A growth maverick shares his ideas.

Chuck Akre on the Search for Compounding Machines

A growth maverick shares his ideas.

Kinnel: You've said you look for "compounding machines." Would you explain what that means?

Akre: When I started in the investment business a good while ago, I was not trained for it in a traditional sense. I had been a pre-med major, and then I was an English major. So, I quite naturally had all kinds of questions about the investment business, and among them were the questions of what makes a good investor and what makes a good investment, and taking a look and studying different asset classes using data from what is now your subsidiary Ibbotson and other places. I came across the well-known piece of information that over the last roughly 90 years common stocks in the United States have had an annualized return that's in the neighborhood of 10%.

So, my question naturally was, well, what's important about 10%? What I concluded was that it had a correlation with what I believe was the real return on the owners' capital of all those businesses across all those years, all kinds of different balance sheets and business models--i.e., that the real return on owners' capital was a number that was probably in the low teens and therefore that kind of 10%-ish return correlated with that, and it caused me to posit that my return in an asset would approximate the ROE of a business given the absence of any distributions and given constant valuation. So, then, we say, well, if our goal is to have returns which are better than average, while assuming what we believe is the below-average level of risk, then the obvious way to get there is to have businesses that have returns on the owners' capital which are above that.

Early in the 1970s, I came across a book written by a Boston investment counselor, whose name was Thomas Phelps. And the book he wrote was called 100 to 1 in the Market. You probably know from the history books that Peter Lynch was around Boston in those days, and he was talking about things like "10-Baggers." But here was Thomas Phelps, who was talking about "100 to 1." He documented characteristics of these businesses that caused one to have an experience, where they could make 100 times their investment. The answer is, of course, it's an issue at the rate at which they compounded the shareholders' capital on a per unit of ownership basis and those that compounded the shareholders' equity at a higher rate had higher returns over long period of years. And so that's what comes into play is this issue of compounding compound machines, and we're often identified with this thing in our process that we call the three-legged stool. The legs of the stool have to do with the business models that are likely to compound the shareholders' capital at above-average rates, combined with leg two, people who run the business who are not only killers at running the business but also see to it that what happens at the company level also happens at the per share level--and then number three, where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate to reinvest that in places where they earn these above-average rates of return.

The most critical piece of that is the last leg, that reinvestment leg. Can you take all the extra capital you generate and reinvest it in ways that you can get continued earnings above-average rates of return? And that's at the core of what we're after in our investments.

Kinnel: On the sell-side, deterioration on those key fundamentals may lead you to sell, but do you also sell on valuation?

Akre: So, in response to your first observation, deterioration to any one of those three will certainly cause us to re-evaluate it. It won't automatically cause us to sell, but it will certainly cause us to re-evaluate it. Our notion is that if we don't get those three legs right where there develop differently in the future than they have in the past, theoretically our loss is the time value of money that it hasn't always been the case. But the deterioration of one of those legs or more than one of those legs diminishes the value of that compounding and, indeed, is likely to cause us to change our view. That's number one.

Number two, the issue of selling on valuation is way more difficult for us. And what we've said is that from a matter of life experience, if I have a stock that's at $40 and I think it's way too richly valued and I sell it with a goal of buying it back at $25, my life experience is it trades to $25.01 or trades through $25 and back up and it trades 200 shares there.   The next time I look at it, it's $300, and I've missed the opportunity. It's my way of saying that the really good ones are too hard to find.  

If I have one of these great compounders, I'm likely to continue to own it through thick and thin knowing that periodically, it's likely to be undervalued and periodically likely to be overvalued. The things that cause us to sell when one or more of the legs of the stool deteriorates. Occasionally, on a valuation basis, maybe we'll take some money off the table.

Lastly, if we're trying to continue to maintain a very focused portfolio, if we run across things that we think are simply better choices, then we may make changes based on that.


http://news.morningstar.com/articlenet/article.aspx?id=534635

Warren Buffett Buys High Quality Companies

Warren Buffett loves high quality companies. He buys high quality business and holds them forever. Why? Because high quality companies do well in both good markets and bad markets.

GuruFocus' monthly Buffett-Munger Newsletter features the best Buffett-Munger bargains for today. These are companies of high quality, but that trade at far below their fair values.

