Some links

Graham & Doddsville Winter 2016 issue (Edit: the Craig Effron interview is a MUST READ)

TGV Partners Fund 2015 letter  explaining the Mutui Online investment plus thoughts on Tech stocks and Oil & Gas from a value investor perspective

Cliff Assness vs. Eugene Fama (on momentum)

Pipeline companies, distress, long term contracts and more

The “indiscriminate” sell-off of European Banks (WSJ, google for Headline)

AIG vs. MetLife from Aleph blog

Some fun with probabilities and Russian Roulette

 

Gaztransport (GTT), Cheniere (LNG), Swatch

Gaztransport – Dodged the bullet..

Well, that was quick. 2 weeks after I reviewed Gaztransport, they have dislosed the following:

2016-01-29

Paris, 29 January 2016 – GTT (Gaztransport & Technigaz) announces that it received today a notification from the Korea Fair Trade Commission informing the company that an inquiry has been opened into its commercial practices with regard to its Korean shipyard clients.

The result: The stock price dropped  ~20% in two days:

Read more

Guest post: Investment Theory: RoCE – some thoughts on a helpful, but sometimes misleading concept

I am happy to present one of the infrequent guest posts. This time a very interesting general post on RoCE (Return on Capital Employed) and Brand value by contributor Knud Hinkel.

Executive Summary:

The RoCE is an important ratio for value investors. However, as it regularly relies on balance sheet data, the concept is susceptible for at least two inconsistencies: (1) Items on balance sheet are not correctly reflected in the EBIT, and (2) items that contributed to EBIT are not reflected in the capital employed. My hypothesis is that the RoCEs of industries with significant self-created intangibles like consumer and software companies are subject to a systematic upward bias and this might light lead to a wrong judgment of (1) the underlying company performance, (2) acquisitions, and (3) the capital intensity of the business model.

Read more

Some links

Why drivereless cars might become reality more slowly than we think

A great inside story of a bank trader who was down 200 mn USD on a single oil trade

Rob from RV Capital has released his 2015 letter. +46,7% in 2015 and a new stock: Trupanion

The Punchcard blog on Ackman’s Q4 letter and “platform value”

Rare interview with “Big Short” Steve Eisman

Interesting matrix on relevant types of moats per sector (H/T Valuewalk)

Wertart goes “deep value” in Australia with LogiCamms

Book review: “Capital Returns” – Edward Chancelor / Marathon Asset Mgt.

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“Capital Returns” is an edited collection of investor letters from UK based Marathon Asset Management. Before reading the book,I actually didn’t know much about Marathon.

On their website, they summarize their strategy as follows:

At the heart of Marathon’s investment philosophy is the capital cycle approach to investment.  It is based on the idea that the prospect of high returns will attract excessive capital (and hence competition), and vice versa.  In addition, an assessment of how management responds to the forces of the capital cycle and how they are incentivised are critical to the investment outcome.

This capital cycle approach is very interesting. As mentioned above, the book has no direct narrative. The investor letters are however clustered together in chapters with similar main topics:

  • Capital cycle, sectors (automoblie, commodity, cod fishing, beer, oil)
  • Growth (Colgate, Geberit, Intertek, Amazon, digital moats, Rightmove, Baidu)
  • Management (incentives,  pro cyclicality, capital allocation, Sampo, Scandinavia, family ownership, Richemont, management meetings, culture)
  • Crisis (Anglo Irish, securitizations, private equity, Spanish property, German banking, Northern Rock, Handelsbanken)
  • After the crash (Spanish construction, Bank of Ireland, PIIGS, low interest rates
  • China
  • Funny “Greedspin” Christmas letters

The book is not so easy to read because the letters themselves, despite very well written, are very condensed with a lot of deep insights. I always had to take a kind of a mental break after one or two letters in order to digest everything

Overall, I would characterize their approach as follows:

  • International with an European focus
  • generalist approach, all sectors, differenent business models
  • transformation from “cheap” to “quality” over the years
  • they also invest into financials
  • the invest relatively diversified

 

Essential personal learning experience

The main take away for me was that their supply focused capital cycle model enabled them to see and avoid many of the problems (CDOs, housing, commodities, PIIGS, China) well in advance. Most analysts focus on the demand side only and forget about supply.

This is something to keep in mind for the future. As a bottom up investor, I think their approach can improve decision making without going into useless macro analysis. If you just look at single companies, one might miss some of the overarching issues in the sector (TGS Nopec…..).

Marathon Track record

The question always is: Talk is cheap, how about their returns ? At least from their website, it seems that their funds made 3-5% outperformance p.a.  constantly  on a 3, 5, 10 and 20 year basis. This is very remarkable for a manager with a couple of billion under management.

For me it was also interesting to see that they not only share many of my personal opinions about investing, but that there is also a nice overlap of companies I find interesting and what they found interesting, for instance Lloyds Banking, Admiral, Handelsbanken and Koc as a well managed family owned company. Clearly there is some “confirmation bias” at work from my side, but still interesting.

