The investment manifesto (1½/2)

You can read the first part of The investment manifesto (1/2) here.

The exclusion process

In the previous post on the investment manifesto I ended with a presentation of my margin of safety definition. The purpose of that definition is to sort out those companies that I won’t allow myself to invest in. In a sense, I use my margin of safety definition as a exclusion process. In other words, the exclusion process is a negative screen to sort out companies that I don’t think I can satisfactorily determine their downside protection. Those companies get excluded and automatically put in my too-hard-pile. Thinking about investing, at least initially, as a negative art, what you don’t want to own, is an underappreciated approach in my opinion. This is based on a belief that risk- (i.e. permanent loss of capital) control should be the main emphasis for all investors. A quote that reminds me of the importance of controlling risk is this one:

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – W. Buffett

However, a quote that in my opinion best explains the reason for the importance of risk control is this one:

Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average. Margin for error gives you staying power and gets you through  the low spots. – H. Marks

Or as one of my favorite authors stated in his newly published book Skin in the Game:

“In order to succeed, you must first survive.” – N. Taleb

The statements and thinking above goes back to my belief that only after one has established a population of ideas with solid downside protection should one move on and start to think about their upside potential. In conclusion so far, downside protection (survival) is more important than upside potential (returns) as one starts to think about which companies to invest in. As you will see in this post, I won’t go as far as; Focus on the Downside, and Let the Upside Take Care of Itself, but almost…

The inclusion process

The population of companies that have survived the exclusion process I termed; The Liquidation Oxymoron’s in the last post. If you haven’t already figured out my reasoning for choosing this name I’ll make sure to explain it now. The companies that have survived the exclusion process all fit under the following oxymoronic statement;

They are going concerns selling below their liquidation value.

My belief is that the population of liquidation oxymoron’s creates a powerful starting point of companies to potentially invest in. The basis for that belief is that the oxymoronic statement establish that there exists a fundamental difference between consensus and value for these companies. In a recent post you can read about why I consider this difference to be the most important thing to establish and take into consideration if one strives to be a successful investor: Consensus is what you pay; the relationship between consensus and value determines what you get.

But now, let’s move on from the margin of safety and downside protection argument and take a look at my inclusion process. The positive screen if you like. I will divide the presentation for this process under three headings; 1) upside potential, 2) catalysts and 3) other factors and characteristics. Remember, the companies I look at during the inclusion process (the companies that have survived my exclusion process) are all potential investment ideas that I would be willing to invest in. More specifically, the inclusion process is about determining if I’m going to invest in company A, B or C at a certain point in time. I will come back to my reasoning for this approach of picking stocks when I present my thoughts for the buying- and selling process for the Liquidation Oxymoron portfolio.

Upside potential

As you would expect, most companies get excluded as a result of the first criteria in my margin of safety definition. That is: Selling below liquidation value (i.e. price below readily ascertainable net asset value = raNAV). The reason why I have put this criterion first is because I think the valuation aspect as it relates to downside protection is the most important one, independent of how one defines “value”, to take into consideration as an investor. Furthermore, I think the same holds true about the valuation aspect from an upside potential perspective. Again, if you are interested in my reasoning for these statements you can read more about that topic in the following post: Consensus is what you pay; the relationship between consensus and value determines what you get. 

However, the valuation aspect is far from what describes the complete picture regarding the upside potential of companies. Unlike the margin of safety definition that should be developed individually, the definition for upside potential is an universal one I would argue. The best way, in my opinion, to think about upside potential is to think of a return formula with three components. One should note that I’m by no means the inventor of this formula. For this I would like to give credit to Fred Lui at Hayden Capital and more specifically his Investor presentation and Calculating Incremental ROIC’s presentation but also John Huber at the Base Hit Investing blog and all posts on ROIIC.

What the two investors just mentioned have concluded is that the upside potential (i.e. future returns) is to be determined by the following three components (some minor adjustments done by me). I have termed this the return formula:

1. Intrinsic value compounding yield (ROIC × reinvestment rate = earnings growth)
2. Shareholder yield (stock buybacks / issuance + dividends + net borrowings)
3. Valuation yield (valuation multiple expansion / contraction)

= upside potential (i.e. future returns)

Although the return formula might seem like a manageable calculation exercise one should not be fooled into a sense security or precision. In investing, should happen ≠ will happen. Therefore, I would again like to stress the importance to only engage with the return formula once one is done with the exclusion process. Furthermore, I would like to point out that one should not cry oneself to sleep if one struggles with all the components of the return formula. For some investment ideas, the calculation of intrinsic value compounding yield will almost be impossible to calculate. Or it might be almost impossible to determine what a fair valuation multiple is for a specific investment idea. Nonetheless, those statements begs the question: Should one stay away from companies for which you can’t calculate their upside potential?

My opinion is; no, companies whose upside potential that is hard to determine should not per definition be avoided. Rather, the important aspect is the certainty of the fundamental difference between consensus and value of the company for which you are trying to calculate upside potential. For me personally, this goes back to my thinking and reasoning for the name of the Liquidation Oxymoron’s and what that name implies. Or explained in a more colorful way with the help of one of my favorite quotes in investing:

“You don’t have to know a man’s exact weight to know that he’s fat.” – B. Graham

In conclusion, I will always try to calculate upside potential based on the return formula stated above. For some investment ideas this calculation exercise will be quite thorough and detailed (e.g. HEL:SAGCV, analysis not published). For some investment ideas (e.g. NASDAQ:GIGM, analysis not published) I will more or less fall back on my assessment that the company is a Liquidation Oxymoron (i.e. makes it through the exclusion process) with high certainty in regards to the current fundamental difference between consensus and value. In conclusion, I will not exclude or rank the Liquidation Oxymoron’s population based on the outcome of their return formula calculations. Rather, I will rank the investment ideas in terms of my conviction for their upside potential, i.e. most probable upside potentialIn order to make such an assessment I have to take into consideration potential catalysts and other factors and characteristics for the Liquidation Oxymoron’s.


