Last Post On Kaizen Investor

I’ve decided to stop writing Kaizen Investor. After more than 100 posts, and to readers of this blog, this may come as a bit of a surprise. Why?

The objective of starting KI was always as a way to build experience and become a better investor. The way I’ve done this has been primarily through documenting what I’m learning on my journey as an investor.

Keeping A Journal

While writing can be a good way to process thoughts and internalize lessons, it takes much more time to write a blog that’s worthy of your time, dear reader.

Documenting thoughts on investment process or rationale for any specific investment situation can usually by recorded in a few key bullet points with note form explanation (I usually record these in a spreadsheet).

This helps my thought processes and learning of lessons. It’s also useful to have a record to refer back to over time to remind yourself what you’ve learnt. It’s an incredibly valuable process as an investor.

However, taking such simple note form and translating this into meaningful, interesting and engaging blog posts takes considerably longer. It’s no longer enough just to bash out ideas as they come into your head and hit “publish.”

Investor or Blogger?

A good post requires lots of research in advance, good writing and editing, and making sure the content is novel and interesting. It also has to speak to the reader on some emotional level.

The other side of the coin is opportunity cost. Everyone’s time is finite: I’ve had to make a choice.

Should I spend time on becoming a better blogger and writer – someone who specializes in conveying ideas?

Or should I spend the same limited time focusing on researching ideas, studying the masters and over time becoming a better investor?

For me, as much as I’ve enjoyed writing KI, the latter is a clear winner. While there is some cross-over the two are not the same thing.

The Best Bloggers Are Master Writers

When researching the most popular and well-read value investing blogs out there, virtually none of them were written by master investors. Here’s one list I came across.

Clearly, they have an undoubted and passionate interest in investing, yet the focus seems to be more about educating others and building a following. Indeed, one is even billed as the new “Ben Graham.”

Don’t get me wrong – some of these blogs are very interesting, well written by extremely capable authors, thought provoking and offer wonderful educational insights. In a word, excellent.

But for me, undertaking such an exercise would detract from the goal of becoming a better investor.

Master Investors

As a corollary, when considering master investors, virtually none of them write an investment blog. Sure, as they become popular and develop a greater following, more people start to read their investment reports. But it’s not the same thing.

This post about Warren Buffett’s biggest secret sums it up nicely. You need insane focus.

Will I write about investing again? Yes, almost certainly. While it may be on a blog type platform, the look and feel will be different.

Do Less To Achieve More

Much of my thinking has been influenced by an excellent book I’ve just read – Essentialism: The Disciplined Pursuit Of Less by Greg McKeown.

The main tenet of the book is to simplify your life and achieve more by doing less. We all undertake many activities, sometimes too many. The trick is to identify the few things that matter, and avoid the many other activities which seem important but are not critical.

One of the quotes I particularly liked is:

“Jim Collins, the author of the business classic Good To Great, was once told by Peter Drucker that he could either build a great company or great ideas but not both. Jim chose ideas.”

For me, this equates to: you can either build a great investment blog or be a great investor, but not both.

And by great investor, I don’t mean someone who becomes a famous investment manager. I’m talking about achieving investment mastery (a lifetime in the making). Or as quoted in the book:

“To follow, without halt, one aim: There is the secret to success” – Anna Pavlova, Russian Ballet Dancer

Resources and Thank-You

For any readers who want to use the resources or articles on this blog, they will stay up for now. These include articles on financial freedom, saving and Growth At Reasonable Price investing. And feel free to check out the Archives.

Finally, a deep thank-you to the readers of this blog for your interest and support. You rock.

Stay curious,

Raman Minhas.

56 – Two Week Break

I’m taking a two week break to reflect on the last few months.

While writing daily is a useful exercise, as the end of year, it feels like the right time to take a step back and review progress. It will also be a chance to dive into my reading list a little… and just think.

The focus remains on how to become a better investor and share those insights with you.

Best wishes for a peaceful holiday season.

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter. 

55 – Alibaba Tmall Global Site Highlights Risks Of International Expansion

Reading: WSJ online –

Interesting:

Alibaba’s Tmall Global Site Stumbles – Alibaba’s e-commerce site for global brands to sell into China, Tmall Global, not living up to expectations for global retailers.

