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The Gent Manifesto: My Journey And Investment Process

2019-05-09T09:25:12+00:00

The Gent's Manifesto: My Journey And Investment Philosophy

Ethical Equities Founder, Claude Walker has suggested that I share with readers some background on my investing journey to date. This is my own fault and the just desserts for my hubris in publishing portfolio returns on Twitter. However, in the spirit of continuing to share ideas and in the hope that readers may find something useful for their own investing journey, the following is an overview of the evolution of the Gent Portfolio over the past few years, and then – more helpfully – some background on my style and what I’m trying to do.

Starting at the end

Here is the end result of my recent investing journey so far: portfolio returns to the end of April versus the benchmark I’ve chosen to use – the ASX Net Return Index (INDEXASX: XNT) (previously called the ASX Accumulation Index, which assumes the reinvestment of dividends back into the market). Please note that my portfolio balance includes small regular monthly contributions – which will have contributed about 20bps of the 353bps increase below (on a contribution basis only, pre including time weighted returns from that additional funding).

Net Return Index from: https://www.marketindex.com.au/asx/xnt

The portfolio is up 353% in a little over few years and clearly beaten the benchmark – but I’m extremely aware that this has been boosted considerably by tailwinds that are favourable to my style. Also, as a retail pleb I have considerable size advantages over the larger professional players – in particular that I can own much smaller companies than they can (whether due to their mandates or minimum cheque sizes), and that I can (usually) jump in or out of stocks without materially moving the share price. My investing style has largely stayed the same over this journey to date, but hopefully I am getting better as I absorb new information (from a mix of books, articles and podcasts – more on that later) and gain more experience. Not that this has stopped me making mistakes – you’ll see I’ve made some howlers – but hopefully I am making new and more exotic mistakes instead of repeating the classics.

Personal background and earlier spells in the market

I am approaching my mid 40s and over the past 18 years I’ve worked in fields that are either adjacent to the market or connected to the market in some way – though not directly professionally in stockmarket investing. My real world experience has included a few years in investment banking, several years in private equity, and several years in corporate finance – and I use the word “experience” here in the context of the Howard Marks quote that “experience is what you get when you didn’t get what you wanted”.

Nevertheless, my background has proven useful for my investing career to date, and I’ve been able to draw upon it when developing “gut feelings” about certain actual and potential investments. I’ve worked on buy- and sell-side transactions, met management teams and been involved in board meetings, dealt with a variety of different types of advisors, and have seen a bit of what is behind the curtain, so to speak. As readers would well know, gut feelings are often a necessary evil in investing outside the ASX Top 100 stocks – especially when there are gaps in information available which makes it difficult to see what is going on behind the scenes.

Before returning to the market in early 2016, I had been in and out of the market a few times over the preceding 20 or so years – but my two most active periods were in the mid-to-late 1990s (already, you know where this is going, don’t you?) and then for a few years prior to the GFC. This pre-Gent Portfolio “investing” experience was largely before the vast majority of my professional career – and is much closer to speculation than analytical investing. At those times I lacked the ability to properly parse financial statements and understand the broader context of companies and the industries in which they operate. Certainly, those periods were prior to later gained financial analytical skills and the development of a more rational decision making process. To wit:

My first ever investment experience was a big fat ZERO: the infamous Star Mining and its Sukhoi Log deposit (apparently one of the world’s largest gold reserves). SCN is a classic study of sovereign risk, with the Russian government seizing control of the mine, (then) Foreign Minister Alexander Downer attempting but failing to save the situation and Star Mining shareholders losing their shirt; also
At the time of the Dotcom crash I was foolishly dabbling in extremely speculative higher risk things like miners-pivoted-to-telcos and other similarly daft sh!t (in amongst some sensible things such as Fosters Brewing Group). The higher risk stocks were largely pre-meaningful-revenue (let alone pre-earnings) and many were opportunistic cash-ins on the Internet 1.0 bubble. I even owned Options in pre-revenue mining-turned-to-telco companies! And so I paid the price on that speculative cr@p – as I deserved to do. I had a poor grasp of risk/reward back then.

I did have some successes in the short interim period in the mid-00s (when my dabbling was closer to “investing” but still nowhere near as thought-out as my process is these days). This included a greater than 10-bagger with Cellestis (eventually taken over by Qiagen) and then early success with Nanosonics (drink for you Three Wise Monkey fans) way back when. I cashed out of the market (from memory around 2007) to use the funds for other purposes.

The Gent Portfolio (2016 – 2019 YTD (April))

When I re-entered the market in 2016 I had been sitting on the sidelines for nearly a decade – during which time I had significantly enhanced my financial analytical and commercial due diligence skills through my aforementioned day jobs. While I re-acclimatised to the market and got back into the grind of vigilant stock and portfolio monitoring, I decided to take a fairly cautious approach initially.

The evolution of my portfolio (focusing on key stocks) is illustrated below. At its official inception in January 2016, the Gent Portfolio largely comprised:

Traditional dividend-paying blue chips such as 3 of the big 4 banks, Woolies and Crown;
Supposed blue chips but actual-future-turkeys QBE, AMP, Flexigroup and Ardent Leisure (all sold largely pre downgrades, though from memory I weathered one on Ardent Leisure);
(Then) higher risk oil-related stocks Santos and Origin Energy (which back then some commentators believed could go under with the WTI crude price below $30); and
A smattering of growth stocks which together comprised 20% of the then portfolio: A2 Milk, BWX and Catapult Group (made a measly 20% on CAT through impatience, missed out on a further 80% gain (but also subsequent crash)).

2016

Going back to the main chart at the start of the article, you can see that for the first 12 months or so, the performance of the Gent Portfolio largely tracked the benchmark. Calendar year 2016 included some good results:

Nice returns on Origin (+71%) and Santos (+60%) as the oil price rebounded, though exited way too early on both (in hindsight);
Handy gains on the banks as they rebounded from their late-2015 nadirs (between 10% and 35% up excluding dividends (reinvested via respective DRP programs);
Some good returns in small caps such Cogstate (+51%) and Vitaco (+37%, fortunately taken over as it delivered a profit warning during the protracted takeover process); but net of
Some complete fails in the Mid Cap space such as Mayne Pharma (-47% after successfully nailing the absolute top [FACEPALM] and then averaging down a few times [Edward Munch “The Scream” emoji]) and Baby Bunting (-24%), as well as losses in mediocre mid-caps such as OFX (more foolish averaging down) and Capilano Honey.

During this time A2 Milk was up 66% and BWX 20%. BWX I would eventually hold to a 98% gain (missing the top by about 15%) – but I abandoned it soon after the Andalou acquisition (which immediately felt “off strategy” to me) and fortunately pre the profit warnings which have occurred since. Watching BWX from the sidelines and profit downgrades from other serial acquirers I fortunately haven’t owned has made me personally very wary of the growth-by-equity-diluting-bolt-on-acquisition model.

While my performance was broadly *meh* vs the benchmark, the time in the market generating actual profits and losses, and the time spent researching stocks gave me the chutzpah to want to take the training wheels off and focus more on what I’m most interested in: growth companies and those that can potentially become multi-baggers (more on that later).

Sometime during 2016 I started listening to investment podcasts, reading investment blogs and classic investment books and generally trying to sponge as much information as I could to help my decision-making and investment-screening process. I have a large pile of investment books I’m slowly working my way through – probably not helped by the fact I’m buying new ones quicker than I’m reading the ones I already have. I also initiated my pre-investment checklist around this time (which continues to evolve) – which has definitely helped me screen potential investments better, but has definitely not stopped me from committing various investment crimes.

Overall, a key driver of the increase in overall portfolio value since 2017 has been Afterpay (added in April 2017 at $2.45 initially pre the merger with TouchCorp, back when the ticker was $AFY). Afterpay has been without doubt the single biggest contributor to the performance of the portfolio. When screening the stock, I thought I could see potential for two Economic Moats: early signs of Network Effects and also Switching Costs (retailers not wanting to switch out of a payment platform which materially increased basket size). The latter is debatable but the former has certainly proven true in Australia IMO.

2017

Also driving performance during 2017 was the doubling of BWX (exited early 2018), the tripling of A2 Milk (though I took profits below $3 and at around $7 – compare this to recent trading above $15 [FACEPALM]), and success with new investments in Pushpay and Titomic (both since exited, however I re-entered Pushpay during the market melt-down just before Christmas last year). Calendar year 2017 contained yet more head scratchers (and valuable lessons) however – such as:

Failing spectacularly in trying to catch falling knives in Vocus (-28%) and BPS Technology (-21%, which I misinterpreted as a Deep Value play);
Speculative fails such as Nuheara (-30%) and Mitula (-36% post a painful profit warning which exhibited operational incompetence (theirs as well as mine)); and
A couple of examples of not doing enough research – the one which has stuck with me the most is Smart Parking (only a 7% loss – but I flipped quickly from thinking it was an interesting novel new technology pre-investment to post-investment realising the technology was literally everywhere already and deployed by much bigger companies than SPZ. This realisation spurred me to deepen the competitor analysis I do pre-investment).

The end of 2017 (and early 2018) also included a hospital stint (re-admission to deal with an infection picked up during an initial knee operation) and heavy antibiotic treatment which lasted a couple of months. This period – probably due to boredom but also at least in some part due to the heavy duty antibiotics (which definitely messed with me physically) – was characterised by much higher levels of trading and arguably higher levels of risk taking. While overall this period was profitable, the net positive outcome is driven by a single 51% return from a relatively large position in Elmo Software – which covered for a string of small losses on lower quality flotsam and jetsam. I learned a valuable lesson about over-trading and not sticking to my system, but it could have been much, much worse and thankfully I wasn’t buying Bitcoin at the December 2017 peak in my delirium and hospital pyjamas.

