3 Ways a Stock Should Pay You

Do you get a lot of useless mass emails? I know I do.

You know the type of emails I’m talking about. They have a catchy headline and a thin veneer of information, but really they’re simply advertising. Mutton dressed up as lamb.

Among the deluge of email noise, Tom Jacobs stands tall. I asked his permission to reprint the following email, as both it and Tom deserve more attention. I’ve followed, liked and learnt from him for 15 years. I recommend you do too.

3 Ways a Stock Should Pay You

Many people incorrectly think there is magic to stock gains and losses because they consider only price. Rather, what matters is whether the business creates what’s called shareholder value. If it does, the stock price will eventually follow. Very simple.

You’d think creating shareholder value would be the goal of every company, right? Sell products and services, take in more money than you spend, and reinvest the excess cash to earn more than if it sits in the checking account. This creates value for owners, whether of a lemonade stand, coffee shop, or Apple, and someone would pay more to buy the business-through our shares.

Yet many businesses are in business to create value for management, not owner-shareholders. And even those who try to be shareholder friendly aren’t often good at it. There are very few truly good CEOs, or every company would make shareholders better off. How do we find good management?


The Five Choices

There are five places execs can spend cash beyond what’s needed to run the business: (1) property, plant, equipment, research and development; (2) mergers and acquisitions; (3) dividends; (4) buying back the company’s own undervalued stock; and (5) paying down higher interest debt.

The first two are growth investing. Here, companies build more manufacturing and distribution facilities, hire more software developers, buy other companies and grow empires! More often than not, these fail to create a more valuable company. These investments don’t earn a sufficient return, and roughly 85% of M&A activity fails to add shareholder value. Simply, most CEOs don’t spend shareholder cash well.


The Virtuous Cash Cycle

The other three choices help prevent management from blowing our money on skittles and beer. They provide shareholder yield. Paying down debt saves on interest payments, freeing up more cash. If the company’s shares are selling at a price that places a very low value on the company, buying its own stock is a good investment. And when the company buys back shares, our shares own more of the company, and earnings and cash flow per share rise, usually leading to stock gains.

Plus, if a company pays dividends, every share it buys back eliminates paying the dividend on that share forever. If the dividend yield is 4% a share, the company “earns” 4% a year forever just by not having spend it anymore. Even more cash is available to increase the dividends, buybacks, and debt paydowns. It’s a virtuous cycle.

Despite this simple thinking, most investors avoid companies that pay dividends and buy back stock, believing their best days are over. Quite the opposite. The best days for management moon-shot paydays may be gone, but the sweet paydays for shareholders have just begun.

Don’t worry about our vibrant entrepreneurial culture. Venture capitalists and institutional investors will always provide capital for companies with new ideas, products and services to enhance our lives. However, let’s leave it to them to speculate.

Instead, we will buy cheaply and get paid. It’s as simple as that.


Tom Jacobs is the co-author of What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. He is an Investment Advisor for separately managed accounts at Dallas’s Echelon Investment Management and serves clients worldwide. You may reach him at tjacobs@echelonim.com.

Falling knives cut deep

Don’t try to catch a  falling knife.

Do you know the game mumblety peg? As kids we called it knives and loved playing it.

Alas the mollycoddled generations will never know the thrill and the fear of throwing knives at their own and each other’s feet.

Most versions of knives involved two players and a pocket knife. Our favourite version of the game was stretch.

The object of the game is to make the other player fall over from having to spread their legs too far apart. The players begin facing each other some distance apart with their own heels and toes touching, and take turns attempting to stick their knives in the ground outboard of the other player’s feet.

If the knife sticks, the other player must move their foot out to where the knife stuck while keeping the other foot in place, provided the distance between foot and knife is about twelve inches or less. Play continues until one player falls or is unable to make the required stretch.

The ‘traditional version was also fun.

