Newsletter - February 15th, 2025

AuditorInvestor

Feb 153 min read

Dear Reader,

Attached is a recent list of stocks that passed value screens (e.g. low multiples of earnings, tangible assets, etc.) but don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

Join Here

Terry Smith - William Green Interview

Notes from William Green's recent interview of Terry Smith, CEO of Fundsmith, one of the best-performing equity funds in the UK and globally:

22:30 Accounts

Investors need to read the accounts to segregate the cash flows from accrual accounting (which is also important as it's a measure of business progress), and to understand the financial leverage or risk in the capital structure. Also view 28:15 - cooking the books.

34:45 Economic reality

Reading the accounts is crucial to figure out economic reality, determine product/service economics, and examine evidence of competitive advantages (see 38:00 below).

Smith recounts finding a $2bn error in IBM's cash flow statement, which nobody else seems to have spotted. Very few investors actually read the accounts. We do - and it could be your competitive advantage.

38:00 Quality Measures

Smith details important financial factors indicating company quality:

High Returns on Invested Capital (RoIC): Apart from valuation corrections, RoIC determines an investor's long-term return on a stock. This is important as, generally, the bulk of earnings are reinvested in the business.

Gross Margins: Higher gross margins indicate pricing power, which is a defense against inflation.

Cash conversion: The ability to convert profits into cash.

40:45 Quality Matters

Evidence of competitive advantage (high RoIC, margins, etc.) in the financial statements needs to be corroborated with reality. Competitive advantages could take the form of: a) brands, b) control of distribution networks, c) intellectual property, d) installed base of software/equipment, etc.

41:30 Management Quality

Apart from operating capability, investors must round up their assessment of managements on capital allocation (including acquisitions), and distributions to shareholders.

50:45 Just own good companies

That's the core of Smith's philosophy, and it's served him well so far.

Smaller investors can also invest in stocks below liquidation value, which we cover in our reports - these opportunities are practically unavailable to large funds like Fundsmith.

1:00:00 Valuations

Smith asserts that investors generally underestimate the impact of compound returns from persistently high RoIC.

He tends to buy shares of good companies when they hit road bumps. He provides examples of buying Microsoft, Domino's, Meta, etc. when others didn't want them.

Exploit Mr. Market's mood swings.

1:04:00 "Just the facts"

Don't follow the story or the hype - just stick to the facts.

"You are right because your facts and reasoning are correct." - Ben Graham

1:40:00 Remote decisions

Smith highlights the advantages of operating in Mauritius - away from the financial centers - it allows for calm, rational and independent decisions.

1:55:30 "Toys get in the way"

Smith shares his thoughts on extravagant personal expenditures. You don't need much in material possessions for a pleasant life.

2:05:15 "Don't trust auctions"

The stock market is a giant auction market - and certain stock prices (especially smaller stocks) can be manipulated in the short run.

As Buffett said: "Price is what you pay, value is what you get". Don't let Mr. Market dictate the value of the stock to you. Form your own conclusions from the facts and your reasoning. This is the approach we try to adopt in our reports.

2:16:00 Make things better

Instead of focusing on making money, focus on making things (products or services) better.

To access the best investment bargains worldwide:

Join Here

Have a great week!

Newsletter - February 15th, 2025

Dear Reader,

Attached is a recent list of stocks that passed value screens (e.g. low multiples of earnings, tangible assets, etc.) but don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

Terry Smith - William Green Interview

Notes from William Green's recent interview of Terry Smith, CEO of Fundsmith, one of the best-performing equity funds in the UK and globally:

22:30 Accounts

Investors need to read the accounts to segregate the cash flows from accrual accounting (which is also important as it's a measure of business progress), and to understand the financial leverage or risk in the capital structure. Also view 28:15 - cooking the books.

34:45 Economic reality

Reading the accounts is crucial to figure out economic reality, determine product/service economics, and examine evidence of competitive advantages (see 38:00 below).

Smith recounts finding a $2bn error in IBM's cash flow statement, which nobody else seems to have spotted. Very few investors actually read the accounts. We do - and it could be your competitive advantage.

38:00 Quality Measures

Smith details important financial factors indicating company quality:

High Returns on Invested Capital (RoIC): Apart from valuation corrections, RoIC determines an investor's long-term return on a stock. This is important as, generally, the bulk of earnings are reinvested in the business.

Gross Margins: Higher gross margins indicate pricing power, which is a defense against inflation.

Cash conversion: The ability to convert profits into cash.

40:45 Quality Matters

Evidence of competitive advantage (high RoIC, margins, etc.) in the financial statements needs to be corroborated with reality. Competitive advantages could take the form of: a) brands, b) control of distribution networks, c) intellectual property, d) installed base of software/equipment, etc.

41:30 Management Quality

Apart from operating capability, investors must round up their assessment of managements on capital allocation (including acquisitions), and distributions to shareholders.

50:45 Just own good companies

That's the core of Smith's philosophy, and it's served him well so far.

Smaller investors can also invest in stocks below liquidation value, which we cover in our reports - these opportunities are practically unavailable to large funds like Fundsmith.

1:00:00 Valuations

Smith asserts that investors generally underestimate the impact of compound returns from persistently high RoIC.

He tends to buy shares of good companies when they hit road bumps. He provides examples of buying Microsoft, Domino's, Meta, etc. when others didn't want them.

Exploit Mr. Market's mood swings.

1:04:00 "Just the facts"

Don't follow the story or the hype - just stick to the facts.

"You are right because your facts and reasoning are correct." - Ben Graham

1:40:00 Remote decisions

Smith highlights the advantages of operating in Mauritius - away from the financial centers - it allows for calm, rational and independent decisions.

1:55:30 "Toys get in the way"

Smith shares his thoughts on extravagant personal expenditures. You don't need much in material possessions for a pleasant life.

2:05:15 "Don't trust auctions"

The stock market is a giant auction market - and certain stock prices (especially smaller stocks) can be manipulated in the short run.

As Buffett said: "Price is what you pay, value is what you get". Don't let Mr. Market dictate the value of the stock to you. Form your own conclusions from the facts and your reasoning. This is the approach we try to adopt in our reports.

2:16:00 Make things better

Instead of focusing on making money, focus on making things (products or services) better.

To access the best investment bargains worldwide:

Have a great week!

Subscribe to Our Newsletter