Monthly Archives: April 2015

Some links

Looks like that the 3rd Romanian stock gets finally listed in London: Fondul Proprietatae (h/t valuewalk)

Good (partial) interview with the guys of Boyles Asset management

Wertart has a post on French Microcap Microwave Vision

The UK Value investor with a great analysis on what went wrong with his Balfour Beatty investment

FT Alphaville has some issues with Greak stock Follie Follie

And finally the MUST READ: Credit Suisse Global Investment Return Yearbook 2015 (h/t Meg Faber) with, among other, some very interesting 115 years (!!!) historical data on industries

Time to admit a mistake – but still slow investing …

Time to admit a mistake: Thanks to reader Roger, I found out that my table showing the tax benefit in the “discovery of slowness” post has some major errors. This was the table from the post:

turnover/year Total gain AT p.a. AT in% of max
1 1024% 8,4% 35%
2 1735% 10,2% 60%
3 2061% 10,8% 71%
4 2284% 11,1% 79%
5 2363% 11,3% 82%
6 2444% 11,4% 84%
7 2529% 11,5% 87%
8 2616% 11,6% 90%
never 2896% 12,0% 100%

Well, as always, what looks too good to be true isn’t true and now, you will not reap such large enefits by extending the holding period only a few years.

The mistake was that I actually did not calculate a full sale at each intervall but only a partial one. If I calculate the effect of a full sale, the table looks like this (with hopefully fewer mistakes):

Avg. holding period Total P.a. In % of total
1 1024,3% 8,4% 35%
2 1068,5% 8,5% 37%
3 1112,8% 8,7% 38%
4 1232,0% 9,0% 43%
5 1201,2% 8,9% 41%
6 1245,0% 9,0% 43%
7 1361,3% 9,4% 47%
8 1558,9% 9,8% 54%
never 2896,0% 12,0%

It’s very easy to see that only the 1 year and 30 year number were correct, but in between the benefit of a longer holding period accrues much slower than in the initial version. The strange behaviour in the 4-6 year range is due to my arbitrary cut off at 30 years.

Holding your stock on average 8 years vs. 1 year still gives you 50% advantage after 30 years but it doesn’t look that spectacular. And to be honest: What fun it is to have for portfolio fixed for 30 years to gain the full “magic of compounding” before tax?

That led me to another thought: What is the impact if you manage to hold at least a certain percentage of your assets for along time ?

Again a very simple table to illustrate the effect and again hopefully with only a few mistakes:

% 30 year vs. 1 year Total p.a. In % of total
0% 1024,3% 8,4% 35%
10% 1211,5% 9,0% 42%
20% 1398,6% 9,4% 48%
30% 1585,8% 9,9% 55%
40% 1773,0% 10,3% 61%
50% 1960,1% 10,6% 68%

This table shows under the initial assumptions (12% p.a., 30% tax on realized gains), how a portfolio develops consisting of one sub portfolio with 30 year holding period and the other with annual turnover.

The results are interesting if compared to the first table: Even if you manage to hold only 10% of your assets for a really long time, this is equal to increasing the total holding period of the portfolio to 4-6 years.

So a small percentage of very long holdings really can create quite a nice benefit after tax, even before transaction cost etc. Intuitively I was trying to achieve something like this by defining a “core value” sub portfolio but I didn’t focus that much on long holding periods yet.

So what now ?

This is what Roger commented:

If they are relevant for you and your investment strategy (as your article suggests) I would suggest to revisit your calculation.
At least for me it would be quite annoying to change my investment habits due to an important insight from a calculation and later having to recognise that calculation was obviously wrong.

Well the good news is: Holding stocks longer is still positive even with the corrected numbers. But more important was this part of the original post:

Secondly, and even more important, being slow in my opinion is the best defense against any kind of behavioural biases.

I think this holds true in any case and the tax effect is just a niece side effect. I hope that the major “behavioural” benefit from this rule will be better investment decisions and the ablitity to hold winners for a longer time. If I look into my personal portfolio, a disproportionate amount of “alpha” comes from my long term winners, not from my rather short term special situations kind of investments. And rather nothing on average from short term “spontanious” trades.

I don’t think that I have to sacrifice anything by limiting myself to one position change per month.