Recommendation:

Overall, the book is an essential”MUST READ” for any investor. The major drawback is that it is currently only available as hard cover at around 37 EUR.

The “value option” is to be found on their webpage where they published some of their investor letters for free.

There is also a similar book on the time period from 1993-2002 called “Capital Acocunt” which costs around 80 EUR on Amazon.

Overall, for me Marathon is clearly one of the “Gurus” in investing and it makes a lot of sense to pay attention to what they are doing. Especially if and when they re-enter oil and commodities.

P.S.: the editor, Edward Chancelor has also written one of my all time favourite financial books: “The Devil took the hindmost” from 2000. If you like financial history, this is also a “must read”:

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Greenlight Re (sell), Handelsbanken (buy) & Bill Ackman

Greenlight Re

Following the E.On discussion, I really asked myself if it was such a good idea to invest into Greenlight Re.

My argument was as follows:

  • the stock looks historically cheap
  • Einhorn had a few very bad years
  • based on its track record hw might do much better in the future

After the E.On discussion however, I recognized the follwoing: Whenever I looked at a stock that Einhorn bought (Delta Lloyd, AerCap, SunEdison, Consol, E.on), I never understood why he did it or I thought it was not a good idea. Even if I look at his 20 bigest disclosed positions, I don’t find any stock that I would buy on my own:

     APPLE INC    AAPL  US
GENERAL MOTORS CO    GM  US
ISS A/S    ISS  DC
CHICAGO BRIDGE & IRON CO NV    CBI  US
TIME WARNER INC    TWX  US
MICHAEL KORS HOLDINGS LTD    KORS  US
AERCAP HOLDINGS NV    AER  US
CONSOL ENERGY INC    CNX  US
ARKEMA    AKE  FP
AECOM    ACM  US
ON SEMICONDUCTOR CORP    ON  US
BANK OF NEW YORK MELLON COR    BK  US
TAKE-TWO INTERACTIVE SOFTWR    TTWO  US
GREEN BRICK PARTNERS INC    GRBK  US
MICRON TECHNOLOGY INC    MU  US
MARKET VECTORS GOLD MINERS    GDX  US
VOYA FINANCIAL INC    VOYA  US
LIBERTY GLOBAL PLC-SERIES C    LBTYK  US
DILLARDS INC-CL A    DDS  US
APPLIED MATERIALS INC    AMAT  US

That in effect lead me to the conclusion that I am most likely the wrong kind of shareholder for Greenlight Re. If things go really  bad, I am not sure if I would have enough trust to keep the position or if I would get really nervous because I could not identify with the manager.

Secondly, I honestly don’t have much insight, how Einhorn generated his fantastic past track record.

Together with not liking his long position, I think it was a mistake to invest in Greenlight and I sold my stocks as mentioned in the comments at around 18,45 USD per share with a tiny profit of around +2,5%.

It could well be that Greenlight maybe has a spectacular 2016 but as I have mentioned above, one should not allocate money to someone where you don’t understand what that manager is doing. Conviction is important to withstand all kind of behavioural traps in investing.

Finally, I am not sure if there could be some isues on the Reinsurance side. AIG surpisingly disclosed a pretty massive reserve strengtening for Q4 and it looks like that this is mostly “long tail” exposure from long ago which is also the “bread and butter” business of Greenlight Re.

Handelsbanken

Following the market turmoil, I began to establish a first (2%) position in Handelsbanken. Purchase price was on average ~98 SEK per share. Valuation wise they are now at a level where I would expect to earn around 16-17% p.a. long term which looks atractive to me despite potential short term head winds.

I plan to increase this to a full position over the next months. I funded this position by selling some of the HT1 bonds, as I want to keep some cash (~10%) in order to be flexible if some of my watch list shares become really cheap.

Bill Ackman

Bill Ackman came out with his Q4 letter to investors just a few days ago. His results were similarily bad than Einhorn’s with -20,5% after fees for 2015.

There was already good coverage on his letter for instance from Matt Levine.

My 2 cents on this:

  • compared to Einhorn, he mostly blames others for his losses (index funds, copycats, the market)
  • he doesn’t seem to fully understand how index funds work
  • funnily enough, he accuses index funds that their only goal is to “attract more funds” at low costs. Why did Ackman then create the public vehicle Pershing Square Holdings ? Well, he also wants to attract more fund but a high costs.
  • he thinks that there are not enough activists. Understandable from an activist perspective. Subjectively I have the feeling that Carl Icahn alone is activist at every single stock in the US.
  • at least he admits that “platform” companies like Valeant are not such fantastic cases per se.

On a personal level, I do think there might be already TOO MANY activists. Many of them only care for short term payouts which, in many cases, might not be benefitial for long term share holders.

All in all, if I would have money invested with Ackman, I would really ask myself if I would trust a guy who only blames others for his misfortunes.

 

 

 

 

 

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