New Sunday Times Feature - Diary of a Private Investor

Colm Fagan

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"Shareholders Have Feelings Too"

is the title of my latest diary update (number 14). The "speed-read" is as follows:

"A Lord venting his frustration helped propel me to a 25% profit on an investment. I then dumped the shares at the scent of possible trouble ahead"

The full update is as follows:

Company bosses should treat shareholders as their friends. No, closer even than friends. How many of your friends would be prepared to hand you money on the vague promise that you would see them right if things went well, but they could wave goodbye to their hard-earned cash if things went badly? The Chairman’s and Chief Executive’s statements accompanying Annual Reports can inform shareholders, sometimes unintentionally, what companies really think of them. In April, I dumped shares that I had bought only six weeks previously, partly because I concluded after reading the Chairman’s and Chief Executive’s statements that the company didn’t value its shareholders and didn’t care much about their feelings.

Charles Taylor plc is a UK small cap company, meaning that it is listed on the main London stock exchange but is outside the top 350 quoted companies. It provides support services to the insurance industry.

In March, I decided to invest in Charles Taylor at £1.94 a share, mainly because Lord John Lee, a successful investor and a former Conservative MP who writes an occasional personal finance column in the Financial Times, thought they were good value a year ago at £3 a share. The company hadn’t told the stock exchange of any material adverse developments in the meantime, so I reckoned its shares must be even better value now, more than a third lower. I was also reassured by the dividend of 11p a share, implying a dividend yield of close to 6%. Companies generally set dividends at a level they think can be maintained in normal circumstances, so even if the price were to fall, I would still earn a good running yield. I decided to invest only a small amount, in keeping with my recent resolution to start with a small stake in a company and to increase it only when I got comfortable with the company’s strategy, its financials and its people (see diary update 11: “The Virtues of a Small Harem”).

Charles Taylor’s results for 2018 were published on 13 March, the morning after I bought the shares. I put the results aside to study later, but I was happy with the proposed 5% dividend increase. It signalled that the Board and management had confidence in the company’s prospects.

The price hardly moved after the announcement, indicating that the results and prospects were broadly as the market expected. I took this as another encouraging sign. Then something strange happened. After staying almost unchanged for three weeks, the share price suddenly jumped 8% on 3rd April, to £2.16, for no apparent reason. It jumped again to £2.37 on Monday 8th April and kept rising over the next couple of weeks, hitting £2.52 by Friday 19th April. It was now up 30% on when I bought just five weeks previously. Naturally, I was happy with this turn of events but asked myself: why did the market wait three weeks before reacting so positively to the results?

I discovered that the price jump on 3rd April came immediately after an article by columnist Lord John Lee appeared in the online edition of the Financial Times. Referring to his holding in Charles Taylor, Lord Lee wrote: “I had expected that the results would deliver a modest bounce in the share price, but hardly a movement.” He was right: the share price hardly moved before his article was published. It soon made up for lost time. The price jump of 3rd April was followed by a further boost when the article appeared in the following weekend’s print edition of the paper.

It was time to do my homework on Charles Taylor, to decide whether to cash my gains or to make a serious long-term investment in the company. As always, I started by reading the Chairman’s and Chief Executive’s statements in the Annual Report. They painted a picture of a business going through a lot of change. Three companies were acquired in 2018 and the business undertook a major reorganisation.

Acquisitions can be good news for a company. They can also cause problems, financially and culturally. Charles Taylor’s largest acquisition in 2018 was of a Latin American insurance technology business (“InsureTech” is the buzz word) called Inworx. It cost the equivalent of more than two years’ dividends. Earn-outs for management could add significantly to the cost – possibly close to another two years’ dividends. Charles Taylor asked shareholders to fund the acquisition. The new shares were placed at £2.60 each.

