Part 2 - Simon Denison-Smith - Insights From London Value Investor Conference, 9 May 2013

12th May '13 by Paul Scott

6 comments 17320 reads

This is the second part in a short series of articles about speeches I listened to at the London Value Investor Conference on 9 May 2013. To read Part 1, please click here.

As in the previous article, I have skipped over a lot of detail, but have put key insights in bold.

Simon Denison-Smith of Metropolis Capital

Denison-Smith works with Jonathan Mills at Metropolis Capital, and they are interesting in that they have come from a business background, and moved into fund management after successful careers building & buying businesses in the real world. To my mind that makes them far more valuable than pure money managers who have never actually run a proper business themselves!

As an aside, I had a personal experience of both Simon and Jonathan when the acrimonious takeover by management of FDM Group occurred a few years ago. Management effectively held a gun to shareholders heads, and tried to "steal" the business at about half what it was really worth. I kicked up a stink, and co-operated with Metropolis, and between us we forced up the offer price from 120p to 150p. It was still a lousy deal, but I was very impressed with these guys - firstly because they had built up a stake in a woefully undervalued growth company, secondly because they were prepared to roll up their sleeves and get activist when out of control management were taking the proverbial, and thirdly that they were happy to talk to other shareholders to secure the best outcome.

Investing approach

Simon's speech is interesting mainly because it explains their rigorous approach to stock selection, using the value investing principles of Ben Graham & Warren Buffett.

In overview, he looks for companies which generate good cashflows, at a low price multiple.

They buy when a share is significantly below its intrinsic value, and sell when it reaches intrinsic value.

They place great importance on capable and intelligent management, who have displayed high integrity.

Interestingly, again they take a concentrated approach, typically only holding 12 stocks. (Edit: Metropolis tell me that their target is to hold 10-20 stocks, with the portfolio currently holding 13). This is becoming a consistent theme with value investors, and is one I wholeheartedly agree with - after all, if you want to out-perform the market, you…

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marben100

13th May '13

Hi Paul,

Thanks for your excellent report.

Interestingly, again they take a concentrated approach, typically only holding 12 stocks. This is becoming a consistent theme with value investors, and is one I wholeheartedly agree with - after all, if you want to out-perform the market, you need to concentrate funds into your best investment ideas, not diversify away the future gains. However, clearly this should only be done once you have a proven track record of successfully picking the right stocks! It would be a potentially disastrous approach for inexperienced investors.

It is worth noting that taking such a concentrated approach is not simply a question of experience. It also requires a very focussed approach to risk. Note the vital role of "forensic analysis" and due diligence in Metropolis' approach. Very few private investors have access to the level of information - and the forensic ability - to make a proper risk assessment (that certainly includes me).

In my experience far too many investors run away with the idea that they can make outsize returns by running a concentrated portfolio, without having conducted the necessary level of due diligence. Many have little idea of what that actually means, and presume that a cursory glance at recent accounts and metrics is sufficient. Some get lucky, when it turns out that their simplistic thesis was right. Far more, however, make heavy losses when it turns out that there was some crucial factor that they hadn't appreciated which explains why a company's shares trade at an apparently big discount to intrinsic value.

Cheers,

Mark

Edward Croft

Here's a piece I wrote on diversification a while back . http://www.stockopedia.com/content/the-5-ways-diversification-can-kill-your-portfolio-returns-63448/

A study of 60,000 private investors showed they only own 4 stocks on average and underperform by 4% per year. Also those 4 stocks tend to be in the same sector.

The points you raise Mark are v. v. v. important for people to understand - too few do.

Greenblatt stated that IF you are an investor who can do the due dil, 6-8 stocks should be enough - if you aren't then just go for a more systematic 25 stock approach.

CantEatValue

On the other side though, it takes less stocks to achieve a decent level of diversification than most people expect. Obviously 4 is silly unless you're a Buffett, but around 20 is a lot better than many would guess at. However you need to be careful with being over-exposed to specific risks (i.e. not owning 10 miners out of your 20, etc):

Paul Scott

17th May '13

Hi,

Interesting feedback, thanks!
Just as a post-script, Simon Denison-Smith's top tip, Cisco, which was $21.10 at the time of my report just a few days ago, is now $24.23, up 14.8% after a positive earnings announcement this week. He must be feeling pretty pleased, certainly great timing, am kicking myself for not buying any, as I almost did after his very convincing talk about why the shares are great value long term.

Cheers, Paul.

cig

25th May '15

Greenblatt recommending 25?! He's widely reported to be buying(/selling) the top 300 for his current quant fund(s).

dmjram

He quotes 20 - 30 stocks for his Magic Formula in the Little Book That Beats the Market.

Think his quant funds are based on fundamental indexing, not the Magic Formula.

Part 2 - Simon Denison-Smith - Insights from London Value Investor Conference, 9 May 2013

Simon Denison-Smith of Metropolis Capital

Investing approach

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Paul Scott

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