Investing against the tide
Posted on May 15, 2009 by Richard Beddard
Filed Under Companies, Investing, Reading list |
In practice:
Huveaux (again)
Rupert Levy, Huveaux’s financial director, returned my call this morning. I rang him yesterday primarily to ask about some of the notes in the accounts.
A quick recap: Yesterday I said this publishing and events company was cheap, but I was doubtful about its financial strength…
Note 15 confirms the company believes the “value in use of the political and educational businesses it bought in its first six years exceeds their balance sheet values. Such calculations are based on judgements about future growth and interest rates that could be wrong, but the company says there’s room for error.
You could argue “they would say that, wouldn’t they”. When a company admits the value of a business it recently acquired is impaired, they’re often admitting they paid too much in the first place. Since Huveaux made a loss on the sale of its healthcare business, the value of the other businesses may be questionable too.
However, the assumptions look fairly conservative, and Huveaux has a new chairman and financial director so they might have taken the opportunity to get all the bad news out at once, take a big loss, write off the value of dubious businesses in one go, and start with a clean sheet. Because they didn’t, I’m inclined to accept their analysis.
Something else I should have mentioned yesterday: The loss Huveaux recorded on the sale of its healthcare division (£5.4m) was bigger than Huveaux’s overall loss of £4m.
In other words, in underlying, or ‘normalised’ terms Huveaux made a small profit, an observation we can have more confidence in because the actual cash earned by the business was also positive.
Finally, its easy to focus on the more visible aspects of a business but, Mr Levy was keen to play down the importance of Huveaux’s political publications like Dods Parliamentary Companion, a directory, and The House Magazine, many of which, like the doomed healthcare business, depend on display advertising.
These are the assets, he says, around which the company is organising events for parliamentarians, lobbyists, and civil servants and building political monitoring services, data feeds for businesses or other interested parties with particular interests in the affairs of parliament.
One conference, Civil Service Live, turned over £0.5m last year, it’s first. So while the trophy publications grab the attention, it’s monetising the data and networks that the company is pinning its growth ambitions to. The diversification of Huveaux’s sources of revenue is apparent in this table taken from its annual report:
If it makes a big success of events and digital, it will be a bonus. For now I think the investment case rests on Huveaux’s cheap share price, profitable businesses in education as well as politics, financial strength (recognising I am, in part, taking management’s word for it) and the promise that this board will be less profligate than previous ones.
As a media company in an unloved market (AIM), which has made at least one big mistake, and performed badly in the last two years, Huveaux’s been abandoned by investors, analysts and even the media. Its share price is a tenth of what it used to be.
It doesn’t feel safe but five years ago, when Huveaux was hoovering up all those companies and investors flocked to the shares it probably felt safe. Evidently, at that stage of its development, it wasn’t. Usually the safest course of action is not to do what everyone else is doing but to invest against the tide…
In theory:
Investing against the tide
If the first half of this blog post demonstrates I’m not trained to read annual reports, it’s an attribute I share with Anthony Bolton. We have a similar stock picking processes too, so it’s hardly surprising that, now I’ve finished his book, I liked it.
More surprising perhaps, is that I’ve added it to my shelf of favourite books. This is a rare event as there’s limited space on that shelf, and, painfully, an old favourite must make way.
Bolton invests against the tide. His favourite shares are small companies turning around their fortunes. So, you’ll understand why I opened this book for sustenance. The names of the investors that inspired him are scattered throughout this blog: Benjamin Graham, Warren Buffett, Bill Miller, John Maynard Keynes, Nassim Taleb, John Templeton, and Peter Lynch, for example.
He parts company with Peter Lynch, his US contemporary at Fidelity, though, on growth versus value. Lynch was an early pioneer of the PEG ratio but Bolton’s not having it:
I realise that PEG ratios are more the domain of the growth rather than the value investor but I’m afraid I can see little logic in the argument that a business at five times earnings growth at 5% a year, one at ten times earnings growing at 10% or one at 20 times earnings growing at 20%, which all have the same PEG, are equally attractive, I would go for the five times earnings growing at 5% every day.
I think the point is growth is speculation, it’s about the future and growth estimates are unreliable. Value on the other hand is much more real.
Occasionally he’s too circumspect. The chapter, ‘Information sources I use’, is comically brief. He says that if everybody’s using the same information, nobody will have an edge. Then he mentions that he’s more interested in new sources of research, like market research, that are not available to most investors. And finally, when he’s built up the reader’s expectations of a triumphant denouement he says he can’t tell us what his secret sources are or he’d have to kill us (in so many words), lest he endanger Fidelity’s competitive advantage.
No wonder he’s known, to his dismay, as ‘The Quiet Assassin’.
The rest of the book is his personal reflections on an outstanding career in investment management, and I love it. It’s practical and imbued with such common sense it seems at odds with the way the finance industry has developed and gives hope to any hard working stock picker of reasonable intelligence.
Even the introduction to the ill-fated chapter on information sources starts with words I think should be tattooed to the back of every stock picker’s hands:
In this business there is no shortage of answers - the skill is knowing whom to ask and what question to ask.
Here’s my new line-up of financial favourites:
On theory:
James Montier: Behavioural Investing
You’ve seen is name all over this blog too, here’s the review.
Benoit Mandelbrot: The (Mis)Behaviour of Markets
Inventor of fractal geometry reinvents finance theory. Here’s the interview.
Janet Lowe: The Rediscovered Benjamin Graham
‘Security Analysis’ and ‘The Intelligent Investor’ are more famous, but this is the easiest introduction to the grandfather of value investing. Here’s the review.
Max Gunther: The Zurich Axioms
Twelve rules that will make you see investing in a different light, I promise.
Burton Malkiel: A Random Walk Down Wall Street
If you think you can beat the market, read this book. If you still think you can beat the market, do it.
On history:
John Littlewood: The Stockmarket
Classic history of the UK stockmarket. Here is an excerpt, and here is another.
Robert Shiller: The Subprime Solution
‘Irrational Exuberance’ is the book that made Shiller famous, but this one is much easier to read. Here’s the review. And here’s the interview (iBall video).
On practice:
Michael Covel: The Complete Turtle Trader
I’m not a turtle and I’m definitely not a trader, but in this book is the best description of the psychological pressure on traders, and investors. Here’s the review.
Anthony Bolton: Investing Against The Tide
He’s British, he’s a fund manager, he’s successful. See the review (above) and my summary of Chapter One.
Peter Lynch: One Up on Wall Street
Legendary American fund manager inspired me to pick stocks for myself, although sometimes I think Lynch makes it too easy.
Accounts:
Holmes Sugden and Gee: Interpreting Company Reports and Accounts
Dry but well organised manual that skimps on the explanation at times, but not the detail
Michael Brett: How to Figure Out Company Accounts
Much more readable text, that leaves out some of the intricacies.
Bob Vause: Guide to Analysing Companies
Another general but highly readable introduction to company accounts.
Michael Brett: How to Read the Financial Pages
The Hitchhiker’s Guide to the City.
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