Invest in the Best

Applying the principles of Warren Buffett for long-term investing success

Keith Ashworth-Lord

• Éditeur: Harriman House
• Année: 2016
• ISBN:
  9780857194855
• Édition: 1
• Sujet: Betriebswirtschaft
• Sous-sujet: Finanzbuchhaltung

This book concentrates on the investment style of Business Perspective Investing, as practiced by Benjamin Graham and Warren Buffett. It takes the reader through the realisation that the thought process involved when buying shares in a company is no different to buying the company in its entirety.Beginning with how to assess the quality of a business, it explains and illustrates with examples what to look for in company accounts, how to determine the value drivers of a business, the strength of its franchise and how to interpret key financial ratios and performance indicators. It discusses the ideal characteristics of a business worthy of investment so that you will develop a mental checklist of what to look out for.The book then sets out a number of valuation methods to determine the likely economic worth of a company. It is against this estimate that a judgement can be made as to whether a share price offers good value.The book concludes with thoughts on portfolio construction, in particular Focus Investing, where a concentrated approach is taken, and legitimate reasons for deciding to sell a holding. Throughout, the emphasis is on the methodology used to manage the SDL UK Buffettology Fund.

Chapter One.
Towards An Investment Philosophy

“If I have seen further than others, it is by standing on the shoulders of giants.”

– Sir Isaac Newton

The experiences of a lifetime – some favourable, some unfavourable – exert a profound and lasting influence on what you think about investment. If you began investing near the top of the dot-com boom or shortly before the crash of 1987, you will tend to think that another disaster is always just around the corner. You have been conditioned to be a natural pessimist.

Conversely, if you got rich trading technology stocks in the dot-com boom and managed to avoid the bust, you are more likely to be a natural optimist. The same goes for people like me who got involved in investing and stuck it out through the long secular bull market of 1982-2000. To set the scene, what follows are some of my conditioning life experiences.

A rolling stone gathers no moss

I was born in 1956 into an unremarkable working class family. I watched my parents strive to better their lot and give me the best possible start in life. My grandfather had worked at Bright’s cotton mill in Rochdale. He and my grandmother lived in a small rented property owned by the mill. My father saved to help him purchase it outright and upon my grandfather’s death in 1964 we inherited the house.

Over the next six years we upped sticks four times, each time endeavouring to ‘trade-up’. The disruption and the cost of the whole exercise was painful and pretty obvious to me even at such a tender age. I craved stability.

In 1970, my parents sold their latest house and invested the proceeds in a corner shop selling groceries. The property was rented. The timing could not have been worse. The great inflation was about to start, taking house prices through the roof. And here were mum and dad having exchanged their property-related wealth for ownership of a business that Tesco was about to destroy single handed. Four years later, the shop had to close and the equity was worthless. In their mid to late fifties, they had to start over. In truth, they never recovered.

For me that was a salutary lesson. It is no coincidence that my family has lived in the same home for the last 30 years. Equally it will not surprise you when I say that I believe my parents’ traumatic experience is the reason why I am so comfortable with a buy-and-hold investment strategy.

Carpe diem

I was lucky to be born with a gift for learning. I excelled at school in academic subjects and sport. Better still, I was bright enough to realise that therein lay my opportunity for betterment. Having seized my life chance, I graduated from university in 1978, into the teeth of an economic recession and with the Winter of Discontent just around the corner.

Getting a job was tough: one offer out of 130 applications. It was from the newly-nationalised British Aerospace, designing control systems for anti-tank missiles. Though my kids think this is cool, I hated it. Within nine months I was looking for an out. I read an advertisement for an MSc course in Management Science at Imperial College, London. Again, I seized the day: I applied, sat the exam and was offered a place. Imperial was my damascene moment; I discovered economics, accounting and finance. Where had they been all these years?

Getting the Master’s degree was one of the easiest things I have ever done. After Imperial, job offers flowed. I was about to train up as an accountant with a US chemicals company. But, at the last minute, I saw an advertisement in the Financial Times for an Engineering Investment Analyst with a firm of stockbrokers, Henry Cooke Lumsden, based in Manchester. Curious, I applied and secured an interview.

With all the confidence of someone with a job already in the bag, I learned all about stockbroking and the role of corporate financiers, salesmen, analysts and dealers. More to the point, I saw this was a genuine meritocracy; cut the mustard and you would reap the rewards. Once more, seize the day I thought. I took the job on a much lower starting salary than was being offered by the Americans and I have never regretted doing so.

There is a lesson for investment here as well. Life is a random walk and opportunities crop up in the most unexpected ways at the most unexpected times. When you see one, act. The window of opportunity will not necessarily be open for long.