The circumstances for what a posteriori is determined as the catalysts is hard to determine and arrive at a priori. I’m not the first one to make this unsatisfactory conclusion as the following statement from 1955 will show:

Skärmavbild 2018-03-04 kl. 16.24.09
p. 544

Related to the statement above is his famous quote:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – B. Graham

Although I ascribe to the belief that value is its own catalyst there are nonetheless some circumstances and signs that I keep my eyes open for when I’m to determine my conviction for the Liquidation Oxymoron’s upside potential. Furthermore, the reason why catalysts, other than the mentioned realisation of value from Mr. Market over time, are important to take into consideration has to do with the time factor of investing. Specifically, these catalysts have the potential to unlock value in a direct and fast manner. I would argue that the time factor is an important component if one, like myself, think in terms of CAGR.

For the Liquidation Oxymoron’s I will specifically evaluate and take into consideration any signs of:

  • shareholder activism.
  • major asset sales, spinoffs or mergers plans.
  • acquisition and/or expansion plans.
  • dividend and/or share buyback plans.
  • buyout or takeover plans.
  • changes in management.

Note that what I have stated above is not to be considered an exhaustive list of catalysts. Rather, the evaluation of potential catalysts and their respective probabilities has to be done on an idea per idea basis since they will be highly individual and context dependent.

Other factors and characteristics

The factors and characteristics I will mention below are not to be considered “make it or break it” components for the investment ideas of the Liquidation Oxymoron population. Rather, they are factors and characteristics that have the potential to improve both the upside potential and the probability of upside potential. As you will see, non of these are original or special in any way but should in my opinion nevertheless be taken into consideration during the stock picking process:

  • Small market capitalisation (preferably nano or micro cap).
  • The trading of the company shares is illiquid.
  • Large insider ownership and/or insider are recent net-buyers of company shares.
  • Reasonable insider pay.
  • Famous deep value investors on the shareholder list and/or they are recent net-buyers of company shares.
  • Company has improving fundamentals (e.g. high F-score).
  • Low-level of debt or high level of debt but the company is aggressively paying down debt.
  • Company has historically paid dividends.
  • Company has historically been net-buyers of company shares.
  • Company conducts business in a stable and/or boring industry.
  • Company has been active for some time (preferably more than ten years).
  • Company shares are currently trading near historical lows.
  • The company is not a perennial Liquidation Oxymoron (i.e. the company has historically trade above raNAV).
  • A big portion of raNAV consists of cash and cash equivalents.
  • Company has hidden/undervalued asset values not reflected on the balance sheet.
  • Positive or low raNAV burn-rate.
  • Low valuation compared to operating earnings and/or free cash flow.

Again, the list above is not to be considered an exhaustive list of factors and characteristics that should be taken into consideration during the inclusion process. The ones mentioned above I usually consider but I might retract and/or add factors and characteristics to the list in the future.

The buying- and selling process

Similar to the situation for the first post on the Investment Manifesto, this one became longer than I had expected. As a result, I will save my thoughts and ideas about the selling- and buying process for the Liquidation Oxymoron portfolio for yet another post. I promise, this will be the last part in my series of post related to the Investment Manifesto.

The investment manifesto (1/2)

It’s been a while since I last posted anything here on the blog. I’m sure that this isn’t the last time I zoom out and remain silent for a while. In the end, although I’m always interested in hearing your thoughts and getting your feedback, I write for an audience of one, me. If that selfish audience is not keen on or have the time to listen the blog will be a quiet one from time to time. I hope you understand.

Nonetheless, after a long break I will try to distill the mess of thoughts that have accumulated in my head and in this case present the reason why I haven’t posted anything “portfolio related” since the mid of July.

A clean sweep

Although I haven’t posted anything you might have noticed, if you had a look at the Portfolio-page, that I sold all previous holdings during the last couple of months. In order to understand the why-question for my reason to do so I would like to start with a underappreciated Warren Buffett quote from the 1998 Berkshire shareholder letter:

Once we knew that the General Re merger would definitely take place, we asked the company to dispose of the equities that it held. (As mentioned earlier, we do not manage the Cologne Re portfolio, which includes many equities.) General Re subsequently eliminated its positions in about 250 common stocks, incurring $935 million of taxes in the process. This “clean sweep” approach reflects a basic principle that Charlie and I employ in business and investing: We don’t back into decisions. Berkshire Hathaway Shareholder letter 1998

What caused me to do a clean sweep of my previous portfolio holdings was that I came to develop a new investment manifesto. Rather than retrospectively trying to fit my previous investment decisions into the new manifesto I decided that the approach applied by Buffett and Munger would be a good and reasonable one for me as well.

One could question the rationality behind the clean sweep since the approach I had used up on till that point in time had worked out fairly well. On that note, I would like to stress that the development of a new manifesto is not a reach for more alpha or that I was dissatisfied with the track record that I had produced up on till that point in time. To the contrary, I realize that the new manifesto could possibly produce a worse outcome than a simple quant based approach. Especially in the short-term. However, at the core of my investing foundation is a firm belief if one is to be a long-term successful investor one should always focus on improving the process applied not the outcome. In other words, focus on what you can control. Over periods of time I will therefore be more than happy to look like a fool and have an audience that questions the rationality of my decisions as long as I believe that the process I apply is the correct one for me. Note that I in the previous sentence say the correct one for me not the correct one in some form of absolute sense. We will come back to this almost egocentric view of investing and its importance several times during the presentation of the manifesto.

The seeds to a new manifesto

Before presenting the process behind my new investment manifesto I would like to share the story and the circumstances that lead to its development.

