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Book review: “The Undoing Project” – Michael Lewis

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Michael Lewis is clearly “THE” author for financial books at the moment. His books are usually great to read, very well researched and a few of them have already turned into movies like “The Big Short”.

“The Undoing Project” is the story of Amos Tversky and Daniel Kahneman, two Israeli professors who developed the so-called “Prospect Theory” which deals with the behavioural “biases” that the human mind shows when deciding under uncertainty. And for which Kahneman got the Nobel Prize in 2002 (Tversky unfortunately died some years before that).

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Up until Prospect Theory, the human mind was assumed to be perfectly rational for most theories dealing with human behaviour and decision-making. As stock investors we all know that human behaviour in the stock market is anything but rational, however only following the groundbreaking work of those two guys, we now have a more structured way to understand how the mind really works.

The book covers the story of this “unlikely” pair of academics who started this revolution plus some side stories about people who were greatly influenced by them, for instance in Basketball and Medicine.

The book describes in very great detail how the relationship between Tversky and Kahneman developed, how it was interrupted by the different Israeli wars, how they moved from Israel to the US and how it ended. To be honest, I found this a little too much detail. It is an interesting story , no doubt, but I guess a few pages less would have made the book better.

Towards the end I really had to force myself to finish the book when Lewis describes in great detail how they tried more or less successfully to counter their critics. I think this was my first Michael Lewis book where I seriously thought about not finishing it.

All in all I would say it is an OK book for people who like those kind of biographic books, however for people interested in the theory and topic itself, Kahneman’s book “Thinking Fast and Slow” in my opinion is the much better choice.

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Gocompare.com (GoCo) – Another Spin-off that became a “Trump victim” ?

The Company / Spin-off

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Gocompare.com (GoCo) has been spun-off from parent Esure in the beginning of November, a week before the US elections and only a few days before Italgas SpA. As a “parting gift”, Esure took out a special dividend of about 75 mn GBP financed by some net cash and a 70 mn GBP loan before spinning the company off-

In my understanding, the major reason for the spin-off was that Esure, the listed UK online direct insurer was short in solvency capital and that this transaction improved the solvency substantially.

Every Esure investor got one GoCo share for an Esure share. Interestingly, Toscafund, the second largest shareholder only holds 14% in Goco compared to 16,7 for Esure, so they seem to have sold some shares.

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Some thoughts on averaging down & averaging up

John Hempton has a very interesting post on when to average down into a stock.

As a summary, one should not average down into a stock if

  • a company has a lot of financial leverage
  • a company has significant operating leverage
  • the company is in danger of becoming obsolete

I think this is already a pretty good advice, as a counter example he gives Coca Cola where one can average down “without much risk”. As this is a very interesting topic, I wanted to contribute my 5 cents to this:

Behavioural biases at work

In my experience, averaging down is often motivated by a couple of behavioural biases.

The major bias which “helps” investors and especially professional ones to average down in the wrong cases is in my experience the “over confidence” bias.

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Oaktree Capital Group (OAK) – Strong as an Oak ?

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Oaktree Capital is an US-based listed asset manager specializing in alternative assets and more specifically in “distressed” securities. Co-founder Howard Marks became quite famous and is one of the most intelligent people in the investment industry. I had reviewed his book 5 years ago and read everything he writes with great interest.

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Oaktree is clearly one of the “Highest quality” names in Alternative Asset Management with a very good long-term track record. A reader mentioned Oaktree in the “ideal company post” and as I had them on my list anyway I decided to make this my first analysis for 2017.

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Italgas SpA (ISIN IT0005211237) – Spin-off special situation meets contrarian opportunity

Management Summary

As this turned into a pretty long post again, quickly the highlights. I do think that Italgas SpA, the recent Spin-off from SNAM SpA represents a potentially interesting special situation investment because:

  • overall sentiment towards Italy is really bad (“Renzi referendum”)
  • the Spin-off was not timed well just a day before the US election
  • the current uncertainties within Italian regulation changes further deters potential investors
  • all this is reflected in asset multiples at the very low-end for comparable regulated assets

For those reasons I initiated a 2,7% position for my portfolio for my “Special Situation” bucket.

DISCLAIMER: This is not investment advice. Please do your own research !!!!

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Novo Nordisk (DK0060534915)- What now ?

When I looked at Novo Nordisk 3 months ago, I found the stock too expensive at 315 DKK/share. That was my summary back then:

What could make the stock interesting again ?

Well, that’s simple: Either a lower stock price or higher growth. Maybe management has low-balled growth ? Who knows. Maybe the market over reacts if the next quarters don’t look that good ? According to Bloomberg, analysts officially still expect double-digit earnings per share growth well into 2019. Even adjusting for share buy backs, this will be difficult to achieve based on the growth rates communicated by management.

For me, the stock would become more interesting at around 250 DKK under the current growth assumptions. I think I would also like to see more negative comments from analysts.

With the stock now trading at ~229 DKK, it is clearly necessary to revisit the stock again.

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Some thoughts on index funds & market efficiency (including some empirical material)

Currently there are a lot of articles in the financial press about the perceived “fight” between active and passive asset management styles.

The passive guys make the point that on average, after fees, active funds have to underperform against the index and low-cost index funds, which is difficult to counter. On top of that, “alpha” created by large active funds is not very persistent.

From the active side, there is the argument that if there is too much money invested in index funds, market efficiency will suffer and stocks will go up and down together because not enough people are analyzing single stocks. If stocks go up and down together without reflecting fundamentals, at some point in time “good stocks” should be too cheap and bad stocks to expensive. Which then should be some easy money for any good stock picker.

Is the market already inefficient ?

This argument  reasonable at first but is there any evidence that the market is less efficient ?  Let’s look for instance at the DAX 30, the major German index. It is hard to come up with good numbers but I do think that maybe between 10-15 % of the DAX is somehow invested via index funds with a clear trend towards more index ownership.

So let’s look how the DAX constituents have performed so far this year (as of Nov. 2nd). The Dax itself ytd is down -2,8% This is the YTD performance of the constituents:

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