Category: Notes

Notes from Anthony Deden interview by Grant Williams

To be honest, I did not know Anthony Deden, he is the founder of Edelweiss Holdings, a private investment holding company with long-term participation in the production, chemistry and technology of food, aquaculture, materials, forestry, resources and various industrial and engineering endeavours.

Recently I watched an amazing interview with Grant Williams (Real Vision) and I was fascinated by all the wisdom Anthony shared.

I started to try to find more information about him and his holding but he only has a corporate presentation on his website. His portfolio (as at 31 Dec 2017) it was formed by:

  • Listed equity participation (28)—58.4%
  • Unlisted investments (1)—0.8%
  • Gold reserves—35%
  • Cash—5.8%

The return record is quite spectacular, Edelweiss holding vs MSCI World Index.

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Also, I could find some equities he owned, such as Emmi (Magallanes Value is a huge fan of this company also), Bic and TFF Group.

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Some notes about the interview:

  • In his 30s he started to help his mentor to manage a family wealth.
  • He discovered Graham and Dobb books because of some Swiss friends in NY banks.
  • He was also interested in understanding what is interest rate and money so he started to read Austrians and classical liberals.
  • Quantification is not as necessary as people believed. His ideas are to focus on understanding the whole business (suppliers, products, management) that to follow the daily price of the equity.
  • He changed his view about investment management (one policy for the 10/12 families he had). Investment is protecting, enhancing and deploying the capital permanently in a time horizon.
  • He talked with the families he managed and ask for a time horizon and one investment policy for everyone. They finished the old investment management agreement and set up a new one.
  • In 1995, 1996 and 1997 monetary policy became the driver of investing. In that period, prices of securities were going up, independently of economic
    results or economic activity. In 1998 he thought it was an error in the way he knows the reality, it was wrong him or others. He started a period of soul-searching because he thought he was too old-fashioned and the world changed. So, you need to rethink the basic assumptions of what is real and what is not.
  • He invests in companies that were there and will be there in the future. In the first QE he though the rules changed.
  • Owners vs investors. Owner businesses are far more interested in this survival of the company,
    also interesting in suppliers, employees, products, etc. An investor is someone that wants to sell higher that he bought. The wealth creation is different from both of them.
  • The book Antifragile, in his opinion, is one of the most extraordinary books he’s read.
  • “Wealth is the compounding of earnings”.
  • “What can go wrong is more important than what can go right because over time you are in a marginally good business will profit, will do well.”
  • My favourite part of the interview is around time 1:01:41, scarcity is the most important law in economics in that no one can have all of they want. Scarcity is a natural law, it’s just part of life there is scarcity in material goods in resources in everywhere you look at the scarcity in real savings in terms of money other than perhaps credits is being created. Scarcity is also found in skill sets, there is also scarcity among the kind of characteristics in character in men that you and I would consider to be attractive.
  • The second word in his principles: permanent, he sometimes thinks to call it endurance, it’s the idea of creating a framework not only within your collection of investments but by extension within each investment nature, an investment that is designed to endure rather than merely grow.
  • The third component is the idea of independence, we are quite dependent (key suppliers for example) dependence makes a system more fragile, so the more independent an organism is from external weaknesses the more likely is to set out its endurance or this strength. Bear in mind that independence is costly.
  • Freedom doesn’t come free, you know you have to work.
  • He called savings instead of wealth. Savings = that which is left over production – consumption.
  • In today’s world he made 1 or 2 investment decision a year, in the past, 20 years ago he made 20/25 a year.
  • It is important to work with people that are like-minded with you.
  • His shareholder turnover it is much lower than his portfolio turnover. This is a great way to understand that his investors understand what he does and how he manages their money.
  • His position in gold started in 1998, he owned gold bullion for many years, he thought it was mispriced. He owned equities but started to buy the physical metal. Also, gold provides him with the three component: scarcity, permanence and independence from the financial system.
  • Two or three questions he oftentimes made:
    • If I owned this whole company would I want the same people to run it?
    • Would I want to own the entire company? If not, why I want to own a little bit.
    • Is this business likely to be around 20 years from now?

Guiding principles:

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Reflections on the Ten Attributes of Great Investors [notes]

Yesterday I read the report published by Michael Mauboussin called as this post title. Michael is Head of Global Strategy at Credit Suisse. I am fascinated with this report, all the common sense Michael share in it. Also, I would like to recommend the Alphaville podcast with the author.

About teaching:

Teaching imposes a discipline of understanding and communication that few other activities can—save perhaps writing. Inspirational teachers are also diligent students. So a commitment to teaching at a high level demands constant learning and consolidation of knowledge. There is the additional benefit of being around young people who are bright and challenging.

Actual time to be an investor:

As I like to tell my students, this is an exciting time to be an investor because much of what we teach in business schools is a work-in-progress.

