I recently heard Warren Buffett and Charlie Munger talk about the logic behind share buy-backs and dividend policy (Berkshire Hathaway AGM 6th May) – it’s really not as complicated as some people make out. Warren said: “I just want to give you a feel for how the cash flows at Berkshire.”  He showed this table:
Shares outstanding (Class A Equivalent)
Dec 2019         Dec 2020             Dec 2021            Dec 2022          March 2023
1,624,958        1,543,960           1,477,429             1,459,733            1,450,152“And you’ll notice that every year the number of our shares go down. So, if we own more businesses, and the businesses make more money, your share as shareholders at Berkshire increases every year without you laying out any money.…
“…..the alternative [is] you could receive dividends. But the reason we’ve gotten to where we are is because we kept the money.
“We did pay a dividend in 1967, $0.10 a share. It was a terrible mistake. (Laugh) And I always tell people that I’d for the men’s room and the directors voted while I was gone. But that isn’t true. I was there, I confess. (Laugh)
“But [since then] we’ve reinvested, and it’s produced the $500 billion plus of shareholders’ equity [it was around $20m in 1965] and the $30 billion plus of operating earnings [little earnings in 1965]...and we’ll continue to follow that policy because it makes a great deal of sense.”
Later on Warren, Charlie and Greg Abel were asked this question:
“Since 2019 Berkshire repurchased huge amounts of stock, reducing approximately 10% of the share count, and increasing the intrinsic value per share for the continuing shareholders. Greg [Abel] is expected to be the successor of Warren as CEO, so will he be in charge of the main capital allocation decisions, including future share buybacks?”
Warren’s response: “Well, the answer is that Greg — I’m going to turn it over to him, but the answer is Greg understands capital allocation as well as I do, and that’s lucky for us.
“And he will make those decisions, I think, very much in the same framework as I would make them. And we’ve laid out that framework now for 30 years, or something like that. People make it way more complicated than — I mean, particularly if you’re working on a doctorate or something, it’s just a great subject to have lots of footnotes in, you know, 50 pages, or 100 pages.
“But it’s no more complicated than if you and I and Charlie had a business, and you wanted to sell your interest, and we could buy it for less than we thought it was worth, and without misleading you in any way about what was going on. And we’d buy it then. But, Greg, you’re on because you’re going to be doing it in the future.” (Laugh)
Greg Abel: “Right. Yeah, well, I think, Warren, you said it really well. I mean, the framework’s been laid out, we know how you approach it, and how you and Charlie have approached it, and really don’t see that framework changing. When the opportunity present itself, we’ll want to be an active repurchaser of Berkshire shares. We think it’s a great outcome for Berkshire shareholders to own a larger piece of each of our operating businesses and the portfolio of the equity companies when the opportunity presents itself.”
Warren: “It can be the dumbest thing you can do, or it can be the smartest thing you can do…you obviously do what the business needs to do first if the opportunities are there: Grow your present business, buy additional businesses, whatever it may be.
“And then you make a decision on dividends. But that decision becomes pretty irrevocable because you don’t cut dividends without having major effects in your shareholder base and a lot of things.
“And then, if you’ve got ample capital, and you don’t see that you’re going to use it all, and your stock is attractive, and it enhances the intrinsic value for the remaining shareholders, it’s a no-brainer.
“And if it’s above the price of intrinsic value, it’s a no-brainer that you don’t even listen to anybody, no matter what investment banker comes in and tells you, “Here’s how to do a repurchase program.”
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)

Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

Ten days ago I was in an auditorium in Omaha with 60,000 other people hearing, among other things, a discussion between Charlie Munger and Warren Buffett on the subject of whether there are fewer opportunities to find bargains today than there were in past decades.
Charlie Munger took the pessimistic view, but Warren Buffett thought that human nature had not changed so there were still plenty of opportunities to exploit Mr Market and buy bargains.
Charlie: “I think value investors are going to have a harder time now that there are so many competing for a diminished bunch of opportunities. So my advice to value investors is to get used to making less.”
Warren: “Charlie has been telling me the same thing the whole time we’ve known each other [they met 1959]. We get along wonderfully….
Charlie: “We are making less.”
Warren: “That’s mostly I think because we’re larger. We never thought that we could manage $508bn. I would argue that there are going to be plenty of opportunities.
“The tech doesn’t make any difference, if you look at how the world’s changed in the years since 1942 when I started, I was a kid that doesn’t know anything about aeroplanes, I didn’t know anything about engines and cars, and I didn’t know anything about electricity and all that….new things coming along don’t take away the opportunities.
“What gives you opportunities is other people doing dumb things. (Laughter) (Applause) Well, the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things. And they do big, dumb things, and the reason they do it to some extent is because they can get money from other people so much easier than when we started.
“You couldn’t get the money to do some of the dumb things that we wanted to do, (Laugh) fortunately. And so, I think that investing [as opposed to speculation] has disappeared so much from this huge capitalistic market that anybody can play in, but that the big money is in selling other people ideas.
“It isn’t outperforming. And I think if you don’t run too much money, which we do — but if you’re running small amounts of money, I think the opportunities will be greater. But then Charlie and I always differed on this subject. He likes to tell me how gloomy the world is, and I like to tell him, “We’ll find something.” And so far, we’ve both be kind of right. (Laugh) Charlie, would you budge an inch on that, or not? (Laughter)
Charlie: “There is so much money now in the hands of so many smart people, all trying to outsmart one another and out-promote one another, getting more money out of other people. And it’s a radically different world from the world we started in. And I suppose it will have its opportunities, but it’s also going to have some unpleasant episodes.
Warren: “But they’re trying to outsmart each other in arenas that you don’t have to play…
…“the world is overwhelmingly short-term focused. And if you go to an investor relations call, they’re all trying to figure out how to fill out a sheet to show the earnings for the year. And the management is interested in feeding them expectations, so we’ll slightly be beaten.
“I mean, that is a world that’s made to order for anybody that’s trying to think about what you do that should work over five, or ten, or 20 years.
“And I just think that I would love to be born today, and go out with not too much money, and hopefully turn it into a lot of money. And Charlie would too, actually. (Laugh)
He would find something to do, I will just guarantee you. And it wouldn’t be exactly the same as before, but he would have a big, big, big pile.
Charlie: I would not like the thrill of losing my big pile into a small pile. (Laughter)
Warren: But we might --
Charlie: I like my big pile just the way it is. (Laughter)
Warren: We agree on that, incidentally.
Charlie: Yes, we do. (Laughter) You’re one of the most extreme lovers of the big pile.” (Laughter)
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

