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
  • 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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