So, despite various flavours of stupidity, the portfolio was up 79% for 2017 with A2 Milk and Afterpay responsible for a good chunk of gains.

2018

These 2 companies continued to underpin returns throughout 2018, as did Appen (added belatedly in late 2017) and Audinate (early 2018), as well as Titomic (+321% overall gain before exit) and Pushpay (+75% for the first time I held it). In 2018 the portfolio posted a 28% return – however this was down 20% since the highs of August, with the market going Risk Off in early September.

One of the reasons I *wasn’t particularly fazed* by the selldowns in November and December was that a number of my stocks in the portfolio had already shredded 30-40% in September and October (ouch!), and didn’t lose that much more over the rest of the year. I added to positions in new stocks Serko and Straker Translations as well as re-entered Pushpay (then down 30% from its August high) in the week before Christmas – which felt very uncomfortable at the time. *What I should have done* was add more to core higher conviction holding Appen (which has since nearly tripled from the December low – but then Appen and I have a painful past (saga described later) and I’ve struggled previously with valuation on that one at times (despite its long history of earnings upgrades).

Calendar year 2018 wasn’t without new and exciting investment crimes however – including but not limited to:

Ignoring price action and being stubborn with Know-Your-Customer software companies Kyckr (just seen down a whopping 75% since I exited – phew) and I Sign This (annoyingly since doubled – L) – both ~20% losses after being up 30-50% each;
Giving the benefit of the doubt for far too long (and being a baggie) with seed technology company Abundant Produce (38% loss, but since re-entered recently at one third of my exit price following 2 positive Australian distribution announcements); and
Copping a 54% loss on Pivotal Systems – a technology provider to the cyclical global semiconductor industry – sadly a lesson not learnt until the recent profit warning for Revasum.

These are all smaller companies – which are typically riskier than large- and mid-caps – the reminder for me here is not to ignore share price and volume signals – particularly in higher volatility periods, as small- and micro-caps can disproportionately suffer in market downturns.

Thankfully, overall there was less churn in the portfolio through 2018 – as I finally (hopefully) learned to stop wasting time on lower conviction companies and try to maximise attention on my higher conviction names.

2019 YTD

Portfolio performance in 2019 (to the end of April) has been frankly ridiculous – and likely unsustainable (more on that later) – with a 61% gain for the first 4 months, which I would be ecstatic to hold onto for the rest of the year. Key drivers of this result have been Afterpay (+106% in 2019), Appen (97%), Audinate (+81%), A2 Milk (+55%) and first cannabis investment Elixinol (+86%), as well as recent IPOs Next Science (+60% to end of April) and Ecofibre (+120%). Given the performance of Afterpay since I first entered the company (up 940% to the end of April and further since) and its increasing proportion of the total portfolio, I’ve sold one quarter of this holding (and also lightened some A2 Milk) partly for risk management purposes, but primarily to fund my participation in the two aforementioned IPOs and new positions in a handful of other companies that I like the look of.

Portfolio stratification and composition – end of April 2019

The table below left (an abbreviated version of my main dashboard (which includes VWAPs and actual returns)) shows how I think about my portfolio, which includes dividing it into three tiers:

Tier 1: higher conviction stocks – which *I personally* believe are reasonably likely to be longer term multi-baggers (and have started this compounding process already) – and so I plan to hold until I see evidence to the contrary (i.e. that growth is likely to slow considerably);
Tier 2: companies that I like as potential longer-term high conviction stocks (may move into Tier 1) – but where I am looking for more evidence (careful not to repeat a past mistake of jumping to a high conviction belief too quickly based on share price action alone); and
Tier 3: companies that I like the look of but are typically earlier on in their development than Tier 2 companies and will likely need at least 12 months of monitoring to make a more accurate later assessment.

This stratification isn’t at all revolutionary and I know other investors who think about their portfolios similarly anyway, but I find it helps me focus more on (1) letting Tier 1 companies run until I see evidence that my initial investment thesis is coming apart; and (2) continually monitoring my other positions for signs that my thesis is either wrong or playing out as hoped – and, if the latter, averaging up and increasing my position (which I struggle with due to my atrocious Anchoring Bias but hopefully am getting better at).

New positions are typically 2-3% of my overall portfolio size until they prove (usually via the next set of reported numbers and key metrics) they deserve to be added to – or divested entirely.

Since the end of April I have trimmed slightly – such that cash is now up to 5%. Philosophically I am normally largely fully invested, with cash having averaged ~3% since inception of the portfolio (though I did trim holdings to increase cash weighting to 8% in September 2018 as I felt the market going Risk Off – and redeployed these funds three months later).

It’s worth mentioning at this point that I monitor my portfolio very closely indeed. I have the ASX Today’s Announcements page sitting in the background all day long at work and I’m constantly scanning intraday for (1) news on my companies which may change my perspective, and (2) potential new investments – especially during 4C and half/full year results seasons. I believe that higher levels of monitoring are needed when investing in Growth stocks and small- and micro-caps generally – as these companies are more likely to experience volatile up and downwards share price movements (in comparison with larger more stable blue chips – though blue chips are not immune from profit warnings, see AMP, IOOF and others).

Prior to buying my first shares in a company, I aim to make sure that I have figured out internally what my personal investment thesis is for the company – what needs to be true in order for the company to be a long term multi-bagger, usually a combination of financial metrics (revenue, margins and profitability), market share and competitive position, and whether potential Economic Moats are actually evolving as hoped (all covered in the Pre-investment Checklist section below).

My overall investing style: aiming to be a baggie of a different kind

For all my adventures and misadventures since the start of the Gent portfolio, my investing style and aim has largely stayed the same: I am trying to find companies that can become multi-baggers over the longer term. In an ideal world, I’d have a portfolio in 20 years’ time comprised of CSLs (up 260x in 25 years since its 1994 float, it had a 3-for-1 stock split in 2007)

*Waits patiently for half an hour until roaring laughter dies down.*

But this is actually not that far-fetched.

If you were to compare the composition of the ASX Top 100 two decades ago versus today, you would see that a number of companies have seeming vaulted into this bracket from nowhere in 1998, and a lot of this is driven by technological advancements over the intervening period as well as the high quality of management teams of those companies. In just the last decade there have been many examples of considerable multi-baggers on the ASX – including but not limited to):

Appen: up 51x since its IPO at $0.50 in January 2015 (just over 4 years);
Afterpay: up 27x since its IPO just 3 years ago;
Altium: up 92x over the last 10 years;
Promedicus: up 27x in the last 10 years;
Webjet is up 13x over the last 10 years; and
Xero is up more than 9x since 2013;

The above returns of course assume that investors stayed the course over the journey and weren’t either tempted to take profits (as earnings multiples expanded considerably) or shaken out of their positions during times of market turmoil. But this absolutely proves that the key to generating multi-baggers in your portfolio is having the mental stamina and conviction to hold these stocks for that long in the first place.

Furthermore, the last 10-20 years is not an unusually fertile once-in-a-century period which provided the environment for technology companies to generate supernormal returns. There were 100-bagging stocks nearly a century ago:

Thomas Phelps’s 1972 book “100 to 1 in the Stock Market” (not yet read but in the pile on my bedside table) details the 365 US stocks which were 100-baggers between 1932 and 1971.
Christopher Mayer’s 2015 book “100 Baggers: Stocks That Return 100-to-1 and Where to Find Them” (have read, recommended) updated this analysis and found a further 365 US stocks which were 100-baggers between 1962 and 2014.

It is of course impossible to predict with any degree of certainty that any company is going to go up 10-50x from the point you buy it. By definition, that company is likely to be a micro- or small-cap, and companies in the smaller end of the market tend to be higher risk with typically lower quality financial and operational information (i.e. versus larger caps with their typically more sophisticated reporting).

It should be noted that companies inherently bear an asymmetric payoff profile: you can only lose 100% (cold comfort of course if you do actually completely lose 100% of an investment) whereas the upside is uncapped in theory.

Of the investment blogs, books and podcasts I’ve digested so far, the content that has resonated most with me personally has been from Ian Cassell and his Microcap Club website (Ian has also been one of the key drivers of the interesting Intelligent Fanatics project). Ian seems to be more of a traditional Value investor, but I think a lot of the key learnings are still applicable at the Growth end of the spectrum – particularly in terms of hunting multi-baggers.

Pre-investment screen checklist

I mentioned earlier that I have developed a personal screening checklist for my own artful purposes in evaluating potential stocks – largely a combination of things I’ve pilfered from elsewhere so I claim no IP here – feel free to borrow any bits (if any) that resonate with you for your own checklist.

This continues to evolve over time and is by no means a fail-safe predictor of success, but it has definitely helped fine tune my decision-making process with respect to potential long term investments.

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Right now the checklist simply adds to a score but isn’t weighted with higher points awarded to the more important factors – which is the next logical step. I have thought about doing this, and will probably re-calibrate in this way. However, I no longer use the checklist as the sole arbiter for the decision-making process. While the score is useful – certainly in knocking lower quality things out of contention – the most important use of the checklist IMO is to ensure I am thinking about the right things before I dip my toe in the water and buy a starting position in a company. The checklist has also helped me make faster decisions – especially if I can quickly see that a potential investment has most/all of the factors I care about most, and few/none of the red flags. This quicker decision time has also been very helpful, especially when I originally used to take as long as 2-3 weeks to analyse a potential investment (during which time the share price could move considerably away from me).

