Giving Money3 a wide berth

I recently took a quick look at ASX-listed Money3 (MNY AU). A well-known NZ-based small-cap outfit own it and have labelled it one of their top picks, and Ray Malone, of AMA Ltd fame (AMA AU), is also the (non-executive) Chairman. I have followed AMA for a long time and admire the company and what Malone has achieved with it, and made good money on the stock in the past (although I am long out of the stock now - I bought at 5c but sold way way too soon, at about 15c). MNY has also been growing quickly and the stock has done well over the past five years, and trades at superficially modest earnings multiples (a low teen forward earnings multiple, although closer to 2x book).

What I found horrified me, and it suffices to say that I won't be investing.

Vacationing in Japan, and going long Yen

I took a break from blogging (and more than casual on-the-road research) last week by taking a quick vacation to Japan - a long overdue first-visit. The snowboarding in Niseko was excellent. Tokyo was the bustling and colourful metropolis I expected it would be; and the food was outstanding. These were all consensus views on Japan, and the consensus was right.

There is another consensus view on Japan I am less in agreement on, however: that the Yen is a sell. I think it's probably a buy.

Why I worry more about a melt-up than a melt-down

Most stock market investors worry incessantly about the risk of a potential market melt down. I don’t. I worry about the risk of a market melt up. To be clear, this is absolutely not a prediction. But it is a risk factor I worry about, and think other investors should worry more about too.

For anyone trying to grow their capital; make a living off their investments; or build a business around managing (and making money for) other investors, the absolute worst thing that could happen would be if markets everywhere were to surge and become (and remain) extremely expensive. Imagine, for instance, a world in which stocks traded at 50x earnings. It would be extremely hard to make money in markets. If you invested, you would be offered a poultry 2% earnings yield in exchange for considerable risks. I would likely have to give up and return all the money I was managing to my investors. I’d be out of business.

Fortress Investment Group; buying breakouts; position sizing; and perpetual self-loathing

I woke up to a pleasant but also slightly bittersweet surprise today over my morning coffee – overnight (I reside in Asia) Softbank had announced a bid to buy out Fortress Investment Group (FIG US) Class A shareholders @ US$8.08 a share. This was an approximate 40% premium to the stock’s previous price, and 66% above the levels prevailing at the commencement of 2017. 

FIG was a 1% position in the primary portfolio I manage (larger in some others), and was acquired in stages over the past six months at a US$5.21 average. I bought my base position (about half) at approximately US$5.00, and I then bought the break-out in January, doubling my position in the US$5.30-5.50 range. A 50-60% gain in less than six months is nice. But it's much nicer on a 5-10% position than a 1% position. I didn't know whether to celebrate or beat myself up for not buying more. More on that later.

Martial arts & the UFC; Michael Lewis; and why rouge punters predicted the GFC, not the mainstream

Michael Lewis has stated that what inspired his fantastic book The Big Short (subsequently made into a Hollywood movie) was the mystery and intrigue of why a handful of under-resourced, small time mavericks and outsiders such as Michael Burry seem to have been able to see something that almost the entire mainstream could not, and predict the financial crisis (or, I would add, at least identify a significant risk of one occurring).

Bank CEOs; Chairmen of the Federal Reserve; and mainstream academics and economists alike all completely missed it, and subsequently claimed the crisis was “impossible for anyone to predict”. Michael Lewis likes to base his books around interesting characters that shed light on a deeper and more interesting story. He wrote an fantastic book that I highly recommend, but in my view he never really got to the bottom of the mystery he sought to solve.

Crisis investing, prejudice, 'blink' investing, and Ferrexpo as a compelling long

I like to go hunting for bargains in off-the-beaten-path places, and particularly in areas of distress. When a figurative financial bomb goes off, I like to run towards it.

This is not an exercise in financial masochism. There is a logic to this eccentric proclivity. If you take a look at a long term chart of the S&P 500, it is fairly obvious when the best times to buy were – they were during recessions and/or financial crises (e.g. 2000-03; 2008-09). That was when the best bargains were to be found. One option is to sit around and wait for a once-in-a-decade market downturn. Another is to actively seek out parts of the world where downturns are already in motion.

Bubble-trouble with Australian/NZ mortgage risk-weightings

Approaching a decade on from the global financial crisis (GFC), I continue to remain amazed by how little the world has learnt. Indeed, Australia and New Zealand, for instance, remain in the grips of record property bubbles at present and are repeating many, if not most, of the same mistakes. The same can likely be said of Canada, and perhaps the UK as well (although I'm less confident on the latter).

While all sorts of new banking regulation has been proposed and implemented in the crisis' wake, the root cause of the crisis does not appear to have been either recognized or addressed. Consequently, the same fundamental mistakes are recurring, but merely in a different guise - namely the use of artificially-low mortgage risk weightings. But first some quick background.

Do tax cuts for the rich help or harm the economy? It depends!