Even more, since I decided for myself to slow down which I did already a few months ago, oddly enough I feel more relaxed overall with regard to the markets and my cash position. I have to admit that I used to pressure myself to come up with many new ideas before actually drilling deeper into existing ones. Especially right now, with a lot of annual reports coming out, I used to feel some stress in the past. This year I am actually quite relaxed. As I already know what I do in April (buy a fund), I now have a lot of time and leisure to prepare a potential transaction in May.

Performance review March 2015 – Comment “Should an active investor give money to a money manager ?”

Just a quick reminder: this will be the last monthly update, from now on I will switch to quarterly updates.


In March, the portfolio gained +2,1% against +3,6% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)). Year to date, the score is +11,5% against +20,2% for the benchmark. Since inception, the portfolio is up 104,3% vs. 73,3%.

Major winners were TFF (+19,6%), Drager (+8,4%), Hornbach (+6,5%) and Thermador (+6,0%). Losers were Ashmore (-7,1%), Van Lanschot (-6,4%) and TGS (-4,3%).

Overall, performance was again behind the benchmark but with around (2,1/3,6)= 58% of the upside fully in line with the current allocation of the portfolio with regard to cash and beta of the investments.

Portfolio transactions

In line with my self-prescribed “slowness” I only made one position change this month: The full sale of my KAS Bank position in mid march. Within my existing positions, I added to my Romgaz stake following the good results.

Cash and “cash similar” positions are now at around 27%, a pretty high percentage but maybe not too bad going forward. So far of course, the conservative approach has cost me a lot of performance, but the year is not over yet. The current portfolio, as always can be found under the respective portfolio page.

Comment “Should an active investor give money to a money manager ?”

I am currently preparing my first investment into a fund actively managed by someone else. For me, as an active investor, this is quite unusual, so far I have only invested in ETFs in order to gain exposure to sectors or directly into stocks and bonds. The big question here is of course: Why should I pay management fees for someone doing the same stuff that I actually enjoy doing myself ? So for myself a tried to rationalize the decision a little bit and came up with 5 criteria which are important to me for trusting my hard-earned money with someone else:

1. The manager has to be trust worthy
2. The manager should have most of or even better all his money in the fund
3. the manager has a different skill set than oneself or just better skills or access to different assets
4. The manager should still be “hungry”
5. The fund manager is not only in for the money
6. The investment vehicle should be a “fair” structure

Interestingly, those criteria are not that different from investing into a stock, but let’s look at them one by one:

1. The manager has to be trust worthy

This sounds more easy than it is. In order to know if someone is trust worthy, you either know someone really well or there is a long track record of this person proving that she/he will always act what in German we would call “in Treu und Glauben” or in English as a true Fiduciary of one’s money. In a standard asset management organisation, this cannot be taken for granted. In many large asset management companies, the main target is not performance but management fees and not the performance of the money invested.

One of the worst cases would be investing into someone where you know that this guy is “bending the rules” somewhere and hoping that still everything would be ok with your money. With Bernie Madoff for instance, many people thought that he was making the nice and easy money in his “hedge fund” by scalping and front running his customers on the trading side of his business and thy were OK with it. Without accusing him in any way, Bill Ackman for me would be also a questionable character. Both, with Herbalife and Valeant he is “bending” the rules to his advantage, how do you know that he will never does the same within his investment vehicles ? I think this is clearly the area where one should never make the slightest compromise.

2. The manager should have most of or even better all his money in the fund

This is something which is especially important if there is a performance component in the fee structure. A performance fee is essentially an option and the value of any option increases with volatility. If a portfolio manager however has invested all his money in the fund, he will think twice about maximizing only the option value…..

3. the manager has a different skill set than oneself or just better skills or access to different assets and the investment process is transparent

Sounds pretty obvious but is still worth thinking about. If I invest in a value investing strategy, this only makes sense if I am sure that the manager does have skills that I don’t have. This could be either very deep research and a concentrated long-term portfolio or access to markets/assets which I don’t have as a private investor. in any case this requires that the manager is transparent on what he is doing at that an investor understands the investment process. Fundholder letters or even better “manuals” are a big plus here.

4. The manager should still be “hungry”

The typical story in investment management goes like this: Manager starts small fund, has great returns, nobody is interested at first. After 3-5 years of great returns, fund gets onto the radar screen of large investors and grows quickly. Performance drops as investment style cannot easily be scaled up and/or investment manager cares more for his Ferrari collection. In any case, I think it is more interesting to invest in the early phase than in the later phase despite a potentially higher fee percentage.

