Money with a dash of Funny: Long term returns

Showing posts with label Long term returns. Show all posts

Tuesday, 10 November 2015

Lonmin the loser

" . . . the company management suggesting that the Xstrata bid at 33 Pounds a share significantly undervalued the company, and that shareholders must reject it. With the impunity that it deserves, to borrow some trade union speak. That was 7 years ago in 2008. Yesterday the group announced a 407 million Dollar rights issue at 1 pence a share. That is right, 1 pence. So not only have you lost out on a 33 Pound a share price in 2008, you have been wiped out to a current share price of 13.25 pence. FML."

To market to market to buy a fat pig. It was a very busy day on the local front here, telecoms Monday to some extent. Telkom said that they were doing a due diligence on Cell C, for themselves of course. That share price was up over a percent. Vodacom announced numbers that were pretty decent, although growth rates are not enormous, they were pretty strong here locally, the stock ended the session one and a half percent higher.

MTN of course as we discussed yesterday dropped a bombshell, CEO Sifiso Dabengwa carrying his belongings out in a cardboard box from the company HQ. The stock closed nearly one and two-thirds of a percent higher. The resolution of the fine, interim (and long time once upon a time) CEO Phuthuma Nhleko said was hopefully to be inside of the next two weeks. I am not too sure which one I hope for first, the rain or the conclusion of this fine. On this side of the country we are really feeling the heat, maximum expected today in the City of Gold is the mid thirties. Holy smokes.

The rest of the market was peppered with green, all bar for industrial shares. Talking of which, there is of course the small matter of TenCent results today, remember that Naspers owns over one-third of the company, often the company trades almost as a proxy for the Chinese internet business. When you mention the word internet and business in the same sentence, you normally send shivers down the spine of the old guard, they will associate the internet era and its beginnings with businesses like Pets.com.

Business with little, or no revenue trading were at unreasonable multiples. Not unreasonable, rather the Tesla (Spaceballs) ludicrous mode. "They" (the Pets.com-join-the-dots-guys) throwback and apply to today. As I tweeted yesterday, there are no two moments in history that are the same, suggesting facetiously that this market looked similar to 1792. Under the Buttonwood tree at 68 Wall Street, that is where the modern day NYSE was formed. TenCent is nothing like Pets.com, although those folks who missed out on the creation of the giant Chinese business would somehow like it to be so. TenCent is an entertainment business, for modern day China.

At the bottom end of the ranking tables was Lonmin. You will recall last week when we wrote about the company management suggesting that the Xstrata bid at 33 Pounds a share significantly undervalued the company, and that shareholders must reject it. With the impunity that it deserves, to borrow some trade union speak. That was 7 years ago in 2008. Yesterday the group announced a 407 million Dollar rights issue at 1 pence a share. That is right, 1 pence. So not only have you lost out on a 33 Pound a share price in 2008, you have been wiped out to a current share price of 13.25 pence. FML.

And to rub the salt flats of Salar de Uyuni (the one in Bolivia) into it, the rights issue is in the ratio of 46 new shares to one existing (at the one pence level) must be followed. So let me get this right, if I had one Lonmin share 7 years ago, someone wanted to pay me 33 pounds for it, now, fast forward to today, if I do not follow my rights I may as well have nothing left. If you don't follow your rights, you would have lost 99.99 percent of a potential bid price.

I initially thought that the PIC was underwriting the whole thing, it turns out that I am wrong, as per the release: "The Rights Issue is being underwritten by HSBC, J.P. Morgan Cazenove and Standard Bank, save in respect of New Shares which the Directors have irrevocably undertaken to take up." I guess if you can get it for one pence, settle obligations, bring it back on an even keel and sell it for two pence inside of a couple of years, job done, not so? Marikana is essentially all of the business, 95 percent of current production. This is about as drastic a measure as I have ever seen, it makes the US banks recapitalisation kind of like Scary Movie measured against the Lonmin "The Cabinet of Dr. Caligari". Perhaps a more modern day example is "The Conjuring".

Over the seas and far away, in New York, New York stocks sank, all the major indices ended the session down about a percent. Global growth fears was the reason given (The OECD cut global growth forecasts), worries about the Fed raising interest rates was the reason given. All bets suggest a rate hike in December, rubber stamped by the strong jobs number Friday. At the end of the day, the Fed will do what they have to, interest rates will rise, perhaps at a more measured pace (every two meetings) and perhaps the Fed will pause from time to time. I suspect that the top end of the interest rate cycle will be a lower high than in cycles gone by.

