investment-auto-motives calls 'Economic Situationists' who are able to see beneath the surface of the immediate.

[The term 'situationist' derived from that post-modern philosophical group which existed between 1957 and 1972. They were able to see “the beach under the pavement”, referring to the underlying sand. The irony is that they were anti capitalists, and though aspects of their criticism were justified, it was their ability to view the world very differently which has been paradoxically adopted here for the 'Money Masters'].

The lessons such individuals purport, which are perhaps of greater importance today given the global need for economic equilibrium, is the fact that market valuations, and so the potential for profit, must be based upon sound logic. Logic derived from analysing the basic quantitative and qualitative fundamentals of a company and those of the geographies it operates within. So a world away from the esoteric financial instruments whose complexity shook the foundations of what should be a progressive and 'fair for all' global capitalist system.

Fifteen years ago the collapse of LTCM arguably highlighted the discord between its name and investing principles, while five years ago a western world awash with invisible toxic debt stretched capitalism to the limits of credulity.

Today, in the present interest-rate suppressed US, UK and Europe, all investor types ought to use this unprecedented period of desperate investment need and opportunity to re-utilise the mentalities and basic tools that those 'masters' plied.

Post Script :

Summary of John Train's background and achievements:

Post Post Script :

Obviously the aforementioned names represent only a portion of those recognised as 'great investors', thus other names well worthy of interest are:

- John 'Jack' Bogle
- David Dremen
- Philip Fisher
- Bill Gross
- Carl Icahn
- Jesse L. Livermore
- Bill Miller
- William O'Neil

- James D. Slater

Saturday, 10 August 2013

Industry Practice – Investment Rationale – Wise Words from the Leading Lights (Part 1)

The Q2 / H1 figures from all global auto-companies have been released, and so as is the norm, investment-auto-motives has been investigating the 'bottom-up' intelligence gleaned from available figures relative to the 'top-down' context of regional macro trends. The former utilised in the formulation of 'Coupled Ratios' analysis, which itself seeks to graphically display the investment dynamics of the sector.

This to follow in a successive web-log.

By providing a double aspect view of Market Valuation, Profitability, Liquidity and Debt, 'Coupled Ratios' was and is an attempt to provide an improved ability for investors, from privateer to institutional trustee, to rationally contextualise and track the positions of the main automotive players, both as individuals and as a group.

Thus 'Coupled Ratios' was obviously devised so aid investment process intelligence, be it only one part of the complete jigsaw to do so. It intentionally sits as the simple 'country cousin' to the 'city slicker' that is modern-day 'quant' analysis - complex mathematical equations driving algorithmic high-speed trading.

Given that the future of capitalism rests upon mass populations' improved appreciation and trust of investment principles, there should, indeed must, be a re-assessment of those far simpler methodologies; those derived from history and understandable to even the most basically numerically literate person – from a Manhattan penthouse to a Mumbai slum.

So that an ever increasing number of people can participate in and so grow both the global investment funding pot and its very structure. And though financial hubs are indeed necessary, a notable move away from the 'ivory tower' syndrome which exists, which when inadvertently toppled by complex financial instruments only serve to damage the finance industry's reputation, the public purse from 'bail-outs' and the future financial security of the average man and woman.

However, the creation of 'Coupled Ratios' and the intent behind it are but nothing to the learning and knowledge of the investment world's past-masters.

To this end, this web-log and the next will relay in what is hopefully a concise manner the advice of those luminaries.

The following text is essentially an overtly simplified, very, very abridged version of the book 'Money Masters of Out Time' as compiled by John Train, the founder of a long established investment firm, author and contributing writer to various financial newspapers, and first published in 2000.

