How much cash should you hold? The case for being fully invested

Over the past decade, a number of highly-regarded value investors with attractive long term track records have lagged the major benchmarks, and not just over one or two years, which can reasonably be expected to occur to any investor from time to time, but over stretches as long as 5-10 years.* There have been many reasons for this, including the much-discussed outperformance of 'growth' over 'value'; the rise of index funds; and markets becoming more competitive. In some cases, it has also been due to previously celebrated investors having only assembled their prior robust track records through a combination of luck and concentration, and having been subsequently revealed to have been far less proficient investors than previously believed (e.g. Berkowitz; Tilson; Ackman). However, one important contributor to many quite excellent investors' underperformance has been the simple fact that global indices have risen more than expected (by many) over the past 10 years, and these investors have held high levels of cash throughout this period - often 20% or more.

Free speech; Mark Zuckerberg; and online 'misinformation'

I've been intending to write a post on free speech for quite some time. I've made several attempts, but it never quite crystallised in the manner I had hoped (I find that if I do not write a post start to finish in a single sitting, it never quite seems to get completed; my curiosity moves on to other matters, my thinking evolves, and when I return to the issue my preferred means of expression changes and necessitates a re-write). There was so much I wanted to say, but I struggled to find a way to present all of my arguments in well-structured manner that was not overly contorted or lengthy.

Contrarianism; ESG investing; coal; and climate change

It is widely acknowledged in the investment world that one need think and act in a contrarian manner in order to achieve outsized returns and differentiated results. However, despite many claims to contrarianism and 'going against the crowd', its actual practice is vanishingly rare, and the core ingredients that drive effective contrarianism are also often misunderstood. It is not simply a matter of having a disagreeable personality, and disagreeing for the sake of it, or buying a stock simply because it has gone down. Much of what passes for contrarianism these days is actually what I describe as 'faux contrarianism' - buying expensive stocks that have recently become slightly less expensive, but where the fundamental view on the company remains very much in accordance with recent mainstream opinion (and often fails to comprehend new, emergent negative developments which have driven the recent share price decline, but are not yet apparent to all).

A duration-bubble or a low-volatility bubble?

I'm a fan of Antipodes Partners, and always find their commentaries insightful. In the company's latest investor update (see below), founder and CIO Jacob Mitchell provides a number of useful insights, but one of the arguments he makes is that investors have been 'chasing duration' to an unprecedented extent in the post-GFC era. Slide 7 is quite revealing. Mitchell's full presentation runs from 5.50 to 22.00 (all of which I recommend), with the relevant section for this article on duration running from 10.05-14.45.

How worried should we really be about an inverting yield curve?

In an interview a few years ago, Elon Musk responded to a question on what had enabled him to innovate so effectively by saying: "I think it's important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. [With analogy] we are doing this because it's like something else that was done, or it is like what other people are doing. [With first principles] you boil things down to the most fundamental truths... and then reason up from there". (He might also have added that, unlike many others, he has not been constrained by the need to generate a positive return on capital, but I digress).

Investing in low conviction stocks; jumping the gun on EVs; and Tenneco

It is fashionable amongst the value investing community these days to hold a concentrated portfolio of high conviction ideas. Indeed, any other approach is usually greeted with suspicion, if not outright disdain. And yet, in my experience, often some of the very best investment opportunities exist in areas of the market where one is intrinsically capable of only low levels of conviction, extending to situations where a zero is a reasonable possibility. Obviously, smaller position sizes and a more diversified approach is warranted with such situations, but on a portfolio basis, they can yield a portfolio with very agreeable risk/reward characteristics - indeed uniquely so I would argue, given how few value investors are adopting such an approach in today's world.

Why P/E multiples are (justifiably) lower in periods of high inflation

The history of financial markets makes it abundantly clear that empirically, P/E multiples have sharply compressed during periods of high inflation. This has confounded many observers, who argue that stocks are real assets, and therefore that P/E multiples ought not change during periods of high inflation. Indeed, seemingly confirming the theory, nominal EPS growth has been significantly higher during periods of high inflation. US Market EPS growth, for instance, was much higher in the inflationary 1970s than the relatively low-inflation 1980-90s, despite much poorer economic and financial market performance. The latter occurred because multiples sharply compressed. Is this a major inefficiency?

Why profits matter (and value investing is not dead)

We have currently reached the point in this (unusual in many respects) cycle where many investors/commentators have started to question whether profits no longer matter, and also whether value investing is dead. As is often the case, the arguments put forward in the affirmative derive mostly from recent market experience/outcomes, rather than reasoning from first principles. Hyper-growth (and generally loss-making) tech companies have seen outsized share price gains (or when privately-held, significant valuation up-marks), with many recent IPO vintages also seeing triple digit gains, despite the absence of any profits either in the past or foreseeable future, in echos of the dot.com bubble. Meanwhile, many profitable and cash-generative companies with low growth, and especially with (even marginally) falling earnings/revenues, have been absolutely massacred.