t is not enough simply to buy every company that has a NCAV under current price.  We need to be more selective than that.  To start with I whittle down the short-list of potential NCAV using a ‘throwing-out’ checklist:
Foreign and opaque
For a start, I’m hesitant about investing in companies run from abroad.  I don’t have a clue about corporate governance procedures, disclosure requirements, political interference, etc., for companies run out of, say, Russia or China.
I’m even reluctant to plump for US companies because I like to be able to judge the sustainability of the business and the quality of the management.  How can I do that when I’m thousands of miles away, ignorant of the market environment and unable to meet the managers.  At least with Smiths News (LSE:SNWS) I can see what they are doing on their delivery rounds, etc.
Cash shells
I’ve also rejected companies for further consideration because they seem nothing more than cash shells with thin management and even thinner business legs.
Natural resources
Then there are the mining (and oil) companies.  Mark Twain said that mine is a hole in the ground owned by a liar. I would not go so far as to say that they are run by liars, but just ask what are those holes worth? Such imprecision makes me nervous.
Managers/controllers looking after number one
On examining accounts and reading between the lines I suspect some managers are syphoning value from the company.  I spotted one team who set up a separate company with 50% of its shares owned by them.  This unquoted company was then given control over various assets of the quoted company.
Then there are those which seem to have a history of playing games with the accounts.  You cannot make a good deal with a bad person.
One family-dominated company I examined issued options allowing the family to buy shares amounting to more than the market capitalisation.  You need to dig deep to find these little facts.
I would rather invest in a traditional manufacturing or service business, with long-standing experienced executives, than one run by sharp City-types who dart in and out of companies playing financial manipulation games.
Avoid those that appear to be the playthings of the main shareholders who show little awareness of their responsibility to minority shareholders
Hidden liabilities
Watch out for the hidden liabilities that wipe out NCAV, e.g. large pension deficit.
Having listed what I’m looking to avoid I will now outline the key elements I’m looking for in terms of prospects for the business.
Prospects for the business
I’m looking for ‘a good business’.  And I expect to find it, even for companies on low prices relative to the Net Current Asset Value. This requires investigation and understanding of some vital qualitative elements:
Earnings power
One indicator of good prospects is a satisfactory level of current earnings and dividends, and/or a high average earnings power in the past.  No projections of great things to come, other than those relying on ‘facts’ proven in the data.
And don’t rely on past data alone: it may mislead.  Take Tesco, for example, the past ‘facts’ look very strong.  But as we all know, the competitive environment can change on the ground.  We must scan beyond the data for signs of vulnerability.
Earnings power is not the current earnings, but is derived from a combination of actual earnings over a period of years (5-10 years) and estimated future earnings over say five years in the future taking into account the competitive strengths of the business vis-à-vis rivals, suppliers, customers as well as the potential for new rivals to enter the industry and for substitute products/services damaging the firm (e.g. the internet provides a substitute for travel agents, recorded music distribution and book selling).
More on competitive position
Some industries are structured so that they provide the players within them a high return on capital employed.  These firms can sell their products at a high margin over the cost of production. Other industries are notorious for the perpetually poor return on the shareholders’ cash that they use.  It seems that they are locked into poor bargain positions with customers and/or suppliers, they have several rivals all clamouring for market share launching into calamitous price wars.
Quality of management
There are two aspects:

1. Competence.  Examine and compare their words and performance over a long period
2. Shareholder orientation. If you have competent and energetic managers you still will not get very far unless they also possess the quality of integrity, particularly with regard to serving shareholder interests.

Financial stability
You do not want to be in a company with high levels of borrowing or highly variable income flows – steady as she goes is much more relaxing.  Industries that are not subject to much change are likely to be stable; so bio-tech and computer game software is out, industries such as selling boring widgets is in (probably).
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

Yesterday’s newsletter displayed results from the 1950s of using the net current asset value, NCAV, method of investing published by the originator of the idea, Benjamin Graham. Today I want to take things further by displaying more up to date evidence.
A reminder of the NCAV criteria:

1. Current asset values are taken from the balance sheet (e.g. inventory, receivables and cash).  From this total are deducted all the liabilities. Long term asset values are usually ignored (counted as zero, with the possible exception of freehold and long leasehold property).  Usually, further deductions are made to reduce inventory and receivable values to give a conservative bias.

1. Companies passing the quantitative test are also assessed qualitatively for business prospects, managerial ability/integrity and business stability.