Two opponents stand opposite one another with their feet shoulder-width apart. The first player then takes the knife and throws it to “stick” in the ground as near his own foot as possible. The second player then repeats the process. Whichever player “sticks” the knife closest to his own foot wins the game.

If a player “sticks” the knife in his own foot, he wins the game by default, although few players find this option appealing because of the possibility of bodily harm. The game combines not only precision in the knife-throwing, but also a good deal of bravado and proper assessment of one’s own skills.

There is nothing quite like the fear of a knife in your foot to sharpen one’s skill assessment.

Anyway that’s  enough of a stroll down memory lane.

Falling knives

The major appeal of trying to catch a falling knives is rooted in anchoring. Coca Cola Amatil was $15 last year, it must be a bargain at $9!

Coca-Cola Amatil falling knife

Last week I confessed to anchoring when selling. Unfortunately I still occasionally fall in to the trap of anchoring with falling knives. I have been closely watching Coca-Cola Amatil (ASX:CCL) since it’s precipitous fall in April. It appeared relatively cheap. Relatively that is compared to its past multiples.

Fortunately Peter Phan of Castlereagh Equity pointed out to me there are other large Australian companies priced similarly that have better growth profiles and less execution risk than Coca-Cola Amatil.

Falling knives present numerous dangers, most of which are as painful as a knife in the foot.

  1. They can and often do keep falling. Cutting deep as they fall.
  2. Even when they eventually land they often turn in to value traps, that is the stock doesn’t rebound to capture past glory.
  3. Those stocks that do eventually bounce often don’t provide a good compound annual growth return. CAGR is the key return long term investors should focus on. If it takes too long for the investment to “work out” then a good absolute return can become a poor CAGR.

Coca-Cola Amatil is a good, but not great example of a falling knife. It has decent underlying businesses and negligible chance of falling to zero.

Speaking of zero, a much better example of a falling knife is Xero (ASX:XRO). Xero is a classic falling knife. Since XRO began falling in March, every single person who has tried to catch this falling knife has been badly cut. And those cuts could get a lot worse.

With no earnings and well heeled incumbents successfully fighting back there is no sign of the floor for Xero’s falling knife.

Xero closed today at $18. And just in case you think I’m jumping on the beat it while it’s down bandwagon, I’ve been screaming watch out below since Xero was $42.

xero falling knife xro asx

Falling knives are worthy of a place on your watch list. If they fall hard enough for long enough then they can provide sensational opportunities, with limited downside and massive upside.

Hopefully my recent purchase of Maverick Drilling at $0.16 will be a case in point.

The trick is patience. Wait, wait, wait and then wait some more. Stocks can keep falling by yet another 20 percent over and over again. Take Xero for example, it’s closing in on its fourth 20 percent fall from its March high. From here it could easily fall 20 percent twice more in normal market conditions or even 5 more times if a bear market bites.

Here’s an old post on the footwear company Crocs that illustrates just how far falling knives can drop, $75 to $0.79.

Disclosure: Please seek expert advice before playing mumblety peg. I am not authorised to provide advice on knife throwing.
Long MAD. CCL is still on my watch list.

Free SMSF Accounting Software Approaching Maturity

Back in late 2012 I wrote about Mclowd, the free SMSF accounting tool.

At the time Mclowd was a relatively new entrant, and the software was in public Beta.

I recently went back to check on their progress, and was amazed at how much the guys had achieved in just 18 months, and how quickly their online Community is growing.

Having spoken to Product Manager Graeme McGuire it is clear Mclowd has the potential to displace BGL and Class with a platform that is free to both individual trustees and practitioners.  (Mclowd makes it money out of a services Marketplace that is run alongside the software, as well as product distribution such as actuarial certificates).

With the release of version 3.0 at the end of September (2014) Mclowd expects to provide support for the full SMSF life cycle, including Statement of Taxable Income and Member Benefit Statements.

From that foundation Mclowd intends to address usability issues and help content, as well as targeting some of the bells and whistles (such as data feeds, peer-to-peer analytics and improved integration with the Marketplace).