Alibaba brand is built on prominence of its China to China focused platforms – Taobao (a virtual bazaar between consumers, like eBay) and Tmall (business to consumer platform within China). The stats:

  • Taobao ranks as no. 2 out of more than 3500 Chinese sites, with 10.93 daily unique page views per user
  • Tmall ranks no.5, with 6.07 daily unique page views per user
  • Tmall Global ranks 311, with 3.1 daily unique page views per user

These show that Tmall Global has nowhere near the presence that global retailers may have anticipated as a way to sell products into China. Another big concern for retailers is that they cannot pay to advertise on site (though can promote through third party advertisers).

Traction, higher ranking and effectiveness for retailers as a China sales channel may develop over time as the Tmall Global platform develops.

BUT it highlights the risks of international expansion – no guarantee that a successful domestic model will roll-out internationally. For now it risks damaging Alibaba reputation.

Where Will Oil Prices Go in 2015 - given the recent price rout in oil, expect to see more articles like this one. Giving predictions is a popular (especially year end) sport.

Polling industry analysts, operators and investors on where the oil price will go in 2015 gives it apparent credibility. But who knew the oil price (WTI) would drop from just over $100 to $55 in the last 6 months? No-one.

You could substitute virtually any macro factor…interest rates, employment figures, GDP, international trade, savings, inflation…

Reminder to self when making investment decisions: don’t rely on predictions. Use mean reversion over the long-term.

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

54 – Buffett To Top Managers: Reputation Comes First

Reading: WSJ online –

Interesting:

Buffett Reminds His Top Managers: Reputation Is Everything – Buffett’s recent memo to his managers of Berkshire’s now 80 subsidiaries. This has been advice/ instructions he’s given them over 25 years. Here are the key highlights that any manager could benefit from:

  • Reputation comes before everything, including profits – “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation”.
  • Do what is legal AND you would be happy to have reported “on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”
  • Don’t take actions where you have concern about their legality or propriety - “There’s plenty of money to be made in the center of the court.” 
  • Report significant bad news fast, don’t let it fester. This slow reporting of bad news caused “a problem at Salomon from one that could have been easily disposed of to one that almost caused the demise of a firm with 8,000 employees.”
  • Famously, Buffett takes a light touch approach with managers of wholly owned subsidiaries: “…talk to me about what is going on as little or as much as you wish. Each of you does a first-class job of running your operation with your own individual style and you don’t need me to help. The only items you need to clear with me are any changes in post-retirement benefits, acquisitions, and any unusually large capital expenditures.” (This fits with him not investing in turnarounds).

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

53 – Blackberry Woes Show Risks Of Turnaround Investing

Reading: WSJ online –

Interesting –

Blackberry Revenues Fall 34% –  Despite success in cost cutting, and last quarter return to profit, revenues fall show risks of investing in turnarounds. As CEO John Chen acknowledges – “Sustainable profitability can only come from revenue growth”. 

Quarterly revenue fell to $793 million against Wall St expectations of $932 million. Revenues fallen from peak of $19.9 billion for FY to Feb 2011, to $6.8 billion in 2014, and expected just over $3 billion for 2015.

Revenue growth dependent on new hardware (Passport and Classic) and doubling of software sales. But all of this is unproven and the market is completely different from when Blackberry products used to rule business applications. There was no iPhone, Android or apps based approach then.

Looks like a very steep uphill climb. Can be very rewarding when they work out well (John Chen’s last gig as turnaround CEO at software maker Sybase Inc, sold to SAP SE for $5.8 billion).

A good example of why Warren Buffett famously does not invest in turnarounds: “Turnarounds seldom turn”

Bill Ackman’s Two-Year Herbalife Bet: By The Numbers – Legendary hedge fund manager, Bill Ackman, two years into his $1 billion short bet on Herbalife. Several other legendary investors on other side of trade. Who will prove right? Don’t know, but by the numbers it looks interesting.