At the start of the summer I decided that it was time for me to read all the Berkshire Shareholder Letters since I haven’t done so previously (you can find my extracts of wisdom from all the letters here). Defining oneself as a value investor, not having read the Berkshire letters is like being a Christian not having read the Bible. The same could be said about not having read Poor Charlie’s Almanack which I read and then re-read during the period I was reading the Berkshire letters. Having read all the Berkshire letters and Poor Charlie’s Almanack twice I could honestly say that I was on the brink of leaving the classic value investing school for the more modern value investing school. Still to this day I agree on almost all of Buffett and Munger’s points of argument as it relates to the advantages of the modern value investing school and their rational for leaving the classic school of value investing. But after countless of days thinking about a possible change I still came to the conclusion that the modern approach would be too hard for me to implement successfully.

Both Buffett and Munger are famous for the too-hard-pile analogy as it relates to individual investment ideas. I would argue that the concept can equally be applied to investment philosophies in general and their implementation. Placing an investment idea in the too-hard-pile will be a personal dependent evaluation and the same should be true for the investment philosophy too-hard-pile. I would argue, in the same way as one has to have conviction in the ideas that one invests in one has to have an even larger conviction in the philosophy that one applies. This off course has to do with the ability to “stick to your knitting” in both the good and the bad times. Not having conviction in your philosophy and your ability to successfully implement it will bring out the worst enemy of them all, you.

The investor’s chief problem – and even his worst enemy – is likely to be himself. – Benjamin Graham

Even though I was not “transformed” in the same way that Buffett once was by Munger I will without hesitation say that reading the Berkshire Shareholder Letters and Poor Charlie’s Almanack is by far the best “investments” I have made in my “investing life”. As you will see in the investment manifesto below, there are now principles at the core of it inspired by Buffett and Munger that did not exist before. These where the seeds to the new manifesto and has since then evolved into its absolute foundation. As many others do, I owe them a lot of gratitude.

Four investment principles

Sound investment principles produce generally sound investment results – Benjamin Graham

As it relates to Benjamin Graham’s quote above I would like to use the famous Munger expression:

I have nothing to add. – Charlie Munger

Therefore, I thought I would go straight to the point of presenting the four core principles of my investment manifesto (if you have read Poor Charlie’s Almanack you will recognize them):

1. Preparation. Continuously work on investment idea generation and the accumulation of mental models and worldly wisdom.

Opportunity meeting the prepared mind: that’s the game. – Charlie Munger

2. Discipline. Stay within the boundaries of the investment manifesto.

You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. – Warren Buffett

3. Patience. Be selective and cautious in the buying- and selling process.

Resist the natural human bias to act. – Charlie Munger

4. Decisiveness. Believe in the investment manifesto and execute accordingly.

When proper circumstances present themselves, act with decisiveness and conviction. – Poor Charlie’s Almanack

Margin of safety

Beyond the four principles, but still at the heart of the manifesto, lies a focus on the concept of margin of safety, i.e. downside protection. By focus I mean that only after one has established a population of ideas with an adequate margin of safety one should move on and start to think and rank the ideas remaining in terms their possible return opportunities, i.e. upside potential.

The concept of margin of safety was first developed (as far as I know) by Benjamin Graham and David Dodd in the classic value investing book Security Analysis that was first published in 1934. However, I think most investors that are familiar with the concept relate it to the 1949 book by Graham, The Intelligent Investor, and more specifically the last chapter in that book called “Margin of safety as the Central Concept of Investment”. As most of you will know, “the margin of safety” is a wide concept and one that has been defined in a variety of ways by both Graham himself and many others since the books first publications. In my opinion, there is nothing wrong with that. To the contrary, I would say that it is both natural and needed considering the variety of investing philosophies in existence and more specifically how one defines the concepts of value and risk. However, I would argue that the margin of safety purpose is a universal one that all can ascribe to (?). In my opinion that purpose was best defined in the original text of The Intelligent Investor:

It’s available for absorbing the effect of miscalculations or worse-than-average luck. – Benjamin Graham

Based on the definition for the margin of safety purpose and with the help of little inversion we can narrow in on my definition of margin of safety. Again, note that what I present below is my definition of margin of safety not a universal one. I would strongly suggest that one goes through the same process as I present below in order to come up with a definition that is your own.

In order to make the starting point of the margin of safety definition process a little bit less vague consider the following excerpt from Poor Charlie’s Almanack:

Why should we want to play a competitive game in a field where no advantage – maybe a disadvantage – instead of in a field where we have a clear advantage?

We’ve never eliminated the difficulty of that problem. And ninety-eight percent of the time, out attitude toward the market is … [that] we’re agnostics. We don’t know. […]

We’re always looking for something where we think we have an insight which gives us a big statistical advantage. And sometimes it comes from psychology, but often it comes from something else. And we only find a few – maybe one or two a year. We have no system for having automatic good judgement on all investment decisions that can be made. Ours is totally different system.

We just look for no-brainer decisions. As Buffett and I say over and over again, we don’t leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side. So we’ve succeeded by making the world easy for ourselves, not by solving hard problems. – Charlie Munger

In other words, your margin of safety definition process should start by focusing on what you define as “no-brainer decisions” or “one-foot fences” to hurdle over and where you believe that you have a “big statistical advantage”. The outcome of that evaluation will allow you to invest in ideas where the purpose of the margin of safety concept will likley be fulfilled. I won’t, since I can’t, go into details about the specifics of the evaluation process for me personally. This is something that has taken years to develop and where the number of inputs now are numberless. Therefore, note that what I will present below is only the end product of a long evaluation process.