The persons covered in the book are:

- T. Rowe Price
- Warren Buffet and Charles Munger
- John Templeton
- Richard Rainwater
- Paul Cabot
- Philip Fisher
- Benjamin Graham
- Mark Lightbown
- John Neff
- Julian Robertson
- Jim Rogers
- George Soros
- Philip Carret
- Michael Steinhardt
- Ralph Wanger
- Robert Wilson
- Peter Lynch

It must be noted that today's far more globalised, complex and inter-connected world can be viewed as a different animal to the largely US centric world in which many of these people operated as the best of broader group who for the most part rode were able to ride portions of the American 20th century economic boom. However, such experiences should have valuable insights for those seeking to best ride global and intra-regional economic development today and into the future

[NB all quotations are paraphrases]

Thomas Rowe Price (1893 – 1983) -

“Stick with the best companies in the highest growth industries”
“Be suspect of Wall Street valuation models”

[this typically referring to the much vaunted DCF (discounted cash-flow method) which itself can be malleable to suit over-optimistic data inputs on sales etc to suit prevailing management desires. This was the undoing of the UK domestic motor industry in the 1970s, 1980s and 1990s]

“Many complex mathematical approaches create the illusion of certainty, nothing could be farther from the truth”

[the CDO sparked financial crisis obviously attests to this]

“In the post 1974 bubble world I sought-out 3 categories of investment criteria:
1. growth stocks of the future (early point in their life-cycle)
2. value stocks of established companies (at good prices though matured)
3.'mixed grille' companies (at basement bargain prices).

Warren Buffet (1930 - ), Charles Munger (1924 - ) -

“the investor should have six basic characteristics”:

A. animated by controlled greed, and fascinated by the investment process, yet don't be hurried by greed...if too interested in money it will (both metaphorically and literally) 'kill you', if not interested enough you won't go to the office. Above all enjoy the process.
B. have patience with holdings that are taken
C. think committees...”if you don't know enough to make your own decisions, get out of decision-making”
D. self-confidence and self-security should come from knowledge, without being rash or head-strong
E. recognise and accept when you don't know something
F. be flexible as to the types of businesses bought, but never pay more than the business is worth now, or its worth in due course.
“sometimes though the bell rings and you can almost hear the cash register”
“the bigger fool in the 'bigger fool theory' – accepting a bad buy and seeking to sell it on – is usually the original buyer and not the intended victim.


“be a genius of sorts” (in whatever sphere) [presumably to confirm intellectual capability]
“possess a high degree if intellectual honesty”
“avoid any significant distraction”

“recognise that only a few businesses are truly exceptional”, their characteristics are:

1. good return on capital without accounting gimmicks of lots of leverage
2. they are understandable, and what motivates all stakeholders from stockholders to management to staff and to suppliers
3. they see their profits in cash
4. they have strong franchises (ie branding) and so have pricing power
5. they don't take a genius to run
6. earnings are predictable
7. not natural targets of regulation
8. low inventories and high turnover
9. owner-orientated management
10. high rate of return on inventories and plant (ie high utilization)
“the best business is a royalty on the growth of others, requiring little capital itself”..this essentially meaning that it directly benefits from the growth of others with little in-house expenditure.

“bad business include”:

1. retail (ironic given that aspects of Berkshire Hathaway's growth included the former),
2. bet the company situations (eg aircraft makers),
3. farm-related enterprises (given long inventory cycle of the crop year, possibility of crop failure, and upfront farmer's costs),
4. dependence upon research and development (seeing R and D costs as a problem not a strength).
5. debt-burdened companies
6. 'chain letter' businesses (geometric growth requiring ever more cash)
7. dishonest management
8. long-term service contracts

Buffet previously espoused that one should “avoid smokestack American industries requiring continuous massive investment, many of them are in trouble because of strong competition, over-regulation, rising labour costs etc”..”the symptom is that to stay in business requires more money than can be be retained out of reported earnings after paying reasonable dividends on the new stock and interest on the new bonds that they constantly issue”.

[NB this was of course long the case for GM and Chrysler of old prior to Chapter 11 bankruptcy, and indeed a 're-mortgaged' Ford, and still arguably is in the long term inside the US even with recent complete 'write-down' re-births. Hence far far greater reliance upon EM regions able to replay the early 20th century American industrial model in the 21st century; the new headwinds being EM political and socio-economic demands of those countries].