Anyone who subscribed to the share placing in May 2018 was nursing a loss of around £0.90 a share by March 2019, when the Chairman and Chief Executive were composing their statements. Yet neither showed any concern for shareholders’ feelings. On the contrary, they seemed pleased to have persuaded them to pay a high price for the new shares. In the Chairman’s words, the oversubscribed share placing “demonstrates our shareholders’ confidence in the Group’s long-term strategy”. The Chief Executive followed up with “we have managed proactively our financial leverage through a significantly oversubscribed share placing.” In plain English, he was trying to say that it was better to have got the money from shareholders, who wouldn’t have to be repaid, than from the banks, who would demand their pound of flesh. Yes, a new share issue was better for managers; shareholders might think differently.

The Inworx acquisition could cause cultural problems. Integrating an acquired business is difficult at the best of times; it is even harder in cases such as this. Charles Taylor’s Board and top management are predominantly British; Inworx’s base of operations is in Latin America and presumably most of its management team are there too. Only one of Charles Taylor’s eight-person board and just one of its eleven-strong Executive Committee have deep technology expertise. Will the company’s Board and Executive Committee be able to rise to the challenge of integrating successfully a technology business that has its headquarters thousands of miles away in Latin America, in a different time zone, whose executive speak a different language day-to-day and who operate in a very different cultural milieu? The high earn-out element in the purchase price exacerbates the integration challenges.

Charles Taylor’s finances are also a source of concern. The company lost £3.3 million in 2018, which was transformed into a profit of £22.3 million after adjusting for exceptional items. I’m always wary of such adjustments, especially when they improve the result significantly on a consistent basis. In each of the last four years, Charles Taylor’s adjusted profit was higher than its published profit. Worryingly, the amount of the adjustment increased each year, rising from £1.4 million in 2015 to £4.0 million in 2016, to £7.9 million in 2017 and to a whopping £25.6 million in 2018.

The financial, strategic and cultural risks were too high for my liking, so I bailed out on 23 April, at £2.49 a share. By deciding to cut and run, I was admitting to another failed attempt to add to my harem, i.e. my portfolio of long-term holdings. There was some consolation in the form of a tidy profit from the adventure, for which I thank Lord Lee.
 

redartbmud

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Due diligence.
Charles Taylor is a small business in a niche sector that operates in 29 countries across the globe. The management must therefore have a reasonably good grasp of those markets and the key players involved.
My first alarm bell that rings, when I examine the acquisition of Inworks is Argentina, closely followed by technology.
We are all aware that Argentina has major structural and financial problems. Then there is the vexed question of technology that has been the death knell of many a good business.
You point out, very clearly, the obvious operating difficulties associated with a subsidiary based "thousands of miles away in Latin America, in a different time zone, whose executive speak a different language day-to-day".

Deeper inspection of the company accounts reveals some interesting statistics:
Revenue has increased from £122.76m in 2014 to £210.32m in 2017, but operating profit remained stubbornly flat - £10.98m (2014) and £10.27m (2017).
Over the period, EPS has been on a declining path and the dividend flat, as does the Operating margin and ROCE.
Turning to the Balance Sheet, Intangibles rose from £55.09m to £107.98m.
They are hardly stellar numbers for a growth business. The material rise in the intangibles denote significant investment, that shows little return by the way of profit.

Your further revelations on the treatment of exceptional items sets 'Big Ben' striking 12 bells, and that is without recourse to the forensic examination of free cash flow.

That having been said, the timing of purchase and quick sale, has generated a tidy profit. well done!!

My personal view is one of higher than the average risk for a small cap stock - Not for Widows and Orphans, and those following a quiet life of Retirement.
It is very easy to buy into the glossy hype of a well oiled machine, that has a strategy of growth through acquisition, but controlled and quality must rank highly on the sheet of objectives, when filtering for suitable businesses.

redartbmud
 

Colm Fagan

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Thanks @redartbmud I defer to what I suspect is your greater knowledge of accounting. Despite our claims at times to understand accounting (and everything else besides), we actuaries (or at least this particular one) can get confused by technical accounting issues, so I'm lost on some aspects of CT's accounts.