Remember one thing, if the Fed hikes rates, then it means that the US economy is strong enough in order to be able to withstand a rate hike. And that is good news, it means that all the damage done through reckless lending over a decade plus ago, in the aftermath of the dot-com bubble bursting, that the cycle has closed somewhat. Of course the cycle never really closes, a new chapter always opens. Banks at a global level still need to recapitalise, to the tune of one trillion Dollars plus. Anyhow, the main story is don't get anxious about the Fed raising rates, the old mantra on Wall Street may be, "don't fight the Fed", we buy companies, not the Fed decision.

Linkfest, lap it up

Being invested for the long term has the the benefit of lower transaction fees and a higher probability of being positive - Playing the Probabilities. Even though the market as a whole has been up over the long term, buying individual stocks might not be up over the long run. A current example is Lonmin, where as an investor you have essentially been wiped out. Here are the returns over set time frames:

Being a small nimble investor has the advantage that you can get into and out of the market quickly and that you don't have an impact on the stocks price - How you, the amateur investor, can beat the pros. Investing, as with sport, keep things simple and get the basics right will result in you having long term gains.

From the same guys who brought you the charts yesterday - 21 charts that explain how the US is changing. It is always interesting to see how things change over time. Normally the change is so small we don't notice it until we can stop and compare over a longer time period.

Home again, home again, jiggety-jog. Stocks across to the East look a little worse for wear. US futures are a little better. Japanese stocks are a fraction better, that is about all the good news that I have, I am afraid. Earnings season is still happening, most of the majors seem to have reported, the other bit of good news I am seeing suggests that we are past the earnings trough, that sounds good. The Rand, sigh, that is a function of global markets and being inside of a global village. Expect equity markets to open lower today.

Sent to you by Sasha and Michael on behalf of team Vestact.

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Tuesday, 1 September 2015

Read less garbage

"Since the great depression there have been 20 periods where the equities market has fallen by 20 percent or more. Over 85 odd years, roughly every 4 years the equities markets fall 20 percent or more. Yet retail investors act with poor judgment, another unbelievable stat: "2007: $85 billion put into stock mutual funds. 2008-2009: $230 billion pulled out of stock funds. 2013: $68 billion put into stock mutual funds." So when the market goes up, retail investors pile in, when it goes down, they head for the hills faster than before."

To market to market to buy a fat pig. Up is better than down when you are long companies, when you stay the course with the quality. Our local market ended a mere 5 points higher here in Jozi, Jozi, after a day mostly spent in the red. At one point stocks were down 1 percent. The drivers on the day were industrials, the results from Bidvest were well received, that stock ended at the top of the leaderboard of the biggest 40 companies, up 4.55 percent. The stock is up a little less than five percent (in Rand terms) for the year, the broader market is about flat. The question always arrises with this company, do they have a peer to be measured against in the local market? The short answer is no. Globally, perhaps Sysco in the US, a food services business, not to be confused with the router and switch manufacturer Cisco.

Helping the cause too was Aspen, the company released a trading update late Friday, after the market had closed. During ordinary trade yesterday the stock jumped nearly 3.8 percent, year to date however the stock is down 15.6 percent and it is comfortably off the 52 week highs reached in late January this year. As ever, it depends where you bought a company and for how long you have held it. The five year return on the same company is 326 percent. That is rather amazing. Over ten years it is a more astonishing 1063 percent, a ten bagger, the term coined by Peter Lynch which is a ten fold return on a specific company.

Nobody cares about that this morning, the historic moves are exactly that, as you wake up the stock is 342.51 Rand. Yes. Whilst the valuation remains stretched for many value people, the growth rates match the multiple and as such the PEG ratio (Price to Earnings over the expected growth rate, you can take a smoothed three years) remains closer to what represent value. The long investment case for Aspen, as the business grows and matures more, is that you are likely to be rewarded with higher dividends. Lots of acquisitions, sweat the assets harder, borrow money to pay for them, pay them down quickly, use the excess cash to reward shareholders.

