I thought it might be useful to put the current downward moves in the market in some perspective, so I've looked up what happened to Berkshire Hathaway when its shares fell significantly and then rose again: How far did it fall and how long did it take to recover? I've also obtained data on the FTSE 100 share index and the Dow Jones as well as information on recessions and recoveries.
Berkshire Hathaway I'm taking BH's share movements as a proxy for the experience of a value investors' portfolio in a bear market and in the recovery phase. It's clear that despite Warren Buffett's talent, Berkshire Hathaway is far from immune from large downward lurches - its shares can fall by 35% or more. More hearteningly, we find that it is not many months before the shares have reclaimed all lost ground. In the crash of 1987 BH shares lost 31% between September and November. If you had bought at $2,900 in November, when there was much fear and gloom on Wall Street, and held for 10 months to September 1988 the return would be 66%. If you had sold after a large fall and so missed out on the climb-back, you'll be kicking yourself in September 1988. Berkshire Hathaway shares August 1987-October 1988 Chart In December 1989 BH shares could be bought for $8,675 each. By September 1990 they had fallen 32% to $5,875. It took only 7 months for them to recover all the lost ground, rising 49% from their low point. Berkshire Hathaway shares 1989-1991Chart In March 1999 BH shares were trading at $80,000. They then fell over the next year by 48% to $41,572. Holding onto to those shares through the recovery over the next 9 months would have resulted in a 71% return ($71,000) from the low point. Berkshire Hathaway shares 1999-2000 Chart In October 2008 BH was at $147,000. It fell 50% over the next 5 months. Then it rose by 69% to $125,000 a year later. Berkshire Hathaway shares 2007-11 Chart So far in this crisis BH shares have fallen only 21% from $346,000 to $272,000, which is fairly modest compared with past downturns. Berkshire Hathaway shares 2019-2020 Chart Lessons
In October 1973 The Dow was trading at 978. Eleven months later it was 40% lower at 584. It took a mere nine ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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Hi Glen
Novice investor here with just a couple of general questions I wondered if you help me understand. When the market crashes like this , where does all the money disappear to , surely it must end up somewhere an another asset somewhere. Also is the crash because people are selling or is it that they are not buying or both? Thanks Pete Hi Pete, Real assets are things like houses or farmland. The assets we buy in the financial markets are claims. So, a share is a claim on future profits and dividends (put crudely). Price is different to value. What the market is doing is trying to value the future income accruing to the claimholder. Thus, if you own a company you are trying to figure what the future flows will be to you, the shareholder. Then, because those moneys come in at various points in the future you discount them (i.e. £20,000 received in 20 years is not worth the same to you as £20,000 due in month - so you discount the 20 year flow more than the one month flow). The market is continuously trying to estimate future flows and the correct discount rate to use. As a result it comes up with prices, through the buying and selling actions of market participants. Prices may reflect accurate the VALUE of future flows, or they may not. Last week investors were content that future flows will grow at a nice rate and that equity investing was a fairly low risk activity (hence a low discount rate). This week, investors are far more fearful that (a) future cash flows will decline (b) that shares are very risky things. Hence investors have lowered PRICES. We value investors have to consider whether the new PRICES are high or low relative to our VALUATION of companies (this depends on the cash flows generated by the business which, in turn, depends on strategic position, assets, quality of managers, operational and financial stability, etc). Analogy: you buy a house because you have a family of six people. The VALUE of that house is the benefit of living there for 20 years and its sale price in 20 years (discounted to present). If one month after buying, the price of houses in your area fall by 20% have you lost money? Did anyone lose any cash because of the theoretical possibilit………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 The virus' impact on psychology and social interaction (the diminishing of it) encouraged me sell a couple of companies which were already looking quite high.
I've sold my Dewhurst "A" shares (non-voting) at about £7.20p. I first bought at just over £3. I've also sold my TClarke shares at 112p (bought at 79.16p). I'll write up why I chose these two in later newsletters. For now, I thought I'd express why the virus worries me so much. To focus on the economic cost, leaving to one side the human cost, the death rate of the virus is no great shakes for the economy. What really matters for businesses is the reaction of humans to fear of an event. There will be lockdowns; kids off school; parents off work looking after kids; factories unable to get workers to assemble; offices closed up; meetings cancelled; capex postponed; purchases postponed; holidays cancelled; aircraft half empty, and; panic buying of essentials. The world of business was vulnerable without this virus. Here are the highlights from this week's The Economist article "Downturn, disrupted" which demonstrate fragility: In the last recession 11m people lost their jobs in rich countries and the profits of big listed firms in Europe and America dropped by 51% and 30%, respectively. S&P historic falls: Dec 2007-Mar 09: 55% May-sept 2001: 27% Jul-Oct 1990: 20% Aug 1981- Aug 1982: 23% Feb-Mar 1980: 18% Nov 1973-Oct 74: 42% In downturns in 2000-02 and 2007-08 sales growth at Amazon and Microsoft slowed sharply. Smartphone sales have already slowed, Apple is struggling to ship phones from China. Ruthless cost cutting has always been part of playbook for companies outside the tech industry when the economy slumps. After a bout of dealmaking, goodwill in BS is at a record high of $3.6trn for S&P companies. This can indicate trouble. In 2000-01 and 2007-09 firms made huge goodwill write offs as they confessed to dodgy deals. In America 97% of S&P firms in 2017 presented at least one metric of their performance in a way that was inconsistent with GAAP, up from 76% in 2007. (Galbraith's "bezzle" is at play at the top of cycles) Since 2007 overall corporate debt has risen. In Europe non-financial corporate debt stands at nearly 110% of GDP, compared with under 90% in 2007. In America businesses are now borrowing more than households for the first time since 1991. In the rich world 1 in 8 established companies makes too little profit to pay the interest on their loans, let alone the principal. That’s up from 1 in 14 in 2007. A recession half as bad as the 2007-9 slump would result in $19trn of corporate debt – nearly 40% of the total – being owed by such straightened companies. The clincher I greatly respect Nouriel Roubini, who teaches at NY Stern School of Business and has been an influential policy adviser. He is one of the few economists to predict the 2007-08 (IMF position paper 2006) foreseeing mortgage defaults, mortgage-backed securities unravelling and the global financial system crisis and recession. Professor Roubini published an article in the Financial Times a few hours ago. Here are the highl ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 I bought Daejan (LSE:DJAN) on 5th February at £52.90 per share. My expectation was that this property company would continue to increase net asset value over the next five years. I would hold during that time, while the share price discount to net asset value would fall from an exceptional level of 56% when I bought to a more normal 20% to 30%. I was quite content to settle down to receiving a regular dividend of 2% of the purchase price while the company advanced and the share price moved up over a number of years. What I didn’t know was that the Freshwater family had been planning for a weeks to buy the 20.5% of the shares they don’t already hold. Honest, I had no inside information. So 16 days after my purchase the shares rocketed to just shy of the offer price of £80.50 and I sold at £79.41 after broker costs, a 50.1%. In early February I was pretty confident that the enormous gap between NAV and share price would close, but can’t take any credit for the speed that it happened. (Previous newsletters describe the rationale for investing in Daejan: 7th – 13th February) Is it a good thing? Net asset value is £120 per share and the offer p ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Speaking at last week's annual meeting of the Daily Journal Charlie Munger invited shareholders to remain sane and rational, and not only with regard to share selection, but in all aspects of life. I've transcribed his words: Part of the reason that some of the companies I’ve been affiliated with that have been successful, it’s not that we’re so smart, it’s that we stayed sane. A lot of what goes on is absolutely nuts. One of my favourite tricks is the inversion process. To give an example: When I was a meteorologist in WW2 they told me how to draw weather maps and predict the weather. But what we were actually doing is to clear pilots to take flights. And I just reversed the problem, I inverted. I said suppose I wanted to kill a lot of pilots, what would be the easy way to do it? I soon concluded that the only easy way to do it was to get so much ice on the planes that they couldn’t handle it or to get the pilot to a place where he’d run out of fuel before he could safely land [He was stationed in Alaska]. So I made up my mind I was gonna stay miles away from killing pilots by either icing or getting them sucked into conditions where they couldn’t land. I think that helped me be a better meteorologist – I just reversed the problem. And if somebody hired me to fix India I would immediately say, ‘what could I do if I really wanted to hurt India?’ I’d figure out all the things that would most easily hurt India and then I’d figure out how to avoid them. Now, you’d say it’s the same thing, just in reverse. It works better to frequently invert the problem…You can help India best if you really understand what will really hurt India the easiest and worst. Every great algebraist inverts all the time because the problems are solved easier. Young [people] should do the same thing in the ordinary walks of life. You don’t think of what you want, you think of what you want to avoid. When you’………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Charlie Munger, Warren Buffett’s business partner, now aged 96, gave some brilliant advice to investors when speaking last week at the 2020 AGM of the Daily Journal Annual Meeting (he is the chairman). Don’t play in game where you are stupid Q. How do you research companies? A: Of course, if it’s complicated technologically I tend to leave it to others. There may be an occasional variation in that. But basically, I just don’t do it. I want to think about things where I have an advantage over other people. I don’t want to play a game where the other people have an advantage over me. If you have a pharmaceutical company, and you’re trying to guess what new drug is gonna be invented, I’ve got no advantage. Other people are better at that than I am. I don’t play in a game where the other people are wise, and I’m stupid. I look for a place where I’m wise and they’re stupid. And, believe me, it works better! God bless our stupid competitors. They make us rich. That’s my philosophy. I think you have to know the edge of your own competency; you have to kinda know that this is too tough for me, I’ll never figure this out. I’m very good at knowing when I can’t handle something. Do well by doing good I’ve never be associated with a company that works harder than Costco to make sure the customers are served well. I just love success that occurs that way. I hate success where you are deliberately trying to cheat people or sell them something that’s not good for them. I would choose that approach even if it made less money. In fact, I think you make more. It reminds me of Warren Buffett’s favourite saying, ... If you want to read more of this article or more articles follow my newsletter here. Daejan (LSE:DJAN) is completely controlled by the Freshwater family who hold 79.5% of the shares. We small shareholders are at their mercy. It is therefore important we consider whether the dominant shareholders tend to treat other shareholders badly.
The directors Benzion S E Freshwater, 71, Chairman and Chief Executive Joined the Board in December 1971 with primary responsibility for the Group’s finances. In July 1976 he was appointed Managing Director and, additionally, became Chairman in July 1980. Remuneration £1.25m. Solomon I Freshwater, 68, Executive Director Directs the Group’s operations in the USA and has responsibility for the Group’s UK sales division. He has been a Director of the Company since January 1986. Remuneration £1.25m Solly B Benaim, 63, NED Appointed to the Board in January 2017 and is an independent non-executive director. He was formerly Global Head of Real Estate at accountancy firm BDO. Remuneration: £25,000 ... If you want to read more of this article or more articles follow my newsletter here. Piotroski factors provide some insight into the likelihood of financial distress by examining trends in key accounting metrics over two years.
If all nine are in a positive direction then a very low level of distress is indicated. Any score under five out of nine should make us wary. The first factor is profits. Daejan was profitable in the year to 31st March 2019 with £159m operating profit and £120m profit after tax (ignoring exceptional items). In the six months to the end of September it made an operating loss of £8m after taking a £46m valuation hit on properties in NY. The loss after tax was £11m. A Piotroski point is awarded for the annual accounts analysis but not for the half-yearly analysis. ... If you want to read more of this article or more articles follow my newsletter here. In the past, when Daejan’s (LSE:DJAN) share price to shareholders’ equity (NAV) ratio fell below 0.6 the subsequent five years gave shareholders a return averaging over 100%. Today Daejan’s shares stand on a ratio of merely £52.90/£120 = 0.44.
The make-up of shareholders’ equity Daejan’s balance sheet is really simple: it holds about £2.6bn of property assets against which it has borrowed £0.5bn. It also has £0.1bn or so in cash and a similar amount in receivables, which is offset by payables. The company accountants acknowledge that the company will eventually have to pay around £0.3bn in taxes for things like unrealised gains when, eventually the assets are liquidated (deferred taxes). Market capitalisation is 16.3m shares x £52.3 = £852m. ... If you want to read more of this article or more articles follow my newsletter here. Osias was born in Poland in 1897. In 1939, leaving his wife and children in Poland with the intention of settling them in England once he could obtain visas, he set sail from Danzig for the UK. It turned out that Osias’ ship was the last to leave the port before the Nazi invasion. His wife and three children fled Danzig but were caught and, tragically, perished in the holocaust.
In London’s East End, he was virtually penniless but hard working, and eight years later in 1947 remarried, to Nechama Stempel. Their two sons, Benzion Freshwater and Solomon Freshwater are the two executive directors of the company today. Landmark London properties were acquired by the Freshwater family in the 1950s, and in 1959 their empire was sufficiently established to warrant a stock market listing. They chose the parsimonious method of a reverse takeover. Assets then amounted to £4m and shares traded at 29p. It grew rapidly through the 1960s – in one transaction over 3,000 houses and flats were bought at “what today would seem a paltry consideration” (company website) - becoming London’s “largest private landlord”. They bought and still own many 1920s and 1930s mansion blocks. ... If you want to read more of this article or more articles follow my newsletter here. |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
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