“understand at least basic accounting principles, the bedrock of investment analysis...without it the investor cannot understand the discipline, let alone find where the truth lies...understand changes to accounting methods (eg meaning if a switch from LIFO vs FIFO) etc.

“be aware the dangers of management stock options, which is detrimental to the external stock-holder's income, the manager then gains from the upside but not exposed to any (possibly self-induced) downside in the businesses fortunes”

Buffet's co-operator Charlie Munger similarly sets out 8 principles:

1. specialisation often produces very good business economics
2. advantages of scale are important
[NB these the corner-stones to Germany's global-reach Mittelstand businesses]
3. technology business improvements must serve the shareholder before customer
4. investors should figure where they have an edge and stay there
5. 'bet big' when the the right moment comes, otherwise never
6. a significant discount means more upside and a greater margin for safety.
7. buy quality even if its costs more
8. low turnover reduced taxes and increases returns

John Templeton (1912 - 2008)

The ten principles:
A. portfolio diversification across various sectors
B. search many markets for companies selling at a fraction of their true value
C. be sector specific and country specific
D. hold flexible viewpoint(s), see past the .surface'.
E. understand the negative importance of 'expropriations'.
(this being the impact of constraints that destroy investment value, such as price controls)
F. be detached from crowd psychology (typically enthusiasm vs desperation)
G. question business management about competitor capabilities
H. use all cost-efficient available intelligence sources
I. don't trust rules and formulae
K. the four universal criteria are:
- p/e ratio
- operating profits margin
- liquidation value
- growth rate and earnings consistency.

Richard Rainwater (1943 - ) -

A seemingly rarer type of long-term investor, who would essentially scenario-plot the expected future, imagine the 'shape' of what a 'perfect type' of company would take and then seek out current companies which approximated the notional ideal.

Having found a company of that ilk, he would become an activist investor, working as investor / consultant / merchant banker so as to re-mould the company into his envisioned version.

Strategy elements:
“I'm interested in large industries and companies that offer products the whole world needs”...

A. target a major industry in disrepute and ripe for change
B. Identify a particularly attractive company or sector target within that industry. This he refers to as the 'double-play', gaining at company and sector structural levels.

...and “companies which has a long-term sustainable advantage, or 'impregnable business franchise'”

C. find a “world-class player” to run the show, rather than personal hands-on management.
D. never enter an investment alone, creation of a partnership with trusted colleagues and specific industry experts
E. improve the risk-reward ratio through financial engineering

[NB though in this present new era, because of the leverage effect which snowballed the financial crash, financial engineering has become problematic, though the long low interest environment will no doubt unfortunately regenerate this approach].

Paul Cabot (1898 - 1970s)

Long passed and an elder statesmen of the investment community, this passage of the book starts with his election to JP Morgan's board as a young man and describes him as “the dean of institutional community in Boston for many decades”, having run Harvard University's endowment fund for 17 years and at State Street Management.

Importantly he heavily criticised the mutability of large educational endowment fund trustees who could be convinced to change their typically conservative stance by excessively exuberant influences in what rightly appeared to him as the late phases of an economic and business cycle.

His personal investments included only 'good grade' municipal bonds where local administrators has a sense of local responsibility.

“realism and care”...”I've only got confidence in older men who have been through depressions, recessions, wars and all the rest of it”.

Philip Fisher (1907 – 2004) -

Apparently a man of simplistic behaviour who abhorred superfluous administration.

General perspectives:
- not a lot of 'good' investments, just a few outstanding ones
- companies with outstanding business management and technical leadership
- understood manufacturing, avoided financials
- concentrate on growth from intrinsic worth
- only sell for one or more of three reasons:
a) you made an appraisal mistake
b) the company ceases to qualify under same appraisal method
c) if a better opportunity elsewhere arises
- mature companies fine if:
1. able to maintain low cost production
2. constant cost-cutter across the business
3. innovation culture
- do not throw away the investor advantage of valuable knowledge gained about certain companies in favour of comparable scant knowledge regards new companies
- do not sell because you think the stock is too highly priced, or because it has gone up a lot.
- a truly great company grows indefinitely
- act conservatively to make capital grow in a practicable manner
- recognise mature companies past their prime relative to their more dynamic younger international competitors.

