Investing Performance update

Performance update

In most cases a picture tells more than words can.  However, it is sometimes insightfull to know the facts and story behind such picture.  This is the graph of the investment portfolio than I have managed (for free for now) for my sister the last 7 years.  She has always had her money invested with Allan Gray since many years ago when I advised her that I think they were some of the top money managers in SA at the time.  A few years back I said to her that I think I can do better, but did not have the confidence, or the verified track record yet,  to ask her to entrust all her investment money to me.  So I said she must devide all her savings, existing and future,  50/50 between AG Equity fund and her own share portfolio, which I would manage for her, in the same manner as I do my own funds.   She will own the investment account in her own name and have 100% access to it to see exactly what is going on and where the money is at all times.

Every year this time I write a short “report” for her on how her investments performed vs some of the well regarded professional money mangers in SA, as well as vs the Equity Indexes.  I always experience a little bit of anxiety beforehand, mainly because before I do the numbers, I don’t actually know how I have done, since I do not keep score throughout the year.  I hope I have not disappointed her up to now, and she has not fired me yet, so she must be happy.  I am only joking though, as my sister is the perfect “client” who never bothers me during the year regarding her investments,  which allow me the discretion to do things as I want, and as I do with my own money.

For 2014 her portfolio grew by 18.7 % .  The JSE ASLI-index was up by 7.6% and the TOP40-index by 6.5%, so an 11-12% outperformance.  I have to mention though that I don’t think I have ever gone below 30% cash levels the last few years and the avg cash position in her portfolio was probably around 40 – 50 %.  So my “benchmarks” is probably a stretch considering the 100% equity of the index and some of the Equity Unit trusts.   I think I am very conservative in nature and did not see too many “sure bets” in the market.

I also benchmark against 2 professional money managers whom I hold in high regard and have a lot of respect for, Allan Gray and Piet Viljoen of RE:CM.  The AG Equity fund was up 12.2 % in 2014 and the RE:CM Equity fund down 7.5 %.  Looking back at the last 7 years, her portfolio performance was more than double that of the indicies and the professional money managers.  So all in all I think a satisfactory outcome up to now.  My aim is to have a full 10 year period to evaluate against.  Lets see what 2015 holds.

Our Human MicroBiome

An exiting new science and medical field is fast gaining ground and attention. The research covers our understanding of the human microbiome and the relationship it has on our health. Some call it another organ within our body.

human microbiome small
For a nice interactive explanation, visit The Scientific American .

Various reports have surfaced about microbiome transplants that have cured diseases or illness that doctors have been unable to cure with normal SOC (standard of care) such as anti-biotic courses. These procedures are cheap and effective without the use of countless courses of very expensive anti-biotics. Some of these procedures are even done by patients themselves. There is the story of a patient, told by his doctor, who cured himself from chronic otitis externa in his one ear by transplanting ear wax from his healthy ear into his “sick” ear. Read the story here.

Another research report just published recently document how scientists have been able to prevent sinusitus infection in mice by having the mice sniff certain lactobacillus species which protected the surface of the sinus and evaded infection by the corynebacterium species. For a good interview with one of the researhers listen to the clip or read the transcrip here.

Of course, the father of modern medicine, Hippocrates (460-370 BC) have said more than 2000 years ago that “All diseases begin in the gut”. So this is certainly not a new concept, although it has been largely ignored in mainstream medicine in favour of drug treatment which is far more profitable ! With the internet becoming more and more a part of everyday life, more published information became available to ordinary people and doctors alike. The increased access to information about the research and findings of doctors and scientists in this field of the human microbiome spurred a renewed interest in understanding the role it plays in our everyday health and how possibly to cure some diseases.

There are many more diseases that are being cured by “transplanting” normal healthy microbiome from donors to those who are sick. The last few years “fecal transplantation ” have been used to cure diseases in the gut like C. Diff (Clostridium difficile), IBS , Ulcerative Colitis and Crohns . There may be many more that we would be able to cure in the future once we better understand what bacterial mismatches in our gut or elsewhere in our microbiome is out of balance.

Specifically in the case of C.diff infections, there is a doctor in Australia, Dr. Thomas Borody , who is achieving 95% success rates with curing C.diff with fecal transplants. He is also achieving success rates of above 50% with UC and Crohns at the CDD where he works. From wikipedia, At the CDD there were indications that FMT could benefit other conditions including ulcerative colitis,[26][27] autoimmune disorders,[28] neurological conditions,[5] obesity, metabolic syndrome and diabetes,[13] and Parkinson’s disease.[6]. While Dr. TJ Borody was experimenting with patients that were afflicted by both CDI and Parkinson’s disease, he realized that after fecal therapy the symptoms of Parkinson’s in his patients began to decrease; some to the point that the Parkinson’s could not be detected by other neurologists.

Recently, a team of scientists performed a transplant of synthetic “fecal matter” called “RePOOPulate,” into 2 patients using a colonoscopy, the same way a fecal transplant is performed. This synthetic matter is made in a “Robo-gut”, a lab-like system that mimics the conditions inside a human gut. The procedure was successful and both elderly women were symptom-free within three days and tested negative for C. diff six months later. This is a big breakthrough and point to more such procedures in the future to cure not only C.diff, but possibly many more other related bacterial diseases. To read an interesting article about the breakthrough, click here and for the scientific publication, click here .

I believe this new field of the human microbiome could be the next frontier of medical research where significant breakthroughs are going to be made in the next few years in finding cost effective cures for many of today’s popular diseases.

