passionsaving - website

This is another good web site. The author explores the idea that passive investing is just not a good idea. His alternative is to change your stock allocation according to the price of the market. There is a link to it here. It is, in my opinion, a value based approach to investing in an index fund.

valuewalk - website

A short post to pass on details of ValueWalk a website that I have just found that is "Devoted to Value Investing and Legendary Value Investors" There is a lot of interesting material - you can find it here.

Investing in Gold

Yesterday I spotted the following on YouTube "Charlie Munger of Berkshire Hathaway thinks you are a jerk for owning gold" which is a video repost against Charlie's statement. You can look at the video here.

I don't think you are a jerk, if you hold gold, but I don't think I would hold gold myself. Warren Buffett said this about investing in gold. ‘You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?’

It is quite an interesting way of looking at things. My take on things is that gold is a way of storing value but not a way of growing value. It's value depends on people valuing it, people have valued it throughout history and it seems unlikely that this value will disappear. It differs 180 degrees from a company or enterprise that, when working properly, generates value. A good company will grow its intrinsic value and/or return to you the (part) owner a return (dividend). Gold will never give you a dividend.

The value of gold changes as its the demand for it changes. In times of high inflation or uncertainty it generally appreciates in value. At the moment we are in times of inflation and uncertainty. I also suspect that we are seeing an increased demand for gold from India and from China - people have new wealth and gold is a way of "capturing" that wealth.

One of the things that LibertyandEconomics (the author of the video) points out is that the purchasing power of gold has not fundamentally changed since roman times. This is an intelligent observation and highlights one of the remarkable properties of gold. However give me the choice of holding gold from Roman times until today or investing it I would rater invest it. Why? well imagine of you got a managed a 1% growth a year for the 2000 years from roman times to now - your one gold piece would have compounded into 439,000,000 or so pieces. On the other hand, as LibertyandEconomics you could have retained the value (or so) across the centuries.

One of the more interesting gold plays I came across was my father's. He had what he referred to as "a few shares" in a minor gold mine that was barely profitable. His take was in times of trouble gold becomes valuable, the barely profitable mine becomes very profitable. This was his hedge against uncertainty.

Philippe Brugere - Value Investor

I came across this video from Philippe Brugere this mourning. When I wake up an hour or two earlier than I would like and am unable to sleep, I crawl out of bed into the bath and scour the web for videos and soak. I spotted this one. This is the first time that I had come across Philippe Brugere - and I like his take on things.

Philippe looks for companies that he feels are given a low value for the wrong reasons - obviously a company that has a low value for the right reasons is something to avoid.

Philippe Brugere is looking to Europe as as source of value - European manufacturing and European banks. I am personally suspicious of banks - but make no mistake this does not mean that they are not good and sound investments, Warren Buffett has increased the Berkshire Hathaway stake in Wells Fargo, Philippe Brugere thinks that BNP and UBS are interesting and is particularly interested in Barclays.

His example of manufacturing is Aktiebolaget Skf a ball-bearing manufacture - SKF has a ROE of 28 and a historic ROE of 22 - over the past 5 years.

Dividends

The other thing that I found very interesting is Philippe's take on dividends. My (rough take) has been that dividends should not be paid if the company can put the money to better use (can generate a high return) from them by retaining them. Obviously with a low ROE the company should pay them out. Philippe's take is different - he likes dividends because they are a sign by which the value of a company can be seen by others. If I understand the way that he thinks of things correctly he buys undervalued stock and then waits for them to achieve their intrinsic value and subsequently sells them (when exactly is maybe not so important) the issue is how long does it take a stock to be recognized by the rest of the market as undervalued. What makes the undervaluation disappear. This is where the dividend comes in - it is the red flag to the bull.

Aswath Damodaran - on brands

This is really excellent video by Aswath Damodaran - the guy who, through the web, introduced me to corporate finance (the assimilation of which is an ongoing saga). Aswath is the kind of teacher that you get rarely and is able to turn a subject that I, left to my own devices, would recoil from in horror into something interesting. How - well it is the magic of somebody who sees things as interesting and explains them in an easy logic. He is also very funny.

In this video he values the brand of Coca-Cola in it he gives a lot of insight into why brands are so powerful and important.

• Brands give you sustainable competitive advantage.
• A good brand is enduring (lasts a long time).
• A good brand gives you pricing power - yes you can just sell the same product for more.

You may have wondered why Waren Buffet was and is so big on CocaCola - now there's a question.