I was reading this piece from Felix Salmon, titled: Ban daily stock market reports, which contained this nugget: "On the other hand, if a big move happens and there's no obvious news event which precipitated it, then it's idiotic to start hunting for some spurious reason for why the stock market is doing what it's doing. Most market moves are random, much as the news media hates to admit it." True. Markets go up and down as a function of the collective, a reason is this or that, Greece, China, the broader Euro zone and the yields at the periphery, inflation, deflation, lack of growth, the list goes on and on. Oh, and I forgot another hot topic, when are the Fed going to raise rates.

It would be unwise to say, I do not care when the Fed are going to raise rates, higher borrowing costs impact on businesses. It is however a sign that things have improved to the point where the people tasked with monetary stability recognise that rates should normalise. And I suspect that by normalise, in the technology age with more efficiencies and cost savings leading to lower long term inflation, that means a lower high point. You know, the opposite of Lesotho, which have the highest lowest point on the planet of any country. This is the opposite, instead of rates in the Us being at 5-6 percent, expect 3.5-5 percent. Anyhow, what do I know?

All I know is that you should not make the Fed part of the reason why you buy companies. You buy companies to share in the rewards and the spoils, the better run the business, the better the products and services, the more receptive customers are to those said products and services, the more they are willing to pay which means fatter margins for those said companies, the more money you make. Or so the theory goes, obviously lots of different things can happen that prevent that from happening.

I read a great piece from Morgan Housel yesterday, titled What Makes Us Bad Investors? Again, some very interesting pieces or snippets in there. Like this one, about the S&P 500: 64% of stocks underperformed the index. and 25% of stocks were responsible for all the market's gains. Wow. If you had just held the "wrong" companies over a thirty year period it makes a massive difference. What it does not mean is that you would not have outperformed treasuries, cash, gold, property and so on.

In fact, further down the article tells you what your returns would be. $1 invested in 1900 was worth $1,016 by 2013 (annual return of 6.3%). $1 in Treasuries was worth $6.36. $1 in gold worth $1.92. $1 in cash worth $0.07. Equities, notwithstanding their incredible volatility and perceived risk are far better investments than treasuries (the risk free rate), gold and most certainly cash. So, cash may be king for snippets in time, presuming that you can time the markets, cash over the medium and long term is more like the court jester. Cash is the court jester. Stocks are not only King and Queen, quite possibly Ace, Jack and ten. Trumps everything else.

Since the great depression there have been 20 periods where the equities market has fallen by 20 percent or more. Over 85 odd years, roughly every 4 years the equities markets fall 20 percent or more. Yet retail investors act with poor judgment, another unbelievable stat: "2007: $85 billion put into stock mutual funds. 2008-2009: $230 billion pulled out of stock funds. 2013: $68 billion put into stock mutual funds." So when the market goes up, retail investors pile in, when it goes down, they head for the hills faster than before. Fear is far more gripping than the rewards. The worst of all, notwithstanding the daily bombardment of news of what is up and what is down, this slide sums it up:

I guess that some people take their personal experience and project that on the equities markets. Obviously the people that Franklin Templeton asked were not following the market that closely. Perhaps the hardships from the period before has skewed their perception of the equities market. The equities market is not the economy, equally the economy is not the equities market. What is the conclusion? As we often say in this daily message (yes, it is daily), do nothing. Do very little. Own the best companies. In market turmoils all stocks get sold. Stay the course. Be calm and invest on, take the lower prices and embrace them, utilise your cash to buy quality at lower prices.

Linkfest, lap it up

This is a great way to get new customers and to build brand awareness - Uber is offering Mad Max rides in Seattle. To drive in those cars I would pay a premium for the service.

How do you measure an increase in the standard of living? GDP is a poor measure because it can't account for the increase in technology and the benefits that come with it - Why our children aren't doomed to being poorer than we are. The other point to note is that even though incomes have been growing slower than some people would like. That income can buy you more because technology has made some big tickets items cheaper and better at the same time, for example washing machines (100 years ago it would take many hours to hand wash everything, then on the introduction of the washing machine only the rich could afford them, now they are common place in the household).

Immigration is a hot topic at the moment given all the people fleeing Africa and Eastern Europe. This is what the global population will look like in 2050, based on current trends.

As you can see the developed world will have a large "old" population and the developing world will have a large "young" population. I think going forward we will see immigration policies loosening to attract more people from the developing world, which is probably a good thing for all involved.

Home again, home again, jiggety-jog. US Futures are lower, stocks across Asia are a whole lot lower. As such you should expect a lower open here today. Do not let that stop you from reading, carry on reading all the quality. Read more annual reports and fewer market reports.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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