 

Stock Research: from reading –

SAP SE (NYSE:SAP); Software Application – stalwart, first pass buy price = $40

Nike Inc (NYSE:NKE); Footwear & Accessories – stalwart, managing to continue growth by tapping into “athleisure” trend – wearing sports wear not intended for workouts. First pass buy price = $31

Herbalife Ltd (NYSE:HLF); Household and Personal Products – first pass buy price = $33

  • based on (i) 10 year CAGR for revenues = 14%, (ii) to be conservative, I’ve assumed no forward growth but revenues stay at current level ($5 billion).
  • If fall in revenues along lines of Bill Ackman short view, then get out quick as it may prove him right.
  • If anything other than bad outcome, then could be a cheap buy price with margin of safety.
  • Used shares outstanding of 115 million, versus current 86 million, due to risk of potential conversion of debt issued for share repurchase (10-Q).

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

Most Useful Books I’ve Read On Investing

Here are the books, and other resources, I’ve found most useful in my investing journey:

Warren Buffett WayThe Warren Buffett Way

This is the book that first turned me on to value investing. When I read it, it was like a light went off in my head. It chronicles how Warren Buffett, deemed by many as the world’s greatest investor, goes about his investment business – with a focus on value over price, economic moats and looking at stocks as pieces of real businesses, rather than just bits of paper – and lots more.

 

GrahamTheIntelligentInvestorThe Intelligent Investor

Warren Buffett describes this as “By far the best book on investing ever written.” Graham was Buffett’s teacher and mentor at Wharton, and then Buffett went to work for him as a securities analyst before setting up on his own. Chapters 8 and 20 particularly worth noting, and the concepts of “Mr Market” and “Margin of Safety.”

 

OneUpOnWallStreetOne Up On Wall Street

Peter Lynch ran the Magellan Fund for Fidelity, averaging 29% CAGR over his tenure, from 1977 to 1990. This led to the fund to grow from $20 million in assets to over $14 billion. In the book, Lynch shares his insights and lessons from a career in investment management, including his search for the magical 10 baggers. Often viewed by many as a growth investor, Lynch applied value principles, to ensure he didn’t overpay for growth. Popularized the Growth At A Reasonable Price (GARP) approach.

 

EssaysofWarrenBuffettThe Essays of Warren Buffett

Once you realize how good Warren Buffett is (both in terms of his investing, and writing), then dive into this great read – it’s a collection of his Letters to Shareholders (which you can also access from the Berkshire Hathaway website), organized by subject matter. A super-valuable read whether you’re an investor or in any kind of business. And definitely one to refer back to time and again.

 

FooledByRandomness-TalebFooled By Randomness

You may not be as great as you think you are. A sage reminder from risk author and options trader Nassim Nicholas Taleb. A particular analogy I found helpful – do you want to make your money as a rock-star or as a dentist? (Clue: a lot more dentists get there than wannabe rock-stars). Behavioural Psychology features big in this book too.

 

ContrarianInvestmentStrategies-Dreman

Contrarian Investment Strategies: The Next Generation

In this book, Dreman, a noted valued manager, does a fairly rigorous back-test of several value investing type approaches, and finds beauty in simplicity. In particular he looks at strategies using various ratios including: Price to Earnings, Price to Cash Flow, Price to Book, Dividend Yield. Also covers useful insights into Behavioural Psychology and its importance in investing.

 

LittleBook-GreenblattThe Little Book that Beats the Market

Greenblatt’s fund, Gotham Capital, returned around 50% CAGR for some 10 years. That’s huge. In this short read, he describes a relatively simple approach that could be adopted by many investors. In particular I like the idea of buying quality stocks when they’re cheap (low Price to Earnings, high Return on Equity). He even has a website to help private investors.

 

DhandhoInvestor- PabraiThe Dhando Investor

Pabrai, a value manager, describes a fascinating analogy for value investors – the Patels, a small ethnic group from India, who came to the US as impoverished immigrants in the 1970s and now own $40 billion in motel assets, pay over $725 million a year in taxes and employ nearly a million people. The book describes how they did it, and what value investors can learn to “maximise returns while minimizing risks.”