But for the vast majority of trustees it is already a viable alternative to paid versions of the similar SMSF accounting software.

Graeme told me that trustees have responded to the consistent delivery of new functionality, with nearly $1m in SMSF assets being transferred each day.

But perhaps the most interesting aspect of Mclowd is the way an online Community is evolving.

Founder Ashley Porter started Mclowd because of the fees his mother was being charged for SMSF accounting, and he vowed to create an environment where trustees could manage their retirement assets in a much more empowered fashion, including their relationship with professional services providers.

Looking at the various conversations taking place in the Mclowd Forum, it is clear that a growing number of trustees are making the Mclowd Community their own, and in doing so potentially changing the balance of power in the SMSF space.

Performance, Pigs, and Investment Process

Pigs at the trough

What’s the difference between an independent director and a shopping trolley?

You can load a trolley with grog but can’t push it anywhere you want.

Hat tip to Michael West @MichaelWestBiz for that amusing summary of Peter Swan’s damning report on the performance of independent directors. As Swan’s report was published in October last year, I’m guessing that you need to present your findings at a junket for the media to take note.

Anyway, it’s great to see the pigs at the trough have finally been exposed. The bigger question is why does the ASX governance council require all listed companies to adopt a majority of independent board members? Do they have any empirical or even strong anecdotal evidence to suggest people without skin in the game who often lack industry knowledge are capable stewards of shareholder wealth? Of course they don’t.

It’s time to slaughter the pigs! Have skin in the game or fork off.

6 Signs of a Good Investment Process

I enjoyed this post on the investment process by Todd Wenning at Clear Eyed Investing. Todd’s 6 signs of a good investment process are:

  • Stoic: It can endure both good and bad short-term outcomes without getting emotionally swayed in either direction.
  • Consistent: It doesn’t adjust to current market sentiment and sticks to core competencies.
  • Self-critical: The process is periodically reviewed, includes both pre-mortem and post-mortem analysis on decisions, and is refined as needed.
  • Business-focused: Rather than rely on heuristics like “only buy stocks with P/Es below 15,” a good investment process focuses on understanding things like the underlying business’s competitive advantages (if any) and determining whether or not management has integrity and if they are good capital allocators.
  • Repeatable: A process gets more valuable with each application — insights are gained, deficiencies are noticed, etc.
  • Simple: The less complex, the better. If you can hand off your process to another investor without creating significant confusion, you’re on the right track.

It’s a great list, though I disagree with some of his finer points. Anyway, Todd is well worth following.


With no disrespect to Todd, I always wonder when reading articles like his if the writer is struggling with poor performance. I hope not, but when my performance lags I often find myself reaffirming that it’s process not outcomes that count. Here’s how Michael Mauboussin put it in ‘More Than You Know’, as quoted by Todd.

Results – the bottom line – are what what ultimately matter. And results are typically easier to assess and more objective than evaluating process.

But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field…all emphasize process over outcome

While I think my process is good, I know my outcomes are great. Give me another ten years and I might also know my process is great.

What a cracking month. The All Ords Total Return Index blasted ahead 4.4 percent. I did slightly better with a 7.2 percent return.

Daily, monthly and even yearly performancefusion fund short term performance vs all ords accum 2014-07 mean little to a long term focused process such as mine, but they are the repeatable steps that facilitate review. And hey, if we can’t celebrate our small victories we’ll get mighty thirsty!

As Mauboussin says results are what ultimately matter and naturally in the investment game it’s long term results that really matter.

As the next chart show I continue to do exceeding well over the long term.

fusion fund performance vs all ords accum 2014-07What I find even more stunning is my results over the last year include an average cash holding of 45 percent. That’s like beating Mike Tyson in a fight with one arm tied behind your back.

