Sorry if this email's formatting is a bit on the basic side but I just wanted to blast this out before Friday lunch-time so you can read it at lunch if you're not going to the pub! (There's about 5 or 10 minutes of reading material here).
I think the theme of this week is excessive analysis and short-termism. After posting about Tesco last week (click here to read the full article) there were various comments both on my site and Stockopedia where some of my stuff is re-published.
Of course everyone has their opinions but a lot of the negative comments were about the current situation (poor like-for-like and apparently weak management) which is kind of the point I was trying to make. Focusing on the short term is for the traders and the professionals, with their teams of analysts and super-computers. That's not a pond I want to swim in.
My whole philosophy is that there are niches where private investors have an advantage, and looking at the short term isn't one, whereas looking to the long term is (because the professionals don't do it because their typical retail investor clients have a short term focus).
Also, people tend to get excited or upset about how many tins of beans Tesco sold last week or whatever. This stuff just isn't (usually) important.
When Buffett bought Coke in the 70's, did he know how many cans they'd sell the following year? No. How about in 1985? Nope. And last year? Of course he'd have no idea how many cans they'd be selling in 20 or 30 years.
He just though it was almost certain to be MORE (because of their brand and size mostly). So precision is often overrated.
Short term thinking (and perhaps excessively detailed analysis) may have been key to the two companies that I've written about this week too.
Robert Wiseman Dairies – How a Takeover Can Create Value
There are various ways that you can make (or lose) money in the stock market. These returns can be boiled down to:
- Dividends or other cash payments
- Changes to the intrinsic value of the underlying company
- Changes to Mr Market's mood (and therefore share prices)
As a value investor you're looking to buy companies that are priced attractively, but you're not the only player in town.
There are other investors and companies out there that also have capital to deploy and if something looks attractive to you it may well look attractive to them too.
That's exactly what happened with Robert Wiseman Dairies, a company I picked up back in May 2011 for 317p per share.
It seems that I wasn't the only one out there that thought this major milk company might be worth more than that. Muller Group (yes, the ones that make the yoghurt) have recently agreed to take over RWD at 390p per share.
Click here to continue reading the full article
Another company I looked at this week lives at the opposite end of the value spectrum from Robert Wiseman Dairies (RWD). RWD is a good company that was available at a discount price, while Titon Holdings is a mediocre business at best, which is available in the bargain bucket.
It is what Warren Buffett would call a 'Cigar Butt'.
It's actually quite popular among the value investors that I know who like 'deep value', which is a term that means bad businesses that have little debt and are very cheap relative to the assets they own. Several of my peers own it and it certainly meets my definition of Deep Value.
Titon – A Classic Ben Graham Net-Net
If you run a net-net screen of some kind it's likely that you'll have come across this (very) small cap stock. Titon Holdings is a Ben Graham net-net in almost every way.
It's a manufacturer, it has property, plant, fittings and fixtures and equipment to bolster his beloved tangible asset value. It also has virtually no debt and a large cash safety cushion in the bank.
It currently has a net-net ratio of about 0.66. For the mathematically gymnastic, this means that it's trading at around 2/3rds of its net-net value which was the maximum value that Graham would typically pay.
The company is also cheap enough to make it onto my modernised version of Graham's strategy.
Click here to continue reading the full article
I'm not a big fan of following economic commentators, precisely because of the short-termism it can create. Probably 99.9% of the endless waffle from economists and the journalists who follow them is of no value whatsoever.
One of the few sources that I do like to read, and he isn't really an economic commentator anyway, is Hugh Yarrow of Wise Investment (no, this isn't a plug; I have no association with Wise Investment or Hugh whatsoever). Like anybody else, I prefer to read things that confirm my existing opinions and Hugh often writes things that I might have written myself. An example from Hugh's 'pen':
"Given that almost none of the present value of dividends a company pays in its life (i.e. its true intrinsic value) will be determined over the next 5 years, market optimism and pessimism driven by short-term economic and industry conditions tend to exaggerate true value."
Which is exactly what I was getting at above.
Click here to read Hugh's latest monthly update
So if you take anything away from this week's letter it should probably be this: Investing based on short-term news (things with an impact or effect of less than a year or three) is a very dangerous game. You're lining yourself up to play with the big boys and their rooms full of PhD's and super-computers and flash-trading systems.
I only have one brain, a small laptop and a few dozen books and papers, which I imagine is quite similar to many investors outside the fund management world.
If we want to beat 'the market' we have to play a different game, one where the odds are stacked in our favour rather than against us. One proven way to do that is to focus on the long term and to forget irrelevant short-term details.
Until next week,
- John
P.S. You can reply to this email and I'll read it; it won't go into some kind of junk bin, so if you have anything to say just hit the reply button.
P.P.S. Or alternatively, if you know someone else who might be interested in value investing then feel free to forward this email to them, I'm sure they'll appreciate it.
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