Fisher believed that 'outstanding companies' enjoyed two aspects;
A. characteristics of the business
B. quality of management

A. business characteristics:
- growth from both existing and new products
- high profit margin
- high return on capital
- effective research (management and technical)
- superior sales organisation
- advantage of comparative scale
- valid 'franchise' (brand power)

B. management quality:
- high integrity
- conservative accounting methods
- accessibility for investors
- long range outlook
(at the expense of quarterly earnings as required)
- excellent financial controls
- multi-disciplinary skills
- specialist knowledge associated to specific industry
- good personnel policies (staff and management)
- continuous programme of cost cutting

Other issues recognised were:
- exceptionally high profit margins attract new competitors, often better to have a small competitive edge plus a high turnover, so leaving little competitive incentive.
- greedy managers are likely to issue themselves new stock options when the company exists valued 'under book' during lean business and economic periods, only to grow, then achieve 'price to book' or over because of market sentiment, without the management having fundamentally altered the companies general shape or directly improved its natural health, yet able to cash-in on their stock options. This seen as extracting innate value from previous and recent external share-holders.
- management that pursues short-term goals whilst talking 'long-term language', this seen via short-term creative accounting, which “borrows from the future to boost near term results”.
- viewed that institutional investors soon recognised such traits and so effectively 'capped' the innate long-term valuation of the company concerned.
- the all too typical over-optimism of annual reports...”the officers of a company seem to view the report as a form of advertising”

Three stage company analysis:
1. view all publicly available material
2. use the 'scuttlebutt', that is industry forums (events to grapevine)
3. company visits

“A company best serves its investors by management following a constant, predictable dividend policy”
“Higher dividends means lower corporate re-investment, and a lower long-term growth build-up of value...which investment is all about”

Benjamin Graham (1894 - 1976)

Seen as the grand-daddy of 20th century investment, influential through his 2 primary publications, his career greatly assisted when made a partner by the age of 25, and forming his own investment pool in 1926.

However, as a mathematics enthusiast and so a near purely numbers-driven quantitative analyst, he was perhaps overly reliant upon just the numbers and far less appreciative of the macro-trends.

“have the ability to say no to apparent opportunities, many times over if necessary”

“diversification is important, a singular investment might go wrong, but that effect buoyed by a the range of others, a type of pro-active insurance”

“a holding may fail to be an investment and thus mere speculation because the analysis, the safety or return is lacking”

“the market pays no attention to reality during periods of speculative enthusiasm”

“The fact that other people agree or disagree with you makes you neither right nor wrong. You will be right if your facts and reasoning are correct”

“seek-out 'bargain issues', companies selling for less than their current net asset value - “cigar butts”

“it always seemed ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone – after deducting all prior claims, and counting as zero the fixed and other assets – the results should be quite satisfactory; they were so in our experience for over 30 years”

“sometimes the patience needed is quite considerable”.

“yet in times of gloom, as any practicising securities analyst knows, you always have any opportunities”.

Six methods used by Graham's fund:
- buying of stocks at two-thirds or less of their net current assets
- buying companies in liquidation (80% + hence of making 20% return annually)
- risk arbitrage: playing both buy and sell sides of an acquisition
- “convertible hedge”: buying a convertible bond or preferred stock whilst simultaneously selling the common stock it converts into.
- buying control of a company selling for less than its worth to force realisation of the assets
- “hedged investing”: buying long one security and short another to balance-out.

Noted by 1939 that “hedged investing” was to precarious to continue.

Indeed, for the average retail investor, only the first method is still periodically available, since the others have become so professionalised.

Undervalued assets were key, he didn't care what the company did or whether the management were capable, simply the level of under-valuation, hence very happy with liquidations.

By the 1970s his theorems had become adopted as core techniques for all professional and good amateur investors, so the competitive advantage seen to be diminished.