 

Soros - KaufmanSoros – The Life and Times of a Messianic Billionaire

Soros is not a value investor at all. He’s a trader, and a hedge fund guy. That being said, I found his story fascinating – from his humble beginnings in Hungary, evacuation during WWII, stop-over in London and the London School of Economics and eventual route to the US. It highlights there’s not always an obvious or straightforward route, and the value of singular focus and intense effort. It also talks about his philanthropy and the Open Society Foundation.

 

ChecklistManifesto-GawandeThe Checklist Manifesto 

Written by a Boston-based surgeon, Atul Gawande, who is also a writer for the New Yorker. Gawande looks at several complex problems in the world – including building skyscrapers, airline safety, surgical safety, and investments. Following examples from these industries, he found that checklists “established a higher standard of baseline performance.” Pabrai (mentioned above) is one of the noted value investors interviewed in the book.

 

Hedge HoggingHedge Hogging

Written by Barton Biggs, a hedge fund master. He covers many valuable lessons and writes in an engaging style. Changing names and places to protect anonymity, he refers back to lessons learned over 30 years as an investment professional. It offers a real insiders look into the world of professional investing and is reviewed here.

 

Other really good books for investors I’ve read:

  • The Rediscovered Benjamin Graham – Lowe
  • Damn Right! – Lowe
  • The Winning Investment Habits of Warren Buffett and George Soros – Tier
  • The Snowball – Warren Buffett And The Business of Life – Schroeder
  • The Millionaire Mind – Stanley
  • Outliers – Gladwell
  • Think and Grow Rich – Hill
  • Free Capital – Thomas
  • Millionaire Teacher – Hallam

Books on my reading list:

  • Security Analysis – Graham and Dodd
  • Why Stocks Go Up And Down – Pike

Links:

Finance websites I use for stock research: 

  • Yahoo!Finance – great for basic stock research, financials and screens
  • GuruFocus – very good resource for 10 year data on stocks and tracking value gurus
  • SEC Filings - for all your 10-K needs and more!
  • Wall Street Journal – excellent news, insights and idea generator

52 – AbbVie, Kraft Show No Guarantees In Spin-Off Land

Reading: WSJ online –

Interesting:

AbbVie Pins Hopes On Hepatitis C Treatment – AbbVie, pharmaceuticals business spin-off from Abbott Laboratories looking to Hep C treatment for growth and to revive drug product portfolio.

Currently, AbbVie lead product, Humira accounts for 63% of sales with patent expiration in 2016. As a biologic drug (complex large molecule), this doesn’t mean generic competition will appear instantly in 2016, but could be close behind.

If AbbVie has success with Hep C product, could take some of market share from Gilead’s hugely successful franchise of Solvadi and Harvoni (Solvadi is biggest pharmaceutical launch ever, with $8.55 billion sales in its first 3 quarters).

Assuming AbbVie’s product could achieve $3.5 billion sales next year, as per analyst suggestion, and with a typical margin for pharma products, this might add around $1 billion in net income and 60 cents in EPS next year. At current stock price, this would give AbbVie a valuation multiple of PE = 21x. This is STILL richer than Gilead’s PE = 18.5x.

Is AbbVie’s potential success with new (and yet to be approved and launched) Hep C drug already priced in?

Kraft Foods Announces CEO Change – Post-spin-off 2 years ago, share price rises to an all time high as CEO change announced. Value outed by spin-off.

Meanwhile:

  • Share price return same as broader S&P 500 index over 2 years (around 36%)
  • Revenues fall since spin-off from $18.65 billion to $18.22 billion.
  • Last quarter earnings decline of 11% as commodity prices rise, and higher costs passed onto budget conscious consumers who could end up buying less
  • Challenges with change in consumer preferences to less processed food and tougher competition.

Shows spin-offs, while can be effective in releasing hidden value, they are not a slam dunk in improving business fundamentals.

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

51 – Sears Highlights Risks Of Investing In Turnarounds

Reading: WSJ online –

Interesting:

Sears Bets Big On Technology, But At The Expense Of Its Stores – Turnaround and asset play with Sears Holdings shows year on year declining revenues from 2007, and overall fall in net income since 2007. Repeated efforts to remodel stores or implement technology solutions so far have not led to improved overall business.