Research shows that even in the "lost" decade from 2000 to 2009, high quality company stocks outperformed by more than 10% a year. GuruFocus' Buffett-Munger Screener is for high quality companies at reasonable prices.

In a recent interview Warren Buffett mentioned three companies that he finds attractive. Out of the three companies he mentioned, two of them are listed in GuruFocus' Buffett-Munger screener. Fortune magazine called this an "unintentional endorsement" from Warren Buffett.

http://www.gurufocus.com/membership/?ref=nl2

Tesco: Consistent Earnings Growth at Attractive Price

This is an old article on Tesco.
Click here to read the full article:
http://marclangefeldsinvestmentideas.blogspot.com/2009/09/tesco-consistent-earnings-growth-at.html


SATURDAY, SEPTEMBER 5, 2009

Tesco: Consistent Earnings Growth at Attractive Price
Tesco (ADR stock ticker: TSCDY) should be considered for potential purchase based on its leading position in the UK retail market, its expansion opportunities in international markets, its ability to improve operating margins and its attractive dividend yield of 3.6%.

Tesco’s ADR stock price target is $21.30 based on applying a 13x multiple to its earnings next year. Tesco deserves to trade at a premium multiple to its high single digits / low teens long-term earnings growth rate based on its consistent earnings execution, its focus on maximizing shareholder value, its best in class EBIT margins and its strong return on equity.

Can You Sum Up Your Investing Philosophy in 10 Words?

By Jason Zweig

Associated Press

Abraham Lincoln in 1858

In a speech to the Wisconsin State Agricultural Society in Milwaukee on Sept. 30, 1859, Abraham Lincoln told this anecdote:

“It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride!—how consoling in the depths of affliction! ‘And this, too, shall pass away.’  And yet let us hope it is not quite true.”

I was recently reminded of Lincoln’s wonderful speech when someone asked me if I could summarize my investing beliefs in no more than 10 words. I laughed and said, “Of course not!”

But right afterward, I realized to my surprise that I could. I banged this out almost instantly:

Anything is possible, and the unexpected is inevitable. Proceed accordingly.

I asked some leading investors and financial thinkers for their own contributions.  Here are a few:

Determine value.  Then buy low, sell high.  ;-)

—David Herro, chief investment officer for international equities, Harris Associates, and manager of Oakmark International Fund

If everybody wants it, I don’t. Avoid crowds.

—Gus Sauter, chief investment officer, the Vanguard Group

Other people are smarter than you think they are.  Index.

—Laurence B. Siegel, research director, Research Foundation of the CFA Institute

Risk means more things can happen than will happen.

—Elroy Dimson, expert on long-term stock returns, London Business School, and co-author, “Triumph of the Optimists”

Invest for the long term and ignore interim aggravation.

– Charles D. Ellis, director, Greenwich Associates, and author, “Winning the Loser’s Game”

100% of business value depends on the future.

—Bill Miller, chairman and chief investment officer, Legg Mason Capital Management

Plan for the worst. Hope for the best.

—Robert Rodriguez, managing partner, First Pacific Advisors

Control what you can: your savings rate, costs, and taxes.

– Don Phillips, president, fund research, Morningstar

In the end, you cannot take your investments with you.

– Meir Statman, finance professor, Santa Clara University, and author, “What Investors Really Want”

The less portfolio management costs, the more you earn.

—Burton Malkiel, professor of economics emeritus, Princeton University, and author of “A Random Walk on Wall Street”

Own competently managed, competitively advantaged businesses at discounted prices.

—O. Mason Hawkins, chairman and chief executive officer, Southeastern Asset Management

Do the math. Expect catastrophes. Whatever happens, stay the course.

– William J. Bernstein, Efficient Frontier Advisors, and author, “The Four Pillars of Investing”

Fallible, emotional people determine price; cold, hard cash determines value.

—Christopher C. Davis, chairman, Davis Advisors and co-manager, Davis New York Venture Fund

New submissions are also coming in:

Save. Invest long-term. Compounding returns builds. Compounding costs destroys. Courage!

–John C. Bogle, founder, the Vanguard Group

Are you smarter than the average professional investor? Probably not.

– William F. Sharpe, emeritus professor of finance, Stanford University, and Nobel Laureate in economics

Finally, it’s worth remembering that the great investing analyst Benjamin Graham engaged in a similar exercise (also evoking Lincoln’s tale) but came in seven words under our maximum:

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”

—Benjamin Graham, “The Intelligent Investor,” Chapter 20.