Before buying into a new company I try to do as much efficient research as possible – not “boiling the ocean” combing the internet for every last sentence on the company, but trying to extract the key information I need to help with the checklist. Typically this includes:

Latest annual report, full-year results and half-year results – especially accompanying investor presentations
For loss-making companies, last 12-24 months of 4C (quarterly cashflow) statements
Last 12-24 months of ASX announcements – with investor presentations
Broker research on the company and competitors (to the extent available)
If the company has been floated in the past few years, the IPO Prospectus (often extremely valuable for industry analysis).

The Gent Investment Manifesto

“Manifesto” is no doubt overselling it, and I’d expect readers to have worked out many of these points themselves already, but below are some things that I’ve learned along the way which I try to remember:

Don’t get jealous. I used to get jealous seeing others doing well on stocks that I didn’t have (particularly if I’d passed on that company). But it’s just not possible to be in every stock and you have to choose which ones you’re going to sink your funds into. Also, different investors have different strategies, I need to focus on MINE, and if I’ve chosen well, my time will come. It’s more important to focus on personal growth (i.e. comparing to yourself 2 years ago, not to other people).
Investing is an emotional competition. Being able to keep a handle on your own emotions and psychology (in particular, feelings of greed and fear) is a key advantage in my view. You need to keep your eye on what the market is doing obviously, but keeping a clear line of sight on your strategy and goals and not being buffeted around by the emotions running rampant in the market prevents you from being shaken out of investments which can potentially be precisely as good as you thought they were before investing initially.
Curate your information feeds. In connection with the previous point, and as discussed a bit further on, there is simply too much financial and market commentary out there – the vast majority of which I personally get zero value from. I read the AFR every day, but I ignore news finance segments, don’t watch Sky, and instead spend the time listening to podcasts and reading blogs and other information sources that I find much more useful and hopefully which will give me an informational edge at some point in the future. I’ve found that this curation has stopped my brain (which is easily distracted, not that dissimilar to the prototypical hamster wheel) from being filled with garbage which can slow down and pollute my decision-making process.
You don’t need to have an opinion on everything. I’d much rather have deeper knowledge of a couple of dozen companies (so I can understand quickly if something changes) than shallow knowledge of 1,000 companies – and be slow to react to developments. This may be more to do with individual personality type, but I don’t need everyone to agree with me (in fact I love having a different view). For the same reason, I generally prefer not to use mental bandwidth to debate stocks.
The natural extension of this to stick to areas where you have knowledge and edge, and to understand what you’re good/not good at. For example, I’m not very good at technical analysis and charting. Sure, I can eyeball a chart and make up my own mind as to whether I think it looks positive or negative, but I couldn’t definitely pinpoint when/where it is time to get into a new stock. Instead, when I have found a potential new investment, I start watching price action, trading volumes and the buy & sell queues like a hawk, trying to develop a “feel” for momentum and lack thereof. You may also have noticed I don’t hold any mining or oil & gas related companies – I’m just not good in that space, and until I spend the time to educate myself on that sector I would be operating at a disadvantage vs people who have many years trading and investing there.
Turn over the most rocks. This is of course that famous Peter Lynch quote: “he who turns over the most rocks wins”. Lynch estimated that only 10% of companies were worth considering. You need to continually be looking at new ideas, because your portfolio probably won’t remain static over a 12-month period (unless you have chosen exceptionally well). You’ll always need good ideas to replace portfolio holdings that turn bad or don't work out as well as planned. Personally I love researching new ideas – though have to caution myself that they need to be as good as (or better than) those companies I already have to warrant inclusion, otherwise by definition I am diluting the position of higher conviction positions. This is of course connected to the great Warren Buffet quote (“Mercy! Is there anyone The Gent WON’T steal from?”) – about waiting for your pitch and not pulling the trigger on lower quality stocks.
“The market is always right.” This is more about realising that we are small players in a huge ecosystem and are individually powerless to turn the tide. But also, we must recognise that sometimes we don’t have access to information that other market participants seem to, and that there may be a very real reason for share price movements which we cannot (yet) see. Investment is just as much about survival as anything else – you have to live to fight another day so that you can win later on – if you are completely wiped out trying to hold fast against the weight of the market you won’t be able to mount your comeback. This is a key reason why I’ve never used leverage (which would just add another layer of risk onto the already-higher-risk area in which I play) – I’ve seen what leverage and margin calls in particular can do to a portfolio.
Try to take a longer term investment horizon. In particular, I try to look out 5-10 years and understand whether what a company does will “still be a thing” at the end of that period. I looked briefly at Big Unlimited (ASX:BIG), now bankrupt, at 70c (without seeing it for what it was) but passed quickly as I just didn’t believe it was going to “still be a thing” in 2027 or even 2022 (and missed out on a potential 7-bagger at the top). The key for me is to understand whether a company’s product or service will be redundant over that time period, or whether it will be something that is still monetisable or just bundled together with other products/services. An example of this email in the Internet 1.0 era – which we all take for granted now of course (but which didn’t stop MCI Worldcom paying more than $500M for Ozemail in 1998).
Know your portfolio, and be ready to sell. You need to be up to date on all the stocks in your portfolio, to understand why you’re holding them and what could potentially go wrong to invalidate your investment thesis. The motivation for following companies this closely is that you can tell quickly if something is not working out and you need to abandon ship – such as signs of management incompetence or unethical behaviour, or if the longer term narrative is changing in a negative way (which can bring Growth company multiples crashing back to Earth).
Think in levels of conviction. A large proportion of investors think in terms of DCF valuations and P/E multiples, and price targets derived from these valuation approaches. As I’ve discussed before on Ethical Equities, the standard P/E ratio does not factor in relative rates of earnings growth between companies. This is where the PEG ratio (P/E multiple divided by EPS growth rate) comes in. For example: I personally would rather own a company trading on a 40x P/E and growing at 20% annually (a PEG ratio of 2.0x) than a company trading on a 15x P/E and growing at 3% annually (a PEG ratio of 5.0), although the latter company is more likely to pay a dividend which narrows the difference somewhat. Unless a company’s valuation becomes truly crazy and the company’s actual revenue and earnings are years away from justifying that (i.e. even after using a PEG ratio), I try to think in levels of conviction – letting winners ride if they are still delivering strong growth. Taking profits in A2 Milk at $3 and watching the remainder of my holding soar above $10 (currently $15) really drove home this point for me personally. You have to remember that as each fiscal year rolls over, the forward earnings period rolls over too, the new year gets pulled forward in the DCF model, increasing base earnings (and terminal value) and thereby increasing DCF valuation as a whole – so valuations and price targets will rise year on year if the company is growing. You can see this happen in the market – going back to A2 Milk for example, I believe that over time the market starts to look through to the following fiscal year (June reporting year-end) EPS as early as April of each year. This is a great reason to try not to get persuaded by price targets and DCFs for fast growing companies, and to consider the PEG ratio as well. There is little point selling if the company is going to become a Hold (fair value) or Buy in several months’ time when the company rolls into a new financial year (and you would want to re-add the company to your portfolio).
Let them bag. As mentioned much earlier (sorry, I should have scheduled an intermission) serious wealth creation comes from letting multi-bagging companies do their thing over time. As Ian Cassell has pointed out, every multi-bagger will have periods of stagnation as fundamentals backfill (earnings catch up to price) and bored, impatient old shareholders sell to new shareholders with a longer term perspective. Patience is a key source of advantage over other investors (short term traders especially) in the market. A multi-year run is comprised of many mini-cycles (look at the share price charts of A2 Milk and Appen for example). Yes it’s true that “nobody ever went broke taking a profit” – but the OPPORTUNITY COST (lost profits) can be extreme. How much money did I leave on the table in my A2 Milk profit-taking example above? Yes, I reinvested the proceeds into other things – and probably recycled the capital a few times since then – but have those things all gone up by 5x? I doubt it. Another thing I have been guilty of a bit – but not much thankfully – is trimming holdings as companies become bigger proportions of my overall portfolio. I know some people who do this continually – which is the exact reverse of how you get long-term life changing multi-baggers.
High concentration is OK. In fact, being highly concentrated is not just OK, it’s one of the keys to building serious wealth over time and also outperforming the market in the process (provided you have selected stocks well, of course). Portfolio diversification is a key risk minimising strategy, but the more stocks you own, the more likely that your returns will mirror the index. Further, a number of recent studies have shown that after about 20 equally sized positions, the benefits of diversification disappear. But naturally, the lower the number of stocks in your portfolio, the higher volatility it becomes. Everyone will have their own ideas about what is the optimal number of stocks to own. Since the inception of the Gent Portfolio I’ve held an average of 12 stocks (as low as 9, as high as 17 at the end of April (which may be the upper end of my personal tolerable limit, I’m starting to get a bit twitchy). Maybe I’ve broken rule #6 above and let a handful of lower quality ideas into the portfolio? Perhaps, although two of these are recent IPOs Next Science and Ecofibre (which I do like longer term – to be proven, currently in Tier 2).
Inflection points are particularly useful. I have long been on the hunt for companies reaching an inflection point (particularly the point where it reaches its cashflow and profit break-even point). Friend of Ethical Equities, Matt Joass, has written an excellent piece on inflection points – which also includes other factors which can lead to a structural spike in revenue and profitability – such as a new product launch or a turnaround. In tracking the quarterly cashflows of loss-making companies I am particularly looking for signs that a company is not far away from reaching cashflow break-even (which the market interprets generally as a major de-risking point) – especially for highly scalable companies where investment has been made in technology, systems and people, and where increasing revenue will lead to greater proportional increases in margins and profitability due to this operating leverage.

Shooting myself in the foot

All this planning and process is all fine and dandy, but I continually run afoul of rule #2 above – in particular, I find it a continual struggle not to succumb to my vast collection of cognitive biases.

