Thursday, February 16, 2017

Transcript of Charlie Munger's DJCO meeting 2017

Here is this year's DJCO transcript.

My learning from giants continue.

The author has already highlighted the important points, so I will not repeat them here.

It is currently reporting season, and things are looking pretty pricey. DLX 30x, RWC 30x, COH 35x, IVC 30x. I look on forlornly and cannot help thinking that the number 30 is this year's financial equivalent to fashion's black. It is a perilous environment, as things trading at 15x starts to look interesting, just when cash is starting to pile up. This is an example of how our brains are wired to think and judge matters on relative terms, rather than on absolute terms. Pretty soon envy will be driving market prices, as everyone strives to do better than the Jones'.

The make-up of the market comprises of over 90% of spots where all capital goes to die, and only a handful of spots where capital is protected and thrives. If you avoid the bad spots, you cannot help but do well.

Enjoy and Prosper,
Yours One-Legged

Sunday, February 5, 2017

Book Review: A Man for All Markets

A Man for All Markets: Beating the Odds, from Las Vegas to Wall Street by [Thorp, Edward O]

https://www.amazon.com/Man-All-Markets-Beating-Street-ebook/dp/B01N4LB3LK/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=&sr=

A Happy New Year to all.

Readers of this blog will hardly be surprised at my excitement and enthusiasm for this book. I finished the first reading of this book in 2 sittings over 2 days. I am now on my second reread.

Initial takeaway points, relevant to both investing and life in general:

1. What matters most in life is what you do, how you do it, and who you share it with. Note: cross refer with Guy Spier's book. Essential for all seeking a better life.

2. Understanding and dealing correctly with the trade-off between risk and return is a fundamental, but poorly understood, challenge faced by all gamblers and investors. Note: I have bleated about this ad nauseam, but I will stop now, as it is to my advantage that participants continue to misunderstand this. To recap: high risks do not equal high returns.

3. The surest way to get rich is to play only those gambling games or make those investments where I have an edge.

4. The Ten-Count System had shown moderately heavy losses mixed with "lucky" streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. Note: read this again carefully- it is a goldmine.

5. If the market does a good job of using today's public information to set current prices, then the only investors who have an edge are those with material private information. Note: I am not sure I agree with this. There is often great variability between system participants irregardless of system average values.

6. Because you can't get out in time when trouble is coming, the excess returns you expect from illiquid investments may be offset by the economic impact of unforeseen future events. Note: very relevant to those focused on small caps.

7. Economists have found that one factor has explained a nation's future economic growth and prosperity more than any other: its output of scientists and engineers. To starve education is to eat our seed corn. No tax today, no technology tomorrow. Note: important message for our political leaders, and also forming a seed for my own personal end-game in life.

Reporting season is coming up- busy time ahead.

Enjoy and Prosper,
Yours One-Legged


Monday, December 19, 2016

Merry Xmas

Another year is just about gone.

As usual, there were many headline events over the year. The cumulative effect of these events on the trajectory of the good businesses that we hold will be virtually nil in the coming 5 to 10 years. On a portfolio level, I have had my share of good decisions and bad decisions, and fortunately, at this stage, the impact of my good decisions appear to outweigh the impact of the bad ones. There is always room for improvement, and I will be taking some time off during the Xmas and New Year to examine ways to minimise my unforced errors.

With a few trading days to go, we received an early Xmas gift from our indomitable UOS with an encouraging profit guidance for the full year. It is worthwhile noting that this guidance came in the face of a 10% slide in the MYR/AUD currency cross-rates. May we have many many more bountiful years with the Kongs.

The folks at DTL continue to kick goals. At the current trajectory rate of the business, I doubt many of the employees at DTL will get a decent break over Xmas. Many thanks from a happy and grateful shareholder.

Once again, another big thank you to Alf Mouffaridge of Servcorp, not the least for presenting another entertaining Annual Report. My message to you this year is that there is no shame in imitation. Many great business successes are based on imitation of best methods invented by others.