A few things stand out for me, however. One is that, despite shareholders contributing £17.6 million in new money last year, borrowings still increased, from £66.2m at end 2017 to £80.9m at end 2018. As an aside, I see that Bank of Ireland is one of their bank lenders. I was also flummoxed by the sudden appearance in the balance sheet of a £13.5m liability for "trade and other payables", consisting primarily of what's called a "Deferred lease liability". There was nothing under this heading last year. I don't know the significance of this. Maybe there's an equally obscure asset on the other side of the balance sheet.

Another interesting technical aspect of the accounts is a reference to IFRS 16, which is being implemented from January 2019. They say that "we expect there to be a material change in the balance sheet on adoption". How material? They also state that "this new accounting standard will have a significant impact on the Group's consolidated financial statements, including but not limited to EBITDA and profit before taxation." How significant will the impact be on the P&L and in what direction? If you or anyone else with accounting expertise could translate all of this into plain English, I would be obliged.

All in all, I'm glad I sold my shares. I wonder if Lord John Lee is sticking with them after writing in the FT about how low the price was - before his article appeared, that is! I'm convinced that his intervention made the difference for me between it being a so-so investment and a very good one. Having said that, while a 25% profit looks good, I only ventured a small stake in the company, for the reasons stated in my article, so the actual cash gain wasn't fantastic.

The experience has made me think how wonderful it would be to have the power to move share prices with my writings. It could open up all sorts of new opportunities for profit :) Give me time!
 
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redartbmud

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On a previous topic:
There has been a reaction to the recent Investor day at Renishaw, one of your favoured stocks.
Investec now rates them as a sell.
The company continues to be an innovator and market leader, but the stars do not appear to be aligned on their horizon for the present time.

red
 

Colm Fagan

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On a previous topic:
There has been a reaction to the recent Investor day at Renishaw, one of your favoured stocks.
Investec now rates them as a sell.
The company continues to be an innovator and market leader, but the stars do not appear to be aligned on their horizon for the present time.

red
Hi Red
I agree. I too was at the Investor Day. I know nothing about Renishaw's business, so presentations on new products go over my head. In the past, I felt like saying "Wow" occasionally, the inventions were so exciting. The "wow" factor was missing this year. The inventions seemed mainly to be enhancements of existing products. OK, an invention that allows a 3D part to be made three times faster may be very valuable but it doesn't bowl me over. It could also be that there is something wonderful in the offing, so secret that nothing could be said about it at the Investor Day.
I'm no longer a buyer, but I'm not selling either. It's a good company with good people and lots of money in the bank. I'm confident that it's still a good long-term buy, better than bonds over the next five to ten years, but probably won't deliver my target return of bonds plus 4%. A further consideration in my decision not to sell is that it would leave me with a massive CGT bill!
 

Gordon Gekko

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I know nothing about Renishaw's business
Hi Colm,

Is that not a terrifying admission? You know far more about markets and investing than most people, but my fear is that, like most people, you too are like a lamb to the slaughter in that your portfolio is too concentrated and you don’t have the resources to research the companies. Would you not be better off playing golf and drinking red wine whilst your old pals in ILIM or elsewhere manage an equity mandate for you? It is a genuine question.
 

cremeegg

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Would you not be better off playing golf and drinking red wine whilst your old pals in ILIM or elsewhere manage an equity mandate for you? It is a genuine question.
But where would be the fun in that. Apologies to Colm for interrupting.
 

Colm Fagan

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@Gordon Gekko Reasonable questions. You're right: I know nothing about Renishaw's core business, metrology (the science of measurement), but I am very familiar with how Renishaw does business and its values. It believes in taking a long-term view, through thick and thin. Every year, it invests 15% of revenue in R&D. That has paid off over the long-term. My original investment of 20 years ago is now worth around 10 times what I paid. That equates to a capital return of 12.2% a year. Add another 2.5% or so a year for dividends. I don't think they'll match that in future, but I still believe in their approach to doing business. It's how I'd like to run a business.

