Good Morning,
Your author is suprised by the number of buys we implemented: but the opportunities were there and I took them. All investments were in companies currently receiving negative press, hence the value component.
Strong companies we wished we owned such as Tesco, Johnson & Johnson or Disney, are simply too expensivbe for us to consider at the present moment - just as we feel the S&P 500 is now 15 - 20% over valued.
It is a very difficult time for those that are concerned in asset allocation - as my day job requires, and who are restricted to purchase only the most liquid securities from the most profiled companies.
Bonds are not of interest, cash will be diluted, many stocks now assume too much growth for us to feel comfortable, most commodities are too wrapped up in the China story and property requires credit expansion to grow.
Personally, I am purchasing the equity of companies that seem undervalued. Marc Faber has stated frequently of late that he feels equities and gold are good investment startegies in the current environment: the former due to the explicit support of the US government should they fall aggressively, the latter because of this explicit support.
We remain heavily overweight in cash because we feel in the short term it is the least worst option. However, we are feverishily looking for good equity opportunities.
Monday, 5 April 2010
Wednesday, 31 March 2010
John Stuart Mills - RIP
“Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”
He who lets the world, or his own portion of it, choose his plan of life for him, has no need of any other faculty than the ape-like one of imitation. He who chooses his plan for himself, employs all his faculties. He must use observation to see, reasoning and judgment to foresee, activity to gather materials for decision, discrimination to decide, and when he has decided, firmness and self-control to hold to his deliberate decision.
No one can be a great thinker who does not recognize that as a thinker it is his first duty to follow his intellect to whatever conclusions it may lead. Truth gains more even by the errors of one who, with due study, and preparation, thinks for himself, than by the true opinions of those who only hold them because they do not suffer themselves to think.
Everyone who receives the protection of society owes a return for the benefit.
One person with a belief is equal to a force of 99 who have only interests.
He who lets the world, or his own portion of it, choose his plan of life for him, has no need of any other faculty than the ape-like one of imitation. He who chooses his plan for himself, employs all his faculties. He must use observation to see, reasoning and judgment to foresee, activity to gather materials for decision, discrimination to decide, and when he has decided, firmness and self-control to hold to his deliberate decision.
No one can be a great thinker who does not recognize that as a thinker it is his first duty to follow his intellect to whatever conclusions it may lead. Truth gains more even by the errors of one who, with due study, and preparation, thinks for himself, than by the true opinions of those who only hold them because they do not suffer themselves to think.
Everyone who receives the protection of society owes a return for the benefit.
One person with a belief is equal to a force of 99 who have only interests.
Monday, 29 March 2010
Long term value....boring!
I often find myself under the impression I am in the entertainment business.
People don´t want to make business like investments, they want to be involved in the latest fad and feel they are living at the edge! If they make money, it´s a bonus!
However, I sympathise with a particaular view of criticising business like investing.
Many clients of private banks have generated wealth from developing a business. There interest in an investment portfolio with a bank may be to take advantage of the properties of listed securities of companies that non listed companies/businesses do not have.
If they wanted to make more money by making business like decisions, they could work on their business, where they have a track record of doing it.
However, this can be counter acted by suggesting that by buying the securities of listed companies they are diversifying their wealth in different businesses and different geographies in a more rapid way than if they did it directly with their own business. Also, they would be dealing with companies that in general would have more experience of working in a particular country or product, so there should be less risk involved.
A particular client made me feel that perhaps I am being too short sighted thinking too much on the potential of the permenant loss of capital and long term business investing decisions, and that a branch of short term strategies need to be included in the portfolio. Value investors usually appriach this by focusing on corporate actions - perhaps it was about time I did the same.
Yours sincerly,
Alessandro Sajwani
People don´t want to make business like investments, they want to be involved in the latest fad and feel they are living at the edge! If they make money, it´s a bonus!
However, I sympathise with a particaular view of criticising business like investing.
Many clients of private banks have generated wealth from developing a business. There interest in an investment portfolio with a bank may be to take advantage of the properties of listed securities of companies that non listed companies/businesses do not have.
If they wanted to make more money by making business like decisions, they could work on their business, where they have a track record of doing it.
However, this can be counter acted by suggesting that by buying the securities of listed companies they are diversifying their wealth in different businesses and different geographies in a more rapid way than if they did it directly with their own business. Also, they would be dealing with companies that in general would have more experience of working in a particular country or product, so there should be less risk involved.
A particular client made me feel that perhaps I am being too short sighted thinking too much on the potential of the permenant loss of capital and long term business investing decisions, and that a branch of short term strategies need to be included in the portfolio. Value investors usually appriach this by focusing on corporate actions - perhaps it was about time I did the same.
Yours sincerly,
Alessandro Sajwani
Price is what you pay, value is what you get.
By distinguishing the two, one can use a buy and hold strategy successfully.
"Though it is uncomfortable having a large cash position in an investment portfolio, it is more uncomfortable making a silly mistake...one does not always have to be invested - this is the primary difference between the speculator and the investor, in the view of your author. The former is always chasing a quick buck..."
"Though it is uncomfortable having a large cash position in an investment portfolio, it is more uncomfortable making a silly mistake...one does not always have to be invested - this is the primary difference between the speculator and the investor, in the view of your author. The former is always chasing a quick buck..."