In the spirit of Lincoln’s classic anecdote, can you sum up your investing philosophy in no more than 10 words that you believe will be “true and appropriate in all times and situations”?

http://blogs.wsj.com/totalreturn/2012/01/27/can-you-sum-up-your-investing-philosophy-in-10-words/?mod=WSJBlog&mod=totalreturn

3 Investing Traps -- And How To Avoid Them

These tips should help you sidestep some common accounting pitfalls.

Alcoholics have 12 steps. Grievers have five stages. Investors have their phases, too, with the biggest leap coming when a fledgling shareholder begins tossing accounting ratios around. I've calculated ratios for years myself, both as a hedge-fund analyst and in making share recommendations for The Motley Fool, and I'll say this: ratios are both powerful and open to misuse by novices. I'd like to share a few tricks with you to help you avoid some common pitfalls.

Trap 1: Focusing too much on return on equity (ROE)

The much-vaunted ROE seems pure: take net profits, divide by shareholders' equity, and you see how efficient a business is with investors' money. ROE is Warren Buffet's favourite ratio, and executive pay is sometimes tied to it.

When it's a trap: When it's enhanced by debt. Borrowing funds to make more money for shareholders isn't necessarily evil, and is sometimes beneficial. But investors strictly watching ROE will miss the additional risk taken by a management team 'gearing up' to meet performance targets.

Protect yourself: Add return on invested capital (ROIC) to your arsenal. Using the same principle as ROE, ROIC essentially compares after-tax operating profits to both debt and equity capital, and thus provides a better measure of operational success that can't be inflated by a financing decision. Moreover, research by American equity strategist Michael Mauboussin of Legg Mason shows that companies whose ROICs either rise or remain consistently high tend to outperform others. Search online to find the precise formula, or drop me a comment in the box below.

Using Standard & Poor's Capital IQ database, I screened for companies with returns on capital (a near-identical cousin of ROIC) above 20% that have seen an improvement in return on capital during the past five years. These shares are not recommendations, but rather screen results that may be of interest given the discussion.

Company	Market cap (£m)	Return on capital
		Last fiscal year	Five years ago
Croda International (LSE: CRDA)	2,638	26.3%	22.8%
Renishaw (LSE: RSW)	1,053	25.1%	16.9%
Burberry (LSE: BRBY)	6,172	24.4%	20.0%

Trap 2: Taking turnover growth at face value

A sale is a sale, right? Wrong. Turnover is a prime line for accounts manipulation.

When it's a trap: Intricate shenanigans with turnover figures can be tough to uncover, but a simple rule of thumb is to become suspicious if growth in trade receivables (for instance, the amounts customers owe) meaningfully exceeds growth in revenues. This could indicate 'channel stuffing', whereby a company extends overly generous terms to customers simply to gain a short-term turnover boost.

Protect yourself: Using a screening tool or your own sums, compute the relative growth of both sales and trade receivables, particularly for companies whose growing turnover forms a major part of your investing thesis.

Again using Capital IQ, I noticed retailer Dunelm (LSE: DNLM) reported attractive 9% growth in sales last year (especially in this consumer market) -- albeit accompanied by a troubling 22% increase in trade receivables. While not a red flag outright, it's something to investigate further.

Trap 3: Using accounting profits to compute dividend cover

I've done this myself, and feel it's probably acceptable with stable companies clearly able to pay shareholders.

When it's a trap: The first thing a budding investor learns is that for accounting reasons, profits don't always match cash flow -- from which dividends are paid. Though cash flows and profits should theoretically match over time, profits are skewed by 'accrual' calculations, such as spreading the cost of equipment purchases over the life of the equipment, versus charging the costs in the year they occurred.

Protect yourself: Experienced analysts use free cash flow instead of reported earnings to produce a more reliable measure of dividend safety. Read this old-school Fool article for a moredetailed discussion on free cash flow. Swapping cash flow for accounting profits in your dividend cover calculation should increase its reliability.

Capital IQ turned up these companies as having cash flows materially exceeding accounting profits.

