Excerpts from Munger's Recent DJCO Meeting

This post is distilled from an excellent article of notes from the recent DJCO meeting.

The following are my main takeaways. Comments are welcomed as to whether there are further important lessons to be learned, and as to how these learnings could be applied in a real life investment setting.

Investment Philosophy- Find Your Own Way

I don’t think all you have to do is read Charlie Munger and you’ll get rich. If it were that easy, this place would be a football stadium.

Reduce Unforced Errors

Do not focus on being smart. Focus on being non-idiotic on a consistent basis. It is not easy at all.

If the incentives are wrong, the behavior will be wrong. I guarantee it. Not by everybody, but by enough of a percentage so that you won’t like the system.

Focus Your Efforts

I think people who multitask pay a huge price. They think they’re being extra productive, and I think when you multitask so much you don’t have time to think about anything deeply, you are giving the world an advantage you shouldn’t do, and practically everybody is drifting into that mistake.

Concentrating hard on something, that’s important, I can’t succeed at all without doing it. I did not succeed in life by intelligence. I succeeded because I have a long attention span.

Commoditization- In The End, Everything Becomes a Toaster

It is hard and dangerous to make money in commoditized business. Even businesses with huge advantages can become commoditized. In other words, everything eventually becomes a toaster and some will be toast.

Genius versus Tough Business

The auto business is very difficult, very competitive, and everybody is going to make wonderful cars. Everybody already has enormous size and wealth. So, I regarded it as a tough business. Elon Musk is a genius, and so if anybody has a chance to do it, he probably is the man.

But we have a saying at Berkshire that when a man with a reputation for genius takes on a business with a reputation for tough operating conditions, it’s the reputation of the business that’s likely to prevail. Without government help, getting electric cars off the ground is really hard. In China, it works a lot better than it does here, because their air is worse.

What Elon Musk really needs is for the whole country to have a disastrous smog attack that kills a lot of people. Short of something terrible like that, I think it’s going to be difficult. He’s a genius, but is going to have to be.

Assess the Downside First

If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life. It’s as good as it gets, and it’s very likely to get worse. It’s always wise to be prepared for it getting worse. Favorable surprises are easy to handle. It’s the unfavorable surprises that cause the trouble.

In terms of monetary authorities, you can count on the purchasing power of money to go down over time. You can almost count on the fact that you’ll have way more trouble in the next 50 years than we had in the last. The technology is changing, so that a few nutcases could make the World Trade Center look like a picnic. We should all be prepared to adjust to a world that is harder.

Enjoy and Prosper

Yours One Legged

UOS putting in another solid year

I commented on UOS here in May 2013 and here again in April 2014.

Another year, another UOS annual report rolls along. A 10.6% increase in book value is plenty enough. Whilst waiting, we got paid a nice 2.5 cents dividend per share.

At current price of 54 cents, the market capitalisation is $630m market cap. This is the price that you pay.

This is the value that you get: UOS’ 70% holding of UOADB at current market capitalisation is about AUD$750m.  UOS’ 46% holding of UOA REIT at current market capitalisation is about AUD$110m. Cash at parent level is $80m. Total=$940m.

Would you like to swap 63 cents for 94 cents?

 Disclosure: I own shares in UOS.

Disclaimer: the content of this post is not to be relied on as financial advice.  It contains my personal opinion only, plus facts that I cannot verify to be accurate.  Do your own research and seek financial advice where appropriate. I have made many mistakes in the past, and will continue to do so in the future.

Reporting Season HY 2015- Part 2

Just a few glossary terms:

CAGR= Compound Annual Growth Rate
EPS= Earnings per share
EV= Enterprise value (derived by adding debt on top of MC)
FCF= Free Cash Flow
MC= Market Capitalisation
OCF= Operating Cashflow
HY= Half Yearly Report

23 February 2015

GNG results out. OCF $20m but $17m in unearned revenue. Dividends= 4.5 cents ff. Margins down. Cash hoard up to $51m.