Genius investor and CEO, Eddie Lampert, may have done well by buying predecessor, Kmart, in bankruptcy proceedings and converting debt into equity – enabling release of cash from operations and asset sales.

But doesn’t mean it’s been good for combined entity, and shows risks in investors hanging on to coat-tails of guru investors; you’re unlikely to get in on the same deal as they did.

Philips To Buy U.S. Medical Imaging Company – Volcano, maker of specialist medical imaging equipment, with $400 million sales, not profitable, and a buy price of $1.2 billion EV. Deal looks expensive on paper today but may actually offer Philips a reasonable return:

  • Strategic fit with Philips live image-guidance solutions – Philips is buying Volcano footprint and can use marketing muscle to expand brand
  • Volcano in expansion phase. Last 5 years revenue growth rate for Volcano is 15% CAGR. If can maintain this with Philips help, and achieve 20% EBIT margin then in 5 years, assuming EV/EBIT ratio of 15x (not unreasonable for specialist medical devices), return would be 2x on EV (i.e. value doubled) and $160 million per year EBIT with  perhaps $100 million or more of net income.
  • Medical imaging is higher margin business than Philips overall, and Philips currently trades at around EV/EBIT = 20x. So buying “future” Volcano (i.e. once costs rationalized in small co. rapid expansion phase, to arrive at industry standard margins) at a small discount to own value, and with better margins.

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

50 – WeWork Startup With $5 billion Valuation: Bubble Territory?

Reading: WSJ online –

Interesting:

WeWork: Now A $5 Billion Co-Working Startup - office sharing company managing to position itself as a social networked company akin to Airbnb and Uber, rather than a real-estate play like Regus. Promoted benefits include: collaboration, communication on ideas and applicants, sleek furniture, info on regular happy hours.

Valuation is about 30-35x revenues. Operational margins claimed higher than other real-estate companies. But charges very high rents (within comparable areas) to start-ups and established cos. – these can easily fall off when economy slows. Regus valuation is 1.4x revenue.

Hmm….sounds like some of the trendy dot-com era internet incubators. Where are they now? Valuation by association rather than business fundamentals.

GE’s Oil and Gas Woes Show Growth Challenge In Big Companies – Oil and Gas targeted as growth area by GE, but as price falls to $60 per barrel, division will do well to break even.

For any super-large company, its difficult for any division to move the needle on growth and profitability.  Over last 10 years, revenues for GE as whole varied but overall gone from $134 billion to $147 billion, or <1% CAGR.

Meanwhile, net margins have drifted down from around 12-13% to 9%. Not even a great dividend play; generous payout at 3.5% but high variability and over 10 yrs flat-line dividends per share.

Good candidate for spin-offs, but unlikely any time soon.

 

Stock Research: Screen filter –

LEM Holding SA (LTS:0QKB); Electronic Components – remove, variable revenues with cyclicality

Swatch Group AG (LTS:0QM4); Luxury Goods – first pass buy price = CHF 57

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

49 – VeriFone Turnaround: Early Success Amid Ongoing Risks

Reading: WSJ online –

Interesting:

Verifone Systems Swings To A Profit – turnaround at credit and debit-card payment machines company making early progress as 5 quarters of revenue and profit growth. More focus on mobile and digital, moving away from pure-play POS. Risks include:

  • ambitious overseas expansion
  • where’s the fit with new terminals offering entertainment?
  • competitive online payment solutions

Riverbed Agrees To Be Bought Out By Thomas Bravo For $3.6 Billion – Riverbed, one of hottest IPOs of 2006, struggled to keep up growth and share price. Led to acquisitions with sub-optimal strategy: sales grew at expense of profits, with profit peaking in FY 2011, entering loss in FY 2013.

Another reason why hot stocks don’t lead to hot returns.

Writing:

Top 5 Sell Rules For Any Stock – blog post looking at why you should use sell rules and which ones are most useful.

 

Raman Minhas writes 100 Investing Days as a challenge to see what he can learn documenting his journey as a GARP investor. If you enjoyed reading this, join his free newsletter.

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