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In the 56th issue of Value Investor Digest we feature a paper written by Ian Lance of Redwheel, a Consilient Observer paper on ROIC, Dave Iben’s latest commentary titled “Jig’s Up”; plus articles, videos and podcasts from Simon Evan-Cook, Artemis, Ruffer, Brookfield, Orbis, Havelock London, Investor Amnesia, Welling on Wall St., Moneyweek on J D Wetherspoon, a Citywire article on Texas Instruments, an article on the ‘Inverse Cramer ETF’ and also a research paper titled ‘Value Investing: Requiem, Rebirth or Reincarnation?’
“Having started working in asset management thirty-four years ago, I used to pride myself on the fact that I had experienced a variety of financial market conditions, witnessed many economic cycles and seen booms, busts and manias come and go. Three things that I have read recently have challenged this notion and made me consider that I may have been participating in one massively elongated cycle which started in 1980 and possibly ended last year. If the last forty years have been the exception rather than the norm this would have very significant implications for likely future returns and investor positioning which I explore in this paper.”
“We have a new report out today on return on invested capital (ROIC) that will be of interest to valuation fans. It updates and extends work from 2014. We discuss how to calculate ROIC and explain how it is connected to free cash flow, economic profit, and growth. There have been numerous accounting changes in recent years that need to factor into the calculation. We work through some of the practical challenges in estimating it properly, including dealing with cash, restructuring charges, and stock buybacks.”
“The table lists the countries with the dubious honor of having debt levels greater than 100% [of GDP]. This is a level from which many believe that there is no return. As the chart dictates, we are changing our acronym [from PIGS] with the proposed substitution of Singapore for Spain, a country that isn’t in the top ten. But wait, what country is that in fourth place and rising quickly? Certainly, that deserves a prominent place in our acronym of shame. It seems hard to argue against adding a U, and not letting Portugal off the hook, bringing back the P. Adding the UP to the end gives us JIGS UP, an apropos description for the central bank planned economy. Many of you have probably heard the saying ‘the jig’s up’. If not, we’ve inserted a couple definitions from dictionaries…”
“This is why the zealots, with their ‘active management’s a con’ motto, annoy me. In the UK, they are doing down an industry that is not just trying to add value for its customers, but actually has. An industry that employs plenty of people in this country, and generates useful tax revenue. But to listen to this lot, you’d think active fund management was a hive of scum and villainy, filled with bandits just looking to take your arm off. It isn’t.”
“The more likely circuit-breaker is compelling evidence that the real economy is performing much better than currently feared. There is actually a good chance that this will prove to be the case – maybe in spite of rather than because of the new economic measures. The facts of full employment, a high level of household savings, a banking sector with a greater capacity to lend (even if the mortgage market is in temporary turmoil) and a corporate and government sector with an imperative to invest should all be supportive.”
“This article first appeared in Grant’s Interest Rate Observer, Vol. 40, No. 18 published on 30 September 2022. It is republished here with permission from Grant’s Financial Publishing, Inc…’Investors are treating the UK like an emerging market, and I think the time will come when the dollar and dollar assets are sold. Then you want to look at emerging markets, and the UK has become the most developed of the emerging markets. I expect UK assets will be an interesting place to be and that it will be a very good stock picking environment. The characteristics of the stocks you want are things that are going to benefit from international nominal growth being relatively resilient and a UK sterling cost base. Professional-services businesses, engineering businesses. They are quite small opportunities, but there are quite a few of them in the UK.'”
“When Tokushichi II was just 18 he dropped out of high-school and joined the family business, learning about the moneychanging business from his Father. However, Tokushichi II quickly grew bored with moneychanging, and pleaded with his father to let him learn about the stock market and investing. Despite being first in line to assume the family business as eldest son, Tokushichi II begged his father to pass down the family firm to his younger brother. While the elder Tokushichi Nomura I rejected this request, he eventually allowed his son to go apprentice for Yasuhiro Shoten, his son-in-law’s stock-trading firm.”
“In the first installment of this new series last week we studied Tokushichi Nomura II, founder of modern behemoth Nomura Holdings. Today’s edition covers a man that could be considered ‘the original Jack Bogle’. While few investors are familiar with Abraham van Ketwich, he is one of history’s most innovative financiers. You will soon learn why, but first we start with the great ‘Credit Crunch’ of 1772.”
“In a market where most products need tens or hundreds of different types of analogue chips, this broad product range acts as a competitive advantage too. Customers know they are more likely to find most or all of what they need with the company. This has also helped a recent drive by management to boost direct sales, which jumped from 34% of the total in 2019 to 64% last year. The significant success of the company’s TI.com website has played a big role while providing the company with insights into market trends.”
“Wetherspoon owns 68% of its estate. The net book value of property, plant and equipment in January 2022 was £1.4bn, including £1.1bn of freehold and long-leasehold sites that haven’t been revalued since 1999…The firm has secured its energy supplies until August 2023 at fixed rates that predate the current price spike. It has arranged long-term contracts for many bar and food purchases. As a result, Wetherspoon believes that in this financial year its overall costs will increase by less than current inflation. On a forward price/earnings (p/e) multiple of 12 for this year, falling to 10.6 for the following year, Wetherspoon’s looks cheap.”
“’Increasing demand for content from streaming services and social media make iconic music IP a scarce and irreplaceable asset,’ said Angelo Rufino, a managing partner at Brookfield, pointing to how music is being licensed to Peloton, TikTok and the metaverse. ‘One of the cheapest forms of entertainment is going to keep finding ways to weave itself into our everyday consciousness and that just means more revenue.’”
“…we put up our best absolute performance numbers back in the 1975 -1982 stretch — and also in the period right after the internet bubble burst. I think the same thing is going to happen now. Investors are going to gravitate towards value stocks, like they always do after a speculative bubble bursts — at least for a relatively short period. I don’t know how long it’ll last. But after the internet bubble imploded, value’s run of outperformance lasted for five years.”
“Owning cheap stocks can also be an expression of humility. If you were convinced you knew the future, you would be prepared to pay vastly different prices for companies, and sky-high valuations for those you knew would grow fastest. If you were convinced the future was unguessable, you would simply buy the cheapest cash flows you could find. With each passing year, your need for a crystal ball dissipates, because the companies generate so much cash.”
“Need a hedge against Jim Cramer? Going by the SEC filing that landed on Wednesday evening, it might soon be possible. Tuttle Capital Management has filed to launch two exchange traded funds that trade on the stock tips of the CNBC personality and Alphaville reader, one that goes long and one that goes short. The mooted tickers are LJIM and SJIM. The concept is similar to Tuttle’s inverse-ARK ETF, which is now a $343mn fund that has gained 56 per cent this year by betting against Cathie Wood’s flagship investment vehicle.”
“Specific to the UK, this year’s circa 15% fall in the Pound against the US Dollar has shielded many investors from the full force of asset price falls abroad. This comes on the heels of a prolonged period of strong performance for US equity markets. I am under no illusions that the UK faces challenges ahead, but I believe that it is not alone in this regard. There is a risk that as attention moves to problems elsewhere in the World, a reversal of the exchange rate and premium on US equity markets will create a headwind for many investors.”
“In this paper, we argue that value investing, at least as practiced today, has become rigid and ritualistic, and that while some of its failures can be attributed to external factors, many can be traced back to practices and rules of thumb that have outlived their usefulness. We argue that if value investing is to be successful in the future, it needs to develop a more dynamic view of value and a greater willingness to live with and invest in the face of uncertainty.”