So, first today I want to present the evidence of the effectiveness of this method from an academic paper and secondly from my experience over the last decade – I include all the NCAV investment I’ve made (no cherry picking).
As a Professor it was my job to supervise PhD students and publish original research. One of the most interesting studies asked the question:  “If, over the period 1981 to 2000, you had bought a series of portfolios of shares whose prices are less than two-thirds the Net Current Asset Value would you have outperformed the market?”
We (Ying Xiao and I) imagined that we had gone back in time.  We searched the entire Official List each July (average of 1,109 companies).  If the ratio of NCAV to market capitalisation is greater than 1.5 we imagined buying.
We then ‘held’ the portfolios for five years, noting the month-by-month performance and compared it with the general market. The average number of companies fulfilling the criteria in a year was 23.
The average performance of the 20 portfolios is striking (see table): In the first year after portfolio formation the NCAV shares averaged a return of 31% which was almost 11% more than the market.
And it just got better and better the longer you held the shares (up to five years – which is as far as we took it).  This is good news for those of us looking to reduce transaction costs and delay tax payments on gains – just hold onto the shares.
After 5 years, on average, NCAV ‘investors’ had turned £10,000 to £35,402.
Average raw buy-and-hold returns
Months after portfolio formation                                    12               24             36              48           60
NCAV portfolio (20 formations averaged)                      31.19%        75.11%     126.27%   191.62%   254.02%
Market index return averaged over the same months      20.51%        45.98%       73.28%   104.97%   137.18%
(Source: Ying Xiao and Glen C. Arnold (2008) “Testing Benjamin Graham’s Net Current asset Value Strategy in London” Journal of Investing, Winter 2008, Vol 17, Number 4)
​
There are many other tests in the paper, e.g. the NCAV investments are shown as less likely to be liquidated than the average share – over 5 years the liquidation rate is 2.6% compared with 4.2%.  I guess all those BS assets must be good for something.
Note this paper used a purely quantitative criterion for qualification for inclusion in the NCAV portfolios – only whether the share price is one-third or more below the NCAV.
In an academic paper we cannot test subject factors such as ‘prospects for the industry’ or ‘quality of management’ because these factors though vital, are subjective.  Thus we can improve the sophistication and outcomes by overlaying the mechanical NCAV criterion with judgment concerning the quality of the business. This is something I did when investment in NCAV shares over the last decade. The results are shown below.
My NCAV share selections in the decade after I gave up my chair to invest full-time
The 2013 Net Current Asset Value, NCAV, portfolio
 CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023        Return to 31.3.23
French Con.25.7.13                £0.3047                      zero                   Sold July 2015 £0.4378                44%
Caledonian T25.7.13               £0.70                         zero                    Sold April 2020 £1.391                99%
Fletcher King6.8.13                 £0.30                        14.25p                Sold June 2016 46p                     101%
Northamber22.8.13                £0.287                          1.6p                 Sold Oct 2016 £0.303                    11%
Titon5.9.13                             £0.379                         6.5p                   Sold May 2016 £1.06                   197%
Mallett   12.11.13                  £0.7682                        12.7p                 Sold Nov 2014 £0.60                      -5%
AVERAGE                                                                                                                                                 75%

The 2014 NCAV portfolio
CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023          Return to 31 Mar 2023
Holders Tech10.10.14 & 3.11.14 £0.47             1p                            Sold March 2017 £0.33                  -28%
Airea4.11.14 £0.1195                                          0.9p                        Sold Sept 2016 £0.309                   166%
Northamber17.11.14 £0.4265                              0.7p                       Sold Oct 2016 £0.303                       -27%
Caledonian T30.12.14 £1.39                               zero                        Sold April 2020 £1.391                       0
AVERAGE                                                                                                                                                  28%

​The 2015 NCAV portfolio
 CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023
PV Crystalox15.1.15 £0.122 zero Sold Dec 2016 £0.237 94%
Arden Partners1.9.15 £0.422 1p Sold May 2018 £0.364 -11%
Northamber4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31%
AVERAGE        17%The AGA holding was doubled 30 April 2015 at a price of £0.9466.
The 2017/18/19 NCAV portfolio
 Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023
Caledonian Trust7.11.17 £1.23 zero Sold April 2020  £1.391 13%
J Smart30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1%
Northamber6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14%
AVERAGE        9%More Caledonian Trust shares bought in February 2019 at £2.29.
More J Smart bought 30.4.19 at £1.16
The 2020/21 NCAV portfolio
 Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023
McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 118.5p 65%
Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69%
J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28%
Fletcher KingFeb20 – May21 £0.3265 0.5p Sold Sept21 – Feb22 £0.40 24%
Orchard Funding7.6.21 £0.568 6p £0.415 -16%
Caffyns22.6.21 £4.65 30p £5.25 19%
Highcroft22.7.21 £8.75 78p £9.10 13%
Town Centre Securities10.8.21 £1.426 1.75p Sold Feb22 £1.581 12%
AVERAGE        27%Bought more Orchard Funding 7.12.22 at 48p

​Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)

Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

Last week, on my way to Omaha to meet fellow shareholders of Berkshire Hathaway, I set myself the task of reading through the Intelligent Investor, a book written by Warren Buffett’s mentor, Benjamin Graham. This is the book that transformed Buffett’s thinking on investing when he read it as a 19 year-old. He subsequently studied under Graham at Columbia and worked for him for a couple of years

Graham made a fortune using the net current asset value, NCAV, method.   As readers of my newsletters will know, I’ve been using the NCAV method for a decade, explaining my rationale for investing in each company at the time of the investment – you can still read those rationales from each of the past ten years.
Net current asset value, NCAV, criteria

1. Current asset values are taken from the balance sheet (e.g. inventory, receivables and cash).  From this total are deducted all the liabilities. Long term asset values are usually ignored (counted as zero).  Usually, further deductions are made to reduce inventory and receivable values to give a conservative bias.
2. Companies passing the quantitative test are also assessed qualitatively for business prospects, managerial ability/integrity and business stability.

The Evidence
I had read the Intelligent Investor before, particularly at the time of writing my books, The Great Investors and The Financial Times Guide to Value Investing, but I had forgotten about a small table Graham presented. It made me sit up straight in my airline seat last Thursday. It showed that all the way back to the first half of the twentieth century had Graham set out evidence that NCAV worked – I don’t know how I had forgotten that table!
Here is the table (Graham shows just the results from 1957, but I know he employed this method each year in most of the 1930, 1940s to 1956 when he retired. He produced returns double those of the market from the mid 1930s to the mid 1950s):
Profit Experience of Undervalued Stocks
Market        No of Companies   Agg Net Current Assets PS, $   Agg Price Dec 1957, $ Agg Price Dec 1959, $
New York SE           35                                     748                                    419                                 838
American SE           25                                      495                                    289                                 492
Midwest SE               5                                      163                                      87                                 141
Over the Counter     20                                      425                                    288                                 433
Total                         85                                   1,831                                 1,083                              1,904Graham defined a NCAV bargain as one where the share is selling at less than “the company’s net working capital alone, after deducting all prior obligations.” (In my work – see results below - I often allow the long term asset of freehold or long-leasehold property to contribute to the NCAV).
The table shows the large margin of safety between the NCAV aggregate $1,831 and the market price to buy those net current assets, $1,083.
Graham commented on his work:
“Very few companies turn out to have an ultimate value less than the working capital alone, although scattered instances may be found. The surprising thing, rather, is that there have been so many enterprises obtainable which have been valued in the market on this bargain basis…[The table summarises] the result of buying, on Dec 31 1957, one share in each of the 85 companies in the list for which the data appeared in Standard & Poor’s Monthly Stock Digest, and holding them for two years.”
And on the results:
“each of the groups advanced in the two years to somewhere in the neighbourhood of the aggregate net-current-asset value. The gain for the entire “portfolio” in that period was 75%, against 50% for Standard and Poor’s 425 industrials. What is more remarkable is that none of the issues showed significant losses, seven held about even, and 78 showed appreciable gains.”
And, more generally:
“Our experience with this type of investment selection – on a diversified basis – was uniformly good for many years prior to 1957. It can probably be affirmed without hesitation that it constitutes a safe and profitable method of determining and taking advantage of undervalued situations.”
I’ve run out of space today to show you evidence of the application of the NCAV to UK shares that one of my PhD students and I wrote up for the Journal of Investing.  I’ll put that in tomorrow’s newsletter along with the results of all my NCAV buys over the last decade.
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