Equity ownership is a powerful incentive

In the early 1980s, stockbroking firms were partnerships. The partners owned the business and had unlimited liability for its debts. This imparted a sense of responsibility that was wonderful to behold. They kept costs under strict control and would limit their drawings to what the business could support in a normal down year. In an abnormal down year, they would take reduced drawings. In a good year, they would make it up in bonuses.

Big Bang in 1986 was to change all that. Out went unlimited liability; in came outside cash and incorporation. Regrettably the era of the ‘professional manager’ also dawned. The shots ceased to be called by the Senior Partner as the top job was handed over to a Chief Executive. This resulted in a big hike in salaries, cost-led expansion and empire building. Now a director of the stockbroking side, I watched with horror as our established business – known as ‘the Cazenove of the North’ – was hitched up to a boutique bank that had only been in existence for a couple of years. Half the equity of the combined group was given away for fool’s gold.

With all the inevitability of a Greek tragedy, the recession of the early 1990s revealed just how weak the loan book had been. Thankfully, I could read the accounts and see what was coming. I got my money out just in time. The bank duly went into administration and the stockbroking business was on the way to losing its independence. I had seen a franchise that took 125 years to build brought down in less than 125 weeks. So much for ‘professional management’. I know exactly how Arnold Weinstock must have felt when the guys who wrecked Marconi got their hands on the tiller.

I learned that when investing in a business, it is a good idea to check out the equity ownership of the people running it and how much they are drawing in salaries. If they have a large amount of personal wealth tied up in the business and behave frugally, it is more likely that they will act like owners to preserve their wealth (and yours with it).

The rocky road to ruin

Long before the banking debacle, I had learned to be very wary of acquisition-led growth and the opportunities it provides for accounting smoke and mirrors. The 1980s was the era of the mini-conglomerate. An entire genre of businesses sprung up seeking to imitate the success that Hanson Trust and BTR had achieved by bulking up with acquisitions. Names like Williams Holdings, Evered, Tomkins and Suter spring to mind, followed later on by Parkfield, BM Group, Spring Ram, Polly Peck, Coloroll and Thomas Robinson. A handful managed to survive; most didn’t.

In those days, I fancied myself as a bit of a rainmaker. Together with two fellow directors of Henry Cooke, we assiduously courted the team that had moved into Thomas Robinson & Son in late 1985, led by Sir Nigel Rudd’s brother, Graham. Robinson was an ancient, sleepy engineering business based in my home town. The intention was to use it as the quoted vehicle to build a mini-conglomerate. The deals came thick and fast, and our firm profited handsomely from the fees. Likewise, the profits shot up, fuelled by the acquisitions: £411,000 in 1985; £7.1m in 1986; £12.3m in 1987; £18.0m in 1988; and £25.1m in 1989.

The larger deals were always done with paper, with cash alternatives fully underwritten. What began to worry me was the insatiable appetite of the business for fresh capital. Robinson became a serial rights issuer, returning to the market again and again for additional funds. Despite the marvellous profit record, no cash ever seemed to come out.

Gradually the reason became clear. It wasn’t just the machinery that was being manufactured. Robinson was using fair value adjustments to write down acquired stocks and debtors, thus booking greater profits when the stock was sold or the receivables collected. Similarly, by writing down fixed assets, the depreciation charge taken against profits was reduced. In an instant I had learned the distinction between profits and cash.

From 1990 onwards, Robinson faltered with repeated profits warnings and a wholesale change of management. The component businesses were eventually scattered to the four winds as the group was broken up piecemeal. The lesson learned stood me in good stead to later predict the demise of Finelist (which I discuss in Chapter Six) and Independent Insurance. I am happy to say that I have never had an investment go bust underneath me throughout my entire career.

Acquisitions provide a wonderful opportunity for creative accounting and investors should view them warily. Some make great business sense; many don’t. As long as you remember Cash is King, you won’t go far wrong. No business generating plenty of cash goes under, which cannot be said for businesses generating plenty of profit. Another lesson is that if you are going to invest in a business, you must master the language of business, i.e. accounting.

Beware new paradigms

History is littered with examples of irrational exuberance: 1630s – Tulipomania, 1720s – The South Sea Bubble, 1920s – The Ponzi Scheme, 1960s – Go-Go and 1980s – biotech mania.

The most memorable experience I have lived through is the 1990s dot-com phenomenon. As with most manias, there was a seminal event associated – in this case the coming of the internet and convergence of information and communications technology. The momentum built up by these manias is very powerful and, for ...