Finally, to Indy Singh of Fiducian. You have built a might fine business. Stick to what you believe, and do exactly what you say. The rest will follow.

To all readers, thank you for your patronage. I wish you a Merry Xmas and a Happy New Year!

Yours One-Legged

Wednesday, November 2, 2016

Xero: Update

Last year in August 2015, I published a review on Xero.

Today, Xero published its half yearly, so I thought it will be interesting to update our figures. The following table summarises the salient metrics:


2014
2015
2016HY
2016F
Revenue
143m
207m
137m
300m
COGS
30%
24%
25%

R & D
50%
48%
42%

General
20%
15%
14%

Marketing
75%
72%
62%

Total
175%
159%
143%



The figures are certainly headed in the right direction. Pleasingly cash burn has reduced to $13.4m in the last half, with $137m left in the bank, implying a steady runrate of 5 years. 

EDIT: 7 November 2016, cash burn is actually $45.8m. $13.4m is cash burn from operations, with the balance classified as investing cash outflow. However, the company's presentation materials emphasised $13.4m rather than real cash burn of $45.8m. Instead of a steady runrate of 5 years stated above based on $13.4m, the runrate is actually only 1.5 years.  This is the problem with promotional companies, and I should have been much more careful in scrutinising the figures.

The current market cap is roughly NZ$2.3 billion. Share price is up roughly 10% since my August review, and given growth rates of 50% in actual financial performance, has resulted in a narrowing of the gap between valuation and earnings expectation. However, in my view, the share price is still incorporating very optimistic assumptions of growth and eventual margins. In fairness, the probability of these optimistic assumptions eventuating have increased since last year.

Monday, September 26, 2016

Giverny Capital Annual Letter 2015

A bit late this year, here is another letter from the good folks at Giverny. I post these letters because I operate on a near identical investment philosophy with the notable exceptions being:

1. my writing skills are far inferior;
2. my investment record is much shorter.

Giverny Capital Annual Letter 2015.

Notable quote from the letter:

"Significant and educational conclusions can be drawn from a 20-year period. Since 1996, our companies have increased their intrinsic value by 1102%, or close to a twelvefold increase. Meanwhile, the value of their stocks has increased 1141% (net of estimated currency effects). On an annualized basis, our 9 companies increased their intrinsic value by 13.2% and our stock portfolio returned 13.4% per year. The similarity between those two numbers is not a coincidence. (my emphasis)"

Yours One Legged

Current Reading

Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses by [Iddings, Sean, Cassel, Ian]

I have just started reading this book.

This book profiles 8 CEOs and then attempts to draw some form of generalisations as to their common features. The objective is to be able to spot these features in CEOs that could possibly achieve outstanding results in the future.

At this stage, whilst being an interesting read, I am also wary of ideas that attempt to extrapolate general ideas from a small preselected sample size. In a nutshell, my argument is that we do not know of countless other CEOs, possibly with similar traits, who has actually failed and lost shareholders' money.

It is also interesting to note that the whole thing could be simplified by viewing CEOs filtering via Jack Welch's criteria of integrity, passion and 4Es, set out in his book, Winning.

I will continue reading, and post any further insights.

Readers may be interested in my Library listing here.

Yours One Legged



Sunday, September 25, 2016

Dogs versus Darlings 2.5 years later

Keeping track of my amusing exercise started in March 2014.

Since then, one of the Dogs has been taken over for a gain of 61.54%. Not to be outdone, one of the Darlings was also taken over for a gain of 22.27%.

Overall, the Dogs portfolio is down -9.5%. The Darlings portfolio, unfortunately, with -15%, has done worse.

But wait, there is more. After accounting for dividends fully grossed up, the Dogs portfolio is flat whereas the Darlings are still down -4%.

The one obvious lesson from this exercise to date is that overpaying for shares could yield results comparable or worse than buying shares in a lousy industry facing severe headwinds.

Valuation matters. Nothing grows to the sky forever.

Yours One Legged