As for the dangers of a concentrated portfolio, I have been banging this drum for a long time. See for example Diary Update 11 ("The Virtues of a Small Portfolio") of 9 February. I attach a copy of the update. The concentrated portfolio has delivered long-term returns well in excess of those produced by ILIM or any of the other major investment firms.
Would you not be better off playing golf and drinking red wine
I don't play golf, but I do like the occasional glass of red wine. There was lots of it on offer - for free - at the Renishaw Investor Day! As for the time commitment, it doesn't take much effort to keep on top of a concentrated portfolio. I only have to keep a weather eye on a small number of stocks. I look at them in detail only once a year, sometimes less often. That's not a significant overhead.
@cremeegg is right: I really do get lots of fun from investing - and writing about it. Maybe I'm just sad. Strangely enough, by managing my own portfolio I'm able to sleep much better at night than if I were relying on an institution to look after my money. For example, at the end of 2018, the portfolio's value had fallen significantly, but as I wrote at the time I wasn't particularly worried as I knew that some of the shares were being ridiculously undervalued by the market and that they'd eventually come back, which they did.
 

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redartbmud

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I feel a little guilty, setting off the rabbit, to run across the fields, then disappear for a short break.
As a long term investor in Renishaw, I understand a bit more about the company, and the business, every time I attend an Investor Day or AGM.
I fully endorse Colm's present views on the status of the business, and his current position. I am holding, but not adding, for the short/medium term. The current state of the world economy will temper growth until such time that we see something new.

The advantage of holding a limited number of shares, in a portfolio, is the amount of time available to hold a watching brief over your investments. Advances in technology have made available considerable quantities of data to sift and digest.
Unlike the 'good old days', when markets moved more slowly, it is vitally important to keep a daily watch for company announcements, broker comments, newspaper articles. Investment forums, where private investors can post their views, can be short term disruptors, should they create short term momentum, either up or down. Programmed trading, using algorithms, have the capacity to create irrational volatility.

The corollary is however, that a larger number of holdings creates a greater risk because the investment is spread more widely. Assuming that you double the number of holdings from 10 to 20. Only 5% of your total investment is held in 1 share. The question is whether share No20 on the list, is as strong as share No10, and that it will generate similar returns. An interesting conundrum.

red
 

elacsaplau

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Hi Retardmud,

Good of you to revisit us! I note that you have a very particular and singular attachment to this thread. And why not! - it's not every day that you'll cyber meet a fellow long-term investor in Reinshaw, who travels to attend its AGMs, has mirroring views on its current prospects and is a passionate advocate of the concentrated portfolio with both feet very firmly in the "diversification is a protection against ignorance camp"!!

In case that an overly comfortable consensus takes hold, just for balance, I'd like to record that there are alternate views which include:

1. Most professional fund managers do not beat the market in the long-term;

2. It is hard to understand why amateur investors generally would be more successful than professional fund managers and by extension even less likely to beat the market in the long-term;

3. Keeping a daily watch of market noise is generally a waste of time and one should be encouraged to find other areas of interest like philately or pilates or something; and

4. There is Noble Prize winning research that would disagree with the general point that "a larger number of holdings creates a greater risk".


Please don't take this to mean that it is not possible for individuals to beat the market. Hell, I've taken bets myself that have paid off handsomely. But it really is hard to tell to what extent such personal investment successes were primarily down to luck. For the majority of people the majority of the time, I am not at all convinced of the merits of the concentrated stock-picking strategy which is central to this thread.

For the avoidance of doubt, I do believe that Colm has beaten the market - I am just concerned with the central messaging and that some people will suffer as a result of it! There needs to be more of the Blue Peter messaging....
 
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Sarenco

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The corollary is however, that a larger number of holdings creates a greater risk because the investment is spread more widely
With respect, that is complete nonsense.

A concentrated portfolio of securities is always more risky than a more widely diversified portfolio.
 

redartbmud

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Hi Sarenco/elacsaplau


Firstly, an apology.
I meant to say that " a larger number of holdings creates LESS risk....". The greater the spread, the lower the risk. In my simple case study a 20 share portfolio suggests a holding that, at cost, equates to 5% of the portfolio, compared to 10% of a 10 share portfolio.

I agree with you on the professionals. Pressure of business once meant that I gave my portfolio to a Broker, to manage on my behalf. It did not end well!! The whole episode could be the subject of a Diary column.