Or is it?

fusion-fund-asset-allocation-2014-07I think a better analogy may be beating Mike Tyson when he has both arms tied behind his back. As this asset allocation chart shows when the market is winding up for a punch my cash position increases. The high cash position stops the market from delivering a knockout blow and allows me to continue taking big swings.

I’m not trying to time the market. Our cash balance is more a reflection on both the lack of opportunities and elevated risks in the market. Just because others are prepared to take more risk for less reward doesn’t mean I will.

Here’s some pearls of wisdom on holding cash from Seth Klarman and Warren Buffett as used by Steve Johnson in his article ‘The real reason you should hold cash‘.

One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities. Klarman

Holding cash gives us optionality. Alice Schroeder, author of the definitive Buffett biography, The Snowball, says this is one of the most important things she learned: “the optionality of cash”.

“[Buffett] thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

As the above asset allocation shows I found an inexpensive security this month, but more on that another day.

One final chart that tells me my process is on the right track and encourages me to keep perfecting it.



Does making financial predictions make you a dickhead?

The good news is making financial predictions won’t make you are dickhead, the bad news is you already are a dickhead!

Before I dive in to the very shallow pool of self congratulations that most financial pundits wallow in, allow me to recap part of my investment philosophy.

As a young lad my mother used to say, “According to you everyone is a dickhead except the Pascoes and Morels”. Bede Pascoe was my best friend and my mum was right. Bede and I thought most people were dickheads!

I was around 14 when I realised that I might also be a dickhead. I remember the incident well, which is unusual for me, and funnily enough Bede was the one who delivered my realisation.

My mantra changed slightly to “everyone’s a dickhead, including me”. The core tenant of my philosophy became that whatever theories or beliefs people held as truths were probably wrong. Yes 2 plus 2 equaled 4, at least most of the time, but I doubted most things, including lots I believed.

So when my interests turned to finance it was no surprise that I thought efficient markets theories were the spawn of complete smegheads.

Predicting the future

But what may surprise you is that I embraced predictions. Yes I have a crystal ball! It may be a tad cloudy, but all you need to make money in the markets is a slight edge. My crystal ball is one of the tools that delivers that edge.

When people believe in efficient markets or scoff at predictions they deliver me an edge.

My focus when investing is predicting the future. Predicting what a company is likely to achieve and how investors are likely to react. Predicting what is likely to happen over the next few years and how investors will respond. This crystal ball gazing works best when the market is mispricing a company, that is when the market focuses exclusively on either the good or bad news surrounding a company.

People are unable to entertain competing ideas let alone objectively price the outcome of those opposing ideas. The larger the herd the easier it becomes to predict the next move.  

Is making financial predictions unusual or bad?

Predictions have a bad wrap, but finance is all about making predictions.

Discounted cash flows are predictions. Not only that, they’re predictions of the worst kind. Predictions should be as vague as crystal balls are cloudy. But by wrapping a prediction in financial mathematics many fools suddenly believe they can predict to the cent what something is worth. They try to predict cash flows 10 or 20 years in to the future and worse yet try to accurately predict them.

Of course wise value investors realise that accurately assessing value in incredibly difficult to do, so they embrace the concept of margin of safety. Buying something for considerably less than you predict it’s worth gives you a margin of safety. A margin to compensate for your cloudy crystal ball.

Soon, I’m going to blow my own horn by showing you one of my predictions and how it played out. But before that here’s a few more predictions.

At around $41 when some analysts were belatedly jumping aboard the Xero (ASX: XRO) rocket and calling it a buy, I said it may be worth a nibble at under $30, but the load up time was around $19. Some people thought I was crazy and Xero would never again see such a low price. Well Xero has traded under $22 this week and you know what I now reckon that under $10 may be possible and under $5 not impossible.

I arrive at those figures by predicting the future based on the reliability of past events and investor reactions. In this case a major market correction or some other major event is likely to occur well before Xero is profitable. When that happens stocks without earnings will be taken the woodshed  and flogged to within an inch of their life. And that is the time to buy a company like Xero.