A frequent source of public policy confusion is the issue of whether corporate tax cuts/tax cuts for the rich (the two are similar but not quite the same) help or harm the economy. The issue is also of increased relevance at present given Trump’s pledge to significantly cut US corporate tax rates.

The typical argument from conservative republicans and neo-classical economists in favour of tax cuts for the wealthy is that they boost the economy by providing increased resources to finance investment. Higher investment, in turn, helps the economy and creates jobs. A virtuous circle is kicked off, with the lower economic tiers of society benefitting via the so called ‘trickle down’ effect.

Why the CAPE multiple is fatally flawed

The Cyclically-Adjusted PE (CAPE) multiple – usually calculated as the market price divided by 10yr average inflation-adjusted EPS – is fashionable amongst value investors. It is particularly popular as a way to value broader market indices. Unfortunately, it has become a deeply flawed and misleading measure.

Once upon a time it made a lot of sense. That was the time when stock buybacks were a rarity and corporates returned cash to shareholders almost exclusively by way of dividend payments. However, today, stock buybacks are quite common – particularly in the US. Probably not coincidently, the US is also the market where the CAPE multiple is most frequently cited as an argument for why the broader market is overvalued. 

KORS 3Q result no kors for concern

The LT3000 Blog got off to a seemingly inauspicious start by posting a long thesis on KORS a day before the company’s 3Q result came in short expectations, sending the stock down as much as 15% intra-day (10% by the close). I increased my position by 50% at close to the daily lows of $35, reducing my average in to US$39, and increasing the position size to 25bp of the fund. The stock is trading up today early in the session at US$38, against a weak broader market, so my position is only marginally underwater at present.

The 3Q result itself was actually broadly in line with expectations. While headline sales and operating margins were down YoY, this was already baked into guidance/estimates. Comp sales declined slightly faster than expected (6-7%, vs. 5-6% expectations), but quarterly earnings actually beat street estimates by a penny. The real issue was weaker 4Q outlook commentary, where the company guided for an accelerated low-teen decline in comp sales in 4Q, and reduced its 2017 fiscal EPS guidance from about US$4.40 to about US$4.20.

Beijing Capital International Airport: Ready for take-off

Over the past few months, I have accumulated a 70bp position in Beijing Capital International Airport (694 HK) at an average price of HK$7.50, and continue to nibble at the position on weakness. Given the right opportunities to add, I can see this growing into a core portfolio holding in time. I believe the stock to be attractive, trading at a FCF yield of 8-9% and a forward FY17E PE multiple (on conservative assumptions) of 15x. Here is why.

BCIA operates the world’s second busiest airport, with annual passenger throughput of some 90m people. Airports are generally great tollgate-type businesses that have delivered outstanding risk-adjusted returns for long-term shareholders. One need look no further than the long term share price charts of the likes of Sydney Airport, Auckland International Airport, or Airports of Thailand or Malaysia for evidence of that. Multiples of 30-40x are not uncommon, as investors have come to appreciate the high value of these assets.

Michael Kors is out of fashion

I recently initiated a 20bp position in Michael Kors (KORS US @ $41.09) – the global luxury goods company run (Chief Creative Director) by its eponymous founder. My entire research process took less than an hour, and illustrates nicely one of the investment philosophies I have developed over the years – that more information does not necessarily lead to better decisions or better investment outcomes. One doesn’t have to know everything or even a lot to make money in markets in my view – only what is important. Indeed, it is arguable that being able to block out irrelevant noise is equally essential.

First things first – KORS screens very well using Joel Greenblatt’s ‘magic formula’ – the stock is trading on a 9x trailing PE ratio, and generates an extremely high ROE of approximately 40-50%. Indeed, the stock screens in the top 5% of companies in the S&P500 on this measure. Greenblatt has argued that a mechanical quantitative approach to buying stocks that screen well on these two combined metrics – using earnings yield as a proxy for ‘cheapness’, and ROE as a proxy for ‘quality’ – has historically trounced the market. It is always comforting to know, when selecting your preferred bottom up picks, that you are selecting from a pool of potential opportunities where the odds are likely skewed in your favour. That certainly does not guarantee a good outcome, but it does increase the probability of one materially.

Welcome

Welcome to The LT3000 Blog.

I have recently left a decade-long occupation as a professional securities analyst to pursue my passion as a full time investor, and perhaps eventually found and run my own fund. Owing to the now onerously-burdensome (and hence costly) regulatory requirements involved in establishing a fund these days, barriers to entry have risen for small-time punters such as myself. As a waystation, I am managing a small pool my own and friend & family money, and in the meantime, am enjoying being able to dedicate all of my energies to improving my capabilities as an investor. 

I have no grand ambitions for this blog – it just seemed like a fun thing to experiment with. I enjoy writing, and putting ones thoughts into writing is also a useful discipline. It quickly reveals any gaps in the chain of logic; missing facts; or insufficiently-scrutinized assumptions that may have crept into ones though process undetected. I do not wish for this blog to become a chore, however, so I intend to only post as frequently as a I feel inclined.