LON:IGG | Mello 2014 Presentations - My Notes

10th Nov '14 by Mark Simpson

16 comments 30409 reads

Thought I’d do a brief write up of the sessions I attended on Friday & Saturday at Mello 2014. These are based on the bullet point notes I made at the time which were the things that stood out to me rather than an attempt to capture the full nature of each talk. Summary & opinions of course are mine not the speakers. Looking back I realise I asked a lot of questions, I hope people felt they were good ones and didn’t feel I unduly monopolised proceedings!

First a big thanks to David Stredder for organising the event which was a big success in my opinion. Being midlands-based it was definitely a positive factor having it in Derby (which was a 1hr drive for me). As someone whose day job means I’m unlikely to ever make an evening event in Beckenham it was great to meet a few familiar usernames in person.

Speakers

Paul Scott – Morning Briefing

After a brief look at the morning’s news Paul gave us an honest account of his market history. I won’t repeat it here but the key takeaways for me were:

- Avoid combining leverage and illiquidity – need the ability to be completely out in 24hrs [edit: added combining for clarity]
- Avoid 100% losses by focus on balance sheet strength.

Andy Brough – Small and Mid-Caps Are Where It’s At

Andy spoke about his strategy splitting stocks into 3 categories A,B,C. The A stocks were his ideal holds:

It's about getting an increasing stream of dividends from increasing earnings.
Biggest gains have come from finding winning business in growing sectors and holding long-term.
Look at where inflation is its where pricing power is. [This was interesting concept to me that I hadn’t thought about before – the inflation reports are freely available information, inflation represents sectors that are raising prices so outside of commodity businesses (e.g. petrol retailing) this represents which sectors have pricing power = revenue growth = positive operational gearing = earnings growth = positive returns in general. So assuming you don’t overpay for that growth and can pick good stocks in those sectors it allows you to focus where you are ‘swimming with the tide’ not against it.]
Top stocks - James Fisher and Sons …

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Paul Scott

11th Nov '14

Hi Danger!

Just a small emphasis of matter comment. The key point I tried to make in my talk was that gearing can be OK (if things go wrong, you can sell a liquid stock), and that illiquidity can be fine (if you're not geared, then you can hold any stock through any downturn), but if you COMBINE the two (as I did in 2007), then you're toast in a massive market downturn.

So - it's fine to be illiquid in a market crash, as you can ride out the market crash. BUT if you're geared on those illiquid positions, then you're toast.

I learned that the hard way in 2008.

Best wishes, Paul. (pity we didn't get to have a beer at Derby - you should have grabbed me!)

Mark Simpson

Hi Paul,

Thanks for the clarification, I'll make a small edit to make that clear.

Yes, would've been good to have a beer with you at Derby but somehow our paths didn't cross. I remember thinking I really should find Paul at the end on Saturday and introduce myself but left it too late because you were on the train back by that time! I'm sure there will be a next time.

Cheers,

Mark

jjis

Thanks for taking the time to share your notes.

Edward Croft

Great post - but I really don't agree with this...

The best investment you can find is a stable economic business with a high beta so that the share price jumps around. You can take advantage of the market drops to buy a quality business whose business prospects remain the same whatever the share price level.

Why a high beta? Low beta stocks actually outperform high beta stocks. See "Betting against Beta" http://pages.stern.nyu.edu/~lpederse/papers/Bettin...

Indeed Buffett's entire outperformance can be shown to be in favouring low beta, high quality, reasonably priced stocks.

There are huge misconceptions about the use of beta. A high beta stock is one that has a high exposure to the overall market - so that when the market rises or falls the stock swings with it... in both directions. These are generally very economically sensitive stocks like housebuilders etc.

I should write a blog on this.

carmensfella

Absolutely fab reporting of all those sessions.....I know it will sound ridiculous but if I was not on a panel session myself then sadly I missed just about everything as I had to welcome in all the guest keynote speakers and buzz around making sure everything I could do to help keep things running smoothly was actually done or agreed by the DCC external staff.

Nobody will enjoy all the recorded highlights and keynote talks on film more than me !

To all of you who came, took part by asking questions and visiting stands plus networked with other friendly faces and are now singing, shouting and generally writing about how much you loved the event....I thank you all and everyone. I am so pleased and proud.

David

marben100

Hi Danger,

Great to meet you at last at Derby - it truly was a stupendous 3 days. I'm posting to try to elucidate one of Andy Brough's points - I though his presentation was excellent. You say:

I also wasn’t clear what his buying strategy was. In his presentation he said something along the lines of ‘I’d be a buyer of James Fischer at £11 but not at £12.‘ As a value investor who always seeks a margin of safety of 50-100% vs. my value estimate, that seemed an incredible tight margin to go from undervalued to fairly valued to me so I challenged this in the Q&A...

I think I understand his buying strategy, because it sounds similar to my own. It's not that the shares are "fair value" at £12, but just that they're not as undervalued at that level as they are at the lower one. E.g. if the fair value is £18, the upside at £12 is 50%, but at £11 it's 63% - that's quite a difference. If I already have a holding of a stock I like, I might not buy it at the current level, because I've already got enough at that price level - but if the price declines by 10%, just for reasons of market sentiment, with no changes in fundamentals, I might well choose to buy more: a) I'm getting better value; b) the total value of my holding has reduced so adding more may well just restore (or slightly increase) my overall exposure as a % of my portfolio.

This is where Ben Graham's "Mr Market" analogy comes in: it can pay to take advantage of him when he's in one of his depressive moods & to trim when he moves to the manic phase.