Any long term investor, who says that they have never had a disaster, must be economical with the truth. Over my years of investing, I have had a number. My aim is to ensure that the percentage of losers, or underperformers, is vastly outweighed by the winners.
There are many publications that show charts that compare performance of the markets vs cash. It is important to understand the underlying assumptions behind the figures, and of course the start point and time span. The fundamental fact remains that income plus capital growth will always outperform income alone, over a long enough economic cycle.

Every investor has their own set of criteria. Some have greater aptitude than others. Sadly, far too may gamble on spread bets, CFD's and other very risky investments, only to retire with a big hole in their pockets, down which their funds have disappeared.
My personal goal is not to beat the markets, but to generate sufficient long term growth and income from my assets, to maintain a standard of living that meets my needs. Unlike Colm, my personal portfolio is far too diverse, and I do not treat all of the content, with the attention that is required, all of the time.

Turning to the column, I find it an interesting, and informative, walk through the world of investing. Both good and bad are reviewed, for what they represent, and generate thought and ideas. It is important to stand back, from time to time, and take stock. The old "cannot see the wood for the trees" springs to mind.

It is a coincidence that Mr Fagan share a similar love affair with a remarkable business, such as Renishaw, but I do not share his devotion, for example, to Ryanair. I am however interested in his opinion.

I have been a reader of Diary of a Private Invstor for some time, but have only recently become a commentator/contributor.
Long may he continue to pen his musings, and create a debate, from which we may all take away a small amount of knowledge, and maybe the odd success story.

red
 

joe sod

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Unlike the 'good old days', when markets moved more slowly,
Programmed trading, using algorithms, have the capacity to create irrational volatility.
Im surprised there is not more analysis of these crucial issues in markets today, how technology moves markets and increases volatility. Look at the huge sell off in december, largely explained by the above. Even when volatility is low in the overall market, it can be high in individual stocks, ryanair falling 10% on little specific news recently. I think the capacity for investors to be spooked out of markets today is much higher than in the pre internet days.
 

Sarenco

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And yet the last decade has been the least volatile in stock market history.

Reality does not conform to your thesis.
 

Gordon Gekko

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The more I see, the more I welcome private investors buying ETFs rather than active because it gives sensible investors an advantage.

The greatest value that an investment manager can add is the conviction to stay the course.

Cheap ETFs are all well and good, but most people who invested in them ran for the hills in December.
 

joe sod

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And yet the last decade has been the least volatile in stock market history.

Reality does not conform to your thesis.
I think what we saw in december with the huge selling and then the very fast recovery in january is not what has been seen before, some of the selling in december was worse than 2008. Even on this site where there is not much discussion anymore there were a lot of people that had sold their holdings because this was the big crash they had been reading about on investment blogs. I think technology and too much information is definitly a big factor moving markets
 

Andrew365

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I remember January 2016 being pretty bad for the S&P before recovering to highs come mid year deja vu.

Something that stuck with me from a podcast years ago and it is the value of your own time. In a Simple example let's say I invest passively and earn 5% or I can pick individual stocks via research in my free time and earn 8%. However is that 3% worth the time I have spent earning it or could i have done something else. Personally for me in my position it has so far I have picked the passive strategy due to work and hobby commitments.
 

joe sod

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n a Simple example let's say I invest passively and earn 5% or I can pick individual stocks via research in my free time and earn 8%.
and unfortunately with investing that extra work could worsen your performance, your assumptions and calculations could be wrong. Even if you research a company to the nth degree you still can be just wrong.
 

redartbmud

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Some interesting posts recently.
The Column is titled Diary of a Private investor, and that may give a clue as to the content.

Gordon/joe
Do you advocate that it is a waste of time to be a DIY investor, and that the best course is to invest indirectly through
products such as ETF's, UT's, IT's etc?
The number and spread of such vehicles is now so huge that you are spoiled for choice. How do you apply filters to select
the fund, in which to invest? The principle is the same as selecting a share., you are relying on the published data, both historic and
future forecast, consequently it is easy to make a mistake when making the choice.
 
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