Sunday, 6 December 2015

Weekend reading

Tren Griffin - Charlie Munger (5 Good Questions)
Related: How does Charlie Munger recommend dealing with adversity? (25iq)

Fantastic talk from Peter Lynch that's worth re-watching once a year - Making Money in the Stock Market: Peter Lynch on Investing in the U.S. Economy (YouTube)

How a “platform company” works (Valuetrap)

How failed JCP Ron Johnson is redeeming himself (Fast Company)

A Vanguard fund manager’s investment philosophy (from Value Investing World) (Vanguard)

Bloomberg ‹GO› Full Episode from 1 December with James Tisch (Bloomberg)

Highly recommend this 3-part Q&A with geopolitical strategist Peter Zeihan (author of The Accidental Superpower) (Gavekal)

How Many People Take Credit for Writing a Hit Song? (Priceonomics)

As China’s Workforce Dwindles, the World Scrambles for Alternatives (WSJ)

My year reading a book from every country in the world (TED)

Will MacAskill on Effective Altruism, Y Combinator, and Artificial Intelligence (Tim Ferriss)

Navy SEALs Have a '40 Percent Rule' And It's the Key to Overcoming Mental Barriers (Big Think)

Trailers and clips from the upcoming Big Short movie (Value Walk)

Sunday, 22 November 2015

Weekend reading

John Malone: Scale Very Important In Media Space – Full Interview (Value Walk)

Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate? (25iq)

Visio Capital Management interview on (Opalesque)
Visio is one of the longest-running and largest independent South African hedge fund management companies with offices in Johannesburg and Cape Town. As of September 2015, Visio’s flagship fund returned 5192% since inception (31.1% average net annual return), with only one down year (2008, -5%)

Jason Zweig interview on demystifying Wall Street (Wealthtrack)

The Single Best Interview Question You Can Ask (Farnam Street)

Surveying the Ghost Cities of China (Priceonomics)

Sir John Templeton Tribute From Franklin Templeton (Value Walk)

It's starting - Foreigners Give Up On Asia As Central Banks Diverge (Barron's
On a rolling 12-month basis, foreigners became net sellers of Asian equities, data provided by Credit Suisse shows

From Adam Grant (author of Give and Take): The Virtue of Contradicting Ourselves (NY Times)

Children don't ruin women's careers — husbands do, Harvard study finds (National Post)

How Friendships Change in Adulthood (Atlantic)

Does being self-deprecating help or harm you socially? (Hopes and Fears)

Sunday, 8 November 2015

Weekend reading

Howard Buffett Is Getting His Hands Dirty (Bloomberg)

Edge Master Class 2015: A Short Course in Superforecasting (via Value Investing World) (Edge)

Oldest South African hedge fund (Opalesque)

Stan Druckenmiller Interview (Vienna Capitalist)

AMA on Charlie Munger: What did Charlie Munger Learn from Phil Fisher? (25iq)

A Dozen Things I’ve Learned from Charlie Munger (Distilled to less than 500 Words) (25iq)

100-year-old companies: How to Stay on Top for the Long Term (Fortune)

Capital Allocation at Asian Wide-Moat Innovators - probably linked this before but within the article there is a succinct checklist on capital allocation (Beyond Proxy)

A visit to Zimbabwe (Platinum Asset Management)

Jamaican Twofer: Book Review and Notes (Minority Report)

MiB: Mario Gabelli of GAMCO (Ritholtz)

Ahead of the elections this weekend - The New Burma (60 Minutes)

The Marginal Productivity of Chinese Debt Has Gone From Bad to Much Worse – Not Good for the Rebalancing Case (Gavekal)

On a three centuries paper trail at Coutts - The private bank manages its corporate past through a trove of records from wealthy clients (FT)

This is a wonderful video (excerpted from George Monbiot's TED talk) on - How Wolves Change Rivers (Youtube)

Sunday, 25 October 2015

Weekend reading

A Dozen Things I’ve Learned from Charlie Munger about Ethics (25iq)

I was reading this write up on Fastenal (Base Hit Investing) and was reminded of this article (Inc.) from back in the days about their management ethos

Annual review from Platinum Investment Management (Australian value fund) (Platinum)

Claire Barnes' Apollo Asia Fund Q3 Letter (Apollo)

Greenlight Capital Q3 Letter (Value Walk)

William Thorndike: "The Outsiders" (Talks at Google)

How to Not Get Invited Back to Parties (BeyondProxy)

For a high level overview of the asylum seeker situation in Europe watch this 60 Minutes video (CBS)

This documentary (from the founder of 5-Hour Energy) has been making rounds on YouTube lately - Billions in Change (YouTube)

Sunday, 18 October 2015

Weekend reading

Warren Buffett at Fortune's Most Powerful Women Conference (Fortune)

Boosting Our Berkshire Valuation (Morningstar)

Berkshire versus KKR: Intermediary Influence and Competition (SSRN)

Fall 2015 Issue of Graham & Doddsvile (G&D)

Mario Gabelli, Chairman & CEO - GAMCO Investor (One Wire)

Capital Allocation at Asian Wide-Moat Innovators (Beyond Proxy)

Vice documentary on the Japanese diamond business - Taking Down Tokyo's Corrupt Diamond Syndicate (Vice)

For something a bit different - Decadence and Madness at the Top: Inside Britain's Secretive Bullingdon Club (Spiegel)

Sunday, 11 October 2015

Weekend reading

Thank you to all of you who read, shared and commented on the Rockwood Holdings/Outsiders case study. The response has been overwhelming and I'm glad that this great story of capital allocation and sensible management is out in the public domain.

Quotes From The Symposium Of Warren Buffett And Charlie Munger (Value Walk)

“The nature of acquisitions is that they get to the board at a point where if you turn them down you are rejecting the chief executive, you are embarrassing him in front of his troops, you’re doing all kinds of things. So, it just doesn’t happen.”

Reminds me of a quote from the 2014 Berkshire AGM on how companies select compensation committee members: "Board delegates decision to a compensation committee and they don’t look for Dobermans, they want cocker spaniels with their tails wagging. I voted for compensation plans in various places that were far from perfect"

This is fascinating and shows that forecasting is not an easy subject: What people in 1900 thought the year 2000 would look like (WaPo)

I’m game for (what appears to be) an underwater croquet match if anyone is interested (second to last picture). 

Related: Can You See the Future? Probably Better Than Professional Forecasters from Jason Zweig (WSJ)

Great podcast from the London School of Economics on advertising: One plus One Equals Three: a masterclass in creative thinking (LSE)

"Every year in the UK, GBP18.3bn is spent on all forms of advertising and marketing of which 4% is remembered positively, 7% is remembered negatively and 89% isn't noticed or remembered. [...] 17 billion quid is pissed away by so called experts every year." Reminds me of the investment business.