Values:

I believe in economic value, the importance of constant learning and teaching, and that diverse input combined with rigor can lead to insight. This is all very consistent with what Charlie Munger, the vice chairman of Berkshire Hathaway, calls the “mental models” approach.

Michael divided his work into 10 attributes that great investors have.

  1. Be numerate (and understand accounting), Michael comments his favourites books:

    Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance, The Financial Numbers Game: Detecting Creative Accounting Practices, The Art of Short Selling. Financial statements have two goals: 1) translate financial statements into free cash flow and 2) find the link between company’s strategy and how it creates value.

  2. Understand value (the present value of free cash flow). Try to understand the magnitude and sustainability of free cash flow.
  3. Properly assess strategy (or how a business makes money). Two dimensions:
    1. How the company makes money.
    2. The competitive advantage when it earns a return on investment above the opportunity cost of capital and earns a higher return than its competitors.
  4. Compare effectively (expectations versus fundamentals). Human are quick to compare but not very good at it. Here Michael explains the “variant perception” concept, I first here about this concept in a well-know twitter account called @PlanMaestro. Variant perception definition: “He develops perceptions (intellectually sound investment thesis) which are at variance with the general market view. In other words, a view that is at odds with the prevailing Wall Street view. He will play those variant perceptions until he feels they are no longer so.”. Fundamentals are how fast the horse will run, and expectations are the odds.
  5. Think probabilistically (there are few sure things). Here the point is that you need to earn more when you are right versus when you are wrong, even if you are wrong more times than right.
  6. Update your views effectively (beliefs are hypotheses to be tested, not treasures to be protected). Open-minded, period.

  7. Beware of behavioural biases (minimizing constraints to good thinking). Here, Michael, presents Keith Stanovich’s idea between IQ (intelligence quotient) and RQ (rationality quotient). I save the name of the last book called The Rationality Quotient. IQ = “mental skills that are real and helpful in cognitive tasks” and RQ = “the ability to make good decisions”.

  8. Know the difference between information and influence.
  9. Position sizing (maximizing the payoff from edge).
  10. Read (and keep and open mind). Albert Einstein’s quote:”success comes from curiosity, concentration, perseverance and self-criticism”.

Multiples are not valuation but a shorthand for the valuation process. No thoughtful investor ever forgets that. Shorthands are useful because they save you time.

What I found more useful in this report is the following part. To peak performance as an investor, you need some factors. From left to right you can find it.

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Selection.

Both Keith Stanovich’s work on IQ and RQ and Phil Tetlock’s work on superforecasting strongly suggest that there’s more to good decision making than traditional smarts measured through IQ. Qualities such as active-open mindedness, thinking probabilistically, an ability to update views frequently and accurately, and persistence are not well captured in tests. Even proxies for intelligence, such as graduating from an elite university, do not do the job.

Deliberate practice.

Done properly, deliberate practice is designed with a specific objective, requires timely and accurate feedback from a coach or teacher, entails substantial repetition, and is only viable for students who are motivated. Deliberate practice is not fun, but it is gratifying because the performance improvements are tangible.

Investing thought

“So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.” -Li Lu (from back in 2010)

via Value Investing World.

Notes: Margin of Safety

Seth Klarman is one of the best-known value investor. He run a company called The Baupost Group for 33 years. In this list published last January the assets under management are $27 bn.

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I started his book, “Margin of Safety”, and I wanna to share my notes here, just to re-read it in the future.

Chapter 1: Speculators and Unseccessful Investors.

  • Stocks represent fractional ownership of underlying business and bonds are loans to those businesses.
  • Investors in a stock thus expect to profit in at least one of three possible ways:
    • From FCF generated by the underlying business, reflected in a higher share price or distributed as dividends.
    • From an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share prices.
    • By a narrowing of the gap between share price and underlying business value.
  • Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price. Many speculatores attempt to predict the market direction by using technical analysis as a guide.
  • Market participants do not wear badges that identify them as investors or specculators.
  • Value investors pay attention to financial reality in making their investment decisions. Speculators have no such thether.
  • Assets and securities can often be characterized as either investments or speculations. Difference: investments throw off cash flow for the benefit of the owners.
  • Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judment, they respond to market forces not with blind emotion but with calculated reason.
  • Two markets view: efficient markets and inefficient priced. The last one, create opportunities for investors to profit with low risk. Mr. Market by Benjamin Graham.
  • Sometimes Mr. Market sets prices at levels where you would neither want to buy nor sell. Frequently, however, he becomes irrational.
  • Value investors, who buy at discount from underlying value, are in a position to take advantege of Mr. Market´s irrationality.
  • The fact that a stock price rises does not ensure that the underlying business is doing well or that the price increase is justified by a corresponding increase in underlying value.
  • You cannot ignore the market but you must think for yourself and not allow the market to direct you.we
  • Unsuccessful investors: dominated by emotion.
  • There are countless examples of investor greed in recent financial history.
  • Given the complexitities of the investment process, it is perhaps natural for people to feel that only a formula could lead to investment success.