My margin of safety definition

Based on my investment beliefs and my accumulated investing knowledge I have developed my margin of safety definition. The population of companies that fit into this definition I call The Liquidation Oxymorons. These will constitute the population of companies that I’m allowed to invest in, i.e. they have an adequate margin of safety:

1) Selling below liquidation value (i.e. price below readily ascertainable net asset value)

2) Proven business model (i.e. historically profitable)

3) Sound financial position (i.e. low risk of bankruptcy)

4) Shareholder friendly management (i.e non-fraudulent management with a thoughtful capital allocation track record)

If you are an old reader of the blog you will find similarities in the above definition to the investing checklist I have previously used (see for example this post about PFIN). That is true. Whats has changed is that evaluation process for each of the four criteria is now qualitative rather than quantitative. Again, if that is a rational and wise move, especially from a return perspective, remains to be seen.

Since the post became longer than I first thought I will split it up into two parts. In the next post I will present the stock picking process for which companies from the Liquidation Oxymoron population to invest in, i.e. the evaluation of upside potential and catalysts. I will also present the guidelines for the manifesto’s portfolio construction and the selling process.

Follow-up and portfolio update

1kr50öreIt has been a while since I published anything. Therefore I thought it would be a good idea to sum-up what has happened in the portfolio over the last couple of months before I move on to post new stuff on the blog. The attentive reader will notice that two companies in the portfolio (IndigoVision Group plc and AG&E Holdings, Inc.) have “expired” follow-up dates but are not included in this follow-up and portfolio update post. I will get back to these two companies in the future.


Hargreaves Services plc (sold 2017-05-17) was one of those net-nets with favourable going-concern characteristics but was nevertheless valued well below liquidation value by Mr Market (see checklist analysis in Swedish). The fact that the company is/was a coal-producing and -distribution company most certainly had something to do with the valuation. However, as with most net-nets the pessimism and negative factors are often well priced into the market valuation. Small improvements can therefore have huge upside effects. In the case of Hargreaves the future started to look a little bit brighter during my holding period. For example, the company experienced increase in both price and demand of coal and substantial assets on the balance sheet proved to be more valuable than their current stated book value. Over my thirteen month holding period the stock went from 166 GBX to 328 GBX and from a valuation perspective the company went from a net-net to selling just below its tangible book value. I concluded on the follow-up date that the margin of safety no longer was in place as a result of the increased share price in relation and that I should sell my position. The return after tax, currency effects and brokerage fees for Hargreaves amounted to 93%.

Arden Partners plc (sold 2017-05-26) shared many similarities with the Hargreaves when bought. It is/was a British company with good going concern characteristics while simultaneously selling well below liquidation value (see checklist analysis in Swedish). Also, similar to Hargreaves the company was conducting its business in an unloved industry. Arden is/was a small in this case a stockbroker that provides a range of financial services to corporate and institutional clients. However, unlike Haregreaves the outlook and corporate fundamentals for the company didn’t improve during my holding period. To the contrary, the liquidation value eroded and the company’s operating losses increased. Right on time to my follow-up date the company announced that it intended to issue new shares worth approximately £5.0 million. For a company with a market value of £13 million that would result in a pretty hefty dilution. For me this was the final nail in the coffin and I decided to sell my position on the follow-up date. However, with a large portion of luck, the return for my Arden position was more positive than what the above description seems to suggest. The return after tax, currency effects and brokerage fees for Arden amounted to 27,5%. Should I have held my shares the outcome would have been even more positive as the issuance of new ordinary shares was done at a price of 40 GBX. This was well above the price which the stock was trading at and the price I sold my shares at (33 GBX).

McCoy Global Inc (sold 2017-06-06) and the position I initiated in the company in May 2016 was largely driven by the same rational as with my position in Hargreaves and Arden (see checklist analysis in Swedish). Unlike the two early candidates McCoy is/was a Canadian company in the business of oil and gas, more specifically the company provides equipment and technologies used for making up threaded connections in the global oil and gas industry. Initially it looked that I had made a really bad call as the price went south and the stock traded as low as 1,41 CAD in November. However, as oil prices started to once again rise and an improved backlog was announced in the Q4 report the price moved back up to the level of my initial buying price. Although there were some positive signs in the Q4 report the margin of safety had disappeared and a sale was inevitable at the follow-up date. However, once again I got lucky just in time to my follow-up. In May management decided that the company’s shares were undervalued and a 5 % share buyback program was announced. The return after tax, currency effects and brokerage fees for McCoy amounted to 11,3%.

Associated Capital Group Inc (sold 2017-06-08) is the only special situation case included in this post although it could also be described as a deep value case selling below cash value. Associated Capital was a conviction pick of mine with a thesis best described as a free lunch created by the spin-off from Mario Gabellis company Gamco Investors Inc (see the first part of the analysis posted in Swedish, part one). The special situation part of the thesis played out well and in line with my analysis with one exception. I made the mistake of concluding that the valuation multiple the company was trading at that point in time would remain the same and that the market would not place a discount on company’s operations in the future. However, the outcome has been the direct opposite. In other words, the market seem to value Associated Capital to a higher extent as a holding company than an operating business within investment management and research. So, while book value has increased, in line with my thesis and predictions, the non-adjusted price-to-book-multiple has decreased from 1,02x to 0,94x. Based on this outcome and the fact that the company is no longer a new/forgotten spin-off I concluded on the follow-up date that the upside, related to the special situation part, had played out. This was the first part of my rationale for selling Associated Capital on the follow-up date. Again, I could be wrong on this point and one should note that $3,71 per share related to the GAMCO note still remain to adjust book value as of Q1 2017:

ac q1 BV

Unfortunately, I also made a second mistake / wrong prediction. In concluded in my second part of the analysis (see the second part of the analysis posted in Swedish,  part two) that the profitability levels of Associated Capital in the presence of Mario Gabelli would likely improve. So far that has not been the case, although assets under management (AUM) has grown. Furthermore, Mario Gabelli has stepped down from his position as CEO of Associated Capital which made my conviction regarding future profitability growth for the company to decrease. So although the downside remains intact the upside has unfortunately disappeared in large parts in my opinion. Or to be more specific and sincere, Associate Capital is now placed in my to-hard-to-analyse-pile. This is my second part of my rationale for selling Associated Capital on the follow-up date. The return after tax, currency effects and brokerage fees for Associated Capital amounted to 16,7%.