Adam Grant's (author of Give and Take) monthly newsletter (Granted)

Great interview with Joe Koster (of Boyles Asset Management and Value Investing World) on Value Walk (Part 1 and Part 2)

Tom Russo: Global Value Investing (Talks at Google)

Sunday, 4 October 2015

Weekend reading

A fascinating hour long talk from John Burbank at UC Berkeley - Invest in things that have never happened before (Value Walk)

Third Avenue's Q3 2015 letters (Third Ave.)
On a related note, I highly recommend to read the Q2 2015 letter of the credit fund (link here, from page 32). A very succinct description of a Chapter 11 restructuring process

Sohn Canada Investment Conference Notes 2015: Capitalize For Kids (Market Folly)

A Dozen Things I’ve Learned from Charlie Munger about Capital Allocation (25iq)

From Ferraris to Cement, Europe's Rich Families Turn Dealmakers (Bloomberg)

Love story from the FT - Silvio Berlusconi and Vladimir Putin: the odd couple (FT)
Related: Putin interview by Charlie Rose on 60 Minutes (CBS)

Buffett on giving - In the first of the FT's Ambitious Wealth interviews, Warren Buffett says philanthropy is getting younger and going global (FT)

Confirmation Bias: Your Brain is So Judgmental (Big Think)

FT correspondent on how to survive — and thrive — in Hong Kong (FT)

First part of an interesting Vice documentary - How Pablo Escobar's Legacy of Violence Drives Today's Cartel Wars (Vice)

Sunday, 27 September 2015

Outsiders in chemicals, the story of Rockwood Holdings

This piece is not about an investment idea, rather a case study of capital allocation and a story of a few Outsiders. When I first came across Rockwood I thought that this could be summed up neatly in a few paragraphs. Technically speaking it is possible but wouldn’t do justice to the story. The content is rather on the long side, however if you don’t feel like reading the whole thing the below quote, from Rockwood CEO Mr Seifi Ghasemi in early 2014, will give you the essence of what I’m about to describe.

This post is for investors who are (i) interested in stories of shareholder friendly managements and capital allocation, (ii) doing their homework on Air Products and want to learn further about Mr Ghasemi or (iii) doing their homework on Albemarle (eventual acquirer of Rockwood in 2014).

Onto the quote from Mr Ghasemi.

“In the last nine years as a public company we have on a consistent basis said that the only strategic goal we have at Rockwood is to maximize shareholder value. This is the guiding principle, which drives everything we do. Our job is to make money for our shareholders. We believe that in the long-term what matters is the increase in the per share value of our stock and not overall size or growth. 

I want to emphasize this point since it is the core of our strategic thinking; the act to increase the per share value of our stock and are not enamored with building an empire and running a bigger company. So it is this fundamental principle of focusing on increasing the per share value of the stock that led us to this strategic decision to sell 60% – yes, 60% – of our company and focus on our two core businesses. We publicly announced the key elements of our strategy a year-ago in January of 2013 and set the target of executing it in two years. Today, a year later, we have delivered on all elements of that strategy well ahead of plan.”

Rockwood was a specialty chemicals company ran by a great management team and ultimately acquired by Albemarle, returning 18% p.a. since the IPO in 2005 until the announcement of the sale in July 2014. The CEO – Mr Ghasemi - has since went on to transform the Bill Ackman backed Air Products.

Rockwood's history goes all the way back to the 1880s when the founder, Bernard LaPorte (back then known as LaPorte Chemicals) came up with a process to manufacture hydrogen peroxide, which was used for bleaching wool and straw hats, key products of the British economy during the industrial revolution. To conveniently skip 100+ years, LaPorte has fallen on hard times and certain parts of its business were acquired by KKR in 2000 for c. $1.2bn. In 2001 KKR brought in Mr Ghasemi, who has a background in chemicals and industrials and previously worked for GKN and BOC (now part of Linde). Mr Ghasemi, along with CFO Mr Robert Zatta and SVP of Law and Administration Mr Thomas Riordan took this business and over time converted into the largest lithium player in the world, handily enriching shareholders in the process.

Flying under the radar

The reason you probably haven’t heard about the company (unless you follow the lithium business) is partly because it’s a B2B company and partly because promotion was the last thing on management’s mind. Companies like Rockwood can hide in plain sight while compounding away. Management was always very low key but very much aligned with shareholders. Their mantra was decentralised operations and they ran Rockwood out of a small office in Princeton, small staff (25 at IPO, 35 at last count) with everybody on one floor. You could think of Rockwood as a holding company with a bunch of assets and hard-nosed approach for lean operations and value creation.

Comments from Mr Zatta (who previously worked at food giant Campbell Soup) in a 2014 interview paint a clear picture.

“Rockwood, with its small management team, definitely provided that [working in a non-bureaucratic environment]. “We didn’t have any bureaucracy,” Zatta recalls. “We didn’t create levels and layers of management for the sake of having process. We were very much focused on getting things done.”

The business is run on a decentralized basis, with the managers of individual units given the autonomy to run things how they needed to be done. “If they had a big capital project, or if they needed approval to shut something down, they only had to talk to myself and Seifi. And now that he’s not here, basically just myself.”

Rockwood’s leaders were crammed into close quarters. “We had our treasurer sitting in the kitchen. That was his office,” Zatta says. “Our controller sat at a secretary’s desk outside my office. When the CEO came in, the only room he could work out of was a conference room.” Zatta said the nimble management structure was a breath of fresh air compared to his big corporate background. “It was exhilarating,” he says.”

A slide from a 2014 investor meeting gives you an overview of their MO. Having read their filings, conference transcripts and presentations I’ve stopped counting the occurrence of “shareholder value creation” at about 347. At least I got the point.

Source: company filings

Act I: The beginnings - IPO (2005)

Rockwood started life as a portfolio company of KKR, when the PE fund acquired the pigments, additives, metal processing and other businesses, which constituted over 50% of LaPorte’s (UK chemicals co) sales, for $1.2bn (around 1.2x TTM sales and 8x EBITDA). Apparently, LaPorte’s share price drastically underperformed the FTSE at the time as the business had a bit of a rough patch due to a strong pound, rising oil and other input costs, hence they hoped that selling assets and focusing on their core operations (fine and performance chemicals etc) would help performance. LaPorte was also a bit of a hodgepodge of loosely related assets so selling things off seemed like the right thing to do. In general, the growth profile of chemicals and industrials businesses is modest, but PE firms like these assets given the stability i.e. they can be levered to the hills. In this deal KKR put about $0.3bn equity with the rest financed by debt.

As a side note, what makes a chemicals company a “specialty” business is that the products they sell make up a small percentage of customers’ operations but are critical to performance. These are in general lower volume, higher margin products as compared to their commodity cousins. Rockwood has built a portfolio of inorganic chemicals assets (i.e. no relation to carbon related minerals such as oil) in a diversified way.

Rockwood has grown via acquisitions of which the largest was the 2004 acquisition of Dynamit Nobel. The Dynamit acquisition included the businesses of Sachtleben (TiO2), Chemetall (lithium and surface treatment) and CeramTec (ceramics, hip implants etc) amongst others. Total consideration was $2.3bn (inc. assumed debt) and the seller was MG Technologies (now GEA Group) as the German conglomerate was separating its engineering and chemicals businesses. At the time Dynamit had sales of $1.6bn (compared to Rockwood’s $0.8bn) and EBITDA of c. $300m (paying just above 8x TTM).

With this acquisition Rockwood expanded into new platforms. While the actual operational overlap was limited, these businesses had one thing in common with the existing operations: speciality chemicals and the products represented a small portion of customers’ production costs.

From Mr Ghasemi at the time (the last point is key). “The four businesses we are buying are profitable stand-alone companies,” says Mr. Ghasemi. “There is no particular product overlap, but there is overlap in customers in the consumer products, construction, electronics and coatings markets. These are specialty chemical businesses where the definition is that the products they make are a small percentage of customers’ costs and essential to the way they make their products.”