Saturday, 20 March 2010
Our in house method of accounting for stock options
Burlington Northern Santa Fe has the following stock option characteristics:-
We do the following calculation to determine the liability on the balance sheet for shareholders due to the stock options:-
=[10,020 * (our objective value – 68.24)] + [ ((2,500*5)*(our objective value – 68.24)]
The first part determines the cost to the shareholder assuming all stock options are excised at our objective value.
The second part assumes new stock options in the next five years will be issued and they will also be exercised at today’s estimated objective value. NOTE: strike price was taken to also be 68.24 USD/share as this was the approx. price of the stock prior to Buffett´s bid for the whole company).
= 720 million USD liability
For 2009, Burlington Northern Santa Fe inputed a compensation cost of 41 million USD through their income statement: 69 million USD in 2008.
We appreciate many could see this as an aggressive number.
We do not assume anyone forfeits their options nor that people will exercise at lower prices. However, we are conservative investors – hence we must be aggressive counters of costs.
Sincerely,
Alessandro Sajwani
We do the following calculation to determine the liability on the balance sheet for shareholders due to the stock options:-
=[10,020 * (our objective value – 68.24)] + [ ((2,500*5)*(our objective value – 68.24)]
The first part determines the cost to the shareholder assuming all stock options are excised at our objective value.
The second part assumes new stock options in the next five years will be issued and they will also be exercised at today’s estimated objective value. NOTE: strike price was taken to also be 68.24 USD/share as this was the approx. price of the stock prior to Buffett´s bid for the whole company).
= 720 million USD liability
For 2009, Burlington Northern Santa Fe inputed a compensation cost of 41 million USD through their income statement: 69 million USD in 2008.
We appreciate many could see this as an aggressive number.
We do not assume anyone forfeits their options nor that people will exercise at lower prices. However, we are conservative investors – hence we must be aggressive counters of costs.
Sincerely,
Alessandro Sajwani
"The market is risky, I don´t want to put my hard-earned money there!"
It is a point I hear often, and for many people, it makes good sense.
However, for me, this expression is akin to the following, which my dear girlfriend (and her mother) will attest to:-
"I don´t like doing the shopping in the market, they rip me off. It costs me more than doing it at the Mercadona (a local supermarket)"
The clear point here is you go to the market if you have the knowledge.
When you know what the the "real market price" of oranges are, you don´t get ripped off. If they offer a greater price, you don´t buy - you go elsewhere or wait another day. If they offer less - you buy lots.
If you don´t know the "real market price", people that shop at markets aren´t afriad to research to see what different stalls are offering and what informed buyers (my favourite are hard faced little old ladies with quiffed hair - for the fruit market) are paying.
If you do not qualify for either characteristic mentioned above, you are probably right in sticking to the fixed price of Mercadona fruit (or fixed deposits and bonds) - or get someone else to do your shopping at the market!
Sincerly,
Alessandro Sajwani
However, for me, this expression is akin to the following, which my dear girlfriend (and her mother) will attest to:-
"I don´t like doing the shopping in the market, they rip me off. It costs me more than doing it at the Mercadona (a local supermarket)"
The clear point here is you go to the market if you have the knowledge.
When you know what the the "real market price" of oranges are, you don´t get ripped off. If they offer a greater price, you don´t buy - you go elsewhere or wait another day. If they offer less - you buy lots.
If you don´t know the "real market price", people that shop at markets aren´t afriad to research to see what different stalls are offering and what informed buyers (my favourite are hard faced little old ladies with quiffed hair - for the fruit market) are paying.
If you do not qualify for either characteristic mentioned above, you are probably right in sticking to the fixed price of Mercadona fruit (or fixed deposits and bonds) - or get someone else to do your shopping at the market!
Sincerly,
Alessandro Sajwani
How competitor discounts evolve during a business cycle
In a time like 2006, people like me will not do well.
Markets will rally, but generally led by cyclicals and lower quality companies who are reducing their discount to their premium competitors.
Markets effectively rally out of sentiment rather than due to a proportional increase in the underlying value of the assets and cash flows they generate.
It is interesting to research how discounts of cyclicals and weaker competitors change over the period of a business cycle. Does the EV/EBIT simply raise in the up cycle: hence higher valued premium competitors drive up the value of secondary competitors as the market rally continues rather than vice versa. And the opposite happens in a down market?
The question of course is trying to answer whether it is the same at the moment. Though we appreciate their is a catalyst for volume sales to increase due to the huge de stocking that occurred in 2008, we feel it is very difficult that earnings surpass those recorded in 2007 (or even volumes unless they are export driven), when credit was flowing in the levels it was then.
We sit and ponder.
Markets will rally, but generally led by cyclicals and lower quality companies who are reducing their discount to their premium competitors.
Markets effectively rally out of sentiment rather than due to a proportional increase in the underlying value of the assets and cash flows they generate.
It is interesting to research how discounts of cyclicals and weaker competitors change over the period of a business cycle. Does the EV/EBIT simply raise in the up cycle: hence higher valued premium competitors drive up the value of secondary competitors as the market rally continues rather than vice versa. And the opposite happens in a down market?
The question of course is trying to answer whether it is the same at the moment. Though we appreciate their is a catalyst for volume sales to increase due to the huge de stocking that occurred in 2008, we feel it is very difficult that earnings surpass those recorded in 2007 (or even volumes unless they are export driven), when credit was flowing in the levels it was then.
We sit and ponder.
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