There are many articles about behavioural biases and how they can impact investor performance. This Investopedia article is a good summary of the most famous biases, following on from the pioneering work of Kahneman & Tversky, including:

Anchoring Bias – anchoring to a particular share price or metric
Confirmation Bias – ignoring information that contradicts earlier impressions and absorbing only that which confirms them
Loss Aversion – failing to sell losing investments because of the triggering of a capital loss and the recognition that the investor may have made a poor investment decision
Familiarity Bias – such as filling your portfolio with very similar companies in the same industry

By far my biggest problem has always been overcoming my profound Anchoring Bias – in particular, failing to pull the trigger on a potential new investment because it has increased from a lower share price to which I’ve mentally anchored, but also failing to average up (buy more) of higher conviction (Tier 1) holdings as they have performed well and started to prove out my investment thesis. Hindsight is 20/20 vision but I should have been adding more Appen and Audinate in particular last year during the Risk Off phase.

My anchoring bias has resulted in the following Sins of Omission (i.e. notable absence of the following higher quality stocks from my portfolio):

Altium: at around $10, waiting for it to fall back to $9 (current ~$33, all time high $35.59)
Promedicus: at $9.10 before last Christmas, hoping for $8.50 (around ATHs of $20.52)
Nanosonics: at ~$2.70 before Christmas – and having owned it from ~$0.50 to ~$1.05 a long time back, hoping it would come back to $2.50 (current $4.85, having hit $5 recently)
Xero: at ~$20 in mid-2017, hoping it would fall back to $18 (where it started 2017) (currently around ATHs of ~$55)
Polynovo: at 55c, hoping it would go down to 50c (current: $1.03, having reached $1.16)

I could add more but I’m turning into a goth as I write this section.

The last example is Appen – you may have noted that I do in fact have APX in my portfolio – because I finally belatedly did pull the trigger – above $7 following the acquisition of Leapforce.. having been frozen to my chair and unable to buy around $4.50 just weeks earlier.. because I was anchored to the $2.50 share price it had been trading at – just prior to not buying it at $2.80. YE GODS MAN!

Predictions of doom and my plan of attack

There is always, always, a tremendous amount of commentary in the financial media – a lot of opinions and predictions and very little accountability and measuring of accuracy after the fact from what I can see. The cynical part of my brain interprets a good chunk of this content as being designed to generate broker commissions as well as sell newspapers etc. There are perma-bulls and perma-bears (both of which will be right at some point), and those that clutter the ether in between. Long ago I decided that this garbage was distractive filler, and that spending more time on curated information sources is a much better way of (1) maintaining my sanity, and (2) saving my mental energy for learning more useful content.

For the last couple of years there has been talk in some quarters of another major global recession, or worse, a repeat of the GFC. The latter seems unlikely to me. I think the GFC was closer to the Great Depression (albeit over a much shorter timeframe) than a normal common or garden recession. A number of recent articles, such as this one from Morgan Housel discuss how investor mindsets are driven by the events experienced during their lifetime. For example, many investors who saw their wealth shredded by 90% over the harrowing 10 year period following the 1929 crash – then lived through the Second World War – were largely not mentally ready to be taking risks investing in the American consumer products boom which started in the 1950s fuelled by easy credit and low interest rates (Morgan again). I am wary of letting my fear of a repeat of the GFC constrain my optimism for future technological advancements and the potential accompanying investment opportunities.

There has also been commentary calling for a repeat of the Dotcom Crash (the bursting of the internet bubble in 2001) due to the elevated valuation multiples currently being enjoyed by the Australian WAAAX stocks (and other tech stocks globally). I definitely do think there is likely to continue to be periodic corrections in Growth companies over the medium to longer term – this is par for the course with higher growth companies as the market oscillates between periods of Risk On and Risk Off. I don’t, however, believe that there is another global reckoning which will see the tech sector come off 70-90% and remain subdued for several years. I don’t like to pull out “This Time It’s Different” Trap Card, but it feels nonsensical to compare the 1998-2001 bubble to now. The Dotcom bubble was Internet 1.0 – when the internet was relatively new, and we were all going to live our lives entirely online from exquisitely modern homes on Saturn by the year 2005. The bubble burst – and continued to deflate for years – because it became quickly apparent that prevailing technological capabilities were massively short of where they needed to be to deliver on the hype, and multi-billion market capitalisations for companies which were not generating meaningful amounts of revenue (let alone earnings) were of course completely nonsensical.

Roll forward to 2019 (and the nearly two decades of technological advancements in between which have made it possible to realise many of those Internet 1.0 era promises) and we have:

Apple trading on a trailing P/E of 18x and generating US$266B of revenue for FY18;
Facebook generating gross margins of 83% on US$56B of revenue (up 37% in FY18) and trading on a 26x trailing P/E; and
Amazon generating US$233B of revenue for FY18.

Obviously these are three of the largest companies in the world, and [gum-chewing teenager voice] like, the most obvious examples ever, but the point remains: they are the vanguard of the tech sector, are all entrenched enormous and highly profitable businesses, and will not be plunging 70-90% in any Tech Crash 2.0. Unless, of course, we have a repeat of the dinosaur-killing asteroid which landed in the Chicxulub crater – in which case, guess what, your odd collection of pimply unloved Deep Value stocks is not going to save your portfolio.

That said, it does feel to me like we are in the last stage of a bull market, and there are a number of signs suggesting this to me – including but not limited to:

The rush to IPO for a number of large loss-making companies including WeWork, Uber and Lyft (never mind the ridiculousness of a $4B valuation (40x revenue) for recently listed US meat substitute company Beyond Meat, or Pitbull recommending biotech stocks);
A lot of backslapping on recent (insanely) profitable investments and from what I can see widespread feelings that it’s become easy to make money in the market in 2019 (especially from younger investors who’ve never seen a bear market, of which many of whom were previously ecstatic, then shattered, crypto speculators); and
Spectacular share price movements in Growth names in 2019 – soaring way above previous mid-2018 highs to new pinnacles.

That great Warren Buffet quote about being fearful when others are greedy feels particularly poignant right now (to me). I do think there is a good chance that at some point in the next year or so we will experience a bear market and 20-30% drawdown. There have been different articles recently about the length and extent of corrections (10-20% drawdowns) and bear markets (20% or more), but broadly (using US figures as the ASX is likely to follow suit just as it has done continually in the past few decades):

The average length and depth of a US correction is about 13-14% and 4-5 months:
The average length and depth of a US bear market is 30-33% and 13-14 months.

That would not be fun (2H2018’s meltdown in Growth stocks certainly wasn’t) – but if history is any guide it’s inevitable at some point. But also, it’s not going to last forever and historically equities have returned to their long-term upwards trajectory afterwards.

Typically, stocks perceived by the market to be higher quality rebound first (i.e. before the more speculative names that soared just because they operate in the same sector etc). Hopefully my portfolio includes some of these higher quality names and any downturn in my portfolio would not be prolonged. It’s up to me and my process to select those higher quality names.

And if I have chosen companies which will continue to grow revenue and earnings and aren’t so impacted by either a falling share price or the reasons behind a broader market rout (i.e. a recession), then I’m personally not that fussed if the share price falls 20-40% (and like the thought of attractive buying opportunities). I’m not confident in my ability to time the market (selling before the plunge in order to buy back at the bottom), I don’t want to trigger capital gains in trying to be too cute, and if these are long term holdings for me which I plan to hold for years (as long as the company continues to grow in line with expectations of course), then why go through the hassle of selling to buy back later? That didn’t work for the masses of people who sold out of the market in late December 2018 (when press commentary was at its most bearish and everyone was certain of a global bear market (which hasn’t eventuated)) – with many stocks up 20-80% since those December lows (and some people only returning to the market in March when they thought it was “safe” again).

There have been many articles in the last few years about the danger of trying to time the market – and they revolve around the fact that a calendar year’s returns are generally driven by just a dozen or so key trading days, with the other 230-240 trading days in a year adding to not much. Not being in the market on those days can put a serious dampener on your returns. I’m not smart enough to know when those days will be and don’t believe I have any edge (i.e. versus the rest of the market) in timing when to liquidate my portfolio (duh, at the top, dummy!) and buy back my holdings (at the bottom!).

In the event of a downturn I’m more likely to be a buyer – providing I have some dry powder of course – hoping to add more to my higher conviction (Tier 1) names, potentially also Tier 2 depending on the extent of share price carnage and the opportunities presented for those companies. Each individual investor will have their own personal feelings about what is a sensible amount of cash to be holding at any given time – just bear in mind that this is also an “active” position (i.e. betting that stocks will go down).

Don’t try this at home..?

You might expect with my Growth style and ludicrous aim of hunting multi-baggers that I would be a perma-bull who gleefully throws cash around without any regard for potential danger, but actually in my personal life I am pretty frugal and fairly risk averse. I own a 13yo Mazda for example (will never own a Lambo – spending money on frivolities like that is not how to get or stay rich). If I had a time machine I would probably go back 20 years and slap younger me about the face about the way I wasted money on CDs and DVDs and other shortly-redundant material possessions. Too late did I realise the key point about compounding: you have to start ASAP – by delaying 5 years you are not forgoing the first 5 years where the snowball is rolling slowly downhill eking out yawn-inducing returns; you’re robbing future retired you of the last 5 years where your nest egg is growing each year at MULTIPLES of your initial investment.

I probably have a higher appetite for risk than others (which I try to couple with an analytical evaluation and research process which hopefully de-risks my strategy somewhat) – so I don’t recommend that readers set out to follow my strategy to the letter as your investment goals and horizons are likely to differ from mine. In particular, I don’t think you could follow my style if you weren’t prepared to keep monitoring your portfolio and the market very closely (which I know some would find extremely tedious). So I encourage readers to follow their own path and decide which investment style is for them – but I greatly recommend that you read as widely as you can, as that can potentially give you an edge over the masses in being able to successfully understand new companies from different industries (personally I like science and astronomy, itching to participate in the Rocket Lab IPO if that happens).