The key here, as you’ll see below, was to get to the lithium business. Rockwood’s management was developing a thesis that an inflection point in the demand for electric vehicles in 10-15 years would cause a surge in lithium demand and a scramble for supply. But to get that business they had to buy the whole thing from Dynamit, with a few problem children.

Following this acquisition, as well as other smaller bolt-ons such as Groupe Novasep (subsequently sold in 2006 in an MBO) and the pigments business of Johnson Mathey, Rockwood would report $3bn in revenues and $570m in adj. EBITDA in 2005 (year end). The other side of this breakneck growth was the increase in leverage, on a gross basis Q1 2005 was close to $3.5bn with interest expense over $200m annually.

KKR decided that it was time to take Rockwood public and did so in August 2005 by selling 23.5m (inc. 3m greenshoe) shares at $20 apiece, raising $440m after discounts, which almost entirely went to pay down debt. Rockwood starting trading on the NYSE under the ticker symbol ROC (Jay Z must have been a buyer).

Prior to the IPO, the business was 75% owned by KKR, 22% DLJ (remember them?) while mgmt owned c. 1% of the business. Post IPO KKR’s stake was down close to 50% and has exited the business via a multiple of sell downs during November 2007, June 2008, December 2010, May 2011 and finally in October 2012.

The below slide gives you an overview as to the development Rockwood has gone from formation to post-IPO.

Source: company filings

Act II: The middle part – 2006 to 2012

As Mr Ghasemi elaborated during a 2011 investor meeting:

“We had two five-year plans that we have executed. The first five-year plan was to change the company culture, service the debt and live within the covenants, grow by acquisitions to more than $3 billion and take the company public. That was our main goal for the first five years. We accomplished that. 

Second five years, we wanted to optimize our portfolio, therefore we sold a lot of businesses. We executed bolt-on acquisitions to strengthen our core businesses. We improved our EBITDA margin to 20%. And we paid down debt. Our goal was three times, which we have – we are very ahead of that. So that was our second target. 

But I'm sure you are very interested in terms of what we are going to do for you in the future. I have some more details on that. But moving forward in the next five years, what are we going to do? First of all, why are we going to do what we are going to do? We want to create value for our shareholders. We measure ourselves strictly by the price of our shares. That is what – we exist to create value for our shareholders […]”

Rockwood closed the 2005 financials with $3.1bn in sales and $570m in adj. EBITDA. By 2012 the surviving businesses in the pursuit of higher returns on capital reported sales of $3.5bn and adj. EBITDA of $780m. While this might not seem like a lot of increase consider the divestments in the process. The core businesses such as lithium and surface treatment (previously part of specialty chemicals) or advanced chemicals have all performed well.

Source: company filings. Pie charts represent breakdown of revenues

During the 2005-12 period EBITDA margins increased from 18% to 22% given changes in the portfolio and operational efficiencies. More importantly net leverage decreased from about $2.7bn (almost 5x net leverage) to $1.5bn (about 2x), which is pretty substantial. In June 2012 management even instituted a dividend policy of paying out $35c per share per quarter ($27m per quarter). In the same period ROIC averaged 12%, FCF margin approx. 5% (positive every year, even in 2008/09) and FCF yield around 8%. This is pretty good in the chemicals space.

I’d mention a few key developments here and deal with a few housekeeping items. To start with the divestments, management sold a few businesses that you see in the 2005 breakdown but not in the 2012 financials, such as Group Novasep in an MBO (it produced pharma ingredients, for EUR425m or $540m EV at approx. 8x EBITDA), specialty compounds business to Mexichem ($300m EV at 1.3x sales and c. 9x EBITDA) or the electronics business to OM Group ($315m EV at c. 8x EBITDA). In addition, they bundled their TiO2 business (Sachtleben) with Kemira, Finnish chemicals co to form a JV where Rockwood owned 61%.

Management also made a run for Talison, a Canadian listed company with the world’s largest ore based lithium mine in Australia. Ultimately they lost out to a Chinese co named Tianqi, but as life works in mysterious ways Rockwood got another shot at it.

Management has been very disciplined in capital allocation. On a 2008 conference call, just before the crisis they noted the following: “Our priority we have said that our priorities number one is organic growth, number two is bolt-on acquisitions. We still have a lot of opportunities. We think actually that with the economic downturn, asset prices have gone down. We are not facing as much competition from private equity as before. As a result we think it's an opportunity to put our cash in use and to do some additional bolt-on acquisitions, which would be helpful.“

They had clear guidelines for acquisitions: the target had to be or have (i) global market position, (ii) adj. EBITDA margin of 25%+, (iii) global industry technology leader and (iv) limited exposure to oil-based raw materials (Rockwood’s bread and butter is in inorganic chemicals).

A word on the 2008/09 crisis. This had a pretty significant impact on Rockwood – sales and EBITDA declined 20% vs 2008. This was coupled with a pretty strong exposure to Europe as well as FX fluctuations. The business was helped by the diversified portfolio and a very proactive management – they’ve started cost cutting already in 2007 to reach $150m by 2009. As leverage was still high, they’ve renegotiated covenants and ultimately came out OK from the crisis. They also had to let people go (about 900 or 9% of the workforce) but mgmt. also froze their base pay, which didn’t increase $1 until 2013 (even then Mr Ghasemi’s stayed flat). Despite the solid results the share price dropped from above $40 at the peak in June 2008 to as low as $4 in early 2009.

A few housekeeping items before we move on.

You’ve noticed that in places I used adj. EBITDA as a metric. This was management favoured reporting method (and what they used internally too). This is basically reported EBITDA adjusted for one-off items. Now EBITDA is one thing, but when I see adjusted EBITDA all sorts of red flags are raised. To their credit they’ve at least been consistent and covenants were also tied to adj. EBITDA metrics. More importantly the company has been FCF positive all through the years (even in 2008/2009), while mgmt. comp was also tied to cash generation.

If you look back historically, the company for a long time traded at a discount to peers mostly due to the complexity of the portfolio (7 segments and 17 business units at IPO). The thing about specialty chemicals is that analysts are looking for a comp and if they cannot find it they’ll assign a discount, which of course creates opportunities for investors. Rockwood’s operations were also mostly based in Germany and other parts of Europe and issues such as FX (cost side) or macro risks (demand) hurt the company vs their peers oftentimes.

The good news was that management was always focused on shareholders and never engaged in empire building. They were always more concerned about the long term, never giving quarterly EPS guidance or forecasts but always laid out a framework of how they thought the business could compound, margins, how they controlled costs and capex, leverage and so on. Reading their transcripts of conference calls going back 7-10 years was very refreshing and full of common sense.

Rockwood positioned itself to be number 1 or 2 by market share in their respective businesses. About 70-80% of their sales came from businesses in such positions and management focused on getting out of the non-core ones. While changes were happening all along in the pursuit of a more rationalised portfolio, prompted by the undervaluation management decided to take drastic actions just as 2012 was coming to an end.

Act III: Management goes activist (2013 to 2014)

On a cold day as the world was getting over a NYE hangover management laid out something radical on a January 2013 investor day: shrinking the business by selling over 60% of revenue generating units and focusing solely on lithium and surface treatments. They certainly didn’t believe in sacred cows. The thinking was that the surface treatment business would be the cash cow: 25% EBITDA margins, low capex requirements (3% of sales on average vs 15% for lithium) and relatively good stability, fuelling the growth that was to come from lithium.