In the long run there is a 100% correlation between the growth in a company’s earnings and its share price performance. So, if you are an investor, concentrate on estimating earnings.
For that you’ll need to thoroughly understand the company. While you are getting to know your company, and later while you are continuing to follow the story of the earnings of your company, there will be all sorts of things happening in the economy: periods of raised inflation, stock market booms and busts, recession, even war.
In the short run these may be so powerful that they have some impact on the price of your company’s share – but in the long run it is earnings that count.
So if your company is McDonalds you are thinking about the product, the quality of the organisation, the future strength of the brand, etc.
These are the things that will determine long run share price. Do not be distracted by money supply numbers, or economist projections of consumer spending, or the coming recession, or the price of oil. Through all these ups and downs people will still buy burgers. If burger sales go up, earnings go up and over time the share price will correlate with that.
(This does not mean I’m advocating buying McDonald’s shares. Excellent companies can make for very bad investments if you pay too much for them).
Keep it simple
The second thing I want to emphasis today is the need to keep your investment ideas simple. Peter Lynch says that if you can’t explain a company “to a 10-year-old in two minutes or less, don't own it”.
So does this mean that you can only invest in very simple to understand businesses?
Not necessarily. Whichever company you invest in you are going to have to do a lot of hard work, often work that is far from simple.
What Lynch is getting at is the skill to look at a great deal of complexity and to cut through and see the really important sources of value.
You must explain in two minutes why your company has a justified expectation of good future profits (good relative to the share price); what it does to entice customers; what barriers to entry to its segment it might have; how dedicated managers are to shareholder value and how competently they run the firm for shareholders; how secured the finances of the firm are, etc.
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

Right now people seem very worried about inflation, the cost of living crisis, central banks raising interest rates and banks going bust. Then there is the potential for escalating war in Ukraine or a new one around Taiwan. These are concerns, but they shouldn’t stop us from investing.
Sure, if war (or blockade) with China came to pass then we are in deep trouble, but history shows us that fear of this kind is ever-present, but the reality rarely comes to pass. For example, in the 1950s many people missed out on a rising equity market because they thought nuclear war was just around the corner or that a 1930s-style depression was to descend again.  And again in the 1960s.
As for the current economic travails, I see them as normal – just par for the course in a normal economic progression.
Around the turn of the year I was looking for signs of a third major economic mess-up (following Covid and then “transitory” inflation from over-stimulus), but as the weeks passed I noticed that the Holmesian dogs were not barking: unemployment was not rising much, if at all; not many companies were going bust; the wage-price “spiral” got stuck at around 5-6%, etc. Less a spiral, more a bit of a jump to a (temporary) plateau.
And now that gas and oil prices are dramatically down on a year ago we will see headline inflation fall way below core inflation – those headlines will ultimately bring down core inflation.
Peter Lynch once said there is “always something to worry about and the key organ in your body in the stock market is your stomach. It’s not the brain. If you can add 8 and 8 and get reasonably close to 16, that’s the only level of math you need to know. You don’t know to need the area under the curve. Remember that quadratic equation and integral calculus and the area under the curve? Whoever cared what was under the damn curve? But you had to study this. You don’t need this in the stock market. So, all you have to know is that it’s always going to be scary, there’s always going to be something to worry about. You just have to forget all about that”. (Peter Lynch 8 October 1994 Lecture to the National Press Club)
So what should you do instead of fretting over the macro-picture and the maths? “Cut it all out and own good companies” (Peter Lynch).
There you have it: understand good companies; ones that will survive, and even thrive, in normal macro vicissitudes.
Peter Lynch recalls from his lifetime of investing a few of the things Cassandras warned us about:
“ when oil went from $4 to $40 and it was going to go to $100 and we were going to have a depression? Well, about three years later, the same experts, now higher paid, oil is now at $10 and  they said it was headed for $4 and we’re going to have a depression……
…..And then the Japanese, remember how the Japanese were going to own the world, and we were going to have a depression? Remember that one? And then about two years later, we were all worried about Japan collapsing. This is the most absurd thing I’ve ever heard. This is a country with a 20% savings rate, incredible work force, incredible productivity, and people were saying we’re going to have a depression because Japan is going to collapse. You know, it’s unbelievable….
…The LDC {Lesser Developed Countries] debt. Remember the LDC debt? Remember that one? All these countries, Chase [Bank] had lent their net worth to Brazil, Chile, Peru and all these other countries. They were not going to pay it back and we were going to have a depression. It always ends in we’re going to have a depression, or the Great Depression, we’re going to have the Great Depression. I never could quite understand that adjective in front of Depression. The Great Depression or the Big One is coming”  (Peter Lynch 8 October 1994 Lecture to the National Press Club)
So, the general rule is keep being invested despite the macro worries. But only in companies you thorough understand, that have sound business models and managers and which are financially robust.
But remember all the while the adage “young people learn the rules; old people learn the exceptions”.  There will be one of two exceptions in the next decade or two when a macro-event is anticipated to be so big that you need to get ahead of the crowd and go ultra safe with your portfolio, say to 40% cash with the other 60% in particularly secure companies.
I hope you have a good financial advisor – or you are really keeping up with your reading – when those times come.
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)

​Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF

It’s important that investors do not get too attached to a company - you can’t treat it like a grandchild.
The way to do that is to fully understand it, to figure out the business model, the competitive edge, and the competence and integrity of the managerial team. If any of those fundamentals deteriorate you have to say goodbye to it.
“One rule you want to remember: the stock does not know you own it.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Don’t flit
Also, if the company is doing well, and you reason that it will keep doing well, then hold onto it.
By “well” I mean that the discounted value of future cash flow is more than the current market price.  You must keep up to date with your company and periodically refresh your analysis, including new discounted cash flow (or earnings) estimations.
Following this rule you might find that even though your company’s share has doubled or trebled it is still a good hold because the updated discount calculation shows much higher value that you first worked out.
Often the best shares are the ones I’ve been holding for many years.  To emphasize: you have to understand it to be able to stay with it.
Don’t be always fearful
We have had two major shocks to the economy, and therefore the stock market, in the last three years, firstly Covid and then high inflation followed by raised interest rates. These were serious things to be concerned about. And serious things similar to these will occur once or twice in the decade ahead, probably.
But you can’t let these sorts of threat paralyse you into never going into the market and buying shares. Most of the time the best advice for a long term investor is to keep on investing despite worries – most of these worries are not on the same scale as Covid or the inflation scare.
Furthermore, other investors have probably already pushed down share prices to incorporate the concerns. So keep going on share investing, and only expect big crises to come along every decade or so.
If you over-worry you’ll miss a decade's worth of returns. Right now I’m 100% invested in UK equities despite the lingering concerns about inflation and recession. I regard these concerns as being of a normal order and not big.
I’m reassured that while inflation seems high right now it won’t be come Christmas (the price of gas, for example, was €343 per MwH in August last year; it is €40 now. Things like this will push headline inflation below core inflation soon, which will have implications for people’s mood, growth and interest rates)
Peter Lynch: “If you own stocks there’s always something to worry about. You can’t get away from it. What happens in the 1950s, people were worried about the only reason we got out of the Depression was World War II. We got another recession in the early 1950s and we said we’re going to go right back into a depression. People were worried about a depression in the 1950s, and they were worried about nuclear war.” (Peter Lynch 8 October 1994 Lecture to the National Press Club). The 1950s were a great time for investing.
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF.