He then proposed a much simplified approach based on:

1. purchase of common stock at less than working-capital value, or net current asset value, giving no weight to plant and other fixed assets, and deducting in full all liabilities from current assets.
2. purchase of common stock at seven times reported earnings over previous 12 months

“at bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public”

with in 1976, building on previous standing:

A. purchase of common stock at less than two-thirds of net current assets giving no weight to fixed assets and deducting all liabilities in full, and thereafter sold at 100% of net current assets
B. the company should owe less than it is worth
C. the dividend should be no less than two-thirds of AAA bond yield.

Selling points:
1. after the stock has gone up 50%
2. if the dividend is omitted
3. if earnings decline that make current price is 50% over new target price

Interestingly Graham stated that it is perhaps irrelevant if the investor knew nothing about the company being selected, he had such faith in the numbers

[NB in the 2000 edition John Train ends the synopsis of Graham by rightly stating that the overly simplified 'all numbers approach' is overtly hypothetical, and that a mix of 'deep numbers diving' (bottom-up) and macro-appreciation (top-down) would return and has become the norm].

Mark Lightbown (1963 - ) -

By 2000 Lightbown had earned a reputation as the EM investment manager, amongst those operating in a 'classical style' of stock-picking, not just EM mass-buying as seemed the case in the late 1990s after the Asian Tiger Economies crash.

His interaction came with recognition of the potential in South America, Chile specifically given its richness in natural resources: copper, timber, agriculture and fishing; after the Allende-Pinochet era.
- focus on 'true worth'
- derived from market capitalization, including and excluding debt.
- compare results to sector peers
- review against self-calculated (not market set) valuation.
- if attractive, set a price range for stock purchase

'True Worth':
- determine the FCF (Free Cash Flow)
- preferred method is to use operating profit plus depreciation and amortisation, then subtract the amounts required in plant and equipment and additional working capital to maintain the expected growth rate.
- this determines whether the company will still spin-off cash to its owners, or if it will instead demand fresh equity to support growth.
“the aim of every business is to create economic goodwill”, ie to grow its innate value.
- determine at which stage or aspect of the business true added value arises

“ I seek management able to grow the business on incremental invested capital”.
“management must have 'intellectual integrity' (ability) to appreciate the future”.

Macro and micro viewpoints:
- EM countries must have aligned President and Congress to support pro-capitalist reforms
- a country must see beyond its natural resources base, to trade and 'people-soft' activities
- indigenous population must want to save and invest, so create a virtuous domestic cycle
- a large trade surplus can be viewed as strong 'national savings'
- homogeneous population with no of few ethnic rivalries, toward common goal.
- educated and aspirational population
- good savings to investment channels, esp for all new infrastructure
- a basic legal and technical system to permit capital movement
- existence or arrival of a stock exchange
- little / no government intervention
- low and stable tax rates
- deregulated labour force
- structural reformation is easier in a country of 'manageable size'
- extracting useful information about a company from its competitors is problematic
- get to know the owner-capitalist of the company, s/he has the same problems
- good companies penetrate far corners of the country, so good distribution channels
- the substantive reality of 'siphoned goods' into the hands of criminal groups

“don't wholly believe local sources of information, even investment 'professionals' get a feeling for how things really happen you should travel extensively by public transport around the country that you are interested in...sniffing around the countryside and provincial cities is far more instructive than worrying about the latest opinion helps you build a mental model of how different components of the country local newspapers likewise”

“the ultimate prize in EM investing is to find a medium-sized company with a solid position in its economy that is on the way to becoming a big company, and eventually a regional or world-class company”

“critical to EM regions is assessment of competitive forces, whether the true market strength of a company is because of its own capabilities” (possibly having acquired competitors) “or because a multi-national has not arrived”

“be patient”

“if you buy a good company that is a valid takeover candidate, you're sitting there when a big multi-national makes an offer”.

To Follow -

A summary of John Train's perspectives on:

- John Neff
- Julia Robertson
- Jim Rogers
- George Soros
- Philip Carret
- Michael Steinhardt
- Ralph Wanger
- Robert Wilson
- Peter Lynch