The video is well worth watching (great jumper) or listening to - Damodaran puts it far better that I can.

Lyons Brown - Altamar Brands

Lyons Brown is an excellent public speaker. He gives some frank as well as rather good insight into the US drinks industry. Check it out.

I have become more interested in brands and branding. I figure that brands have become an integral part of what we consider our culture. Thinking back I grew up on Birds-Eye fish fingers because they were "better". If you buy Ice cream what brand do you want if you have friends calling around. What kind of cereals to you want to pour into your bowl in the morning. You buy a bottle of water!!? (it is 100% drinkable and clean out the tap) and you hit out for a brand and so it goes on.

A strong brand is a moat around a business.

James Pan - Value Investor

Here is a series of videos of a lecture given by James Pan. I came across them trawling YouTube last year. Here is the first - you can get the rest from YouTube quite easily.

I very much enjoyed the videos there are a couple things that stick in my mind even though it is, now, quite a while since I listened to them.

1. There is nothing quite like the feeling of a successful short.
2. Who can understand the company report of a bank?

The second point is quite interesting - if you can not understand the company report what hope do you have of figuring out for yourself if the company is good or bad or mediocre. You can, of course, rely on other peoples advice. I have got burnt that way once and almost burnt another time. Almost burnt is probably the more interesting. I am an on and off reader of the Investors Chronicle (which is excellent) I remember a recommendation for the Anglo Irish Bank.

Warren Buffet and Charlie Munger are adamant about investing in things that they understand. The more I think about this the more it makes sense.

Ron Hosen - Value Investor

At the back end of last year I came across a series of videos by Ron Hosen. Looking at the number of views these are not popular - but I recommend them. I found them insightful and very interesting - Ron is a skilled investor. Anybody who manages 20% a year compounded is.

There are five videos in the series - I recommend listening to them all. I did a fair bit of my listening as I did the washing up. Somewhere in the middle Ron describes his take on inflation in terms of Rotisserie Chickens. Two bouts of QE have failed to change the cost of chickens so Ron (quite correctly) establishes that there is zero inflation. Inflation affects you only in the things that you buy. I, unfortunately, don't buy Rotisserie Chickens and I do buy quite a lot of other things. I am feeling inflation bite.

Here is the first of Ron's videos - YouTube will offer you the rest.

A few days ago Ron published a followup Video - a shorter set of two where he goes over the "crumbs" that are left.

David Mayhew - Chairman of JP Morgan Cazenove

On Friday I was fortunate enough to attend a lecture given by David Mayhew the chairman of JP Morgan Cazenove. It was a good lecture - David covered his early life - how he got stared in banking through to where he is today. Like many successful men he rests a lot in the value of hard work and is wise enough to have stressed a few times the role of luck in his career.

I won't attempt to cover what David covered in his lecture in any way - what I will enumerate is a few points that he covered that I found particularly interesting and have thought about afterwards. Because a blog is not a fixed thing I may well add to this later as I think about what he said.

• Monopolies are hard to break. He mentioned this in the context of the 15 years it took to replace the old system of Jobbers and Brokers - wikipedia covers the "Big Bang" here.
• Reputation is very important. This is something I have thought about a fair bit over the years.
• The next decade will not be as good as the past one.
• If you loose control of costs you loose control of decision making.
• Quantative easing will inevitably produce inflation.
• Quantitive easing was necessary to provide liquidity to the banks.
• Qualitative easing has helped to provoke the bubble in the emerging markets. This is because it has provoked a rush of money into these markets.
• Politicians are not being straight when they fail to tell us that basically we will be worse off.
• It takes 10 years for a mine to be developed and be productive - if you are interested in mining stocks this is worth thinking about.
• There is plenty of iron ore in the world - the problem is mining capacity.
• Transparency is important. If I understand things correctly then he believes that a key role of regulation is to introduce transparency. Transparency leads to confidence which is important for investment.

I guess that low interest rates are a part of what is pushing money into emerging markets.

Updated 20-feb-2010

Setting out

Like many men I have traded on the stock market. I think that it is a part of what the modern man does - he fixes his own car, he builds his own house and he trades shares and wins on the stock market. I have not won - I have probably broken even which is what happens if you don't know what you are doing but are patient.

What I hope to do in this blog is to collate the things that I learn and have learnt. The internet is an incredible resource. Books are, compared to many forms of training (check out what an MBA will set you back) inexpensive. So as I go and as I learn I hope to post.