Management made a bold bet and starting selling assets off aggressively. In June 2013 they agreed to sell the advanced ceramics business (CeramTec) to Cinven (European PE fund) for $2bn (3.5x TTM sales and 11x TTM EBITDA). It was a high quality business with margins in the mid 30%s and given its presence in healthcare ceramics (think hip implants etc) a good exposure to the theme of ageing population.

Since they bought it as a package deal when acquiring Dynamit the like for like return comparison is not straightforward but assuming the $2.3bn price paid (inc. assumed debt) for then $1.6bn of sales (1.4x TTM sales), which then allocated equally to the segments (CeramTec was 18% then) would result in a 5x gross return (the multiple allocation is pretty subjective). If you assume constant multiples i.e. 3.5x TTM sales it’s a 2x gross return. The important point is that the return above is on an asset basis, in reality Rockwood used about $425m equity to buy the entire Dynamit business (as noted above CeramTec was less than 20% of the valuation) compared to selling just the CeramTec business for $2bn (gross proceeds – about 10% went to taxes, other fees etc - and a large portion went to pay down debt). It’s a pretty good achievement on an asset basis, amazing on equity. Why did they sell such a high quality business? On a conference call after the close Mr Ghasemi admitted that the exposure to a potentially huge medical liability didn’t let him sleep well at nights.

Next on the line was the Clay-based Additives business in July of the same year for $625m to Altana, a German specialty chemicals business for 3.3x TTM sales. This business was part of the performance additives segment. As a fun fact Altana (a company owned by one of the children of BMW founder Herbert Quandt) was considering buying Rockwood or parts of it in 2008, but talks didn’t materialise in the end.

Then to conclude the divestiture spree Rockwood neared the year-end by selling its TiO2 and the remainder of the performance additives business for $1,275bn (inc. pension) to Huntsman. The business generated $1.5bn TTM sales and $105m TTM EBITDA at the time of the announcement. Huntsman’s acquisition price was $1bn (exc. pension) so a multiple of about 0.7x TTM sales and 10x TTM EBITDA, however 2014 adj. EBITDA was expected to be over $200m (improvement of about $100m yoy, on volume, price recovery, raw material reduction etc) so the multiple is in effect was about 5.5x EBITDA at announcement (before synergies). The multiple seems low, but it’s roughly in line with peers. Some saw multiples fetching 6-7x given the speciality element in Rockwood’s business but that ultimately didn’t materialise. The deal happened amid a volatile period for the TiO2 industry with an industry restructuring so probably mgmt. preferred not spending any more resources on this business, which resulted in a decent sale in the end. This business was always a problem child for Rockwood, but as noted above the only way to get to the lithium business. The business was probably worth more in the hands of Huntsman. After a bit of back and forth on regulatory matters the deal finally closed in October 2014.

Lest you think we are done, Rockwood announced that after a failed attempt about a year ago it agreed to acquire a 49% stake in a JV with Tianqi (the parent company of Talison, which owns the Greenbushes lithium mine in Australia) for a total consideration of $516m ultimately (c. $1bn valuation). The saying of "if you cannot beat them join them" comes to mind. Mgmt. guided c. $50m proportional EBITDA from this JV (c. $100m on 100% basis) so would imply a multiple of around 10x, which is along the lines of peers. On a TTM basis with $60m EBITDA (100% basis) the implied multiple was 16.5x. In their 2012 run for Talison, Rockwood offered a valuation over $720m for $30m EBITDA, just as earnings were ramping up.

Talison operates the largest lithium producer anywhere in the world with about 100ktpa lithium carbonate capacity (global production capacity is about 250ktpa). The idea was that the eventual growth from batteries, cars etc would in the next 3-5 years more than compensate for the introduction of this monstrosity of capacity. The Australian mine doesn’t actually supply lithium carbonate but hard rock lithium, which other players (such as Tianqi, a Chinese hard rock converter and the largest in the world) process further. The mine is not the lowest cost but very close to China, while Tianqi is their single largest customer. In commodities you either make money with a cost or location advantage, if you’ve both - think nitrogen fertiliser producers in the US Cornbelt - you have found yourself a gold mine. Ultimately this move strengthened Rockwood’s presence in lithium globally. Additionally, Rockwood entered into an option agreement with Tianqi through 2016 which stipulated that Tianqi can take a 20-30% stake in Rockwood Lithium (which controls the EU and Asian arm of Rockwood’s Li business) at 14x TTM EBITDA less net debt if they wished so.

With the sale of approximately 2/3 of Rockwood’s business and over $3.5bn of gross proceeds received or on their way (vs 2013 ending market cap of over $5bn) you could say that 2013 has been a rather busy year, but all of these moves resulted in a clearer equity story and a better positioning for a large M&A. You could think that the story ends here but it didn’t take long for Rockwood management to shake things up and cap this remarkable story off.

Capital returns

Before we come to the end it’s worth making a quick detour to address capital returns.

Given the leverage and focus on growth, dividends and buybacks haven’t been too high on the agenda until 2012. The first dividend payment came in June 2012 when the company announced a $0.35c per share quarterly dividend ($27m per quarter), which was then subsequently raised to $0.40c per share in February 2013 and then to $0.45c per share (c. $35m per quarter) in August 2013. The dividend payout ratio was in the low to mid 30%s with a view to maintain a 2.8-3.2% yield (higher than industry average). In addition, Rockwood announced a $400m buyback in January 2013 just as it was embarking on its strategic simplification. This was completed in whole during Q3’13 and in November management announced an additional $500m, two-year buyback (this ultimately wasn’t completed). All in, shareholders received about $600m in buybacks and $300m in dividends from June 2012 through the third quarter of 2014. Furthermore, Rockwood paid down debt aggressively - from gross $3.5bn leverage in 2005 it was in net cash (pro forma for the last of asset sales) by late 2014. At the beginning Rockwood was essentially a public LBO.

A word about compensation and management shareholding. Compensation included a mix of base and performance based remuneration, however for the three key executives base compensation hasn’t gone anywhere between 2008-2013, while their performance based compensation was entirely tied to both short and long term financial - mostly cash flow - and relative/absolute share price performance goals. In a 2011 conference Mr Ghasemi commented that almost all of his net worth was tied up in Rockwood shares (both directly acquired and via options). At peak management beneficially owned close to 3% of the company, by early 2014 this was around 2% worth over $100m.

Act IV: Sale of Rockwood (2014)

Just as management was completing their strategic plan, they were on the hunt for their next move. In August 2013 Mr Ghasemi approached the CEO of Albemarle (US chemicals co) to acquire ALB, which didn’t go anywhere and Rockwood went on to focus on the acquisition of Talison. In February 2014 Mr Ghasemi approached again the CEO of ALB, now with a merger of equals plan but again this did not materialise. Following on from the two rejections Rockwood approached other PE and strategic investors. Some were interested in pursuing a transaction but not at the right price, while some PE shops only wanted the cash cow surface treatment business. In an interesting turn of events ALB approached Rockwood about an acquisition in early 2014. Mr Ghasemi indicated that shareholders would need a premium and a significant cash portion to even consider a deal.

Eventually in July 2014 the two companies announced a $6.2bn acquisition of Rockwood by Albemarle. The acquisition rationale was analogous to when Rockwood bought Dynamit Nobel’s businesses - increasing the number of platforms but not necessarily in already existing categories.

The per share consideration at the time was $85.53, paid $50.65 in cash and 0.4803 ALB stock (roughly 60/40 split) and ROC shareholders would become 30% of the combined company. The price meant a 13% premium to prior closing price. While this technically speaking is not a lot, the multiple paid was already on the high end. ALB paid a 14x forward multiple (around 11x including synergies), which is still pretty fair considering that only half of the Rockwood business is in high multiple lithium. Furthermore, as you’ll see below Rockwood’s share price significantly outperformed the market in 2013/14 given the delivery on the strategic plan hence one could argue that the then valuation already implied a high multiple. It’s actually a peculiar turn of events where Rockwood went from being a suitor to getting taken out at a premium. Management played it well.

An interesting twist before the acquisition (though probably on the cards for a while) was the resignation of Mr Ghasemi and his subsequent appointment as CEO of Air Products (Bill Ackman backed industrial gases co) in June 2014. To handle the acquisition, Mr Zatta and Mr Riordan stayed on.

As Pershing was wading through the corporate slog that APD was, they appointed Mr Ghasemi to the board in September 2013 given his experience in the industry and after a 10 month long search process the board decided that Mr Ghasemi was indeed the best candidate and elected him as chairman and CEO effective of July 2014. The industrial gases sector is a lot more concentrated than the specialty chemicals (owning to a previous industry consolidation) hence his remit is to basically restructure the business internally and focus on capital allocation. When his appointment was announced APD share price jumped 8% on the day and reached all time highs. Here is a recent video from Delivering Alpha where Bill Ackman describes how the board came to appoint Mr Ghasemi (watch from the 6:20 mark).

In Conclusion

I know that this is highly theoretical but since the listing in August 2005 through the announcement of the acquisition in July 2014 meant a compounded total return of 18% p.a., performing in line with the wider specialty chemicals sector but outperforming the S&P’s 8% p.a. return. In line performance with the sector comes from a larger drawdown during the 2008/2009 crisis. If you look at the second chart, since the end of 2008 (not even counting from the lows of March 2009) Rockwood returned 46% p.a., ahead of peers and the S&P. Since the end of 2012 (just before the announcement of the strategic dismantling of the company) the stock returned 44% p.a., again ahead of peers and the S&P.

Source: Bloomberg

If you made it this far you probably wonder why I took the time to put all of this on paper. I think that the fundamental performance of Rockwood is remarkable, considering the time period and the sectors they operated in and shows a few key lessons.

Management matters - “Outsiders” are by definition rare. While there is certainly a hindsight bias here, once you find them just sit back and hope they have a long runway ahead of them. Running Rockwood from small HQs, tucked away in Princeton allowed management to make decisions without the burden of bureaucracy and analysis-paralysis.

Disciplined capital allocation is paramount - Having clear guidelines, conviction and financial discipline for growth and/or capital returns can make or break the company. Management essentially bet the farm on lithium but remained disciplined. For instance, instead of getting into bidding war over Talison, Rockwood walked away from a deal in 2012 only to come back in 2013 when the prospects were better.

No sacred cows - While somewhat related to the above, Mr Ghasemi and team were willing to let go approx. 2/3 of their business because that was the right thing to do, without fear as to how that would impact their compensation or social standing (most CEOs like to run bigger, not better companies). It’s not about growth, but value creating growth.

Leverage works both ways - Leverage was a big part of the story and prudent financial management ultimately led to great returns on capital. From $3.5bn gross to net cash in less than ten years, without capital raise is remarkable considering the cards they were dealt at the beginning.

I’d close with two slides Mr Ghasemi presented on his first ever investor call with APD in July 2014 and at a recent investor meeting just a few weeks ago this September. The message is clear.

Source: Air Products filings

Saturday, 26 September 2015

Weekend reading

A tally of the brief survey suggested that most people seem to think that the correction we have experienced/experience could be sticky, at least for a while and have started to add to positions on a small scale. Thank you for everyone who participated or got in touch separately.

Now onto the selection of weekend readings.

Why bother cooking the books if no one reads them? (FT)

Nicolas Berggruen is on a crusade for ideas (FT)

Cove Street Capital - Strategy Letter No. 22 Paleo Investing (CSC)

A discussion about Fannie Mae and Freddie Mac with Bethany McLean and Bill Ackman (Charlie Rose)

Sanjay Bakshi on Reading, Mental Models, Worldly Wisdom, and Investing (Farnam Street)

The striking partnership of Alex Ferguson and Michael Moritz (FT)

The Scariest Navy SEAL Imaginable…And What He Taught Me (Tim Ferriss)
Recommended book on the topic: No Hero: The Evolution of a Navy SEAL (Amazon)

Jeroen Bos: The Genesis Of My Book On Value Investing (Value Walk)

Rising Strong: Lessons for Value Investors in the Turnaround Story of Bata India (Beyond Proxy)

The Best Way To Be Smart … Is To Not Be Stupid. a16z interviews the author of 25iq, Tren Griffin (a16z)

The Art of Value Investing: The Fiction That is a Fact (Undervalued Japan)

William MacAskill on Effective Altruism and Doing Good Better (Econ Talk)

Why Bill and Melinda Gates Call Themselves “Impatient Optimists” (Vanity Fair)

John McAfee – The Most Interesting Man in the Universe (James Altucher)

Interview with Michael Jordan's Personal Trainer, Tim Grover (Tai Lopez)

Sunday, 13 September 2015

Weekend reading

Charlie Munger on Avoiding Computers (Farnam Street)
Munger: People calculate too much and think too little

Don’t fret about the data, China’s GDP forecast to be good news (FT)
China’s economic data for September will not be collated until early next month, but the ruling Chinese Communist party has already decided they will bring cheering news. “The focus for the month of September will be strengthening economic propaganda and . . . promoting the discourse on China’s bright economic future and the superiority of China’s system,” the party’s propaganda department said in a directive to national media outlets.

Living the Chinese dream (FT)
From poverty to superwealth: three Chinese billionaires tell their extraordinary rags-to-riches stories. But is the dream over for the next generation?

China fooled the world, and now comes the Great Unwinding (FT)

As Sales Slump, Hong Kong’s Luxury Jewelers Think Local (WSJ ChinaRealTime)
For those holding Luk Fook, Chow Tai Fook or Chow Sang Sang shares

Jim Rogers exits India, says one can’t invest just on hope (Live Mint)

Jeff Ubben On What He Learned From Peter Lynch (Value Walk)

Of would-be $1B fees, trips to Omaha and hardball negotiating: Behind the scenes of the Precision-Berkshire deal (via Value Investing World) (Bizjournals

A great online course from Yale - Introduction to Negotiation: A Strategic Playbook for Becoming a Principled and Persuasive Negotiator (Coursera)

Sugar addiction – breaking the cycle (Platinum)
The Platinum Group (Australian value fund) has done a very good study on sugar, it's implications on health and as an investment theme. Worth looking through it

How to Live Wisely (NYT)

Why the 'happiest' cities are boring (FT)
It was Harry Lime, played by Orson Welles in Graham Greene’s The Third Man, who famously got to the heart of the matter. (The 1949 film noir is set in the immediate postwar era when Vienna was a much more exciting, but much less liveable, city than it is today). Lime says: “In Italy for 30 years under the Borgias they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love, they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”

Tara Brach on Meditation and Overcoming FOMO (Fear Of Missing Out) (Tim Ferriss)

How to breathe - Steve Maxwell on Gracie Breathing Techniques (London Real)

Sunday, 6 September 2015

Back to school reading

Summer is over and this fact couldn't have been made more clearer by the recent volatility in the markets. To this end I'd be quite curious to see what you think of the events. I've set up an informal survey (to the right of this post) and would be grateful if you could please take a minute to complete it. I'll be sharing the results next weekend. Thank you!

Below is a selection of articles, book, interviews, podcasts and videos I read and saw in the last few weeks. Hope you'll find them useful. Regular posting will resume shortly.


EU refugee crisis: End of an ideal (FT) and, What is the Europe migrant crisis and how has it evolved? (FT)

The World According to China (NY Times)

How farmers from rural China bet on the stock market and lost (Washington Post)

Would Chinese-style education work on British kids? (BBC)

The Biggest Gamble: Can Macau Beat the Odds? (Bloomberg)

Cooling of China’s Stock Market Dents Major Driver of Economic Growth (NY Times)

Jim Chanos interviewed on Full Disclosure re China and a related article from the WSJ

Only 6% Investors Think China Is Growing At 7% (Barron's)

This game will show you just how foolish it is to sell stocks right now (Quartz)

Highly recommend reading the winning pitches ( and Zhaopin) of SumZero's China TMT competition. Both are great write ups.

Berkshire Hathaway’s Bright Future (Barron's)

One of the best resources of Warren's and Charlie's wisdom (via Value Investing World) (BuffettFAQ)

Fosun defiant over its firepower after share price fall (FT)

Mahindra & Mahindra: India’s Own Version of Berkshire Hathaway? (Beyond Proxy)

Getting To Know Bill Ackman: Six Part Series (Value Walk)

Selection of posts from 25iq: Paul Tudor JonesSam ZellDavid Einhorn and Munger on risk  

Two posts on Colombia from Harris Kupperman and the guys at Capitalist Exploits 

Value Investing and the Art of Reading the Air (Undervalued Japan)

The 10 Richest People of All Time (Time)

Meditation: Why Bother? (Farnam Street)

Not an Introvert, Not an Extrovert? You May Be An Ambivert (WSJ)

Study: The kinds of friendships you have in your 20s and 30s predicts your well-being later in life (Quartz)


Interview with Carol Loomis (Longform Podcast)

Interview with Howard Marks (Masters in Business)

Making sense of the Islamic State: An Organic Crisis in Arab Politics (London School of Economics)


Jim Simons: A rare interview with the mathematician who cracked Wall Street (TED)

How the mysterious dark net is going mainstream (TED)

CBS 60 minutes: with Chinese tennis player Li Na (also watch her hilarious speech after winning the 2014 Australian Open) and a fascinating spy story from the Cold War


Jonathan Haidt - Happiness Hypothesis (Amazon)

Michael Singer - The Surrender Experiment (Amazon)

Blake Mycoskie - Start Something that Matters (Amazon)

Barry Schwartz - The Paradox of Choice (Amazon)

Ronald Chan - Behind the Berkshire Hathaway Curtain (Amazon)

John Kralik - Simple Act of Gratitude (Amazon)

Saturday, 25 July 2015

Weekend reading

One from the archives: James Montier's 2006 paper titled the "Little Note that Beats the Market"
"In general we find that the EBIT/EV value strategy is very powerful. For instance in the UK, it 
outperforms the equally weighted market by nearly 13% p.a. over our sample! Performing even better than the Little Book strategy! A pure value strategy based on this modified earnings yield seems to perform particularly strongly in the US and UK.

However, pure value strategies may have added career risk for professional investors. We show that a pure value strategy suffered far worse during the bubble years, than the Little Book strategy. So a fund manager following the Little Book strategy was unlikely to have been fired whilst a pure value fund manager would have found their life very uncomfortable."

Peter Lynch's investment principles (originally on Value Walk)
Peter's Principle #7: The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders

Peter's Principle #17: All else being equal, invest in the company with the fewest colour photographs in the annual report

Buffett’s Error of Omission in Disney — Magic Innovators in Asia? (BeyondProxy)

Great collection of Japan related articles and analysis from Undervaluedjapan

BreakingviewsNikkei and Dealbook on the recent purchase of the Financial Times

A very well written primer on John Malone and his empire (Jnvestor)

Morgan Downey, the author of Oil 101, interviewed on the Investors Podcast
The interview is pretty good but the book is highly recommended for its straightforward description of the oil industry.

Warren Buffett, and Bill and Melinda Gates on Charlie Rose

Dr. Henry Kissinger fireside chat with Eric Schmidt (Google Talks)
They talk a bit about his most recent book World Order, as well as other recent political developments. My favourite book from him is Diplomacy, which does a wonderful job of describing the history of international relations (and the good news is that it is also somewhat shorter than the Lord of the Rings trilogy). Would also recommend his book on China titled very fittingly On China. The Economist TV ads at the beginning of the video are priceless (as is the whole interview)

Howard Marks interviewed by Barry Ritholtz (Ritholtz)

Billion-Dollar Bloodlines: America’s Richest Families 2015 (Early to Rise)

History of the NBA in Africa (NBA)

Europe's Demographic Tides (Cook and Bynum)
A new map created by Germany’s BBSR shows in greater detail than has been previously available the population shifts impacting Europe. The BBSR collected data between 2001 and 2011. While that might sound slightly outdated, these are actually the most up-to-date figures Europe has to offer, as 2011 is the most recent year for which comprehensive population data is available for the whole of Europe. According to its makers, the map provides a level of detail previously unavailable, as it is the first ever to collect data published by all of Europe’s municipalities. The results are impressively comprehensive and reveal a few surprises

Sunday, 19 July 2015

Weekend reading

Bloomberg special report on Asian hedge funds (Bloomberg)

Greenlight Capital's Q2 2015 letter (Value Walk)

Claire Barnes' Q2 2015 letter (Apollo Asia)

Platinum Asset Management (Australian-listed value investing firm) Q2 2015 letters to investors (Platinum)

Continuing series from the Observer - excerpts from the book Great Minds of Investing:
Mario GabelliBill AckmanJoel Greenblatt and 10 Warren Buffett quotes

Pat Dorsey Follows Buffett’s Lessons to Pick Stocks (Barron's)

Samsung: The activist vs the ‘owners’ (FT). Highlights of EM corporate governance...
One more related to the subject from Breakingviews

On corporate governance in Asia, here is a telling tale from Japan (Undervaluedjapan)

Infamous Japanese Activist Returns in Father-Daughter Team (Bloomberg)

Iran: The oil and gas multibillion-dollar ‘candy store’ (FT)

Oldie but goodie, in the context of what's going on in Europe - A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solution from Jonathan Tepper (Policy Exchange)

“Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else.” - President Lyndon B. Johnson

It was with President Johnson’s salty humor in mind that the author decided to write this paper in plain English for the layperson in order to reach as wide an audience as possible. The paper is, however, based on a wide review of economic and legal academic and professional literature.

What Drug Dealers Can Learn From Walgreens, with Stephen J. Dubner (Big Think)

Two recent podcasts from the LSE: decoding glamour and on finding nature's deep design

Alvin Roth on Matching Markets (EconTalk)

Jim Kwik: Brain Coach and Superhero (interview with James Altucher)

The math behind basketball's wildest moves (TED)

For something lighter. BBC documentary on Richard Branson's Necker island in the Caribbean (YouTube)

Summer Reading Book Review: One Summer - America 1927 (Minority Report)

Great quote from Stan Druckenmiller - The Secret to Good Returns (csinvesting)

"The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that's kind of the way my philosophy evolved, which was if you see - only maybe one or two times a year do you see something that really, really excites you. And if you look at what excites you and then you look down the road, your record on those particular transactions is far superior to everything else, but the mistake I'd say 98 percent of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully."

Sunday, 12 July 2015

Weekend reading

On the recent events in the Chinese market:
Story of China Still Intact Despite Market Downturn (Mobius)
Uncertainty persists despite China's stock bounce (Asian Review)
Market turbulence in China tests Xi’s reform agenda (FT)
Kerr Neilson's, portfolio manager of the Platinum International Fund, take on the Chinese stock market (Barron's)

Activist investors love spin-offs. Here’s why you should, too (Fortune)

Male Investors vs. Female Investors (WSJ)

The Rise of Asia’s Wide-Moat Machine Innovators (Beyond Proxy)

Meet Leon Cooperman, CEO & Founder Of Omega Advisors (Value Walk)

Our heretical (and not-so-simple) views on the Greek referendum (Alcimos; originally found on Vienna Capitalist)

Billionaire Rales brothers ready for a new act in split of Danaher (Washington Post)

The Inside Story of How the iPhone Crippled BlackBerry (WSJ)

A Dozen Things I’ve Learned from Ben Horowitz about Management, Investing and Business (25iq)

On Philanthropy: A Conversation with Oscar Tang, Ronnie Chan and Steve Schwarzman (Value Walk)

Graphics of languages spoken across the world (SCMP)

George Mumford, who was the psychology and mindfulness coach to Phil Jackson's teams in the NBA, recently published a great book called the Mindful Athlete, which I highly recommend. Chapter 1 of the book is excerpted on his website

Recent podcasts I've listened to:
Michael Singer (author of Untethered Soul and Surrender Experiment) on James Altucher
Mimi Ikonn interviewed by Brian Rose (London Real)
Sam Harris on Tim Ferriss' podcast

Sunday, 5 July 2015

Weekend reading

Barry Ritholtz interviews Richard Thaler and Leon Cooperman

Tom Gayner: The evolution of a value investor (Talks at Google)

A dozen things I've learned from Leon Cooperman about investing (25iq)

Interview with Peter Cundill protege Tim McElvaine on Japan (Manual of Ideas)

Todd Sullivan on creating shareholder value through buybacks (Manual of Ideas)

Growth Matters (Mobius)

How Fanuc quietly took over the world (Nikkei Asian Review)

A prisoner ID in one hand - and a CFO award in the other (FT)

Former Enron chief financial officer Andrew Fastow says that following accounting rules to the letter contributed to the infamous collapse of the US energy trader and landed him in jail.

Life after default: Malaysia's tips for Greece (Breakingviews)

As he prepares for a referendum that could determine Greece's future in the euro zone Prime Minister Alexis Tsipras could seek some inspiration from Mahathir Mohamad, Malaysia's leader during the 1998 financial crisis. Breakingviews imagines a conversation between the two.

Ad man Rory Sutherland, vice chairman of Ogilvy, interviewed by Brian Rose (London Real). Also linking a few of his earlier TED talks, which are a joy to watch (here, here and here)

Your questions about sleep, answered (RAND blog)

How Shake Shack leads the better burger revolution (Fast Company)

Interview with Tim du Toit

A new series I plan to do more of is to post interviews and conversations with fellow investors about value investing, approaches, stocks etc. In this inaugural post I’ve the pleasure to host Tim du Toit, a Hamburg based value investor, whom I’ve known for a long time. He has been publishing a newsletter for many years and not too long ago he launched two quantitative value investing research tools – quant-investing and quant-value. Below is a short interview with Tim about his journey as a value investor and also some thoughts about the research tool.

I’ve been tinkering with the screener over the last few weeks and found it to be quite straightforward to use. In terms of coverage it extends to all major global markets in Europe, North America and Asia Pacific and over 22,000 stocks spanning all sectors. You can work with four different factors covering various elements of (i) valuation (e.g. multiples, various yields), (ii) quality (e.g. margins, returns), (iii) momentum, (iv) volatility and finally (v) growth (e.g. free cash flow or dividend).

Below is a sample screen I’ve selected for companies (i) trade in the US, (ii) market cap over $100m, and (iii) FCF yield up to 20%. Once you’ve done that you’ll get a list of companies, which you can tweak and sort as you like by many of the factors listed above. You can also set up your own templates to make your life easier. For geeks like me you also have the option to export it to Excel where you can live out some of your wildest fantasies with the list of companies.

In addition to the screener the website also has a list of quant strategies that Tim backtested and wrote about in a research paper (here and here). These strategies will consist of different valuation metrics coupled with other quality or momentum factors. The screener will allow you to search for stocks given a certain strategy’s criteria and build a portfolio of them over time. As noted above quant strategies can help your research and investment process but key is sticking to them over time even when they might not make sense.

Overall, I find the screener to be a very useful addition to my research process as it covers all the key elements in terms of valuation and other fundamental metrics that I use. The dataset is wide enough to have a great sample of global stocks to work with. While it won’t have the robustness of a Bloomberg terminal for instance you are also not paying $20k+ for the pleasure of financial data but you get many of the core features in the screener.

And now for the interview.


Tim, you are well known in the value investing community but for those who might be unfamiliar with your work could you tell us a bit about your background and how you came to value investing?

In 1986, shortly after finishing school, I enrolled in a stock market correspondence course. A year or so later I pooled my limited funds with an amount from my father and started to invest in the real world.

Made every investment mistake

I then went on to make nearly every investment mistake you can think of (technical analysis, broker recommendations etc) until I read a unknown 84 page book called “Winning on the JSE” by Karl Posel an engineer and former professor of applied mathematics.

This book was my introduction to value investing. It broke investing down into a logical process. The book also made me realise that investing was not a recent human activity and that there must be some good research and books about what has worked, not in the short term but over long periods of time in up and down markets.

So from about 1998 this is what I have done, studied the results of every possible book, research paper and investment study I could lay my hands on that showed superior long term performance – and I still do.

This of course led me to Graham, Buffett, Dreman, O'Shaughnessy, Greenblatt, Pabrai, Lynch, Piotroski, Antonacci etc.

All this research led me to develop my own unique investment approach that is value investing based.

I’ve known you for a few years and in that period you’ve gone from stock picking to a more quant based investing approach. What moved you to do it? What were some of the key lessons learnt along the way?

As I mentioned all the study and research I did made me a classic value investor.

Why I changed from pure value investing

This however changed when I read the outstanding book by Joel Greenblatt called The Little book that beats the market, where he introduced me to the Magic Formula. After finishing the book I started doing a lot more reading and research into quantitative investing and how it can be combined with value investing.

What works on European markets?

As part of my research a friend and I in 2012 set out to find the investment strategy that would have given you the best returns in the European markets over the 12 year period from June 1999 to June 2011.

As you know 1999 to 2011 was a horrible time to be an investor (not just in Europe) as it included both the bursting of the Internet bubble (2000) the financial crisis (2007 and 2008) as well as the European sovereign debt crisis (2010 to 2013). We called the study Quantitative Value Investing in Europe: What Works for Achieving Alpha.

Astounding returns +1157%

What we found astounded me, with the best performing strategy returning 1157% over the 12-year period.

In fact the top 10 strategies we found generated an average return of 881%, a return I’m sure you will also be proud of.

Valuation not the most important

The thing about the study that will surprise you (it surprised me) is that valuation was not the most important factor in any the best performing strategies.

Valuation was important but is not the first thing you should look at.

What was more important was to first look for companies with strong share price momentum and select the most undervalued companies from this list.

You may be asking if the research study changed me from classical value investor to a completely quantitative value investor.

A bit of both

The answer is I became a bit of both.

I still enjoy analysing companies and have of course remained a value investor but I make sure all of the ideas I analyse come from one of the best investment strategies in the research study as well as from continued research.

But I’ve also become a quantitative investor investing part of my portfolio in ideas that are quantitatively generated.

In terms of your investment process, how do you go about selecting ideas for your portfolio? Any bias towards certain geographies, industries, company size? What are your thoughts on portfolio composition, size limits, risk management etc?

I use the Quant Investing screener to generate ideas.

I may still look at an idea from a friend or fund manager I respect but that does not happen very often.

I am completely indifferent in terms of company size, location or industry. That said I prefer companies where there is enough volume traded daily for me to get in and out easily and I do not like to invest more than 20% of my portfolio in any one industry.


I size positions so that they make up a maximum of 4% of my portfolio when I buy. I keep the position as long as the company remains an attractive investment. When it becomes overvalued or is not on my screens after a year I sell.

If I invest quantitatively (buy a basket of companies with a high EBIT/EV for example) I do not put more than 2% of my portfolio in any one investment. This is because I have not done as much research on the companies.

A stop-loss limit?

Since 1987, when I started investing, I have been an on and off supporter of stop loss limits. This changed earlier this year when I sat down and researched all the research papers about stop-loss strategies I could find.

The conclusion of the research is, especially if you use momentum to get investment ideas, that a stop loss strategy adds a lot of value. With a trailing stop loss level of 15% to 20% giving the best results.

Because limiting losses helps you a lot with the psychological problems we face as investors, mainly the pain of losses, I recommend that you seriously consider implementing a stop loss system for your portfolio.

There are numerous studies on the outperformance of quant based value approaches, however key here is the limited interference of human actions in the process. How closely do you adhere to the recommendations of the tool to build a portfolio? Do you ever find yourself saying "there is no way this stock is going into the portfolio”?

That is a good question and something that is very hard to do.

If you get a list of company names from the screener and you do even the slightest amount of research, even if you just read the company names, it will lead to you changing in the investment process.

So you must either do no research at all or lay down strict rules about what exactly you want to research before you invest.

That said if you choose 20 investments from a list of 40 companies the screener generated based on your investment strategy that is also fine. If your strategy is good the investment ideas will give you a satisfactory return.

You can read about all the best investment strategies we have tested here: Best investment strategies

Could you tell us a bit about the idea behind Quant Investing? When did you start developing the tools, what are some of the core features and who do you see as your key audience? What are some of the new features that you are working on and planning to roll out in the future?

I am always looking for ideas and insights that can increase my investment returns. But to make sure that the ideas really work I needed a database to test ideas.

As I did not find anything that fit my needs (and budget) so I decided to build it myself. So that is how quant-investing was born.

This allows me maximum flexibility and the ability to try out all ideas I read about or think of.

I had to get a good data source, which you know is expensive, is why I make the screener available to other like-minded investors for a small monthly payment.  

This does not mean the screener only has tools I use, I am always glad to include the ideas of subscribers to make the screener as useful as possible.

Reason for good strategies and data quality

Because I use the screener to invest my own money is the reason why subscribers can be sure the data quality as well as the performance of the investment strategies are good.

I eat my own cooking.

Useful for all kinds of investors

When we developed the screener we included ratios and indicators so that it can be used by as many different types of investors. Whether you are:
  • Growth,
  • Value,
  • Short term momentum,
  • Smart Beta
  • Net Net or
  • Dividend investor

The screener will definitely be able to give you interesting investment ideas.

New developments - Large companies on steroids

We recently added a feature to the screener where you can select market leading companies, basically large companies on steroids. The idea comes from James O'Shaughnessy’s excellent book What Works on Wall Street.

Value rank

We also just finished development of a valuation ranking system we called Q.i. Value that ranks companies based on a combination of the best valuation ratios we have tested including the work from the research paper Quantitative Value Investing in Europe: What Works for Achieving Alpha.

It ranks the whole universe of companies in the screener (22,000) using four valuation ratios and thus helps you to select the most undervalued companies. Q.i. Value is calculated with the following ratios indicators:
  • EBITDA Yield
  • Earnings Yield
  • FCF Yield
  • Liquidity (Q.i.)

You can find more information here:

What makes this screener stand out from other screeners?

The first thing you will notice when you use the screener are the four filters (or funnels) that allow you to select up to four ratios and then use a range slider (for each ratio separately) to choose the range of companies you want to include.

The image below gives you an example of how easy it is to screen using four filters (or funnels):

Over 83 ratios you can use

The four ratios mentioned above are just examples. The screener has more than 83 ratios and indicators you can use to search for companies that exactly meet your investment strategy. You can find a list of all ratios and indicators here: Glossary.

For those who are interested where can they find more information about the site and what’s the best way to reach you?

Here are the best places to look at on the website.

Information on the best investment strategies we have tested: Best strategies
The latest ideas we have researched and other interesting articles: Quant Investing Blog
Where you can find pricing information and sign up to get your own investment ideas: Join today

Your FREE guide to screening

If you click on the following link you can download a free guide, in simple to understand English, to help you make the most of any screener. To download your personal copy of the guide simply click the following link: Guide to screening

Any questions?

If you have any questions please feel free to email me at

Any quant investing books that you enjoy reading and would recommend to others?

Other good books you want to take a look at are:
What Works on Wall Street by James O'Shaughnessy
Quantitative Value by Wesley Gray and Tobias Carlisle

Tim, anything you’d like to say in closing?

Each investor has his or her own unique approach to investing and that is a good thing else we will all be buying the exact same companies.

This is also the reason why we programmed the screener with over 83 ratios and indicators to ensure you find something that fits your investment strategy.

The idea with the screener is to allow you to, as easily as possible, find investment ideas that fit your investment style.

We test strategies all the time to give you an idea of what works and what not.

Please note we do not do this to change your investment style but just to help you with ideas to improve your returns.

And who does not want that.

Let me end on a more philosophical note.

Investing is not a difficult skill to master but it is more difficult than it looks.

If you are interested in investing your own money my best advice is to ignore the popular media completely. Read books and research studies by other investors that have been successful over long periods of time in up and down markets.

Learn from each of them but build your own investment strategy by taking the best from what you've learned that makes sense to you. Each person has got a different temperament and invests in a different way.

However if you follow time-tested investment strategies and build your investment strategy on what has worked you cannot do anything else but have outstanding returns over long periods of time.

Thanks Tim!


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