Cheers,

Mark

Hi Ed,

Maybe 'volatile' is a better , more general, description than 'high-beta' to capture what we were talking about. It's not about capturing a general return factor across all shares but about gaining access to specific great companies at a good price. Think of it more like the research of Robert Schiller that showed that share prices were far more volatile than the underlying value of the businesses as measured by the NPV of the future dividend stream. So we are looking for a company that is not very economically sensitive, due to a strong competitive advantage, regulated markets, repeat orders or similar, but happens to be categorised with other companies that are (or are considered to be) very economically sensitive. Hence the share price moves in that specific business are far larger than the true underlying movement in business prospects due to sector buying/selling. You can buy on the market related dips.

Hope that makes things clear,

Mark

12th Nov '14

Hi Mark,

Great to meet you too. I agree a very good presentation from Andy Brough in general. I have a very similar buying strategy to you so you are probably right - he did say he didn't think there were any companies 50-100% undervalued without being very high risk so that would indicate that maybe he is very sensitive to buying price. I think on the day he probably took my question to be about the specific company (since a lot of people must ask successful fund mangers about individual companies) whereas I am always much more interested people's strategies not the specific stocks they hold.

Cheers,

Mark

timarr

13th Nov '14

One note on Katie Potts' presentation - which I found fascinating although, admittedly, she's not the greatest speaker in the world.

She made the point that Herald has made outsized returns over the past 20 years by largely investing in small, UK based tech companies. The UK is a sweet spot in terms of a combination of entrepreneurial expertise (unlike, say, Japan) and reasonable pricing (unlike the US, where they may be more technically switched on, but are also much better at fully valuing companies).

I thought that was interesting, because unexpected: in essence we in the UK aren't as good at valuing growth as in the US. And, of course, mispricing presents opportunity.

Katie also outlined, almost as an aside, the way in which Herald has acted as a white knight for many of our smaller IT companies when in need of funding. I particularly liked her justification for only taking half sized stakes in early stage companies - because she expects that they'll need rescuing at some point, when she can double her stake. It makes sense for her shareholders, but also for UK plc.

Tim

Thanks Tim,

Didn't realise you were at Mello. How come you didn't do a talk? I would have thought a talk on 'Strategies to avoid poor investment decision making due to behavioral bias' or something similar would've been a great topic to listen to/debate and given your background wouldn't have taken much prep.

Cheers,

Mark

Cockerhoop

Completely agree with Tim regarding Katie Potts - found her analysis of the failings of UK markets absolutely fascinating.

In contrast whilst I found Keith Ashford Lord entertaining (in a bizarre Geoff Boycott parody sort of way), I wouldn't dream of placing any money with him. Far too full of himself.

I enjoyed Keith's presentation too: I'm not sure you can really do that job without a degree of surplus self-confidence! FWIW I though his stock selections were excellent in terms of quality, and I like the principle (which I try to adhere to myself) of buying such stocks when they or (better still) the market has a setback. But I don't use collective investments so my view is neither here nor there, really.

Mark, I didn't present at Mello because I wasn't asked! I could have volunteered, but I'm horribly busy on a whole raft of things, so I was very happy to sit at the back and take mental notes. I felt like death for all three days so I wasn't exactly the best of company anyway. But I thought it was superbly organized, and any quibbles were minor. Personally I'd prefer somewhere a bit closer to London than Derby, but sufficiently far away from the capital so that everyone stays around.

Top write up, btw.

Tim

He said that he expects AIM will be best performing market in the future.

The AIM market has been a terrible failure for too long. Sure there are a few great companies there, but on average it's full of dismal returns, shareholder dilution and highly speculative junk.

The most sobering chart is comparing the FTSE 250 with the AIM All Share over the last 10 years (below). Anybody who takes a moment to understand the pricing of lottery tickets & the negative payoff to risk would be well advised to steer well clear of throwing darts at AIM stocks.

Frankly I don't see that the choice of exchange should have anything to do with stock selection. It should be about the quality of the companies and the price you pay for the stock - all else is largely irrelevant. Though it should be pointed out that main board stock exchanges have stricter listing criteria - and often higher returns as shown below !

5464c71cb9d30FTSE_MID_250_INDEX_Share_Ch

14th Nov '14

I think the subtle point about Gervais's presentation is not that he thinks AIM will be the best performing exchange, but that he expects the best performing companies to come from AIM. The thesis (and I missed the beginning of the presentation on account of needing a coffee and sugar infusion) is that the outperformance of large caps that we've seen over a couple of decades is coming to an end and we'll see a return to the conditions back in the 70's and 80's where small caps outperformed.

That said, the performance of good companies on AIM is very good indeed. Finding these companies puts a premium on research, which is why the events David organizes are so critical, especially for those of us who don't have the time to spend days visiting the companies themselves.

But I did miss the beginning of the presentation, so I may be misreporting.

Tim

ed_miller

14th Nov '15

Fair enough Ed, and good clarification. In the same spirit I would note that the low average beta in Buffett's Berkshire Hathaway Corp arises incidentally (due to the high-quality, non-cyclical, repeat revenue those businesses generate. Buffett himself extolls ignoring beta and, as I read recently in Lawrence Cunningham's The Essays of Warren Buffett, Buffett emphasises that, for the long-term investor, volatility is not risk. And he expressly mentions that volatility can provide favourable buying (and selling) opportunities for the long-term investor to exploit. Says Buffett: "Read Ben Graham and Phil Fisher, read reports and accounts, but don't do equations with Greek letters in them."

Regards,
Ed Miller

I quite agree: investing in a general AIM tracker, if there were such a thing, would be a very poor decision!

Mello 2014 Presentations - My Notes

Speakers

Paul Scott – Morning Briefing

Andy Brough – Small and Mid-Caps Are Where It’s At

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Mark Simpson

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