There are many different ways to make (and lose) money in the market – and this is mine. It will probably be anathema to self-righteous bearded value investors [thank you John Hempton for that awesome imagery (he said, stroking his self-righteous beard)].

I believe my investment style fits with my personality type and world view (optimistic about the pace of technological innovation, trying to look 10 years out). My style has worked recently but there’s no certainty that it will continue to work equally well in the future. I have a long way to go from an investment development perspective – there will always be new things to learn – and I’m looking forward to seeing where the path takes me. Onwards and upwards.

Thank you for reading this far if indeed you have.

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Epilogue: recommended reading/listening

Below is a short list of information sources – in the case of podcasts and blogs, ones that I listen to/read regularly – as part of an overarching mission to educate myself, broaden my horizons, and try not to be as ignorant as I have been for most of my life.

BOOKS

There have been a number of Recommended Reading lists published by various professional and retail investors in recent times – a good one here by another friend of Ethical Equities, the giant red cartoon hound 10foot Investor (Twitter: @10footinvestor). I would add a handful to this list (and would have added more if I’d made more progress with my ever-growing pile):

100-Baggers – Christopher Mayer
The Most Important Thing – Howard Marks
The Outsiders – William Thorndike
Money Masters Of Our Time – John Train
Zero To One – Peter Thiel
The Little Book That Builds Wealth – Pat Dorsey (great discussion on Economic Moats)
The Little Book That Beats The Market – Louis Navellier
A Short History of Financial Euphoria – John Kenneth Galbraith

PODCASTS (and Twitter handles)

Australian

Three Wise Monkeys (Claude Walker, Matt Joass, Andrew Page).
The Acquirers Podcast (Tobias Carlisle).
The Rules of Investing (Livewire).
Australian Investors Podcast (Owen Raszkiewicz).

Invest Like The Best (Patrick O’Shaughnessy: @patrick_oshag) – my single favourite podcast, with a wide variety of very smart guests from very many different fields, strongly recommend going back to listen to all of them.
Capital Allocators (Ted Seides: @tseides).
The Meb Faber Show (@MebFaber).
Masters In Business (Bloomberg – Barry Ritholtz).
Against The Rules (Michael Lewis).
FYI – For Your Innovation (Ark Invest).
The Disruptors – About The Future (only recently discovered, a long backlog of episodes to catch up on).

INVESTMENT BLOGS (and Twitter handles)

Microcap Club: microcapclub.com/category/blog/educational/ (Ian Cassel: @iancassel).
Morgan Housel: collaborativefund.com (@morganhousel).
Michael Batnick: theirrelevantinvestor.com (@michaelbatnick).
Nick Maggiulli: ofdollarsanddata.com (@dollarsanddata).
Matt Joass: mattjoass.com (@MattJoass).
10foot investor: 10footinvestor.com (@10footinvestor).

This article does not take into account your individual circumstances and contains general investment advice only (under AFSL 501223). The author owned shares in the companies disclosed above at the end of April 2019. Authorised by Claude Walker.

Ethical Equities Returns

2018-08-02T01:15:33+00:00

Big news -- Ethical Equities is Back!

After a four year hiatus spent building a market beating track record at Motley Fool Hidden Gems, I will now be moving all my stock market commentary to Ethical Equities, and refreshing the site.

Before long, my best ideas and analysis will be sent exclusively, (and fortnightly) to members of the Ethical Equities Newsletter. With thanks to my new employers, Simply Wall St, for allowing me to blog.

Join today, it's free

Claude

Ethical Equities Performance Financial Year 2015

2015-06-30T09:36:33+00:00

Well, in the spirit of accountability, here is my private portfolio performance for financial year 2015.

Performance has suffered due to a failure to not selling overvalued equities when the market offered a good price, but -- more significantly -- by the poor performance of a handful of investments, which, in retrospect, I paid too high a price for.

The poor performance of Azure Healthcare (ASX:AZV), Academies Australasia (ASX:AKG) and one other company which I sold recently were a major drag on returns.

Luckily, my highest conviction investments performed well, and this led to decent results despite my manifest and numerous errors.

Overall, I go into FY 2016 feeling pretty pessimistic about my portfolio, since only some holdings are solidly in "clear value" territory. I have probably let a few holdings get too expensive to justify holding on, as a result of selling too early on many occasions in the past. I'm developing a "hold on" bias, and it's faced its first test in the last few weeks.

However, on a brighter note, I think my portfolio is still of good quality, with heavy weightings towards companies that have resilient revenues and reasonable growth prospects. I've got some cash to spend should I so desire, but as is my fashion, I'm not sitting on significant chunks of dry powder.

Notably the graph below doesn't include some puts I own, which are in the money, but would nonetheless drag down returns if included.

Nothing on this website is advice, ever. The author owns shares in Azure Healthcare and Academies Australasia. This post is for entertainment (and for my own reference!)

Please do follow me on twitter @claudedwalker.

The Free Newsletter is not regularly published at present, but you can still subscribe now.

Update on the Ethical Equities Micro Cap Healthcare Watchlist

2015-06-12T06:04:21+00:00

Back in September last year I decided to run an experiment regarding a basket of microcap health stocks. I had a theory that a basket of small healthcare stocks would beat the market. Therefore, by selecting from within that basket, one could improve the chances of beating the market. My aim was to beat the ethical equities micro cap healthcare watchlist in my own portfolio, but I also wanted to see whether the watchlist itself would beat the market.

Have I correctly identified a market beating pool to fish in? Well, it's only been 9 months since I started the experiment. That's too soon to know, but I think it's fair enough to have a peak at the progress so far.

The stocks chosen for the watchlist are below (and my current disclosure in brackets):

Medical billing company ICS Global (ASX:ICS), which has since consolidated its shares. (Not held)

Cryogenic storage company Cryosite (ASX:CTE) which has since paid a fat capital return, which is not captured in the results below -- if anyone wants to run a dividend inclusive comparison, be my guest. (Held)

Hospital and allied health practice software provider Global Health (ASX:GLH), which has been through a rocky ride. (Not held)

Medtech Global (ASX:MDG), another medical practice software provider, which has related party dealings that raise a red flag for me. (Not held)

Compumedics (ASX:CMP) a diagnostic hardware/software company that may finally have executed a turnaround. (Held)

Resonance Health (ASX:RHT) a diagnostic imaging software company that has seen the back of a questionable CEO. (Not Held)

Pro Medicus (ASX:PME) a different kind of diagnostic imaging software provider, which shouldn't really be classed as micro cap anymore, and has been winning contracts in the US. (Held)

Azure Healthcare (ASX:AZV) a hardware/software provider of nurse-call systems. (Held)

Below I track each company's performance since the inception of the Ethical Equities Micro Cap Healthcare Watchlist

As you can see, the basket of healthcare stocks has narrowly beaten the market... by just under 5%.

However, had good judgement allowed you to eliminate Medtech and Analytica due to them being quite poor quality and burning cash, the average would have been 25.5% versus 3.5%, a truly whopping example of how a basket can beat the market. But woe betide he who skipped Pro Medicus! I think the risk of paying too much for Pro Medicus was much more sensible than the risk of paying too much for Medtech or Analytica, because they could easily be worthless.

From now on, I'll also track the performance of the basket without those companies. It will be interesting to see if that helps or hinders...

One big lesson I've solidified recently (and this further proves it), is: Don't invest in companies with very high downsides. Generally, for me, if it's reasonably easy to imagine the share price falling more than 50% before value investors come in to buy it, then it is probably not worth the risk.

Another lesson is that if you want to take a basket approach you still need to carefully vet for quality. Fortunately for me, I had much smaller exposure to the under-performers in the watchlist above and much larger exposure to the out-performers. However, returns could have been improved by not holding Analytica and Medtech at all. I believe this represents an error on my behalf, since I was aware that they were lower quality companies, and I really hadn't put enough work into researching them... the more I looked the more I didn't like what I saw.

Live and Learn.

Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

Please do follow me on twitter @claudedwalker.

The Free Newsletter is no longer regular, but is still accepting new readers.

Ethical Investing, 2 Years On

2015-03-22T00:19:38+00:00

My investing journey started in 2009, but I didn't really have a clue what I was doing at that stage, and I was essentially a mug punter taking random bets in between law lectures. We all start somewhere.

I spent the next two years applying myself to my law degree, and didn't have much time for investing. By the end of 2011, I graduated, and by early 2012, I was on my own, unsure of what to do next, but gradually realizing a career in the law was not for me.

I took a job with a solar company and -- too emotionally exhausted to socialize much -- I spent a lot of my spare time doing actual research. You can see my first attempt at writing a research report right here. I note that the company in question has thumped the market, and wish I'd had the courage of my convictions.

The main purpose of this website is to prove that ethical investors can thump the market, and I think that the Hypothetical Ethical Portfolio, goes some way to making that point. It does, however, have a few flaws. It's not a real money portfolio, and my position (which I am really loving) as a Investment Research Analyst for Motley Fool Hidden Gems, precludes me from continuing with it.

However, I thought regular readers -- if there are any left -- might be interested to know how my actual portfolio has fared over the last two years, since I started this website.

And it's been a big 2 years.

It was in early 2013 that I got my investing education growing and started investing full time. A boutique fund manager and lawyer taught me a lot in those days and I can thank him for improving my process, despite the fact he would probably disagree with the many of my positions. I'd definitely say that my results from early 2013 somewhat represent "cleaning house" as I improved the quality of the companies I owned.

