Tag Archives: book review

Book review: “Quality Investing: Owning the best companies for the long term”

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“Quality Investing” is one of the growing number of books from Asset Managment firms where they outline their philosophy. I have reviewed already 2 of them, “Capital Returns” from Marathon Asset Managament and “Simple but not easy” from Oldfield Partners.

“Quality Investing” is about London based AKO Capital Management, a company with currently around 9 bn USD under management. The book itself was written by Lawrence Cunningham, a guy who is often described as a “Warren Buffet” expert.

As the title of the book says, AKO focuses on “High Quality” businesses which they intend to own for the long term. A “High Quality” business in their view is defined as a business which can earn high return on capital for a long period of time. In their view, such companies are often undervalued even if they are more expensive than market averages.

The book then walks through different aspects of how to identify “quality”. According to them they look for:

  • Capital allocation (Growth Capex, R&D, M&A, Dividends, buybacks, working capital)
  • Return on capital (asset turns, Gross profit margins)
  • growth (market share, geograhic expansion, Cyclical growth)
  • Management (Discipline, long term orientiation, communication)
  • Industry structure (Barriers to entry, Oligopol, rationality, obscurity)
  • Customer benefits (intangible, Convenience, customer types)
  • Competitive advantages (technology, network effects,distribution
  • Revenue type (Recurring, upfront, licenses, service model, subscriptions, network density)
  • the “friendly middleman”
  • Toll roads (gold standard, “Magic” ingredients)
  • Low Price plus (price vs.differentiation,scale, low cost squared)
  • Pricing power
  • Brand strength (Heritage, Trust & consistency, scale)
  • Innovation
  • Forward integration (own stores, Franchising, online presence)
  • Market share gainers
  • Global cpabilities
  • Corporate culture (trustworthiness, long term orientation, execution, family ownership)
  • Cost to replicate

Companies they like are:

L’Oreal, Diageo, Geberit, Assa Abloy, Handelsbanken, Unilever, H&M, Inditex, Luxottica, Rolls Royce, Atlas Copco, SGS, Intertek, John Deere, Syngenta; Wärtsilä, Kone, Chr. Hansen, Ryanair, Hermés, Novo Nordisk, Nike; Fielmann, Experian

What makes the book authentic is the chapter about “pitfalls” and some case studies where they made mistakes. According to them, the most important pitfalls are

  • cyclicality (flow products, customer cyclicality, long period swells)
  • technical innovation
  • dependency (Government, stakeholder concentration)
  • Shifting cutomer preferences (fashion risk, good enough substitutes)

They mention specifically Saipem and Tesco where they lost money and Safilo, Nobel Biocare and Nokia for “quality” companies who fell into those pitfalls.

The final section of the book looks at implementation of a “high quality” strateegy and especially the challenges

  • Long term compounding vs short term pressure (short term underperfomance)
  • qualitative judgements vs. “big data”
  • dull businesses
  • Top down mistakes
  • overconfidence
  • too much debt
  • “boiling frog” problem (owning companies for too long if things go bad slowly)
  • changes to the market place (Wincor Nixdorf)
  • Accounting red flags (Elekta)
  • Endowment effect (Emotional connection)

Overall I do think the book is quite good. I would recommend it especially for people who think about migrating from a more “Graham” based approach of value investing to a “Late Buffett/Munger” style.

For those investors who are already deep in “Munger territory”, the book will not present many new ideas but is maybe a good summary of many concepts. The book is also a great basis to build a “Quality check list”.

For me personally the chapters about industry characteristics and customer benefits were most interesting as I haven’t paid a lot attention to this.

Quibbles:

The only quibble I have is that they claim in the books many times that quality companies are not trading a the premium that would be justified. However, they do avoid mentioning anything quantitative, i.e. what premiums they are looking for and how they calculate it.

Of course they need to keep some of their “secret sauce” in order to justify the fees they are charging but as it is the book to me is kind of incomplete. As it is, the book is basically more like a “check list” with explanations than a real “investing book”.

Summary:

As described above, for anyone who wants to get into a more “late Buffett/Munger” style of investing, this is a very good book. Especially if you are looking to build a check list for assesing the quality of companies, this is a great start.

If you look for a “fully fledged” investment book, an important part (valuation) is missing. If I would need to decide between this book and Marathon’s Capital Returns, I think I would go for the latter.

 

 

 

 

 

 

 

 

 

 

Book review: “The Shipping Man” – Matt McCleery

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This is a book reader “JJ” recommended to me somewhere in the comments. Its a very unique book as it says “A novel” on the cover but in effect is the best book I have read about the shipping industry.

The story is about a NY based hedge fund manager who decides that he wants to own a ship. He buys an old ship with his personal money from a strange Greek guy and then gets into the world of shipping. Along the way he loses his hedge fund, encounters many problems and sells his ship with a lot of luck at a profit.