24 February 2015

BYL HY out. Debt up again due to Rio contract. Margins low. Dividends maintained.

CMI selling TJM for $22m.

AMA HY out. NPAT $4.3m. Rev $43.5m, EBIT $6.4m, EBIT margins 14.7%. Presentation- evidence of start of operating leverage in panels business.

FLT HY out. Company cash near $400m. UK and US both on the growth path. TTV increased, margins decreased.

VRT HY out. Market in Australia contracting. Business affected by economic cycle, not defensive healthcare.

VEI HY out. Margin crimp appears to have stabilised.

25 February 2015

MRM- vessels valued on books at $1b, but MC is $370m with debt at $440m, giving EV of $800m. Poor outlook. High committed capex of nearly $300m in three years. A cyclical play cf Prabai’s Frontier. Check Baltic Dry Index, research vessel evolution to Cape Size.

SSM mopping up unmarketable parcels. Always a good sign.

RFL reach 52 weeks low.

CTE HY out. Revenue continues to increase. OCF is $1.1m. Still $1.5m locked up in working capital. $4.2m cash in bank. Ramp-up investments continue. ROE also healthy, nearly 20% annualised. Dividend of 0.5 cents unfranked. Biological services margin has jumped.

26 February 2015

RHT HY out. Maiden NPAT, scan volumes up. More details now provided, including commercialisation plans for HepaFat.

REF HY out. 1800 Reverse continues to improve. Net cash up to $6.3m.

UOS HY out. Net assets increased 10%.

ICS HY out. Revenue up, cash up. On the right track.

FID HY out. Profit increased despite $500k in restructuring costs. FUM up. Dividends increased. Strong balance sheet with $10m in cash plus extra $2m stuck in working capital, thus resulting in reduced OCF.

27 February 2015

TCN HY out. Cash $2.8m. Clean balance sheet, receivables exceed total current liabilities and no long term liabilities. NPAT $1.5m, and normalised $1.25m. Annualised over $2m of NPAT supporting $17m of MC, and $14m of EV after backing out cash.

3 March 2015

SXE director bought on market.

4 March 2015

BYL- $11m contract from Landcorp. Contracted work is $260m over 2 years.

5 March 2015

TCN director bought on market $20k worth of shares. Another director bought $12k worth. K Jakoby now owns 45m shares out of 223m.

CTE Andrew Kroger bought another 268k shares on market. Holdings crept up to 25% now.

6 March 2015

CTE director Christy Boyce bought 40000 shares on market.

GNG to be added to the All Ords. Will need to be purchased by the trackers and ETFs now.

SXE at MC $60m is equal to NCAV. SXE being dropped from indices. SP close to all time lows.

So all in all, not a bad reporting season for the watchlist and holdings.

Enjoy and Prosper

Yours One Legged

Reporting Season 1H15- Part 1

Okay folks. Reporting season is underway.

Just a few glossary terms:

CAGR= Compound Annual Growth Rate
EPS= Earnings per share
EV= Enterprise value (derived by adding debt on top of MC)
FCF= Free Cash Flow
MC= Market Capitalisation
OCF= Operating Cashflow
HY= Half Yearly Report

5 February 2015

REA HY out. Another great result, revenue up 25%, EPS up 34%. Flowing $128m OCF before tax, and $88m after tax. On track to hit $200m FCF per annum. MC over $6.6b implies CAGR of over 20% pa.

9 February 2015

COF HY. As expected, Geosciences still under pressure, but ID is doing fine. Mining services obviously still slow going, and government infrastructure spending has stalled.

IMF HY out. As expected, they spent $42m to get $35m net. The days of $1 for $3 are gone. Percentage of profit from claim value has gone done into single digits. The ROI profile for IMF is changing. Roughly $80m invested on which you would expect $160m to be returned, plus net cash and net receivables, yield value of just under $300m vs $370m market cap.

10 February 2015

COH HY. Back on track with sales growth in the teens. Nucleus 6 turns out to be successful despite initial misgivings. FCF roughly $160m to $200m pa, on $5b of market cap, implies CAGR of 15% to 20% per annum for 10 years. Pricey.