5. The fund manager is not only in for the money

That sounds strange at first, why should a money manager not be in for the money ? What I mean here is that there are a lot of people in the investment management business who see this as the fastest way to make a lot of money. In my experience, those people are generally not good money managers in the long-term. The really good ones are those who actually like what they are doing and do it because its their passion. Those guys will go the extra mile and read annual reports on week ends and in their vacation because they don’t consider it as work.

6. The investment vehicle should be a “fair” structure

As I am an individual investor I would for instance have a problem with a structure where I pay upfront commissions or custody fees that an institutional investor would not pay. Also, if I plan to invest long-term, I would not want to invest in a structure where other investors could hurt my returns by either putting in a lot of money on a daily basis or pulling their investments at any time. As a long-term investor, I would need to be sure that also the others are in for the long-term and no “hot money” can disturb the investment success.

It makes also a lot of sense to look at other investors in a fund vehicle. It is an advantage if other investors are known and reliable.

Those are the 6 criteria which are important for me for trusting my money to someone else. Of course this is no guarantee that the investment will perform well, but at least the risk to the downside is limited to a certain extent if all criteria are met.

More on the specific fund investment will come in a later post this month.

Investment Strategy update: The Discovery of Slowness

The discovery of Slowness

The last book  I read was a German novel called “The Discovery of Slowness” (in the English Translation) from German writer Stan Nadolny.

The book is a ficticious story about a real person, the famous English explorer John Franklin.

In the book, John Franklin is an extraordinarily slow person who has a rough start into life as a kid. He always needs a lot of time to answer questions or react to things happening. During his life, this weakness turns into a strength. More than once, his slowliness and deliberate long thought process leads to a superior solution compared to the “first impulse”.

For instance once, after their ship goes under, he and his comrades find themselves themselves stranded on a flat corall bank. Whereas his fellow sailors start shouting for help etc., he directly starts to build a platform in order to survive the high tide and thereby saves all his comrades. When he was asked later why he did this he says “As I am so slow, I have to start early”. In another situation, a ship under his command gets in into a storm in the Arctic seas and is at risk to get destroyed by Icebergs. His men start to panic and want to get away. He takes his time and finally contra-intuitively stears the ship into the solid ice as this is the only safe place in a storm and they survive.

During his life, he turns his weakness into a strength by preparing himself extremely diligent for any unforseen problems. As it turns out, good preperation is almost always better than fast reaction time. He is calling this preparation a “system”. One of the core pillars of this system is to have an organization run by two person: One “fast” one for the daily work and a “slow” one for the really important decision.

Despite the book being a good read itself (kind of a Forest Gump story with a Victorian English setting), the more I read the more I had to think of investing and Warren Buffett in particular.

Compared to today’s financial technology (Twitter, High Frequency Trading etc.), Warren and Charlie look as slow as John Franklin in the book. They are so slow that they actually missed the whole first bubble and many other hypes. However, by creating Berkshire as a permanent investment vehicle and holding a big cash pile, they prepared themselves well for any kind of troubles.

Both have stressed themselves the advantages of being slow many times, either Charlie with his “sit on your ass investing” or Warren’s “Punch Card”. From the outside I would even say that they employ the “Franklin system” to a certain extent. Warren seems to be the fast guy and Chalrie is the one who makes the big changes, like steering Warren to “great” companies many years ago.

For many investors, including myself, this often sounds counter intuitive. Real time stock prices, twitter feeds, mobile phone trading etc. enable us to do everything real time, so why should we care what those old farts say ?

Well, one aspect of this a pretty tangible one: Capital gains tax. In Germany, as a private investor, you pay around 30% capital gains tax. For fun, I made a quick table with the following assumptions:

– Underlying annual return 12% p.a.
– investment horizon 30 years
– Capital gains tax 30%

The following table shows the total return over 30 years depending on how often the portfolio is being “turned over”. So 1 means: The portfolio is turned every year, 5 year means 6 turns within 30 years etc.. These are the results:

turnover/year Total gain AT p.a. AT in% of max
1 1024% 8,4% 35%
2 1735% 10,2% 60%
3 2061% 10,8% 71%
4 2284% 11,1% 79%
5 2363% 11,3% 82%
6 2444% 11,4% 84%
7 2529% 11,5% 87%
8 2616% 11,6% 90%
never 2896% 12,0% 100%

The results are logical but still striking: Over a thirty year period, if one turns the portfolio every year, the result is roughly 1/3 of a portfolio which remains constant over the 30 years. It is also interesting that the total result increase over-proportionally with every additional year of the average holding period. Already with a 4 year holding period one captures almost 80% of the total yield.