The wonderful thing is that it doesn’t mater if I’m wrong, it only maters if I’m right. I lose nothing if wrong, but am prepared to win if right. Compare that to those telling people to buy Xero at over $40. If they were wrong there was huge obvious downside, if everything went perfectly there was limited upside.

Here’s another prediction. The current yield chasing craze will end badly. Investors who are currently congratulating themselves on being masters of their own universe will be found to be naked as the yield tide goes out.

On to the main self congratulating event, here’s what I wrote in March 2013. Hopefully you can extract something useful for your future endeavours.

Finger Lickin’ Good

Collins Foods (ASX: CKF) owns, operates and franchises KFC and Sizzler restaurants…

A respected fund manager, Orbis Investment Management, continues to buy Collins Foods, and they now own 17.4 percent of outstanding shares. They’ve bought over 60 percent of shares traded in the last month.

Orbis has been virtually the only buyer of Collins Foods. The stock, a recent IPO at $2.50 per share, is seemingly hated and/or ignored by virtually the rest of the investing population.

Imagine how low the price may have fallen if Orbis had not been buying! $1 or less? Now that would be a one-foot hurdle!

We may still get $1, but at around $1.10 Collins is a good two-foot hurdle.

Orbis can only buy 2.6% more of Collins Food stock, so patient investors may soon be rewarded with a great entry price. Naturally there are no guarantees that we’ll get a lower price, but the odds are in our favour.

Over the medium term a rebound in Queensland trading conditions should stabilise the business and earnings.

Here’s a couple more comments I penned on Collins.

March 2012
Collins Foods (ASX: CKF) was close to being our top pick last month and again this month. If it weren’t for low trading volumes, this purveyor of grease and starch may have made the starting lineup. Institutional investors remain shy, and most retail investors are yet to notice the opportunity.

Investment arms of NAB sold down their holdings in December and January; respected Orbis Investment Management was a buyer. With bad news baked into its share price, any positive news will send shares rocketing, while further bad news is unlikely to have much effect. In sum, Collins presents limited downside risk with the possibility of a double within two years.

February 2012
Collins Foods (ASX: CKF) has been trading in a tight range since its disappointing inaugural results as a listed company. Institutional investors remain shy of a company that has already burnt several of their brethren, and most retail investors are yet to notice the opportunity.

Collins has now doubled! And after hitting $1 as I said it might.

Collins Food Group ASX:CKF share chart

While it may appear I’m simply blowing my own trumpet, I’m really sharing this for the lessons that can be learnt. It’s basic stuff that most people simply don’t make part of their investing DNA.

  • If the bad news is priced then the upside potential is probably being ignored and mispriced.
  • Be prepared! Imagine what could happen based on the facts at hand and be ready to respond to what occurs. I predicted share price could hit a $1 when Orbis could no longer buy, it did.
  •  Think about companies from a future perspective rather than linearly extrapolating historical data.

It’s that simple logic that led me to Acrux (ASX:ACR). The downside was more than priced in. Today’s price jump is no surprise. It wasn’t rocket science or advanced financial maths — there’s an oxymoron — it was simply assessing whether the risks were being over-weighted. The downside was priced in! That puts you in the wonderful position of any good or even alright news will be an upside catalyst.

Acrux Axiron sales increase chart

Here’s another example from 2013 using pSividia.

pSivida is hoping third time’s the charm. Alimera has submitted  ILUVIEN for FDA approval for a third time. The outcome is expected in October. If rejected, watch out below, pSivida longs will be  crushed. Here’s the crucial point for those looking for better odds. A rejection would make pSivida worthy of attention as it will still have the growing European cash flow, a promising pipeline and the possibility of eventual FDA approval if Alimera coughs up and performs the additional trials the FDA have always wanted. It may also have a share price starting with 1 — ouch!

The approval was rejected and that proved to be a great time to go long. While pSividia didn’t drop below $2 it did get within the ballpark.