Company	Net profits (£m)	Free cash flow (£m)
Marks & Spencer (LSE: MKS)	603	701
Sage Group (LSE: SGE)	189	283
Rexam (LSE: REX)	154	265

There you have it. You're now three traps wiser, which is a step ahead of most investors. Indeed, while spotting numerical chicanery may be best for sidestepping share-price stinkers, avoiding losers is more than half the battle to building a winning portfolio.

http://www.fool.co.uk/news/investing/2012/02/02/3-investing-traps-and-how-to-avoid-them.aspx?source=ufwflwlnk0000001

I had so much cash, all I wanted to do was spend

Gary Numan: I had so much cash, all I wanted to do was spend

Singer Gary Numan, 53, chose to buy fast cars and planes rather than invest for the future.

By Richard Webber

7:30AM GMT 22 Jan 2012

HOW DID YOUR CHILDHOOD EXPERIENCE INFLUENCE YOUR ATTITUDE TO MONEY?

Unfortunately, not much. My dad was a baggage handler at Heathrow and careful with money. He worked hard and had three jobs when I was young. I wish I'd inherited his care for money. Sadly, I've grown up to be rather scatty when it comes to finances.

Before breaking into music, I had various jobs: forklift driver, driving a courier. But I was forced into working rather than doing it off my own bat because that was my dad's way: you got a job and paid your way.

Fame came quickly. I was only 19 when I secured my initial recording contract and my first two hit records – Are Friends Electric? and Cars – were number ones.

I became massively famous with all the money in the world for a while. At that stage, I never had any appreciation of money: I knew it was hard to get, but I had so much – I'm talking millions – and all I wanted to do was spend. I went mental with it, including buying a big house next to Wentworth golf course, Surrey, in the early Eighties. It was about £165,000 back then but would be worth millions now.

ARE YOU A SPENDER OR SAVER?

Still a spender, although not as bad as I was because other commitments soak up much of my earnings, like sending my children to private school. Nowadays, there isn't so much free money around to buy aeroplanes, helicopters and all those lovely things I used to acquire.

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HAVE THERE BEEN ANY TIMES WHEN YOU WERE WORRIED ABOUT MONEY?

Many. Two business ventures in the Eighties didn't work out. I opened a restaurant – Coffee Pot – in Hounslow and my own record company; both were disasters.

When I started having success in music, everyone said it wouldn't last and to ensure I had another source of income. So I tried diversifying for the day the music career collapsed. But it was naive because I knew nothing about restaurants or running a record company.

Setting up Numa Records in 1983 would have been OK if I'd concentrated on my music, but I signed other bands. The company lost hundreds of thousands and closed a few years later. My father knew what he was doing but I kept sticking my nose in and making it difficult for him.

Our debts levelled out at around £600,000 and perhaps the biggest cause of this was my desire for elaborate light shows long after my career could justify it. But even during the early Eighties I spent too much: on one sell-out tour I lost £150,000 due to expensive lighting and production – pure stupidity.

WHAT'S BEEN YOUR BEST BUSINESS DECISION?

Despite my first attempt at running a record label being a disaster, I tried again in 2005 when I launched Mortal Records. It's only two years or so since my dad retired from running the business so it's been a steep learning curve for me. This time, I'm concentrating solely on my music and doing a much better job.

WHAT'S YOUR MOST TREASURED POSSESSION?

Until a few years ago, I'd have said my Harvard, a Second World War plane, but I sold that. I did air display flying but two things happened: my second child came along and my flying team-mate, Norman Lees, was killed in a crash.

Now, my most treasured possession is a Gibson Les Paul guitar I've had since I was 15. My dad bought it in Ealing and it's some guitar to have when you're a teenager – another example of me being a spoilt child.

WHAT'S BEEN YOUR BEST BUY?

My house. It's a Twenties six-bedroom detached property set in eight acres of Sussex countryside. Originally two houses, we bought it in 2005 for around £850,000. It was valued recently at around £950,000-£975,000. We're thinking of selling up and moving to the United States.

WHAT ARE YOUR FINANCIAL PRIORITIES FOR THE NEXT five TO 10 YEARS?

I don't have specific financial goals but I want my children to remain in private school, whether we move to the US or not. So it's all about earning as much as possible and spending as little as I can.

Album sales have collapsed, with few artists making money from albums; touring is more lucrative. But I'm 53 now and won't be able to tour forever so a logical step is to get into writing film scores. Trouble is, you need to be somewhere which has a big film industry – another reason why I'm thinking about living in California.

WHAT'S BEEN YOUR WORST BUY?