Greek update #3: The narrative flips; selling Piraeus

Late last year, I wrote a blog post on the Greek banks, with a particular focus on Eurobank. I discussed how the popular narrative at the time had completely crushed Greek bank share prices, despite clear evidence existing that the economic and banking-industry fundamentals were actually markedly improving, not deteriorating. I took a meaningful position in Eurobank (2.0%), and eventually also about a 50bp position in Piraeus, mostly in the 0.60-1.15 range.

The (real) way to solve the (real) US trade deficit problem

Last year, I wrote a piece (here) opining that Trump had a point in objecting to the US's large and persistent trade deficit - even if he may have arrived at that conclusion through a different intellectual route than I. I continue to hold that view. However, what I do not support is the means by which Trump is seeking to address the problem, which are both unlikely to solve the problem, and also quite likely to create significant costs in the process - albeit that the US economy could well still end up a net beneficiary of the policies.*

The problem with Ben Thompson's 'aggregation theory'

Ben Thompson, via his website Stratechery ('Strategy' and 'Tech'), has made a name for himself over the past decade popularising the concept of 'aggregation theory'. I invite readers to check out his material directly for a fuller explanation, but in short, his argument is that tech platforms have become so powerful (and profitable or potentially profitable) because in the internet era, the game has changed, and it has become far more important for companies to aggregate (and control) demand than to control supply (the latter of which Ben argues was the case in the past). Organisations that now control demand are the ones destined to prosper, and those companies are the large tech platforms.

Berkshire Hathaway succumbs to the tech bubble

We have currently reached the point in the cycle where investors are once again questioning whether traditional value investing is dead. The last time this occurred was in 1999, and much like in 1999, it has also resulted in many self-described value investors caving in to the pressure of years of disconfirmatory market outcomes (high growth, high quality businesses sharply outperforming - particularly hyper-growth tech names); abandoning traditional value discipline; and rationalising a move towards more growth-oriented investing, which feels much more comfortable (being with the crowd, and doing something that has worked very well in recent history).

Uber, delusion, and ride-hailing's structural economic inefficiency

Uber's much-anticipated IPO occurred on Friday, and to the surprise of almost no one (sensible), the stock ended the session down 7% (despite the offer having already been priced at a discount to initial ambitions, after Lyft's weak post-IPO showing). In my view, the stock likely has much further to fall, and in many respects the Uber story is the perfect exemplar of this cycle's excesses.

Turkey update, Lira outlook, and keeping one's eye on the ball

In recent weeks/months, Turkey has again been making headlines for all the wrong reasons. This time the focus has been on the acrimonious outcome of local elections; the further recent weakening of the Lira from about 5 to more than 6 vs. the USD (after having recovered from over 7 in August last year, touched on the day I first blogged about Turkey); controversy about the sufficiency of the Turkish central bank's foreign currency reserves; a March spike in overnight Lira swap rates; and the debate on the willingness or otherwise of the CBT to tighten sufficiently to ward off seemingly intractably high inflation (19.5% YoY at present - down from a peak of 25.5% in October 2018, but still elevated).

The great bribe-the-distributor US drug pricing scam

The US Senate Finance Committee recently conducted a hearing investigating galloping list prices for US drugs, quizzing the chiefs of a number of pharmaceutical giants. One of the key messages from these drug companies was that their 'net' received prices, after paying significant rebates to PBMs (Pharmacy Benefit Managers) and insurance companies, are considerably less than 'list' drug prices, and that furthermore, their net prices had been rising at very modest rates, in comparison to spiralling list prices, or even falling. They blamed middlemen for escalating drug prices.

Is another tech bust coming?

The technology sector (referring to online services, and to a lesser extent, SaaS, which is somewhat different in the B2B space) has been one of the strongest stock market performers over the past decade. Growth rates in users and top-line have been incredible, but with a relatively small handful of exceptions (Facebook, Google, Tencent, Alibaba, Expedia & Priceline, and a few others), profitability has been vanishingly rare. However, managers with heavy technology exposure - either in the listed or unlisted space - have nevertheless made a tonne of mark-to-market/capital-raising-valuation profits, as valuations have escalated alongside galloping top line and user growth.

Flawed thinking on buybacks, and why buybacks are still underutilized

Something I encounter repeatedly in the world of investment commentary/analysis is a lot of flawed thinking and fundamental confusion about the issue of dividends vs. corporate buybacks. You'll often hear people say things like "I would prefer the company reduce the dividend so it can increase buy backs, as the shares are undervalued", or "management shouldn't be buying back stock at current elevated prices; they should instead be returning excess capital to shareholders via dividends".

The value of what is vs. what could be, and the economics of disruption redux

In the past, I have blogged about both the often-tortured debate on the growth vs. value investing dichotomy, and how in my assessment, many self-described value investors are today practicing strategies more akin to growth investing than value investing. Meanwhile, I've also outlined some thoughts on how the economics of disruption is often misunderstood (see here). I hope to pull together these strands here, and offer some additional insights.