By pure coincidence he ends up as the CEO of a Norwegian Oil Tanker company and tries to raise senior debt funding at Wall Street.

The book seems to be at least partially autobiographic. What I really liked about the book is that despite telling a funny and readable story, the author also manages to include many great insights on the shipping industry specifically and financing, cost of capital and other financial aspects of Wall Street along the way. 

One of the key messages is that financing ships economically sucks because a lot of the players think quite uneconomically. They want to have the biggest ships or the biggest fleet and always manage to lure in many gullible investors on the way. The whole industry seems to be like a big casino where some insiders always get their cut and all the oher “players” lose in the long term by design.

Actually I do think that the same principle applies for any other very capital intensive businesses.

Anyway, I can highly recommend this book. It is a good read and interesting for anyone who has ever thought about investing into something related to shipping.

At least for me, I am now completely “healed” from even looking into shipping companies or Off-shore drilling etc.

 

Book review: “Mister Swatch -Nicolas Hayek and the secret of his success”

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This is basically part 4 and a half of my “watch series”. The founder of Swatch Group, Nicolas Hayek who died in 2010 was such an interesting character so I thought it made sense to read this biography.

The biography is unauthorized, Hayek was against it. The author is one of the most well-known Swiss Journalists. I actually read the German version because it was 10 EUR cheaper as hardcover than the English version.

Hayek was born in Lebanon into the “affluent middle class”. He went to Switzerland because he fell in love with a Swiss Aupair girl. His parents would not let marry him because of”low status” of the girl, so he left and went to Switzerland.
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Book review: “Good to Great to Gone: The 60 Year Rise and Fall of Circuit City” – Alan Wurtzel

Circuit City was the largest consumer electronics retail chain in the US in the 1990s and 2000s. The stock was a super star performer and the company even made it into Jim Collin’s book “Good to Great” as one of the best companies in the US.

In 2009, Circuit City filed bankruptcy. The book now describes the full story from the founding in the 1960s to the fall in 2009. The book is written by Alan Wurtzel, the son of the founder Sam Wurtzel, who also served 13 years as CEO from 1973 to 1986 and as a board member for couple of more years until 2001.

So clearly his story about the company is not as neutral as a “normal” author might have written it but he states that at the very beginning of the book.

Pretty early in corporate life, around the 1970s, Circuit City (then called Wards) had already an existential crisis as their previous business model (mostly selling to “department like” stores in larger stores) stopped to work. They then completely changed strategy. In the 1970s to the 1990s they perfectly rode the wave of consumer electronics with their “super stores” which relied on sales via dedicated sales professionals working on a commission.

Then, starting in the mid 2000s, Circuit City lost track, especially against Best Buy and had finally to file for bankruptcy in 2009. Funnily enough, Best Buy had its own crises but somehow recovered.

Wurtzel is very critical on his successors, especially that they never really used the cashflow for improving stores but rather did share buy backs and acquisitions.

The unique aspect of the book in my opinion is that the author very much focuses on strategic planning and the interaction between Management and the Board. He describes in very good detail what kind of strategical mistakes were made by the management and how the board failed in challenging and correcting the flawed strategy. There was a lot to learn for me and I think it would be interesting for people who regularly speak to management. Just asking how they handle strategy might get some surprising results. Wurtzel for instance is of the opinion that an annual strategy process tends to become “mechanical” and inefficient and that strategy should only updated on a 2 year basis.

The book is also a reminder that retail is a very difficult industry. Retailers can grow very quickly and profitable, but if something changes profoundly in the competitive landscape, turning around businesses becomes difficult. In Circuit City’s case, the larger self-service Best Buy stores seem to have been the nail in the coffin. Circuit City never got up to really take a big investment and completely remodel the stores. Instead, in order to keep investor happy, they used the cash to buy back stocks. Wurtzel correctly points out that stock buy-backs make only sense if you have “truly” free cash flow. If you just avoid or shift necessary Capex, then buying back shares is not a good idea.

Circuit City also had a very strong corporate culture, especially with regard to its sales personal. The problem with that culture was that it also seemed to prevent the shift to a non-commission, self-service structure like Best Buy. So yes, strong culture is a competitive advantage, unless it prevents a necessary change in the business model. Interestingly, Circuit City started a used-car dealership called CarMax based on the same prinicpals which was spun off from Circuit City and still is doing well (14 bn USD market cap).

The Circuit City story reminds me a little bit about Tesco. Tesco also tinkered around little by little in its stores in the UK while they didn’t fully realize the threat of the discounters. Let’s wait and see how they will do.

In any case, I can highly recommend this book to anyone who is interested in the retail industry and/or company strategy.

P.S.: There is even a documentary on the rise and fall of Circuit City called “The tale of two cities”. Some clips of that movie can be viewed on Youtube here.