So the next time people laugh about crystal balls you might want to ask them what they’re basing their investment decisions on. DCF? That’s the worst type of prediction. Historical financials? While useful, it’s what is gong to happen that counts.

Whatever they’re basing their decision on its most likely a crystal ball going by another name. They’re simply dickheads without enough insight to know that.

My name is Dean Morel and I’m a dickhead! A lot of my predictions are wrong, but as they cost me nothing I can keep making them all day. Sometimes my guesses are right and I take a swing.

Disclosure: You’re a dickhead, but you’d be an even greater one to think this is anything more than the ramblings of an idiot.  I’m long several of above mentioned companies. Needless to say this ain’t advice. Here’s the advice, pull your head out of your arse, look at the future, figure out what is likely to happen and what is priced in. Or like me, if you discover your head is too far up your arse then keep forcing it further up until it finally pops back out your neck. I’m not sure mine has popped out yet, but it’s getting close ‘cos it no longer smells like shit in here.

Free S&P ASX Index Total Return Accumulation Data

S&P love making their ASX All Ordinaries Index (^AORD) and ASX200 (^AXJO) total return data hard to find. For my money the ASX accumulation data is way more meaningful than the market weighted indices such as the All Ords.  It reflects the total return from share market investing (capital appreciation plus dividends) rather than just the capital appreciation half.

Where to get Free S&P ASX Total Return Accumulation Data

S&P/ASX 200 Total Return

Here’s the link for S&P/ASX 200 Total Return data. You may need a a free S&P account to access.

When you land on the page you’ll see the standard index data, not the total return data. But never fear, you simply need to click the Export button. The Excel spreadsheet has all the TR data. As you can see from the image you can download up to 5 years worth of the ASX accumulation data.

S&P ASX accumulation data free


S&P All Ordinaries Total Return

If you want the All Ordinaries data here’s the link.

Other Australian indices are available from the S&P site.

Other sites for free ASX TR data

Tony Hansen from Eternal Growth Partners let me know that Google finance is now covering the TR indices, here’s the link to the ASX/200 data. I’m not sure why but the Google data is different from the S&P data.

Stockbrokers can cost you a lot more than high execution fees

Is Marcus Padley getting desperate?

In this article Padley attempts to intimidate self directed investors into using the over priced services of stockbrokers.

Whether a trade costs $19.95 or $79.95 will have less impact on your long term wealth than whether it was a sound investment to begin with. In my experience full service stockbrokers provide lousy advice that can cost you significantly more than the $60 extra bucks you pay for a trade.

So to counter Marcus Padley’s long list of attributes he believes investors require — many of which are spurious — I give you this list.

Use a full service stockbroker if you:

  • want to feel like you’ve been shafted with dud shares that your stockbroker is trying to off-load for their preferred clients,
  • wish to make a salesman — as that is what stockbrokers are — rich,
  • like to feel bad about your well reasoned and researched decisions because the salesman at the other end of the phone has conflicting incentives,
  • enjoy investing in “guaranteed sure winners” that don’t,
  • like being encouraged to trade too frequently, thus sending your costs skyrocketing as fast as the salesman’s new Porsche can go,
  • enjoy selling your winners too soon, as the salesman needs to hit his commission targets,
  • like to lock in losses with stop loss orders due to simple market volatility rather than a fundamental change in business prospects,
  • want to be guided more by someone’s past experience and existing beliefs than by logical thinking and rational decision-making — see here,
  • think it’s good to be directed by a salesman who has difficulties disengaging themselves from vastly anchored thinking patterns,
  • are unable to take responsibility for your own decisions and need someone to blame.

When investing, don't use a monkey throwing darts

Beware of incentives

Marcus Padley is the same as almost every person involved in finance. They are all either unable to or purposefully choose not to disentangle their ‘advice’ from their own incentives. Stockbrokers advise you to use stockbrokers, while newsletter writers advise you to be self directed so they can sell you advice. Banks, brokers and financial advisors all advise you to to use margin, not because it is financially sound, but because they are incentivised to do so.