My own studio, Rock City, in Shepperton some years ago. Initially, it seemed to make sense but soon became a bottomless pit in terms of money. I poured so much cash into it, but couldn't make my money back on it. By the late Eighties, I decided to move on.

HOW DO YOU PREFER TO PAY – CARD, CASH OR CHEQUE?

I have Visa and Mastercard credit and debit cards but prefer cash, if I've got it. I carry various amounts, depending on what I'm doing. We recently attended a Hallowe'en party, so the day before went out with £1,500 to buy some stuff. Yesterday we went to London with the kids and I only took £300.

Cheques seem to be disappearing, while I struggle establishing a mental picture of my financial state with cards. At least with cash I can go out with a chunk of notes and control myself when it starts dwindling. It may sound simplistic but that approach works for me.

HOW DO YOU TIP?

Ten to 12pc if people are friendly and helpful. But if they're surly little people, I won't give them anything.

DO YOU BANK ONLINE?

Yes, with HSBC. I banked with Barclays for years but moved after a diabolical problem during the first day of a Florida holiday last year. I was with my wife and children and had just got our shopping for the week when my card was declined. I rang Barclays from the US and was asked the most stupid security question concerning what I'd bought several months earlier – how could I remember that?

Having failed the security check, the bank wouldn't help and the guy hung up when I started shouting. I had a fortune tied up with them at that point so switched to HSBC when I got home.

I love online banking and I check my accounts constantly. Going to a branch can be embarrassing sometimes, especially if you're at the counter with a long queue behind you and suddenly find you haven't got the right ID or have filled a form in wrong.

HOW DO YOU FEEL ABOUT PENSIONS?

I don't rate them, especially after the recent bad press about returns. My dad was always keen that I paid into a scheme but I never saw the point.

When I took over the running of my company, I inherited a number of things my dad had set up for me. I didn't get involved at that point so don't really know what they are, so I'm talking to a financial adviser at HSBC to establish exactly what I've got. Whatever it is, we're probably talking peanuts.

HOW DO YOU INVEST?

I don't, I'm afraid to say. This is what I'm discussing with the friendly man at HSBC. Most of my money is in various bank accounts rather than investment products.

HAVE YOU EVER INVESTED IN SHARES?

No, I don't do anything like that – I don't even have Isas. I know it sounds silly but none of these forms of investment seems worth the hassle because you get so little out of them.

If you know what you're doing, perhaps some are worthwhile, but to make money on shares you need to be clued up and prepared to gamble.

For someone like me, who is ignorant about financial products, investing in shares would probably result in picking something so safe that I'd probably only earn a penny on a grand or something ridiculous.

YOU ENJOYED SEVEN TOP-10 UK HITS. WHAT WAS THE MOST SUCCESSFUL?

At the time, Are Friends Electric? did better than Cars but the latter has lasted the longest. It's been used in adverts, films and been covered many times. Barely a week passes without receiving a request for a new cover version or for the song to be used in a film or advert.

DO YOU HAVE A FINANCIAL ADVISER?

Only the guy from HSBC who is helping me sort out life insurance and my general financial situation. As yet, we haven't discussed anything in terms of new investments.

Regrettably, I never had a forward-thinking head on my shoulders and was so childish when I was younger. While I was earning lots, I never thought about which financial product to pick, it was what Ferrari to buy! I've owned several cars, including a Corvette, but having children I now drive a grey seven-seater Jeep Commander.

DOES MONEY MAKE YOU HAPPY?

Yes, it makes a real difference. OK, if you've got a terrible illness or your wife has left you, all the money in the world won't make a difference. But if things are ticking along quite nicely, life is better if you have money.

WHAT DO YOU HATE ABOUT DEALING WITH MONEY?

I find tax demoralising. As my money comes in, I have to put aside a significant chunk and pretend it's not there. That's always depressing.

HAS THE RECESSION AFFECTED YOU?

Not on an everyday basis because my company can still afford to pay me the same as it did one or two years ago. But from a business point of view, it's harder selling concert tickets as people tighten their belts. If it continues like this, I'll have to think about my concerts and perhaps reining in the production somewhat.

Gary's new album, 'Dead Son Rising', is out now on Mortal Records. Visitnuman.co.uk for more information

http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/9028387/Gary-Numan-I-had-so-much-cash-all-I-wanted-to-do-was-spend.html