Sanshin Electronics Co Ltd (sold 2017-07-13) I struggled with quite a bit whether to sell or hold. Sanshin was my first J-net and as with most Japanese net-nets the fundamentals looks to be good to be true when you factor in what they are selling for (see checklist analysis in Swedish). After my thirteen months holding period Sanshin still looked good. The company is still selling below liquidation value, P/NCAV = 0,77x, and the business is still profitable. However, as of today the company is trading well above its historical liquidation multiples and the P/NCAV = 0,43x I bought my position at. This is mostly attributable to the fact that the share price that has increased about 75 % (including dividend) over the last thirteen months. So partially, my rational to sell the Sanshin position was a decreased margin of safety and a current above average historical valuation (both as it relates to assets and earnings). Also, when I bought Sanshin I made two mistakes that a sale of the position would “correct”. The first mistake was to deviate from my focus on small obscure deep value companies. With a market value of 42B JPY Sanshin is not exactly small or obscure. In other words, it is harder for me to justify and hold Sanshin after the hefty increase in both price and valuation multiples than if the company had been a small/nano-cap J-net. The second mistake was my position sizing of Sanshin. In this case the my position size was too small. I will try to not make the two mistakes just mentioned in the future. The return after tax, currency effects and brokerage fees for Sanshin amounted to 64,3%.


Macro Enterprises Inc. (bought 2017-05-12) is a new type of deep value candidate in my portfolio. It’s a raNAV (readily ascertainable net asset value) candidate not a NCAV (net current asset value) candidate. I wrote some sentences about the importance of raNAV and the differences to the classical net-net/NCAV calculation in my latest post about BEBE (see post Lessons about leases and liquidation value: a bebe stores, inc case study).

I probably won’t spend any time putting all my notes, spreadsheets and links about Macro Enterprises into a whole post/analysis. Reason being that it has already been done to perfection by two other people. I recommend you read the Macro Enterprises analysis by Jan Svenda if you have Seeking Alpha pro. If not, I would highly recommend that you read the analysis of Macro Enterprises included in the sample newsletter for On Beyond Investing and that you listen to the episode of The Intelligent Investing podcast were the author of On Beyond Investing Tim Bergin talks about the company and the investing case.


Disclosure: The author is long CVE:MCR when this analysis is published. Also note that CVE:MCR is a nano-cap stock (44 M$ in market capitalization). The trading is illiquid.

Follow-up: 11 88 0 Solutions AG (telegate AG)

Q4 2016 – 0,48 € – ETR:TGT

After my thirteen months follow-up I have decided to sell my position in TGT. After brokerage fees and currency effects the return amounted to -51,7 %.

1kr50öre11 88 0 Solutions AG, formerly Telegate AG, is a Germany-based provider of directory assistance and call center services. The Company operates through two segments: Directory Assistance and Digital. The Directory Assistance segment provides services related to inquires made at by phone for information regarding to phone numbers, pre-dial numbers and addresses. The Digital segment receives revenue from advertisements on the Company’s platforms and Websites. The Company also offers online marketing services related to Google AdWords, Google My Business, social media Websites and company profiles on platforms, as well as tools and market analyses, and software for data, address and network management. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 

  • P/NCAV < 1x
    • 0,75x ✓ 
      • MoS = 25 %
    • 1,7x (incl. operating leases).

Assessment of margin of safety:

Although the company is still a net-net and makes it through the rest of my checklist I regard the current margin of safety as inadequate. This is based on an assessment of the NCAV-brun rate that is negative for both YoY = -41 % and QoQ = -20 %. In other words, there is a high probability that the NCAV will continue to erode in a quick pace and that the 25 % margin of safety is gone by next follow-up. Also, taking operating leases into consideration the company is no longer to be regarded as a net-net as it is selling at a premium, 1,7x. This is relevant since TGT uses IFRS and the changes to be effective as of 1 January 2019 with IFRS 16 (operating leases are to be capitalized). Based on these notations and that I haven’t found any other value creation catalyst I have decided to sell my position in TGT.

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):


  • Debt/Equity < 25 %
    • 0 % 


  • Z-score ≥ 3
    • 0,2 X

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):


  • Positive retained earnings:
    • -28M € X


  • Positive aggregate operating income for the last ten years:
    •   118M € 

3. The company does not have a shareholder unfriendly capital allocation:

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 0 %
    • Net buyback yield TTM = 0 %
      • =  0 % 


Disclosure: The author doesn’t own any shares of ETR:TGT when this analysis is published.

Follow-up 2.0 Kingboard Copper Foil Holdings Limited

Today the announcement from the supreme court of Bermuda was made public. If you want some background to this legal process and Kingboard as a company see my earlier published checklist analysis post and follow-up & special situation analysis.

The Board wishes to update the Shareholders that the Court of Appeal of Bermuda had allowed the appeal and found in favour of the majority shareholders that have filed the appeal (the “Appellants”). A written judgment in respect of the appeal had been issued on 24 March 2017 (the “Appeal Judgment”). The judge deciding the appeal found, among other determinations, that the entry into the license agreement by the Company’s wholly-owned subsidiary, Hong Kong Copper Foil Limited, and Harvest Resource Management Limited (the “License Agreement”) was not oppressive conduct and did not unfairly prejudice the minority shareholders of the Company. It was also decided that the costs of the appeal and the court proceedings below are awarded to the Appellants.

This outcome of the legal process is not what I had expected, I must admit I’m really surprised. But when you are wrong the only thing to do is to admit that you were wrong and then review the current situation and any new facts that have been presented. So what do I do now?

The tender offer 0,40 SGD per share is still active and the intention to take the company private hasn’t changed. This morning the shares traded between 0,40 – 0,41 SGD. So the interesting question that I had to answer was: is there any upside left or should I sell today?

