I didn't attend Day 2 of this year's Mello London event, but luckily for me, Ben Hobson did. I've got a hold of some of his recordings - two good speeches here:
Keith Ashworth-Lord
Switch On Companies; Switch Off markets
- Keith Ashworth-Lord ('KAL') manages the UK Buffetology fund
- The fund tries to find really great companies at a price that makes sense, invests meaningful quantities in them, and intends to hold them forever
- They use 'Business Perspective Investing' - this expression came from Benjamin Graham but is more closely associated with Warren Buffett
- The key requirement is economic moat
- They look for companies defying the first law of capitalism (excess returns over the cost of capital, year-in, year-out)
- Pricing power is the crux
- Growth potential - both for the company and the market
- Companies that are predictable in terms of where they will be in 3, 5, 10 years' time
- eg. Diageo (LON:DGE)
- First thing KAL looks for is rising margins on sales at gross margin and operating margin levels - this indicates economies of scale
- static or declining margins —> franchise could be coming off the boil
- Even more important is ROE
- They look at marginal ROE - what's happened in the past 1-5 years
- This is delta (change in) earnings over delta equity
- Must be a cash return on equity; high conversion of earnings into free cash flow
- Look at cash flow over a five year basis to account for volatility
- 'Cash flow is absolutely king'
- Return on equity minimum of teens
- Cash flow has to be minimum of 80% of earnings
- Most of their businesses tend to have a very strong balance sheet & net cash
- They allocate capital rationally
- They look for situations where money can be invested to generate high marginal returns, which leads to future organic growth
- Reinvest meaningful quantities of cash for future profitable growth
- Growing by acquisition can make sense - moving into complimentary industries, synergies
- But they don't like the 'transformational' acquisition
- Something like 9 out of 10 of these make no new wealth for the company
- Croda (LON:CRDA), which they own, was an exception
- Management that are owners, that return cash to owners rather than hoard it
- Investment holy trinity: enduring franchise w/ growth prospects…
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