Many people contemplating being a share investor hesitate because they think they don’t have an edge, an extra insight into companies and sectors. This is usually untrue.
If you have worked in the motor industry, for example, say in sales, or manufacturing, you might be very familiar with the companies. You might know which have the best managers and which have a great new product line-up. This is the sort of knowledge that can give you an edge.
You only need a few good share buys a decade to perform well over time. So you can bide your time, only buying a company’s shares when all the qualitative and quantitative factors are right AND the share is selling at such a low price so as to give an adequate margin of safety.
There is no rush to build a portfolio; a few stocks that you know really well is far better than 50 that you know little about.
Peter Lynch said “When your lifetime is over, you don’t need a lot of five-baggers to make a lot of money starting with $10,000 or $5,000. So, in your own industry you’re going to see a lot of stocks. There are good stocks out there looking for you and people aren’t listening and they’re just not watching. They have incredible edges.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Peter Lynch, one of the greatest ever investors with an extensive knowledge of some industries, had great respect for ordinary folk who possess special knowledge about certain industries, they know a lot and stuck within their circle of competence:
“People have big edges over me. They work in the aluminum industry. They see the aluminum industry inventory coming down six straight months. They see demand improving. In America today, you know it’s hard to get an EPA permit for a bowling alley, never mind an aluminum smelter. So, you know when aluminum gets tight; you just can’t build seven aluminum smelters. So, when you see this coming, you can say, “Wait a second. I can make some money.” When an industry goes from terrible to mediocre, the stock goes north. When it goes from mediocre to good, the stock goes north. When it goes from good to terrific, the stock goes north. There’s lots of ways to make money in your own industry. You can be a supplier in the industry. You can be a customer. This thing happens in the paper industry. It happens in the steel industry. It doesn’t happen every week, but if you’re in some field, you’ll see it turn. You’ll see something in the publishing industry. These things come along, and it’s just mind boggling that people throw it away.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
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Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF.

Ideally, we investors would pick up brilliant investments like Walmart when it only has a handful or stores, or Microsoft before the PC software revolution really took off. But this is simply not possible for most of us. We only discover later in the day that these companies are so well run and so dominate their markets that they are destined to produce good dividends for shareholders.
Does that mean that you are always going to miss out unless you are lucky enough to have personal knowledge of a nascent Great?  It turns out that there are opportunities to benefit from the continued rise long after millions of investors are aware of the company .
For example, by the 1980s everyone knew that Coca-Cola was a great brand and had terrific distribution. It’s shares were not obviously cheap relative to the market average PER based on past earnings.
But, in the eyes of Warren Buffett they were cheap relative to future profits to be boosted by raising margins and through international expansion. Berkshire Hathaway spent about $1.3bn buying 400,000 Coca-Cola shares between 1988 and 1994.  Today those are worth over $25bn. (It was a similar story for 1930s investors in Coca-Cola, or those in the 1950s or 1960s).
Peter Lynch points to another great American company that was an excellent buy when it was very small, but was still a good buy once it was well-known, that of WalMart.
“People are in an unbelievable rush to buy a stock. I’ll give you an example of a well-known company. Walmart went public in October of 1970; 1970 it went public. It already had a great record and had 15 years’ of performance; great balance sheet. You could have waited ten years, saying you’re a conservative investor and you’re not sure this Walmart can make it. You want to check. You see them operate in small towns. You’re afraid, they only operate in seven or eight states. You want to wait until they go to more states. You keep waiting. You could have bought Walmart 10 years after it went public and made 35 times your money. If you bought it when they went public, you would have made 500 times your money, but you could have waited 10 years after Walmart went public and made over 30 times your money.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Lynch also cites Microsoft: “You could have waited three years after Microsoft went public and made 10 times your money…If you knew something about software (I know nothing about software)  you would have said, “These guys have it. I don’t care who’s going to win, Compaq, IBM. I don’t know who’s going to win, Japanese computers. I know Microsoft MS-DOS is the right thing.”  You could’ve bought Microsoft.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
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Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF.