Newsletter - June 1st, 2024

Dear Reader,

Attached is our latest list of stocks passing value screens (below net current asset value, tangible equity, etc.), which 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:

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Terry Smith Latest

Notes on a recent interview below:

0:45 Compound interest

Equities are unique among assets in its reinvestment component. Businesses (common stocks) reinvest retained earnings unlike bonds and real estate, which facilitates the power of compound interest over time.

10:30 Accounts

It's crucial to go to the source and read the footnotes to the accounts - i.e. the 'unadjusted' numbers.

We do that for you without compromise - no matter the language.

15:00 Yield plus Growth

Free cash flow yield plus growth rate: a rule-of-thumb for expectable returns.

20:00 Cost of debt

Smith makes an insightful point on the potential returns on tangible assets. If businesses can borrow easily against their assets, they are easy to replicate, and the expectable returns on invested capital taper down to the cost of debt.

While this is true for longer-term returns, we're buying stocks where the equity price itself is below the debt that could be safely issued against the business (usually found in smaller stocks). This offers the ideal combination of low risk (from the margin of safety associated with a bond) and high returns (from the larger income and principal appreciation associated with common stocks).

21:30 Intangibles

Properly maintained intangibles are strong sources of earning power over long periods of time, which is what ultimately matters in passive investing. These include brand names, control of distribution, installed bases of equipment, etc.

24:30 Ecosystems

Smith contrasts the failure of the Nokia "ecosystem" thesis in the early 2000s - with the success of the Apply ecosystem thesis recently - i.e. an entrenched service business behind the handset sales.

32:00 Animal spirits

Understand the animal spirits underlying financial markets - Predators ball, Liar's poker, the Big Short, etc. And try not to get carried away by them.

33:15 Patience

Patience is the ultimate trait of the successful investor. It's time in the market that counts (not timing the market).

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Wish you an excellent week ahead.