There might be some upside left due to the fact that the independent financial adviser has not yet commented on the 0,40 SGD buyout offer. However, because of the outcome of the court case in favor of the majority shareholder I believe there is now a much smaller chance of that review resulting in an increased buyout offer than I had predicted before. Reason being that it could earlier be argumented that the valuation of the tender offer as a premium to historical share price was a really bad staring point of valuation since Kingboards shares had traded at depressed levels because of the ongoing legal process and unfairly prejudice of minority shareholders. While I still think that historical share prices are not a relevant staring point for any valuation the premium can now arguably be seen as more “fair” than before as a court case didn’t find that minority shareholders had been mistreated (i.e less reson for the financial advisors to come up with a different valuation).

Another factor that might result in potential upside relates to the problem for majority shareholders to acquire enough shares to take the company private. So there might be an increased share offer price in order to succeed with this intention. There might even be a legal shareholder fight regarding the current buyout price being to much of a low ball offer. But again, because of the outcome of the legal process I have a hard time making an argument for this as a likely and successful outcome for minority shareholders. We also have the time factor to take into account as this can easily result in a another drawn out legal process.

To summarize and conclude, the court case announcement was both surprising and unfortunately really negative in relation to my predictions made in the special situation analysis. My main argument then was that all shareholders would likely to be bought out at the same price as the minority shareholders (‘the Pope entities’) as a result of the Bermuda court case. As a result of todays announcement we now know that my assumption and analysis was wrong and that it is now less chance of an increased buyout price. Therefore I decided to sell my entire position in Kingboard this morning at 0,405 SGD. I could of course have waited and tender my shares at 0,40 SGD at not transaction cost, but at a price of 0,405 SGD the transaction cost are already “included”. Also, selling today equals better CAGR on the investment but probably the most important factor of all; it saves me all the potential headaches that could arise with a Singapore-tender-offer in combination with a low cost focused stockbroker.

After brokerage fees and currency effects the return in Kingboard for my initial net-net position amounted to +45,7 %.

After brokerage fees and currency effects the return in Kingboard for my later initiated special situation position amounted to – 5,5 %.

Disclosure: The author doesn’t own any shares of SGX:K14 when this analysis is published.

Follow-up: CDI corp.

10-K 2016– 7,50 USD– NYSE:CDI

After my thirteen months follow-up on CDI I have sold my position. After brokerage fees and currency effects the return amounted to 67,4 %. From a qualitative standpoint I still like the case, mainly due to the recent activist activity in the company (more about that below), but due to a high NCAV-burn rate and an increased share price development the company is no longer a net-net, i.e. I’m forced to sell.

See original checklist analysis of CDI here (in Swedish).

1kr50öreCDI Corp. provides engineering, information technology and staffing solutions. The Company operates in three segments: Global Engineering and Technology Solutions (GETS), Professional Staffing Services (PSS) and Management Recruiters International (MRI). It provides staffing services through its MRINetwork of franchisees. The GETS segment provides engineering and information technology solutions that involve the production of deliverable work products or services performed at its facility or at a customer’s facility. The PSS segment provides technical and professional personnel for discrete periods of time to augment the customer’s workforce in times of project, seasonal, peak period or business cycle needs. The MRI segment is a global franchisor that does business as MRINetwork and provides the use of its trademarks, business systems and training and support services to its franchisees. It serves the oil, gas and chemicals, aerospace and industrial equipment, and hi-tech industries. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 


  • P/NCAV < 1x
    • 1,5x X
    • MoS = N/A

Assessment of NCAV margin of safety:

CDI is today selling for a premium to NCAV. The reason behinds development since I initiated my position at 0,57x NCAV is a combination of positive share price development of 62 % and a NCAV burn rate of -40 %. Since CDI is no longer a net-net I will therefore sell my position. However, for an investor that are not following strict rules when investing, CDI might still be an interesting case. This is mainly due to the fact that there is an ongoing activist activity within the company with the aim to sell or merger with the highest bidder. Also, the quality of the company is in fact quite good (checks all boxes below and they had a net buyback yield of 5 % for the TTM).

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):


  • Debt/Equity < 25 %
    • 0 % 


  • Z-score ≥ 3
    • 4,8 

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):


  • Positive retained earnings:
    • 179 M$ 


  • Positive aggregate operating income for the last ten years:
    •   155 M$ 

3. The company does not have a shareholder unfriendly capital allocation (i.e. not diluting shareholders):

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 0 %
    • Net buyback yield TTM = 5 %
      • =  5 % 


Disclosure: The author doesn’t own any shares of NYSE:CDI when this analysis is published.

Follow-up & special situations analysis on Kingboard Copper Foil Holdings Limited

Last Friday Kingboard Copper Foil Holdings Limited (SGX:K14) announced that Excel First Investment Limited had placed a cash tender offer at 0,40 SGD for the shares in K14. Excel First is an subsidiary to the parent company Kingboard Laminates Holdings Ltd. (listed on Hong Kong stock exchange) which is also the parent company of K14 (owns 66,01 % of K14). Before the cash tender offer was announced the shares of K14 traded at 0,34 SGD (+17,7% tender offer premium) and after the announcement the stock is trading at 0,415 SGD, I will come back to both of these facts later in the post. If you read my analysis of K14 that i published in mid January you will notice that this development was not a lightning strike from a clear blue sky. Although, I had anticipated an offer first after the result of an legal appeal in March 2017 and that company would directly make use of its then newly implemented 10 % buyback mandate. I will come back to both of these factors later in the post as well. According to the offer announcement the reason behind the offer is to delist K14 from the Singapore stock exchange. In other words, the intentions are to privatize the company (this is an important factor to take with you when reading this post).