The real reason populism is rising in the West

In recent years, we have seen the emergence of 'populist' movements across many developed countries, from the US (Trump) to the UK (Brexit), to Italy and now even the Yellow Vest protests in France (not to mention the rise of what are sometimes described - often unfairly - as 'alt right' parties across Europe). This has given rise to much confusion and concern amongst the elite, but if the issues are properly understood, it shouldn't. I feel the underlying drivers are very poorly understood and often misdiagnosed, and I hope to shed a little light on what is going on with this post.

The Road to Serfdom: How identity politics and socialist-communist ideology are intimately linked

In the world of investing, politics is a little bit like economics. Despite all the incessant media chatter, most of the time it doesn't matter very much. However, occasionally, it matters a great deal (e.g. during the US housing bubble and the ensuing GFC). Politics generally doesn't matter too much, as long as policies do not swing to the hard left (not to be confused with the center-left), where property rights and economic freedoms start to get seriously undermined. Those that say buy and hold always works, have clearly never invested in a country overrun by socialism/communism. Buffett has a strongly-held view that the US "has a system that works", but it never malfunctioned in his lifetime, and so is potentially outside the range of his contemplated experience.

The art of worldly wisdom, smoking, and British American Tobacco

When students study either undergraduate finance or an MBA, they are taught various methods of valuing companies - primarily discounted cash flow models, utilising appropriate discount rates (or inappropriate ones - CAPM has been long debunked). The problem with this valuation education is that the mathematics involved in valuing a company - given certain cash flow and discount rate assumptions - is trivially easy. The hard bit is figuring out what the likely cash flows will be. And finance degrees/MBAs offer virtually no useful instruction in this regard.

Apple's strategic dilemma

After a heady run, Apple has been a poor performer over the past several months, and has de-rated to levels that have started to attract value investor interest. Peters-McGregor, for instance, recently purchased shares, outlining all the traditional strengths the bulls have historically identified with Apple (brand, customer lock-in, growing services), and that the stock is now on only 13x (and 11-12x ex cash).

Fishing where the cod is, and Munger's stunning rebuke of many 'value' investors

I've been thinking a lot over the past few years about some of the things I seem to be doing differently to the vast majority of self-described value investors. I just look at companies all day and try to value them, and I buy the ones I think are the cheapest. Presumably, most other value investors are doing the same thing. And yet, for years I have seen many self-described value investors complain incessantly that they can't find anything to buy - often organisations stocked with large teams of people. Some of them have closed shop as a result.

The capacity to suffer, LCV/CAC, and Capital One Financial

Earlier this week, Capital One Financial (COF US) - a stock I own - announced a 4Q18 result which, while above expectations at the EPS line on a reported basis, was below expectations after excluding various 'one-off' items. Markets sent the stock down 6.2%.

Is Netflix screwed?

Netflix has become a darling stock over the past decade (despite a moderation in the euphoria of late), and is an honourary member of the FANG club. It is seen as one of the new breed of incumbent online monopolies, and trades at more than 100x current earnings. However, to my mind, many investors seem to be ignoring some fairly important realities/risks, and believe it can be argued that Netflix is more akin to a Tesla than an Amazon - i.e. a company that is set to become 'just another media (auto) company' that will soon have to compete with many seasoned competitors in possession of far greater financial resources. It's going to be interesting to see what happens.

US cultural breakdown, and identity politics run amok

Fairly extraordinary things are currently happening in US popular culture. A short clip of a native American man banging a drum near the face of a smirking 15 year old white kid, who appeared to many to be taunting the man with his expression, set off a firestorm of controversy over the weekend, in both the mainstream media and twittosphere, with the level of vitriol directed at the kid reaching almost unimaginable levels.

Worst marketing campaign ever...?

Ominous music plays. "Women, is this the best we can do, really?", booms a voiceover. Scenes play in the background of women being hysterically emotional, falsely accusing people of rape, bickering & bitching amongst each other, being ditsy blondes, and exhibiting all sorts of the worst cliched 'toxic femininity'.

Greek bank update: The importance of regulatory forbearance

In November of last year, I blogged about the Greek banks, and specifically Eurobank. Since that time, Greek bank prices have remained under pressure, falling about 20%, although Eurobank has bucked the trend somewhat, rising 10%. It is nevertheless down about 10% YTD after rallying in late 2018, underperforming what has been a strong rally in global bank share prices this year.

WSJ exposes corrupt hospital practices that inflate healthcare bills

Last year, I discussed how corrupted incentives have acted to inflate drug prices well above what would have occurred in a properly functioning market. As noted at the time, this is just one small piece of the complex puzzle of why US healthcare costs remain so absurdly high (18-19% of GDP, more than twice the OECD average, which is itself far from optimised, and continues to rise).

In December, the WSJ ran an excellent article/expose on another feature of the system that is well worth discussing. I highly recommend the article be read in full (paywall). The article highlights how increasing market consolidation and 'vertical integration' amongst hospital networks into the provision of primary healthcare services, coupled with a third-party payer system and a lack of price transparency, have all contributed to the cost of labs tests and other tests & procedures all being grossly inflated.