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29 March 2019VALUE & QUALITY 1


Last month major indices either declined a little or went up a little but really not much of anything.

We are not buyers, but we are looking hard at quality and value as we may be at or near to arresting the decline of the last few months.

So, what would value look like? It could be a share that is selling for less than its book value ie it has intrinsic value built in. An example might be of a share selling at $£Euro/Yen 1 with a asset value of 2. In other words you are buying $£1 etc  for 50 cents which is good. However it is not that simple as the company may be selling at these levels for a reason. It may be suffering losses, its Income may be in decline because competitors are taking its market share and so on. You need to look at how it is generating cash, whether it has high levels of debt, whether it spends as much to generate the cash as it generates in cash ie Cash Flow – Capital Expenditure = Free cash Flow.

To illustrate the difference, you could argue that a business like (say) insurance will not have to spend a lot on generating its Cash Flow, while an Iron Foundry might have to spend a great deal on heavy equipment just to keep producing the product. If the company is paying a Dividend has it been cut or even stopped as profits decline. Check the Dividend cover to ascertain the sustainability of the Dividend.

If none of the above is present and the company is profitable and generating cash consistently over the past few years then you may have hit on a market anomaly. Perhaps the sector has “fallen out of favour”, perhaps an event which on examination would not impact on the ability of the company to continue being profitable, whatever the reason, if the company is still sounding optimistic with its forward guidance you may wish to make an investment. After all should the very worst happen the assets will be worth more than you paid for them so you should be alright.


Last month most of the major indices rose a little with, roughly speaking, Europe still in Bear territory, the US clinging on to its Bull status and the Eastern Indices while below year highs are still just about in Bull territory.

So, nothing much has changed, we need to have lots of patience and stay in cash for now as we wait for these indices to start rising in a sustained manner.

While we wait it might be a good idea to refresh our view on what it is that we are looking for in our investments. Are we looking for Income or Growth or a bit of both. Are we committed to holding our investments for at least 5 years to allow them time to work. While we are thinking about Growth and Value we also need to be looking at Quality and how we measure that. After all little point in making an investment in an apparently growing company only to discover that the growth is not sustainable and is perhaps on the decline and with it the share price. To keep us on the right side of this we look at Momentum over an extended period to ensure that we satisfy ourselves that the attractive share that we see as being a suitable investment today will maintain that trajectory in the years to come.

 And lastly when we are satisfied that we have a good prospect for investing we look at the Annual Accounts to check for any manipulations or massages to the figures that may make them appear better than they might otherwise be.

TIP: Always read a set of Accounts from the back forward to the front and not the conventional way.

01 February 2019UNCERTAINTY


Last month the major Indexes either declined a little more or held steady. Generally speaking the European Indexes are in Bear territory while the US indexes seem undecided. Indexes having generally fallen over the past 4 months and have become volatile which is not a good investing climate. There does not seem a clear global economic consensus going forward at the moment.

How do we pick shares in these markets? The answer is that we do not try. Instead we wait until the Indexes start telling us that they want to start moving upwards in a sustained manner, which in turn increases our probability of making successful investments. Strong sound companies, bought at a good price, in a rising market, equals probability on our side and not against us. It is difficult enough trying to find successful investments (just look at the abysmal performance of the funds that look after the money of most people) so we need to have a fair wind behind us to afford us the good prospects.

As has been said before, sometimes the most profitable strategy is staying in cash and doing nothing.

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