Does K14 still pass my net-net checklist requirements?1kr50öre

Yes, I have concluded that K14 still passes my net-net checklist without any difficulties. To the contrary, since I analysed the company in January the company has published its FY report for 2016. As of this report the company is posting good revenue growth, it is still profitable on the bottom level and the company is still debt free. Also, the net current asset value (NCAV) per share has increased from 2,09 HKD to 3,02 HKD, an increase of 45% (notice that the reporting currency is HKD but the stock is traded in SGD). In relation to the share price development of 51 % since I bought my position at 0,275 SGD, the 45 % NCAV increase has translated into an P/NCAV-multiple that is almost unchanged (P/NCAV = 0,72 vs P/NCAV = 0,75x). In other words, the margin of safety in relation to NCAV is the same even though the share price has increased 51 % since I bought my position. From the checklist point of view I will therefore not be “required” to sell my position. On the other hand, I don’t want/allow myself to be an owner of a private Singapore company so lets review what options that I currently have at my disposal for closing the K14 position.

Options for closing the K14 position

The way I see it I have three options:

  1. I can tender my shares at the 0,40 SGD cash offer. With this option I won’t have any transaction costs for the sale of my position.
  2. I can sell my position at the market price of 0,415 SGD. With this option I will have transaction costs of about 1 % but I will also gain about 3,8 % above the 0,40 SGD offer.
  3. The third alternative requires me to sit tight and wait for the results of the Court of Appeal in Bermuda that takes place March 6 and 7 2017 (yesterday and today) which might result in an increased tender or buyout offer.

I believe the third option needs a more in depth explanation than option 1 and 2… Before presenting my facts and arguments for option 3 here is short sales pitch for that alternative:

In my opinon there exist a high probability that the result of the appeal will not be in favor of the holding company of K14 (the defendants/majority shareholders of K14) and that this in turn may require them to increase the cash tender offer to ~0,67 SGD if they want to take the company private. In other words, I would argue that there is a potential +61% return on the table to take advantage of. That’s not even the best part, if I’m wrong in my analysis I can still tender my shares at the 0,40 SGD cash offer (option 1) without any transaction costs and only incur a small loss of -3,8%. I think Mr Market is aware of this potential outcome and that is why the company today is selling above the cash tender offer (0,40 SGD) on the market. So obviously I have chosen option 3 (in potential combination with option 1).

Explanation for the sit-tight-and-wait-option (Nr. 3)

As I presented in the analysis in January there has been a legal process going on since 2011. I won’t go into the history of the legal process as this has in been explained in detail by the blog ThumbTackInvestor and also in the articles linked to in my earlier analysis. But in short terms the legal process i about:

Kingboard Copper Foil entered into a license agreement with Harvest Resource Management after the Petitioner (Annuity & Re Life Ltd) had vetoed the proposed general mandate for interested person transactions at the AGM of the Company on 29 April 2011.

which has resulted in that:

The Supreme Court of Bermuda found that, as the majority shareholders failed to promptly initiate negotiations with the minority shareholders with a view to resolving the impasse and take into account the interests of shareholders as a whole following the blocking of the IPT Mandate, the license agreement was a commercially prejudicial means of enabling the Company to circumvent the Petitioner’s legitimate exercise of its right to veto the IPT Mandate.

What is more important to know is that the petitioners of the legal process is the company Annuity & Life Reassurance LTD. This company is a subsidiary of Pope Investments II LLC under which another company, Pope Asset Management LLC, can also be found. The Petitioner’s holdings in K14 together with those of the two Pope entities amounted to 80,251,528 shares by July 18, 2011 according to this supreme court judgement. Its is this judgement and the findings therein that the defendants, mainly Kingboard Chemicals and Kingboard Laminates, are appealing against as I write this post (March 6 and 7). It is important to note that K14 is only a third party in this legal process, and will therefor not bear any litigation costs or liability.

In relation to the above linked supreme court judgement the consultancy firm Ernst and Young (EY) was appointed to conduct an independent review. The independent review was presented in October 2016 with the outcome that supported the supreme court judgment. This is one of the main reason why I in my earlier analysis of K14 stated that the appeal is not likely to result in favor of the defendants. What was then unknown was how the case would play out for the minority shareholders that were not appealing in court and those who hadn’t signed a form as of 7 April 2016 stating that they would like there shares to be redeemed under the same conditions as the petitioner (the Pope entities). With the current cash tender offer of 0,40 SGD  with the purpose of taking K14 private we now know a bit more. But now to the really interesting part of the whole situation.

In the cash tender offer announcement the following can be found:

Requirements for delisting:

Under Rule 1303(1) of the Listing Manual, if the Offeror succeeds in garnering acceptances exceeding 90% of the total number of Shares in issue excluding treasury Shares, thus causing the percentage of the total number of Shares in issue held in public hands to fall below 10%, the SGX-ST will suspend trading of the Shares on the SGX-ST at the close of the Offer.

In connection to this requirement for delisting we can read the same thing but from a compulsory acquisition point of view and the value of shares:

Compulsory acquisition:

  1. (a)  obtained acceptances from shareholders holding not less than 90% in value of the shares in a Bermuda-incorporated company (“Target”) whose transfer is involved (other than shares already held, at the date of the offer, by the offeror, the offeror’s subsidiaries, and nominees of the offeror or its subsidiaries)

Finally, there is the 95% ownership level which would enable them to not only take K14 private but also entitles and binds them to acquire the remaining 5 % at 0,40 SGD tender offer:

Under Section 103 of the Bermuda Companies Act, the holders of not less than 95% of the shares in a Bermuda-incorporated company (“Purchasers”) may give notice (“Section 103 Acquisition Notice”) to the remaining shareholders of the intention to acquire their shares on the terms set out in the Section 103 Acquisition Notice. When such Section 103 Acquisition Notice is given, the Purchasers will be entitled and bound to acquire the shares of the remaining shareholders on the terms set out in the Section 103 Acquisition Notice unless a remaining shareholder applies to the Court to have the Court appraise the value of such shares.