Then, as the bull market charged on, my philosophy tailwind investing paid off reasonably well. I made many many avoidable mistakes along the way though, and I'm always aiming to improve. Most investors who know me well, know that my tendency is to sell too soon. However, I do believe that is partly due to the fact that for much of my investing life I have needed to take money out periodically for personal expenses. I'd say the biggest change over time has been that I hold positions for longer. Also I readily acknowledge that 2 years of performance doesn't prove anything... it's just my journey so far.

It was in March or April 2013 that I started this website -- most of all, this is a two-year follow up for anyone who first joined me back then. Long time readers, thanks for motivating me from the start.

And to everyone, thanks for reading and thank you to all the wonderful people who have contacted me, signed up to the newsletter or commented -- I really appreciate the interactions!

Sharesight Performance

I'm not sure how accurate Sharesight is, since I've been adding cash to my portfolio for most of the last two years. However, it's probably not too badly distorted, because the majority of my cash was already invested by mid-2013. I'm not entirely sure of the algorithms that Sharesight use, but it is a decent way of keeping track of things, I believe. Early indications are that I'm not wasting my time with this, so that's a positive. Touch wood.

Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

Please do follow me on twitter @claudedwalker.

The Free Newsletter is going on indefinite hiatus but you can sign up to receive the older hidden research.

Next Level

2014-12-05T10:30:59+00:00

I've had this sitting in drafts for a while. I can see that the number of regular readers is declining since I temporarily signed off in the last newsletter, but I hope a few of you will enjoy this excerpt from an email I received a while back. I think it's interesting to hear what actually motivates people to invest ethically.

Here it is:

I am in no doubt that there is a ruling class in Australia, that is the nexus of business and politics (just look at ICAC) and I am frankly sick of the endless parade of mostly white, private school educated men that constitutes this privileged corporate class. I am familiar with it because I grew up in it (for example, both [edited out] and [edited out] were in my year at high school, although I have nothing against them personally). I have spent my life trying to work at the opposite end of that spectrum ie in the grass roots cultural and community sectors, so I am well aware of the irony that I am now a professional investor.

My long background in underground electronic culture means that I see my investing activity as a form of 'hacking' (in the non-criminal sense). Since I am stuck in a capitalist system, I try to use my knowledge to (ethically) exploit vulnerabilities in that system, because the market is not efficient, especially at the microcap end. Meanwhile I try to do as little harm to the planet as possible by investing in what I believe to be relatively ethical companies, and ideally companies that are trying to make the world a better place.

In addition to financial independence from wage slavery, I use my profits to create a more environmentally sustainable life for my family, and make donations to organisations that are aligned with my values. Longer term I hope to be successful enough to be able to practise philanthropy on a larger scale. I look to people like David Walsh and Graeme Wood in that regard.

I know that was all very pretentious and long-winded of me, but I thought you might be interested to know where I'm coming from, since we all come to (ethical) investing from different backgrounds and perspectives.

----

Don't hesitate to be in touch.

9 life lessons from Tim Minchin - Heavily Edited

2014-09-25T04:34:57+00:00

This post is inspired by Tim Minchin's Occasional Address at the University of Western Australia...

In his words, "you might find some of this inspiring, you will definitely find some of it boring and you'll definitely forget all of it within a week."

So I don't forget, here are his nine life lessons. I've edited them heavily (sorry Tim), because I wanted to focus on the bits that I think are most relevant to ethical investing. I wonder if Tim Minchin invests ethically...

You can find the full transcript here (it's funnier in full).

Tim Minchin's 9 Life Lessons - heavily edited.

1. You don't have to have a dream... If you focus too far in front of you, you won't see the shiny thing out of the corner of your eye.

2. Don't seek happiness... keep busy and try to make someone else happy.... we didn't evolve to be content. Contented Homo Erectus got eaten before passing on their genes.

3. It's all luck, you are lucky to be here, you are incalculably lucky to have been born... I suppose I've worked hard to achieve whatever dubious achievements I've achieved, but I didn't make the bit of me that works hard... Understanding that you can't truly take credit for your successes or blame others for their failures will humble you and make you more compassionate.

4. Exercise... You think therefore you are but also you jog therefore you sleep therefore you're not overwhelmed by existential angst... Take care of your body, you're going to need it.

5. Be hard on your opinions... A famous bon mot says that opinions are like arseholes in that everyone has one... I would add that opinions differ from arseholes in that yours should be constantly and thoroughly examined... We must think critically, and not just about the ideas of others... Be intellectually rigorous, identify your biases... Most of society's arguments are kept alive by a failure to acknowledge nuance. We tend to generate false dichotomies and then try to argue one point by arguing two entirely different sets of assumptions...

6. Be a teacher... If you're in doubt about what to do, be a teacher... Even if you're not a teacher, be a teacher. Share your ideas.

7. Define yourself by what you love... We have a tendency to define ourselves in opposition to stuff, but try to also express your passion for things you love.

8. Respect people less powerful than you... I don’t care if you’re the most powerful cat in the room, I will judge you on how you treat the least powerful.

9. Don't rush... It’s an incredibly exciting thing, this one, meaningless life of yours. Good luck.

Ethical Equities micro-cap health stock watchlist

2014-09-24T08:19:35+00:00

Some time ago I was going to write a blog about micro-cap health stocks. I never ended up publishing because I was trying to accumulate (at slightly lower than market prices) some of the illiquid micro-caps on this list below.

I thought I'd share my micro-cap healthcare watchlist. I don't hold all of these, and for the majority (but not all) of the ones I do hold, my purchase price is below the last traded price. I have different allocations in each holding.

However, just as an experiment, I want to see if this portfolio of 10 stocks outperforms the ASX All Ords and the ASX 200 over the next 10 years.

The All Ordinaries Index just closed at 5,375.90. Google Finance's S&P/ASX 200 Net Total Return measure sits at 44,697.70.

The last traded price of these 10 micro caps are recorded below. I shall call them the ASX Microcap Health Index. Let's see how they go.

Mainly Services

ICS - I hold - Current price: 4.7c

CTE - I hold - Current price: 41c

Mainly Software

GLH - I hold - Current price: 47c

MDG - I hold - Current price: 17c

CMP - I hold - Current price: 13.5c

RHT - I don't hold - Current price: 5.1c

PME - I hold - Current price: 94c

Mainly Hardware

ALT - I hold - Current price: 4.1c

SOM - I hold - Current price: $2.11

AZV - I don't hold (as of this morning) - Current price: 47c

Investment process: 11 questions I ask

2014-09-14T05:08:51+00:00

1. Does the business have long-term tailwinds or headwinds?

2. Does the business have 'good economics,' namely, the ability to re-invest in itself at satisfactory rates of return (at least 15%)?

3. How much will the business be able to grow? I am looking for businesses with a "long runway" before the business is likely to saturate the market or face significantly increased competition.

4. Does the business have a moat (competitive advantage)? Is that moat sustainable? Is it widening or becoming narrower?

5. Does the business have honest and competent management, and how are they incentivised? Look at shareholdings, track record and remuneration.

6. What is the history of the business? Consider debt, capital raising, dividends and who owns the shares.

7. What is the value of the free cashflow likely to be generated over the next decade, and what is the likely value of the business at the end of the decade? Perform a variety of discounted cash-flow models, minimum discount rate 10%.

8. What are the main risks facing the business? What is the business worth in the worst reasonably possible scenario? Make a pitch against the business.

9. What is the most likely intrinsic value range of the business?

10. What do other intelligent and trustworthy people think about the business?

11. Why might the market incorrectly value this business?

Edit: 12. Who does this company create genuine value for other than its shareholders and management? What value does it create, and is it broadly commensurate to profits?

This additional question is designed to identify business drivers and long term sustainability. For example, a roll-up engaging in multiple arbitrage offers little value to anyone, but a blood plasma company saves lives. My belief is the latter is a more sustainable proposition.

The true measure of wealth is the capacity to love

2014-08-24T02:07:21+00:00

"I've never seen a sad person on a jet ski."

While the lighthearted reply to the question, "Does money buy happiness?" got a laugh out of me and was clearly all in good fun, I'll admit it also got me thinking.

After all, I'm writing at the end of a 6 week holiday that's taken me from the fairy-land Black Forest in Germany to the coral reefs around a fairly inaccessible Caribbean island called Providence. That money could be compounding. Surely, the only justification for such expenditure is that it buys happiness, right?

Wrong.

If you look beyond the superficial facts, the real reason for my journey betrays a deeper truth. I travelled to celebrate my father's 60th birthday with him, and to visit two of my best and oldest friends. One lives in a hipster suburb of Berlin, the other in Ecuador - but we met up in Colombia.

If anything, what my trip proves is that for me, personal relationships are the greatest source of my happiness. Money is just the means by which I can spend more time with, and do more for, the people who I love most.

And in an oblique sense, that may well include you. There's no doubt that humans have the capacity to love people they've never met. There are many many ways people express their love for people they've never met. Old men and women plant trees. People give money and time to help those who need it. Indeed, governmental programs like free healthcare and education express concern not just for society, but for individuals who need help from others.

Love for strangers and even future generations is also the driving force of ethical investing, and the main reason I'll always prefer a company like Cochlear Limited (ASX: COH) over a company like Woolworths Limited (ASX: WOW).

Woolworths may well be a "great business" but the cold hard truth of the matter is that the company is also the largest operator of poker machines in the country.

I could barely imagine a "better" business model. A poker machine costs very little to operate, and is specifically designed to take advantage of human psychology. Pokies literally take money off people. But it's worse than something for nothing. Thanks to human irrationality, gambling addicts are left with the impression they can win back their losses.