SGH- WIP is now $521m. Holders of SGH is well advised to read carefully on what is WIP and how SGH recognises revenue.

EAX update- sales up, NPAT static, declining margins.

BOL HY out. Operations squeezed out $12m in cash (boosted by $4m income tax refund), and sold $9m equipment versus $7m capex. Paid down debt by $14m. Squeezed working capital and reducing costs. Equity= $231m versus MC plus debt of $59 + $83= $162m.

11 February 2015

CSL HY out- 8% sales growth in constant currency. Gross and net margins maintained. Net FCF is US$1.3b, after deducting R & D of US$460m (annualised). So FCF pre R & D is nearly US$1.8b=AUD$2.3b. MC=AUD$39b, implying less than 10% CAGR for 10 years. SP dropped 8%, implying market expects double digit growth and was disappointed.

CPU HY out- Sales down, Costs up. Net debt of over $1.2b. FCF less than $300m annualised. MC=$6.3b.

BOL- Bewarder Stichting now up over 10% of the register.

TWD HY out- 73% increase in EPS pcp, interim dividend up. Qld still dominates. If NSW and VIC do only half as well as Qld, revenue will double, for very little capex spent.

12 February 2015

TLS results out- NAS division growing and revenue is $2b per annum.

13 February 2015

GBT- FCF HY is $10m. FCF run rate $20m with MC of $290m.

16 February 2015

SCD HY out. NPAT $300k, FCF $500k. Expenses all reduced. Total cash increased to $6.7m. Total revenue $6.2m, $3.1m for both product sales and service. Orders on hand=$3.6m, together with service revenues should ensure second half is not lower than first half, giving a NPAT and FCF runrate of $600k and $1m at a low point in the cycle. Margin of safety in initial thesis remains intact.

SEK HY- annualised $220m in FCF supporting $5.8b in MC, implying CAGR of just under 20% for 10 years. Not going to happen.

MGX HY out. $354m in cash but deduct $69m receivables and $44m provisions, balance is $240m which is roughly the MC. Extension Hill cash cost is roughly $50, realised average price was $61, so this mine is just barely cashflow positive. The only possible upside appears to the insurance claim.

FFI HY out. Flat results. OCF=$1.54m. Dividend reduced from 10c to 8 c ff.

18 February 2015

NEA HY out. Revenue is $11.4m, on target for runrate of $30m by Dec 2015. Expensed a big chunk of USA expansion, funded from strong cashflows. Cash is at near $22m, no debt. 36k named users up from 22k. Capture costs amortised over 5 years, very conservative because database has an indefinite perpetual value. NEA sold off on results- MC approaching $170m, meaning EV of $150m after backing out cash.

ISD HY out. FCF runrate of $28m to $30m supporting EV of $600m, implying FCF 10 year CAGR of 10%.

CRZ results out. FCF runrate $90m, supporting $2.4b in MC, implying FCF 10 year CAGR of 15%. Long term structural disruptive threat from self-driving cars.

SSM HY Out. Revenue up. NPAT $4m. Dividend declared 0.5 cents ff. Net debt $10m. Accrued revenue up from $71m to $80m. As expected, Fixed Comms and Mobile taking up where Energy & Water coming off. OCF disappointing due to $9m increase in working capital, showing up in accrued revenue. Looks like SSM throws off about $20m in cash per annum.

COO HY out. Revenue down slightly, with both divisions revenue down. Profit before tax remained steady due to cost control, and NPAT increased due to tax benefit. Cashflow is down. Cash at balance date is $12m, but would be less now after payment of dividend and employment termination payments to the CEO. OCF is $1.7m but payables have decreased by $1.8m, so normalised OCF is still well over $3m for the half.

ASW HY out. Steady despite soft conditions. Good yield, good management.