One remark: Please don’t confuse this withe an advice for dax driven investments. This is just to illustrate that slow portfolio turn-over has adnatages.

Secondly, and even more important, being slow in my opinion is the best defense against any kind of behavioural biases. The book was written well before Danial Kahneman’s famous book, but clearly shows that slow thinking leads to better decisions which is especially important in investing.

In the past, I have often reacted to quickly, which resulted either in selling too early or buying to quickly. Especially when prices move significantly within a short term, some behavioural biases like anchoring become very strong. Maturing as an investor in my opinion means among other things, to become slower.

However this is more easy said that done. A large part of the investment industry is hard wired to make investors trade as often as possible in order to generate fees. If you watch CNBC or read investment magazines, they always emphasize to buy or sell things now and not wait until it’s “too late”.


As I have written in some of my comments, I am aiming to lengthen my holding periods anyway, but I still think I am too fast. For me, I have come up with 3 very concrete action items which should hopefully help me in becoming a lot slower:

1. I will limit my news feed to high quality sources. I will abandon high frequency stuff like Zero Hedge and Clusterstock

2. I will stop writing monthly performance comments and switch to quarterly

3. I will create my own “soft punchcard”: I will limit myself to either 1 new position or 1 complete sale of a position per month. Increasing or decreasing existing positions is still allowed.

A little explanation for point 3, as this is a real “hard restriction”: This means that at a maximum, I can “switch” 6 stocks a year into new ones. I have to sell one first in one month and buy the new one in the next. As I own on average 25 positions, this should translate over time to a holding period of at least 4 years, preferably more.

This will of course limit my choice to do for instance soem short term special situations, on the other hand I hope that this will further improve my investment decisions and focus better on the long term. I would love to have an brokerage account which would actually limit me on the number of trades I could do in a month.

Deeply discounted rights issues – Serco Plc (ISIN GB0007973794)

Serco Plc, the British outsourcing company, used ro be a stock market favourite for a long time. Especially in the 2000s, Serco was able to increase its profit ~10 fold from 0,04 pence per share in 1999 to around 40 pence in 2012.

Then however, a little bit similar to Royal Imtech, problems and some scandals piled up and culminated in an accounting bloodbath for 2014. Serco showed a total loss of 2,09 pounds (!!) per share, eliminating pretty much all profits made from 1999.

After raising a smaller amount of capital last year, Serco announced a large 1:1 capital increase at a sharp discount in early March, the rights have been split of on March 31st. Serco wants to raise some 500 mn GBP with the majority being used to lower the outstanding debt (currently around 600-700 mn).

Looking at the stock chart, Serco shareholders have suffered a big loss, especially compared to competitor G4S which, despite relatively similar problems, has recovered well:

Normally, I would not look at a “turn around” case like Serco at all, but in this case it might be different. The difference is the new CEO, Ex Aggreko CEO Rupert Soames:

Soames surprised everyone in early 2014 when he left Aggreko after leading the company for 11 years and with great success. For anyone who has read an Aggreko annual report, one knows that Soames was not only a succesful CEO but also a very good communicator. I can highly recommend to read those reports as they are very interesting.

Before asking for shareholder money, he actually said that he will not take his guaranteed bonus for 2014 which I found was a very good gesture.

After enjoying the Aggreko reports I decided to look into the 2014 annual report and especially the “CEO Letter” from Soames to see what he has to say.

I was positively surprised by the openness how Serco’s problems were adressed, both from the Chairman and Soames himself. It is the classic tale of too much growth through acquisitions combined with a lack of integration and bad execution. Other than at Royal Imtech, it doesn’t involve outright accounting fraud.

One rarely gets to read such a good description of the problems of a company and the historic context (page 9 of a turnaround case. This is then followed by a clear change in strategy, namely to focus on Government services and get out of “private” contracts altogether. Overall the strategy section looked very well thought out and not unrealistic to me.