So to summarize and conclude so far, if the parent company of K14 don’t manage to acquire more than 90 % of K14 it will fail in its intentions to take the company private. This notion translates into two milliondollar questions:

  1. Can the parent company acquire more than 90 % of K14?
  2. If the parent company fails to acquire more than 90 % of K14, what will then happen?

Can the parent company acquire more than 90 % of K14?

According to the cash tender offer announcement the parent company has control, direct and indirect, over 66,01 % of K14 (se picture one below). Indirect they also have control over another 10 % if we take into account full use of the company’s buyback mandate. Finally, if the Pope entities have their 11,1 % holding redeemed, the parent company will have the control over 87,11 % of the shares in K14. In other words, the parent company is relying on the cash tender offer and that it brings in another 2,9 %. Thats is, if the parent company manage to make full use of the buyback mandate, otherwise the tender offer will have to be more successful than just 2,9%. As of the pre cash tender offer announcement there have been no signs of the buyback mandate put to use. If we make the bold assumption that the 12,618,000 shares traded yesterday (well above the average trading volume of 15,000,00 shares) were all acquired via the buyback mandate they would just have managed to vacuum up 1,7%. In other words, if we hold my bold hypothesis true for the coming days it will take at about two weeks for the company to make full use of the buyback mandate. It should be noted that I don’t think it is very likely or fair assumption but more importantly, the volume of shares traded will most likely to decrease in the following days (i.e. the portion of shares that the company can potentially acquire per day is well below 1,7%). This assumption was already obvious today when only ~1,700,000 shares have been traded (0,2 %).

So to summarize and conclude, YES the parent company can theoretically acquire more than 90 %. However, I find it not very likely given what we know today and it will most certainly not happen over a night. Instead, I would argue that the current cash tender offer (0,40 SGD) is to much of a low ball offer to give minority shareholders the incentive to sell their share at the market or to tender their shares (i.e. the company will have a hard time putting its 10 % buyback mandate to use but also in succeeding to acquire another 2,9 % via the cash tender offer). Also, the fact that the appeal and the valuation for the redemption of the Pope entities holding is not jet decided upon I believe that many minority shareholders, me included, will sit tight in the boat and wait for the outcome of the court appeal. Together this leads us into the question of; what will then happen?



Option Nr. 4 – The special situation case for K14

When I started to write this follow-up post I had not thought about the idea of acquiring more shares in K14 (this is the reason I postponed the post). However, I have come to realize that K14 has morphed into a very attractive special situation case. I have therefor increased my position in K14 under the special situations heading, not as an increased checklist net-net investment. As a result I therefor extend my earlier three options decision framework for closing the K14 position to include a fourth option. What I present below is options 4 – the special situations case for K14.

To start, I don’t believe it’s a coincidence that the cash tender offer at 0,40 SGD was announced last Friday. This belief is mainly related to the fact that the earlier mentioned appeal takes place March 6 and 7 and 2017 and that this will most likely, due to the EY report, result in favor of the petitioner (i.e the Pope entities). Also, as pointed out earlier there is still no announcement regarding the valuation at which the petitioners holding is to be redeemed at. This will most likely be announced in the connection of the appeal outcome. I would argue that the price the petitioner will be offered is well above 0,40 SGD. I would also argue that the minimum price is around 0,67 SGD since this represent the equity per share as of 31 December 2016 for K14. It might even be higher as a result of the company being profitable and debt free but also that the valuation will probably take into account loss of earnings as a result of the misconduct by the defendants.

Furthermore, one should note and be aware of that the defendants are charged under section 111. This translates into what is know as a “Class Remedy” for all shareholders. In plain English, the redemption of shares at a value jet unknown, but probably at the minimum of 0,67 SGD, is in theory not only applicable to the Pope entities and the shareholders that signed the 7 April 2016 form but in fact all minority shareholders. However, it is a bit unclear to me if the class remedy also holds true for investors that has become shareholders after the legal process started back in 2011 or not. What confuses me, as I’m not legal expert, are these two quotes that can be found in the supreme court judgment earlier referred to:

Statement from the court: “However, as I have already found above, the Petitioner is not entitled to seek relief in respect of shares in the Company purchased after the presentation of the Petition on August 3, 2011.” (p.85)

Statement from the respondents lawyer: “Mr Wong SC did not dispute the argument that section 111 is fundamentally a class remedy. In principle it seems to me that all minority shareholders must have a right to be heard at the relief stage of the present Petition.” (p.85)

However, lets say that the first quote is true and that is how the court is going to decided upon which shares get redeemed at the not jet disclosed valuation level. In that case, I would argue that this in fact doesn’t really matter for how the whole situation is going to play out for other minority shareholders like myself. I would argue that the 0,40 SGD is to much of an low ball offer to get minority shareholder exited and that the sneaky attempt by management to fool minority investors in order to attain the +90 % position needed to take the K14 private is not going to succeed, as discussed before. In other words, we may very well see an increased cash tender offer or an buyout offer at the same price as the redemption of shares for the Pope entities even though we might not legally be entitled to it. This in order for the parent company to succeed in acquiring the shares needed to delist the company and take it private, all according to its stated intentions.

Even if i’m drastically mistaken or wrong in my above probability guesstimates, reasoning and argumentation this is still an very favorable special situations bet. Reson being that at the current price of 0,415 SGD there is an estimated minimum upside of 61 % (0,67 SGD) at the same time as the downside is limited to -3,8 % (i.e. the 0,40 SGD price at which I can cash tender my shares). I think Mohnish Pabrai would would let me use the phrase “heads I win tails I don’t lose much” without to much complaints in this case.


Disclosure: The author is long SGX:K14 when this analysis is published. Also note that SGX:K14 is a micro-cap stock (173 M$ in market capitalization). The trading is illiquid.