If you’re above average intelligence then manage your own money. No-one is as strongly incentivised as you are to make sure your wealth grows.

Disclosure: My main incentive is to grow my family’s wealth. As alpha — market outperformance — is a zero sum game that may mean that I’m incentivised to give you a bum steer! Maybe I think I can beat you more easily than I can a stockbroker.
Of course this blog is simply for my amusement. I am not authorised to give advice.

Is Anteo Diagnostics the hottest ASX company?

Long ago, Keynes argued that the “central principle of investment is to go contrary to general opinion, on the grounds that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.” This powerful statement of the need for contrarianism is frequently ignored, with disturbing alacrity, by many investors. James Montier June 2011 GMO White Paper

There is little doubt that ‘everyone’ is agreed about the merits of Anteo Diagnostics (ASX: ADO) and its wondrous universal glue Mix&Go. Feckless ADO ramping posts on investment forum — and I use that term very loosely — Hot Copper garner so many positive recommendations that for now it seems investors can’t even think about any other ASX listed company. The image below is not from the ADO board on HC, rather it’s the top posts across the entire forum.

anteo diagnostics ado speculative bubble

I highlighted Anteo’s potential back in early 2011 and from a high level perspective very little has changed since then, that is except the intensity of vociferous longs, oh and the price of course, which is now 4 times higher. In fact very little has changed since way back in 2010 when Stuart Roberts at Southern Cross Equities said “Two licensees – Bangs and Merck – have been secured and prospective licensees in multi-billion dollar markets are showing interest.

anteo diagnostics ado speculative bubble chart

Yes deals do seem closer now than they have ever before. Perhaps Anteo will close two substantial deals this year and earn royalties of $20 million or more in 2015. Based on Anteo’s current market cap it’s trading at the fingers crossed possibility of 11 times 2015 sales. As Mix&Go is little more than a very clever glue that can be mixed up in someones backyard it will have high margins, let’s say 50 percent net margins. That gives Anteo a forward hopeful price to earnings multiple of 23.

While both those multiples are high, they are not outrageously so. Unfortunately there is a reasonable chance revenue and earnings will fall well short of those targets. And therein lies my concern. Everyone on the overcrowded Anteo boat are focusing on the upside potential without considering that the vast majority of speculative companies fail.

As Peter Lynch advised in One Up On Wall Street, hot stocks are best avoided.

If I could avoid a single stock it would be the one in the hottest industry, the one that gets the most publicity, the one that every investor hears about it in the car pool or on the commuter train, and — succumbing to the social pressure — often buys,” writes Lynch. “Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there’s nothing but hope and thin air to support them, they fall just as quickly,” he continues.

Second, avoid the stocks of companies that have been singled out as the next big thing: the next Google, the next Apple, the next Disney. “In my experience the next of something never is – on Broadway, the best-seller list, the National Basketball Association, or Wall Street,” writes Lynch. “In fact, when people tout a stock as the next something, it often marks the end of prosperity not only for the imitator but also for the original to which it is being compared.”  via Forbes

Flavor Flav of Public Enemy said it all in four simple words “Don’t believe the hype“.

Make no mistake Anteo is speculative. While I like and respect Anteo’s chief cheerleader Matt Sanderson I was gobsmacked by this exchange we had on twitter.

anteo speculative vs knowledge

I do appreciate the tremendous effort Matt has put in to analysing Anteo, but he seems to have imbibed to much kool-aid. No amount of research improves the odds of a speculative investment turning out favourably. Research does improve your odds of picking a winner, but from there it’s predominately luck. And certainly no amount of knowledge moves a stock from speculative to safe.

The other dangerous point about Matt’s comment is that most investors perform the majority of their research once they’re already long. Worse yet, that research is predominately to confirm their hypothesis. A speculative investor’s time would be be better spent trying to disprove their analysis. Either way no amount of post-investing research will improve the odds.