Companies like Aristocrat Leisure Limited (ASX: ALL) pride themselves on designing machines that keep people "playing" for longer. Imagine if the machine flashed the word "loser" and made a loud sound every time a spin failed to pay off? I don't think people would play as long. And the longer "players" stay, the more money Woolworths makes. And for the record, I'm not arguing for legal regulation against pokies. I'm just acknowledging they hurt people.

Because I care about people I've never met, the knowledge that children whose parents are addicted to pokies suffer multiple disadvantages bothers me. They simply go without. They go without their parents' attention, they go without trips to the football, and in severe cases they go without the basics. Evidence from 2011 suggests there is concern about the impact of pokies across the political spectrum, even if there's no agreement on how to mitigate the harm.

And here's the kicker, Cochlear is also a great company. But unlike Woolworths, the bi-product of its pursuit of profit is to improve people's lives. Woolworths leaves kids in poverty, Cochlear gives deaf kids the ability to hear again.

In my book, the whole point of having money is so that I don't need to hurt people to make more money. Because if you elevate profit over people, are you really rich at all?

Every day that I can afford to care about people that I've never met, including people that aren't even born yet, then I'm already wealthy, no matter what the value of my share portfolio. That's why I advocate for ethical investment, and that's why I try to practice ethical investing myself.

The bottom line is this, whether you're an ethical investor or you express it in other ways (and I acknowledge there are plenty):

The true measure of wealth is the capacity to love.

Just do it.

Are you interested in ethical investing too? If so, sign up for the Ethical Equities Newsletter to hear about what stocks I'm buying, and receive the hidden research, first.

Join me on Twitter!

Nothing on this website is every advice. I do not hold an AFSL.

From the Vault: Learning from others and some old research on Hansen Technologies (ASX: HSN)

2014-08-01T12:37:40+00:00

Hansen Technologies Limited (ASX:HSN) will increase revenue by over 50% and achieve EBITDA of well over $20 million in FY2014, according to their recent update.

The share price is now over $1.45, making it not unreasonably valued at a far higher price than when I stupidly sold it some time ago. It was my friend Damien Lynch who first told me about Hansen when the share price was under 80c. He also told me to look at My Net Fone (ASX:MNF) when it was around $1, told me to seriously consider TFS Corporation (ASX:TFC) when it was about 60c, and suggested TPG Telecom Ltd (ASX:TPM) to me when it was trading at but a fraction of its current price.

Here is an excerpt from a private email I wrote to him in early 2013:

"I've sold my entire holding [of Hansen] at 85c, which, accounting for all costs and dividends, puts me at only a mild profit... I don't see Hansen growing until 2014, at the earliest. I think that once more information becomes available about the acquisitions, then the company's prospects will be a lot clearer."

Here's my original research that I wrote and shared when I bought Hansen shares in 2012. You can see how my style of analysis has changed quite a bit since then (although I do tend to post shorter blog posts more these days - which are more about sharing ideas than presenting full research.)

HSN Compiled Research (opens pdf)

It's interesting to note for me because the research is very basic (but proved to be roughly correct). If I had stuck to my guns, I'd be sitting on a big gain.

In retrospect, from March 2013 - October 2013 I was overly influenced by another investor, because I was focussed on learning as much as I could from others. Whoops.

The big lesson for me is not to let someone belittle your research and make you doubt your own intelligence. A good friend will disagree with you, strongly if need be, but they won't attack you personally. One such example is the personal attacks I got when I suggested Sunbridge Group Ltd (ASX: SBB) might be a trap rather than literally the best value opportunity I have ever seen on the ASX. One acquaintance told me to stick to my knitting. A bit rude but forgivable.

But that relatively benign ad hominem shot seemed to encourage some lunatic to start trolling me on twitter. He [the lunatic] demanded to know what "black flags" I was talking about. Blocked.

A few hours later the CFO resigned. But in more recent news, the stock is up strongly on the latest quarterly which - surprise, surprise - looks good. Sunbridge just may have been the cheapest stock on the ASX, but I couldn't be sure of that, so I gave it a miss. I regret the bumper profits I've missed, but I don't regret questioning the opportunity (indeed, I still wonder why that insider was in such a hurry to sell).

Funny how some traders see fundamental analysis something to use to their advantage, whereas others see it as a threat to their profits (they need stocks to be overhyped or hit by panic to make money).

I'd suggest that if you want to find a good technical trader, look for the ones that aren't afraid of fundamental analysis, but rather use it to their advantage. Assad Tannous seems to be able to combine the disciplines effectively although his core strength is in Technical Analysis. There is of course an element of self-fulfilling prophecy about his buys - given his truly phenomenal twitter following - but I've found his and Bill Pavlovski's technical analysis to be extremely useful. I think if I let their opinions guide me a little more I could probably improve my returns. Technical analysis remains a significant weakness of mine (although I think I am learning a bit...)

My main teachers are the market and of course my investor friends. However, friends don't attack you when they think you are wrong. They simply disagree with you politely and try to convince you otherwise. Sometimes, they just tell you what they're buying or selling (as that is a good signal they may disagree with you.) For example about 2 months after I sold Hansen (in May 2013), Damien emailed me that he "Recently bought HSN (earlier in the week)... Overall, cashed up as well."

At least I have had long term exposure to Hansen through my investment in this boutique ethical fund.
The author owns shares in My Net Fone. The author has an indirect interest in Hansen Technologies, TPG Telecom and TFS Corporation through his shareholding in August Investments. Nothing on this blog is advice, ever, and may even be plain wrong. The purpose of this blog is to document my thoughts on different companies in an easily accessible way and to make connections with likeminded investors. Subscribers to the Free Newsletter get sent research first, and have access to the Hidden Research.

Follow @claudedwalker

What are the cool kids watching?

2014-06-10T07:40:00+00:00

I caught up with a friend of mine the other day who is an experienced investor. He told me that one of the reasons that he bought My Net Fone was because he made a spreadsheet of companies and marked off who (of the good investors he knows) liked them. I am going to attempt to do the same thing with my Micro - Nano Watchlist.

Off the top of my head I've compiled a list of who likes what - but I'll be sure to have forgotten people's interests and will have under-counted in some cases. Also, I myself do not count on the tally below (I will add myself in for future editions).

If you have emailed me, tweeted me, talked to me or even conversed with me on Hotcopper or on the Australian Capital Network facebook page, you could be one of the people that has gone into this spreadsheet (identities withheld, obviously). However, the survey is based on my incomplete knowledge of what stocks you like.

So please, have a look, and let me know if there are stocks on this list that you particularly like (you have to have bought shares at some point, even if you've since sold, or have an open order for them, or be very close to buying.) The idea is you like the company enough to really want to own it. Also if you think I put a stock on this list because of you, and that displeases you, let me know - I have no intention of publicising a microcap that you're currently trying to accumulate.

Please note, I'm interested in whether you think the business model is attractive, not whether you would buy at current prices. This list does not take into account current prices, especially as some of the list are illiquid mini-micro caps. The purpose of this exercise is to uncover businesses, that we, as a group, think have a bright future. If you do email me letting me know any favourites on this list, you will receive the updated version in a few months. You may also nominate companies that aren't on this list with market cap < $100 million. Email me at claude@ethicalequities.com.au or text me or just tell me next time we talk.

On the current list, my thinking is that 3 - 4 people liking a company indicates a solid business model, but don't forget, this survey disregards price to a large extent, though obviously the company needed to be cheap enough at some point to get people interested. Also two of them I've left a mystery because they are super low liquidity and spiking up and I don't want to draw people's attention to the stocks. There will be no mystery stocks in the follow up edition of this survey, which will be sent directly (and privately) to the participants.

Without further ado:

ALT	1
NEA	5
SOM	2
???	2
ICS	2
GLH	4
KME	2
CGO	4
RFX	2
RXP	3
FPS	5
AEF	2
CTE	2
EPD	3
MBE	1
AZV	3
RFL	2
PGC	1
OCL	2
MNY	1
TPC	1
QTG	1
???	3
AWI	1
KRS	1
IIL	1
MWR	0
ELX	1
RDH	3
PHG	1
QHL	0
ITD	0

I own shares in some of the companies listed above - email for full disclosure if required. Nothing on this blog is advice, ever.

Ethical Equities Discounted Cashflow Valuation Method

2014-04-26T04:07:23+00:00

Some readers might be interested to know a little more about the Discounted Cash Flow model that I use on this website, as it is quite eccentric. I've had a few questions, but to date, no-one has been able to work it out.

My required rate of return is 10%, but I actually discount cashflow by 10% - that is, I multiply estimated cashflow by 0.9 (per year in the future) to get my “DCF Value.”

I suspect both of you reading this use the more traditional discounted cashflow model that is based on a required rate of return. I choose to discount at 10% even though that implies that zero risk money (or the benchmark) would earn just over 11.1% per annum. I do this because it incorporates a dynamic margin of safety, that is, the margin of safety implicit in the “DCF Value” for year number 9, is considerably greater than the margin of safety implicit in the “DCF Value” in year 2. I also use diluted shares on issue or, sometimes diluted shares rounded up. I also usually adjust my values for where in the year we are. The inbuilt unavoidable inaccuracy of the process necessitates conservative assumptions about future cashflow.

Below is an example that compares my method to the traditional method. Traditional DCF (for 10% discount rate) is Present Value = Future Cash Flow divided by (1.1 to the power of n) where n is the number of years into the future. The table below uses June 30 2014 as "Present Value." Click on the image to see a larger version.

Understanding Incentives: The Impact of Fee Structure on the Performance of Fund Managers

2014-02-17T08:19:34+00:00

“Well I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it.”

