How did you get started in investing?
From a young age I had an interest in business, I was always trading and selling stocks during my school years. In high school I took accounting and that really fascinated me. In 1986, shortly after finishing school, I enrolled in a stock market correspondent course that really got me started thinking about investing from mainly business previously. A year or so later I pooled my limited funds with an investment from my father and started to apply my investment knowledge in the real world.
Can you talk about your investment approach and how it has developed over time?
I made all the classical mistakes a beginning investor could make. I lost a substantial part of the money my dad invested with me using technical analysis to purchase gold shares. This taught me two important lessons. One, be very careful of companies that have no control over the price their products and secondly, technical analysis was not the Holy Grail I though it was.
I then lost even more money investing in ideas from ”helpful” brokers who of course wanted me to trade as much as possible. With none of my ideas working I continued to read as much about investing as possible. I somehow stumbled onto a book called “ Winning on the JSE” by Karl Posel, an engineer and former Professor of Applied Mathematics.
This book was my introduction to value investing. It broke investing down into a logical process with the following steps:
- If an investor does not know what he is doing then the stock exchange is no place to be doing it
- Purchase only after the announcement of interim or final results
- Buy only where interim or final results indicate an increase in earnings per share and/or dividend per share
- Only purchase shares where the calculated value is more than the market price using sector price earnings ratios and earnings per share
- Realize that the price of a share can behave illogically and have the courage of your convictions to realise that logic will once again return to the market.
- Do not purchase a company’s shares if its long term loans are more than 20% of its share capital and reserves
- Do not purchase shares of a company where its pre-tax return on capital employed is less than 15%
- Do not purchase shares that have a weekly trading volume of less than 20,000
- Have some knowledge of the company concerned. Satisfy yourself about its history, track record and modus operandi. Read Managing Director’s and Chairman’s reports
- Sell when the price earnings ratio or net asset value exceeds the sector price earnings ratio or share price is higher than its net asset value
The book made immediate sense to me, giving me a framework that can be applied to investing.
For the next 20 plus years I studied the results of every possible book, research paper and investment study I could lay my hands on that showed superior long term performance – and I still do.
This of course led me to Benjamin Graham, Warren Buffett, David Dreman, James O’Shaughnessy, Joel Greenblatt, Joseph Piotroski etc.
All this research led me to develop my own unique investment approach that is completely value investing based.
How did you weather 2008 and the first part of 2009?
I did quite well.
I had a bad 2007 because my largest investment went bankrupt. I made the mistake of making an investment in a small UK company called Lambert Howarth too large of a holding in my portfolio. The company lost a customer that made up 50% of its sales and at the same time and soon thereafter announced it was entering administration.
It was a very painful lesson I learned. This loss made me very careful as 2008 came by. I was also not finding a lot of really attractively valued companies. This led to my portfolio being about 80% in cash when things started falling apart. It was still painful as I ended the year with a loss of 12.8%. This was not nearly as bad as the 33% loss the FTSE All Share had or the 46% loss of the Europe STOXX 600 index.
In 2009 I waited on the sidelines far too long. I thought there was going to be another leg down later in the year. This kept me out of the market to a large extent. I ended 2009 with a gain of 6.5% while being 70% in cash, substantially less than the 25% plus that most world indices returned.
So overall I did a lot better than the markets. Not losing nearly as much in 2008 but not gaining as much in 2009. More information on my track record can be found athttp://www.eurosharelab.com/track-record
How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?
I use screeners a lot. Over time I have put together a lot of criteria I screen for. The screens come up with a list of companies that I analyse using . a 50 point check list. The check list is not rocket science but it forces me to think systematically and not to overlook anything.
Companies that make it through the checklist get analysed further. I read the annual reports, look at presentations and listen to conference calls when available.
Once I am comfortable that it’s a good business and there is a margin of safety I invest. I also read letters by investors I admire for investment ideas. But I always do my own research.
How many positions do you typically have in your portfolio and what are your ideas concerning portfolio composition?
As a general rule I try not to have more than 30 positions. This is the number of companies I have found I can easily keep track of. More investments ties up too much time and I then am not able to look at enough new ideas.
Within the 30 companies position sizes vary. I used to have all my positions more or less equally sized but that changed when I did a lot of research on the subject and saw a great presentation by Zeke Ashton on the subject.
I wrote about it in an article titled How concentrated should you be?
At the moment I have 29 positions in my portfolio with sizes ranging from 2% to 6.5%.
Describe some of your biggest investment mistakes and what did you learn from them?
This is an easy question to answer. Isn’t it funny how we remember losers but forget winners?
For the life of me cannot say what my best investment was. I can however easily say what my biggest mistakes were.
The largest one was Lambert Howarth, the huge loss I had in 2007 (mentioned above) when the company went into administration. I am still in the process of writing something about the whole process but the basic story is as follows:
In July 2006 I identified Lambert Howarth on one of my screens. It had no debt and cash equal to 7% of book value. It was trading at 0.44 times book value. Looking at the average of the last seven years the company was trading on a price to earnings ratio of 2.5 and 3.1 times free cash flow per share.
It had a market value of £15.2 million and in 2005 bought