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.

Uppdaterad net-net checklista och portföljregler

Imorgon är det dags för min första uppföljning av ett bolag som jag ägt i 13 månader (NASDAQ:RELL), ska bolaget ut ur net-net portföljen eller stanna kvar ytterligare 13 månade? Mer om det imorgon. I detta inlägg tänkte presentera min uppdaterade checklista och portföljregler vilket jag har arbetat på den senaste tiden. Likt den föregående uppdateringen så är det inte tal om några större förändringar. Checklistan är fortfarande inriktad på att minimera riskattributen oegentligheter, utspädning och konkurs för de bolag som hamnar i net-net portföljen (för mitt resonemang kring detta se ovan länk). Den största förändringen hittar ni för kriterium 1, dvs nyckeltalen för tillräcklig säkerhetsmarginal. Jag skulle vilja påstå att jag nu är mer kritisk (kräver större säkerhetsmarginal) än tidigare även om jag höjt själva P/NCAV-multiplarna. Jag tänkte inte mer ingående gå igenom förändringarna utan en jämförelse mellan nedan checklista och den som användes i den senaste analysen (Holder Technology) borde synliggöra förändringarna. Hänvisar även till de föregående portföljreglerna om man vill göra en liknande jämförelse. Skulle dock något vara oklart besvarar jag gärna era frågor i kommentarsfälltet.

Uppdaterad checklista för net-nets

1. Tillräcklig säkerhetsmarginal (kriterium a) eller b) måste uppfyllas): 


  • P/NCAV < 1x
    • x


  • EV/Rörelseresultat(5y&10y) < 3x
    • 5y = x
    • 10y = x


  • P/NCAV < 0,76x
    • x
  • NCAV-burn rate  > -25 % för Qx – Qx-4 och Qx – Qx-1
    • Qx – Qx-4 = %
    • Qx – Qx-1 = %

P = börsvärdet = aktiekurs * antal utestående aktier

NCAV = totala omsättningstillgångar – totala skulder – värdet av preferensaktier 

EV = börsvärdet + räntebärande skulder + värdet av preferensaktier – kassa & kortfristiga placeringar (EV får vara negativt värde)

Rörelseresultat = Totala intäkter – COGS – SG&A – D&A

(5y&10y) = genomsnittligt rörelseresultat för de fem och tio senaste åren (de genomsnittliga värdena får ej vara negativa)

NCAV-burn rate = minskning/ökning NCAV mellan angivna perioder justerat för eventuell utdelning och/eller återköp.

Qx = senaste rapporten

Qx-1 = föregående rapport

Qx-4 = Qx rapporten föregående år

2. Risken för permanent förlust är låg:

2.1 Konkursrisk i bolaget är låg (kriterium a) eller b) måste uppfyllas):


  • Totala räntebärande skulder/Eget kapital < 25 %
    • %


  • Z-score ≥ 3


  • Totala räntebärande skulder/Eget kapital < 50 %
    • %

2.2 Bolagets operativa verksamhet är inte helt olönsam (kriterium a) eller b) måste uppfyllas):


  • Positivt balanserat resultat:
    • M


  • De aggregerade rörelseresultatet under de senaste 5/10 åren är positivt:
    • M

5/10 = det aggregerad rörelseresultatet för de fem senast åren används enbart som utgångspunkt då bolagsdata inte existerar för de tio senaste åren.

3. Låg utspädning av antalet utestående aktier (kriterium a) eller b) måste uppfyllas):


  • Utspädning < 2 % för Qx – Qx-4 och Qx – Qx-1
    • Qx – Qx-4 = %
    • Qx – Qx-1 = %


  • Bolaget har nettoåterköpt aktier de senaste 5/10 åren:

5/10 = nettoåterköp för de fem senaste åren används enbart som utgångspunkt då bolagsdata inte existerar för de tio senaste åren.

4. Risken för oegentligheter är låg (samlad bedömning utifrån nedan svar):

  • Dagens ledning har inte historiskt varit kopplad till oegentligheter:
  • Bolaget är inte huvudsakligen kinesiskt (verksamhet och/eller majoritetsägare):
  • Bolagsdata existerar för de senaste 10 åren:
  • Bolaget har återkommande skiftat ut kapital till aktieägarna (utdelning och/eller återköp):
  • VD och/eller insiders har ägarincitament (värde av aktieinnehav/lön + bonus > 3x):
    • = x

Klarar bolaget samtliga krav? JA/NEJ 


Uppdaterade regler för net-nets portföljen

  • Ingen belåning av portföljen.
  • Investeringsbeslut tas den 25:e varje månad.
    • Bolag som klarat checklistans samtliga krav och som inte är ett innehav i portföljen utgör urvalspopulationen för varje månads investeringsbeslut.
      • Det eller de två bolag i urvalspopulationen med störst MoS till NCAV blir månadens bolag att investera i.
  • Väger samtliga innehav jämnt vid initial investering.
  • Uppföljning av varje portföljinnehav görs efter 13 månader, alternativt:
    • Uppföljning görs direkt vid upp- utköperbjudande.
    • Uppföljning görs direkt vid avnotering/byte av lista.
    • Uppföljning görs direkt när aktie utsätts för pump and dump (i.e aktiekursen rusar utan fundamental nyhet presenterats)
  • Maximal sammanhängande ägandetid per innehav är 3 år.
  • Anledningar att sälja vid uppföljningsdagen:
    • Bolaget missar på ett/flera krav i checklistan.
    • Ägt bolaget i sammanhängande 3 år.
  • Anledningar att behålla ytterligare 13 månader efter uppföljningsdagen:
    • Bolaget klarar fortfarande checklistans samtliga krav.
      • Om 50 % nedgång sedan initial investeringskurs och bolaget klarar fortfarande checklistans samtliga krav få bolaget åter en plats i urvalspopulationen.

Uppdaterade portföljregler (net-nets)

Efter att jag i föregående vecka presenterat en uppdaterad checklista för net-nets tänkte jag att det var dags att även uppdatera portföljreglerna för net-nets. Några större förändringar är det inte att tala om mer än att jag lagt till några punkter som tidigare inte varit uttalade i skrift.

Som alltid tar jag gärna emot input och feedback på vad ni tycker är bra/dåligt i kommentarsfältet!

Portföljregler net-nets

  • Ingen belåning av portföljen.
  • Portföljkoll max en gång i månaden.
  • Investeringsbeslut tas den 25:e varje månad.
    • Bolag som klarat checklistans samtliga krav och som ännu inte ägs utgör urvalspopulationen för varje månads investeringsbeslut.
      • Det eller de två bolag i urvalspopulationen med i mina ögon störst säkerhetsmarginal försöker jag ta position i (max två bolag per månad).
  • Väger samtliga innehav jämnt vid initial investering.
    • 50 % nedgång från initial investeringskurs och bolaget klarar fortfarande checklistans samtliga krav = ökar med initial investeringsposition.
  • Uppföljning av varje portföljinnehav görs efter 13 månader, alternativt:
    • Uppföljning görs vid upp- utköpserbjudande.
    • Uppföljning görs vid 50 % nedgång från initial investeringskurs (se ovan).
  • Maximal sammanhängande ägandetid per innehav = 3 år.
  • Anledningar att sälja vid uppföljningsdagen:
    • Bolaget missar på ett/flera krav i checklistan.
    • Ägt bolaget i sammanhängande 3 år.
  • Anledningar att behålla ytterligare 13 månader efter uppföljningsdagen:
    • Bolaget klarar fortfarande checklistans samtliga krav.