Further in the report, I found this interesting statement:

Historically, the key metrics used in forecasts were non-GAAP measures of Adjusted Revenue (adjusted to include Serco’s share of joint venture revenue) and Adjusted Operating Profit (adjusted to exclude Serco’s share of joint venture interest and tax as well as removing transaction-related costs and other material costs estimated by management that were considered to have been impacted by the UK Government reviews that followed the issues on the EM and PECS contracts). We believe that in the future the Group should report its results (and provide its future guidance) on metrics that are more closely aligned to statutory measures. Accordingly, our outlook for 2015 is now expressed in terms of Revenue and Trading Profit. The revenue measure is consistent with the IFRS definition, and therefore excludes Serco’s share of joint venture revenue. Trading Profit, which is otherwise consistent with the IFRS definition of operating profit,adjusts only to exclude amortisation and impairment of intangibles arising on acquisition, as well as exceptional items. Trading Profit is therefore lower han the previously defined Adjusted Operating Profit measure due to the inclusion of Serco’s share of joint venture interest and tax charges. We believe that reporting and forecasting using metrics that are consistent with IFRS will be simpler and more transparent, and therefore more helpful to investors.

This is something whcih I haven’t seen before that actually a company is going back from “adjusted” reporting to statutory which I find is very positive.

Another good part can be found later in the statement from the CFO (by the way another Aggreko veteran) regarding the implementation of ROIC:

A new measure of pre-tax return on invested capital (ROIC) has been introduced in 2014 to measure how efficiently the Group uses its capital in terms of the return it generates from its assets. Pre-tax ROIC is calculated as Trading Profit divided by the Invested Capital balance. Invested Capital represents the assets and liabilities considered to be deployed in delivering the trading performance of the business.

I always like to see return on capital as an important measurement for businesses and implementing this is clearly a great step forward.

Another interesting fact from the Renumeration report: Both new board members have significantly lower salaries than the old, outgoing board members. Soames has a 800 k base salary, Cockburn 500 k. both pretty reasonable numbers.

However the big problem for me is that I know next to nothing about the business of Government outsourcing. So for me it is at this time very difficult to assess how attractive the stock is and how long it will take to recover.

The current management is clearly a good one but I am not sure if the underlying business is a good one as well. Especially those long-term contracts do seem to contain significant risks. Page 50 and following pages in the report provides  a very good view in great on what can go wrong with long dated contracts. In many cases, Serco was locked into fix price contracts and costs went against them without having a chance to do anything about it.

On the other hand, the 1,5 bn write-off for sure is conservative and one could/should expect that it contains some “reserves” which might be released in coming years.

Deeply discounted rights issues in general

Another word of caution here: A couple of discounted rights issues I looked at in the past were actually not very good investments.

Severfield was a good one with around +50% outperformance against the Footsie since the rights issue in March 2013. KPN even outperformed the Dutch Index by ~+62% in the two years and Unicredit even more than 70%.

On the other hand, Monte di Pasci underperformed by -70% against the index since their rights issue  and Royal Imtech by -45%. EMAK finally performed more or less in line with the index over time after the capital increase.

So overall, the score of outperformers to underperformers would be 3,5:2,5. With Royal Imtech it was pretty easy to see that it would be difficult, as there was a significant accounting fraud involved. BMPS also looked like a big problem as the rights issue was to small and another one is in the making.

So the question is clearly: Is Serco more like Severfield/KPN or Royal Imtech ? For the time being I would rather look at Serco more positively, mostly due to management.

Not surprisingly, analysts hate Serco. the company has one of the lowest consensus ratings within the Stoxx 600. This alone is not a reason to buy, but at least might explain a potential under valuation. A final note: Soames might not be a bad choice for running a Government outsourcing company. His ancestry should ensure some viable contacts at government level:

Rupert Soames can just remember his grandfather, Sir Winston Churchill. His earliest memories are of playing cowboys and Indians with Britain’s wartime prime minister – and of not being allowed to attend his state funeral. He was six at the time and furious: “Watching it on TV was a very poor substitute,” he once said.

His family has long been part of the political establishment: his father Christopher was the last governor of southern Rhodesia, now Zimbabwe, who served in Margaret Thatcher’s cabinet and was also a European commissioner, while his brother Nicholas is a current Tory MP.


Overall, the Serco case does look interesting. A brilliant management team is trying to turn around a troubled Government contractor with a transparent and plausible strategy. On the other hand, the business is a difficult one or at least I do not have a lot of knowledge about this sector so I need to digg more into it.

So for the time being, I will watch this from the sidelines and maybe try to learn more about this sector in general.

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