19 February 2015

SRV HY. Revenue up 10%, NPAT up 36%. OCF up to $29m. Normalised OCF is $27m. OCF per floor is $388k. Revenue per floor is just under $2m. ANZ section down, but Asia and EMEA up strongly. USA is slightly profitable but in red due to costs of new floors. Occupancy like for like is 80%. Cash up slightly to $103m. Dividend up 11 cents. ROE=14.7%, but if excess cash is backed out, we get ROE range in the high teens to twenties.

ONT HY. All metrics up. Rolling $6m cash pre-tax, annualised to $12m. MC $150m.

KKT HY out. The hard yakka continues.

IRI HY out. Massive headline results.

BOL Stichting Bewaarder up to 12% now.

20 February 2015

VOC HY out. OCF nearly $22m. Capex efficiency now 0.50. 14% utilisation on total network expanded by 33%. But dragged down by AMM's poor results.

AMM HY out. Poor, although telco division is still growing in low teens.

PME HY out. Revenue up, progress on track. $10m net cash left, but cashflow neutral before payment of dividends.

Yours One Legged

Merry Xmas

Dear Readers,

Thank you for your continual patronage of my humble blog.

I have not posted much in recent months because of several reasons:

1. I do not talk about or discuss stocks currently held in the investment company;
2. A lot of attention has been devoted on stocks currently held, with some of them undergoing merger and acquisition activities. Stock specific activities took away a lot of time from general and philosophical thought activities;
3. There simply has not been much material in my head worthy of taking up your reading time.

So apologies for the dearth of articles. I am taking a short rest over Xmas, and taking the time to mull over broader ideas relating to investing. If this generates some interesting ideas or angles for discussion, then I will be posting them.

Regards
Yours One Legged

Interesting Articles

Slow advance of battery technology and implications in an article published by Business Spectator.

More academia navel gazing on the NBN here. Some food for thought on ultimate landscape of our telecommunications industry, except that the focus is way too narrow given the inexorable convergence of IT and telecommunications. Man with a hammer syndrome I reckon.

John Hempton's usual considerable intellectual heft being targeted at the future of telecommunications spectrum, relatively heavy reading here. Relevance once again to possible future landscape for telecommunications industry.

A not-too-recent article on Walter Schloss here. Investing wisdom is timeless, and I strive to learn from the preeminent, both dead or alive.

Warren Buffett's recent interview here. Most memorable quotes:

1. "You know you have a bad business when you have a good manager and still get bad results."
2. "You are nothing to the stock. The stock does not care about your buy price. The stock has no feelings for you. It just doesn't care."
3."Over one lifetime, USA GDP has increased by nearly 6-fold. This has never happened before."


Enjoy and Prosper,
Yours One-Legged

Recent Musings 9 October 2014

On risks versus returns, and how some psychology of misjudgment impact on the investment process.

Investing involves estimating risks and returns. Success or failure in investing over long periods of time (5 years and above) is a byproduct of average returns per unit of risk taken. The process involves an estimation of both the probability and consequences of each possible outcome, both good and bad. Once that is done, the overall result is compared with an alternative choice of investment.

That sounds like a lot of work. It is. Unfortunately, our human brain is not wired to automatically work this way. We prefer stories which progress in a linear fashion, rather than grasping with multiple timelines with different outcomes. In areas of complexity, we are wired to make simplifying assumptions.

There is also an asymmetry of incentive involved. Dreaming about returns is much easier. Assessing risks is unpleasant. Therefore the human brain, being risk/pain adverse, does not automatically engage in risk assessment.

The brain also suffers from a recency bias. This leads to the brain over-emphasising recent events, which can lead to extreme pessimism in bear markets and extreme optimism in bull markets. Both result in mispricings which can be systematically exploited, provided one is patient and not succumb to the Action Man bias. The difficulty in staying calm and patient must also be understood in light of our natural human tendency towards collective madness, especially in moments of stress and uncertainty.

Altogether, it is much easier to dream than work. Being aware of this will give one an automatic edge over the general market.

How do we apply the above learnings to our opportunity set in the current market?