Another issue I have with Matt’s comments is that if Anteo delivers on all its promise, the retail longs will put it down to their skill, when as with all speculative investments luck plays the largest role.

I’m long Anteo but believe many investors would be best served by taking a bath on this speculative play rather than walking away victorious. It’s better to learn a good lesson early in your investment career than make a few lucky dollars and learn nothing. As Bill Gates said “success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

I do believe there is room in a well balanced portfolio for speculative companies. But like all investments be they speculative or not, they must be bought when the expected value is considerably higher than the current price. That boat has sailed for Anteo.

Expected Value: “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.” Buffett from the 1989 Berkshire Hathaway Annual Meeting via the brilliant PM Jar.

[Update 27 March: Perhaps the following song is more appropriate for Anteo. What do you think? At any rate, fabulous song and video.

Ha ha ha
Pump it
Ha ha ha
And pump it (louder)
And pump it (louder)
And pump it (louder)
And pump it (louder)
Turn up the Anteo

Disclosure: Long ADO

Volatility is my friend – Fusion Fund February performance

Last month I wrote about my Buffett inspired performance. At the end of February our 5 year annual returns leapt from 26 percent to an incredible 30 percent. Unfortunately that jump in return was more a reflection of poor results in February 2009 than strong February results.

I’m pleased, but not excited about our results. As Joe Kunkle said last week “stay humble – Helen Keller can pick winning stocks in this market – don’t get complacent”.

The first two charts show my performance, but it is the last two charts I want to talk about this month, so see you down below.



Love that volatility

Could you stomach 20 percent monthly declines? How about a 10 percent draw-down? Since July 2008 we’ve had three roughly 20 percent monthly declines and six declines around 10 percent. This volatility is a result of my move back to running concentrated portfolios, after temporarily flirting with diversification.

Do what I say, not what I do.

I still believe in the mantra to concentrate to accumulate, diversify to protect, and strongly believe most people should automate their saving and investment plans by long term averaging into low cost index funds. This excellent article succinctly summarises the path most people should take to wealth creation.

4. Automate everything. When it comes to saving and investing, you are your own worst enemy. So remove yourself from the equation. Automate your savings, bill payments and investments. You’ll save time and hassle–and be less inclined to impulsively spend your retirement savings on a hot tub.

February marks our seventh straight month of positive returns. We twice hit our prior record of four consecutive up months, in 2009 and 2012. So we’re way out in uncharted waters, yet we’re certainly enjoying these green seas!

With half yearly reporting now over here in Australia, whether we record an eight up month or not mostly depends on one company. Fingers crossed Prana Biotechnology delivers good results for their IMAGINE trial.

Show me the money

Our cash balance is increasing. As I’ve said before the cash piling up is predominately a result of limited investment opportunities rather than a macro call. Still as we enter what is likely to be the last leg in this cyclical bull market I take comfort from our cash weighting. If you’re not concerned with the preservation of your capital, then by all means remain 100 percent invested.


If you’re still 100 percent invested or worse leveraged, then you simply must read these extracts from Seth Klarman’s latest investor letter.  Lots of people jawbone about focusing on downside risk, Seth Klarman actually does. So what’s your cash weighting?

As mentioned, there is a high probability we’re in the final stages of a cyclical bull market, so as Klarman says it’s time to concentrate on return of capital rather than return on capital.

Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist so so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they’re sure everyone else won’t stay on forever.

Just because the music is playing, there is no need to keep dancing.

One last thing, if you haven’t read this post by Peter Phan I encourage you to do. Buying highly speculative stocks with little or no earnings at this stage of the cycle is not rational. I’m confident that a smidgen of patience will let me purchase some current high flyers for a fraction of their current price tag. I just hope you’re not one of the fools I buy from when you can’t stand your losses anymore.

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