Spoken by Charlie Munger, Warren Buffett’s business partner.

Executive Summary

Pre-tax returns to investors in a fund will amount to returns from investments generated by the fund minus the fees charged by fund managers. Yet the ramifications of management fee structure extend beyond this mathematical impact. Fee structure also impacts fund performance as a result of the incentives offered to management.

Management fees create a perverse incentive to acquire new funds, which actually harms the interests of existing fund members. However they are designed, management fees do not adequately penalise mediocre or poor performance.

Performance fees can create an incentive to make higher-risk investments. However, this is mitigated if the fund manager has a significant portion of their own wealth invested in the fund. A performance fee, without a management fee, is apt to appropriately align manager and member interests.

Categories of Fees

For the purpose of analysis, fund management fees are placed into three categories: management fees, performance fees and extra fees. Management fees are fees calculated on funds under management, regardless of performance. Performance fees are fees calculated on performance relative to a certain benchmark. Extra fees are fees that do not fit under either of these categories. Such fees include “transaction fees,” “withdrawal fees,” “membership fees” “establishment fees” and various other fees that reduce total returns.

Some money managers simply add an additional layer of fees. For example, members of Colonial FirstChoice Superannuation who choose the Fidelity Australian Equities Fund pay a 1.54% management fee, $60 a year investment fee and 0.2% transaction fees.[1] In comparison, the Fidelity Australian Equities Fund charges investors a 0.85% management fee and 0.25% transaction fees.[2] Colonial therefore takes a 0.69% management fee for doing very little.

Extra Fees

Extra fees make it more difficult for investors to discern the true costs of investing in a fund. Arguably, a transaction fee is appropriate to discourage unnecessary transactions that add to the frictional costs of the fund. However, frictional costs can also be limited by developing a strong relationship between investors and management or by requiring advanced notice for withdrawals. Extra fees complicate fee structure without creating useful incentives for managers.

Management Fees

Management fees are charged as a percentage of funds under management (FUM). Therefore, management fees increase as FUM increase. This incentivises managers to grow FUM. There are two ways to do this. The first is to make successful investments. The second is to attract new funds through marketing.

The second path is often the easier one. Such funds usually report monthly (but sometimes quarterly). Each month, investors may be tempted to withdraw funds. The priority, therefore, is to avoid temporary underperformance that might lead to a loss of members or stymie attempts to attract new members. Alignment with the index reduces the chance of outperformance and underperformance alike, but preserves the ability to market the fund. As FUM grow, underperformance becomes more likely, resulting in a stronger incentive to align the fund with the index.

Managers receiving management fees often claim that their interests are aligned with members because they own equity in the company. But managers must own a large proportion of the fund for the effect of greater or lesser returns to outweigh the incentive to profit from fees. The incentive to prioritise acquiring new funds grows stronger as new funds dilute management.

These perverse incentives can be mitigated by either closing funds to new investors or capping management fees at a certain level. However, in the absence of a performance fee such a structure still fails to reward outperformance or adequately penalise underperformance.

Performance Fees

Performance fees either replace or supplement management fees. This section considers the impact of performance fees in the absence of management fees.

Performance is measured relative to a benchmark. Above that benchmark, managers share in the returns achieved at the “incentive rate.” The incentives created by the performance fee depend on both the benchmark and the incentive rate.

The most important feature of any performance fee is whether underperformance is carried forward. In most cases, underperformance (that is, failing to achieve the benchmark) will result in a corresponding reduction of future performance fees. This is sometimes referred to as a high water mark. Without such a mechanism, a performance fee merely rewards volatile returns and is completely inappropriate.

Even when underperformance is carried forward, a fund manager could close the fund after a bad year and therefore avoid making up for underperformance. The best way to defeat this risk is for the fund manager to have a large portion of their own net worth in the fund. The threat of reputational damage and personal ties between manager and member also reduce this perverse incentive.

The virtue of performance fee remuneration is that it incentivises high returns on investment rather than the acquisition of new FUM. A performance fee will have no mathematical impact on pre-tax returns when the fund underperforms the benchmark. However, when the fund consistently beats the benchmark, the mathematical impact on returns may well be greater under a performance fee structure than a management fee structure.

Performance fees are not unrelated to the amount of FUM, but increasing FUM alone is not sufficient for the managers to receive their fees; they must still beat the benchmark. Indeed, increases in FUM make outperformance more difficult. The incentive to acquire new funds is likely to be weaker than under a management fee structure, but will depend partly on the benchmark and incentive rate.

Benchmarks

A fee structure with a low benchmark and a low incentive rate emulates a management fee and will create a stronger incentive to acquire new funds. The higher the benchmark, the more important it will be for managers to achieve strong performance. However, a benchmark that is very difficult to attain will encourage risk and increase the risk of a manager quitting after severe underperformance.

The most common types of benchmark are:

a) An absolute return, and;

b) A market index.

Comparison of Absolute Return and Market Index Benchmarks

Type of Performance Fee	Advantages	Disadvantages
Absolute Return	Incentivises managers not to lose money under any circumstances. Managers are more likely to avoid holding shares if they think the market is overvalued. Capital preservation is more important to the managers, leading to a more conservatively managed fund.	May pay outsized performance fees, even if returns are largely a result of a buoyant market.
Market Index	The fund manager cannot benefit from a rising market alone, but must outperform the market.	In a year where the market produces substantial negative returns, the fund manager can be paid a performance fee, despite the investors losing money.

These benchmarks are inspired by alternatives available to investors, namely, cash and low cost index funds. An index based benchmark creates more of a disincentive to hold cash in a rising market than does an absolute return benchmark. Both types have their merits; one solution could be to design a hybrid benchmark derived from both an index and a flat rate.

Prior to taking over Berkshire Hathaway, Warren Buffett had various partnerships with various fee structures. Notably, none of these structures included a management fee.

Buffett used the following combinations of benchmark and incentive rate: [3]

a) 6% benchmark, 33.33% incentive rate

b) 4% benchmark, 25.00% incentive rate

c) 0% benchmark, 16.67% incentive rate

Buffett subsequently consolidated these arrangements into a single partnership with the following fee structure:

d) 0% management fees, 25% incentive rate above a 6% benchmark, and any deficiencies in earnings below the 6% carried forward against future earnings, but not be carried back.

Although it is difficult to compare performance fee structures, it is clear than an inverse relationship should exist between the benchmark and incentive rate.

An absolute benchmark may be more appropriate if members wish their managers to consider cash holdings to be a viable option. It may also be appropriate to adjust an absolute benchmark with reference to prevailing interest rates. For example, it would not make sense to have a 6% benchmark if term deposit rates were at 8%.

The Best Fee Structure

There are many fine fund managers who do not use the ideal fee structure, who do achieve fantastic results for their clients, and who do have high levels of integrity. However, the power of incentives means that as a group, fund managers who incorporate some element of the best fee structure in their practice, should outperform fund managers who do not.

Warren Buffett has described fee structures that combine management fees and performance fees as a “grotesque arrangement”[4] that is guaranteed to make investors (as a group) poorer. Such a structure permits the negative qualities of management fees and performance fees but negates the positive qualities of the latter. Under such a structure, when strong performance is achieved the fund manager makes immense profits, but when the performance is poor the manager still profits handsomely. A hybrid fee structure has the potential to be superior to a management fee structure, although this will not necessarily be the case.

This article contends that management fees are never appropriate, as they create the perverse incentive to focus on acquiring new funds, to the detriment of existing members. Management fees impact performance by encouraging managers to stick closely to the index. As a result of the mathematical impact of fees, the average fund will produce unsatisfactory returns for investors with this fee structure.

Performance fees do not perfectly align management and member interests. However, the main shortcomings of this structure are remedied if the manager invests a significant proportion of their own wealth into the fund. A fee based on performance alone, with a reasonable benchmark, paid to a manager that has a significant equity interest in the fund, is the optimum remuneration structure for fund managers.

[1] Colonial First State, FirstChoice Employer Super Product Disclosure Statement, 11 June 2013.

[2] Fidelity Worldwide Investment, Fidelity Australian Equities Fund Product Disclosure Statement, 11 June 2013.

[3] Warren E Buffet, To My Partners, 22 July 1961

[4] Berkshire Hathaway, 2006 Letter to Shareholders, 28 February 2007

ALT	1
NEA	5
SOM	2
???	2
ICS	2
GLH	4
KME	2
CGO	4
RFX	2
RXP	3
FPS	5
AEF	2
CTE	2
EPD	3
MBE	1
AZV	3
RFL	2
PGC	1
OCL	2
MNY	1
TPC	1
QTG	1
???	3
AWI	1
KRS	1
IIL	1
MWR	0
ELX	1
RDH	3
PHG	1
QHL	0
ITD	0

ALT	1
NEA	5
SOM	2
???	2
ICS	2
GLH	4
KME	2
CGO	4
RFX	2
RXP	3
FPS	5
AEF	2
CTE	2
EPD	3
MBE	1
AZV	3
RFL	2
PGC	1
OCL	2
MNY	1
TPC	1
QTG	1
???	3
AWI	1
KRS	1
IIL	1
MWR	0
ELX	1
RDH	3
PHG	1
QHL	0
ITD	0

ALT	1
NEA	5
SOM	2
???	2
ICS	2
GLH	4
KME	2
CGO	4
RFX	2
RXP	3
FPS	5
AEF	2
CTE	2
EPD	3
MBE	1
AZV	3
RFL	2
PGC	1
OCL	2
MNY	1
TPC	1
QTG	1
???	3
AWI	1
KRS	1
IIL	1
MWR	0
ELX	1
RDH	3
PHG	1
QHL	0
ITD	0