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 stable 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 produced 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 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: Technical Communications Corporation (NASDAQ:TCCO)


Back in July there was a big pump and dump scheme in Technical Communications Corporation (NASDAQ:TCCO). On no new fundamental information the share price jumped from about 2,90 USD to 5,10 USD in one day of trading. After a few days the share price went south and we were back at the starting point.

Back then my rule was than under no circumstances should I revaluate my net-net holdings in relation to the checklist until thirteen months after the initial purchase date. So basically, I missed out on a +100% return. After a few weeks of thinking I decided to put in three safety vales to the standard thirteen-month rule. See my old post about the updated checklist and portfolio rules (in Swedish).

  • A follow-up is done on each net-net holding after thirteen months, or directly:
    • if there is a buyout/tender-offer for the company’s shares.
    • if the company is going to be delisted.
    • if there is a pump and dump scheme (i.e. the share price has risen drastically on no new fundamental information).

Follow-up on TCCO (a mistake)

Earlier today I got a notification on my phone saying TCCO was up over 40 % in today’s trading. Here we go again a thought to myself. After a check on Google Finance I saw the same pattern as I had observed the last time. A huge spike in shares traded and no link to any new fundamental information. Together with a quick search on Twitter, were I found a bunch of traders bragging about their morning return in TCCO, I decided to apply the follow-up safety value of “pump and dump scheme”. Although sitting on the train, I managed with my phone and the last Q-statement to figure out that TCCO was now selling for P/NCAV = 1,15x. With that conclusion the company no longer had in accordance to my net-net checklist an “adequate margin of safety”. I therefor decided to sell my position at 3,20 USD. In relation to my entry price that translated into a total return of 28 %.

So here this post should end, right? Unfortunately, no. I made a mistake. As it turned out I did a sloppy job of researching the “no new fundamental information” part. When I came home I found a new link via Google Finance that took me to this following statement (published yesterday): Had I only checked all the company’s fillings in Edgar I would have come to a different conclusion regarding the relevance of the safety vale. That in turn would have meant that I had not sold the TCCO position.

This is a perfect example where of a good outcome is not the result of a good decision. I guess we all make mistakes. Luckily this was not one that resulted in a permanent loss of capital for me. But take my word, I will learn from this!

Disclosure: The author doesn’t own any shares of NASDAQ:TCCO when this is published.