Another very good article to read : Economist article on human microbiome

Some more media articles on FMT :
http://seattletimes.com/html/health/2020149085_fecaltransplantxml.html

Portfolio Performance

5 year Performance

If I can’t beat the full time professional fund managers, and the market indicies, I should really be doing something else. This always was, and still is, my motivation for putting in the time and effort. Above is the 5 year performance of my sister’s share portfolio that I manage for her. In what was arguably one of the toughest 5 years in the market, which included the “Great Resession”, I managed to double the value of her portfolio and beat the performance of the stock indicies and some of the best fund managers by more than 3 times.

Hopefully I can repeat this performance the next 5 years and well beyond that as well. I feel I am getting better and learn more every day. Even after doing my own analysis and managing my own money for nearly 20 years now without the help of a stock broker, there is always something new to learn about different businesses and the people that manage them.

Compounding and Nutrition

To be able to enjoy one of the greatest wonders of the world, compound interest, you have to live long. As Charlie Munger have said, ” I only want to know where I am going to die, so I don’t have to go there ” . Or Warren Buffett, “When I die, I’d like them to remark that it’s the oldest looking corpse they have ever seen”

When my middle son was diagnosed with Type 1 diabetes in May 2012, his life, mine and our family’s changed forever. The past few months I have spent most of my time researching the subject of Diabetes and specifically nutrition. I have come to realise that nutrition is probably the most important factor in living a long healthy life. I have never before give too much thought to nutrition, except the dogma of conventional advice, “eat low fat, high carb diets “.

What I have learned in this time has brought me out of my hibernation of blogging. There is a message that needs to be told. The conventional wisdom is not working and the world population is getting more unhealthy as a consequence. This is bad for investments and bad for our health.

Jeremy Grantham on financial bubbles

James Montier, one of my favourite strategists and market commentators, formerly from SG, is now working for GMO.  Now that is very convenient for me, since I can now access two of my favourite commentators and strategist from one website! That is just a side comment though, since what I wanted to write about today, is the latest commentary from Jeremy Grantham in his quarterly letter for 1st Q 2010.  The link is here.

He has some excellent comments and discussion about the Graham and Dodd crowd and their investment strategy, which makes the read worthwhile on its own. But what has struck me, was their research into financial bubbles. His big point is the fact that ALL bubbles revert back to trend, as was the case for the previous 32! He makes special mention of the still existing UK and Australian housing bubbles and how they still defy their inevitable 40% decline back to trend because of artificial stimilus by their Governments.

This of course had me wondering where we in SA stood as regards to our housing market, and today I read an article where they discuss the housing bubble in the UK and Australia compared to the US. This led to an interactive chart from “The Economist” where you can chart the relative house price increases over time.

The interactive chart at the Economist can be viewed here. As you can see, if the UK and Australia house market are regarded as being in “bubble” territory, then I don’t know how they will define SA’s right at the top!

Stewards of Capital

If I have seen further than others it is because I have stood on the shoulders of giants” ( Isaac Newton)

Dear fellow business owners

I’ve set myself a goal to learn as much as I can from successful investment-, as well as business managers as I could. It is a journey with no end destination and a life long dedication in order to be as successful in investing as I’ve set my goals to be.

In my quest to find honest managers, of money and businesses, I recently discovered Howard Marks. His memo’s to his clients over the years was just released recently on their website . His firm Oaktree Capital has an enviable record and he was also asked to write the foreword for one of the chapters in the newest edition of Security Analysis, by Graham and Dodd, the bible of Investment Analysis. For those interested, a very good interview with him can be read in the newest newsletter of Graham en Doddsville at the following link, http://www4.gsb.columbia.edu/null/download?&exclusive=filemgr.download&file_id=7212104 .

In my reading of his past memo’s, I came upon the one he wrote in 2004, Hey, Steward ! . Here he discusses the breaking down of fiduciary duties of the mutual fund industry and how “Amassing assets under management became the [mutual fund] industry’s primary goal, and how their focus shifted from stewardship to salesmanship.” (Emphasis added). Then lastly he focuses on those fiduciary duties of directors and professional managers of public companies. The whole memo is an excellent read but it is this second part that I quote hereunder which is especially relevant in these days.

Enjoy !!

What Else?

I want to make it clear that just as I do not universally indict mutual fund executives and directors, I don’t think stewardship problems exist only in the mutual fund industry. Most of the shortcomings disclosed in the corporate scandals of 2001-02 – in Enron, WorldCom, Adelphia, HealthSouth and Tyco – stemmed from the failure of executives to act on behalf of the shareholders who own the companies, and from the
failure of directors to police the executives.

The examples are endless: excessive compensation, unwarranted expenditures, phony accounting, and transactions intended only to deceive or obfuscate. In general, executives forgot that they run companies for their owners and instead tried to turn them into personal piggybanks. Or they decided to eschew honest reporting in order to hype results and thus their own economics. Directors of these companies haven’t been accused of wrongdoing, just underachieving. They were too complacent and obliging, and thus asleep at the switch. As Warren Buffett says, “sadly ‘boardroom atmosphere’ almost invariably sedates their fiduciary genes.”

The fundamental questions regarding corporate directors and executives are the same as those I proposed earlier regarding mutual funds: How much ends up in the pockets of the company and its owners, and how much in the pockets of the stewards? What means are used to accomplish this “wealth transfer”? How much is disclosed, and how clearly?

A number of thought-provoking examples were discussed in the Wall Street Journal of December 29, under the headline “Many Companies Report Transactions With Top Officers; ‘Related Party’ Deals Disclosed By 300 Large Corporations; Potential for Conflict.” The article discussed not the headline-grabbing misdeeds of the scandal era, but matters that are routine at America’s largest corporations. Often called “related-party transactions,” they represent deals through which directors or executives receive benefits beyond their standard compensation. Of course, there’s only one possible source for this enrichment: the companies and their shareholders. The Journal and I draw no conclusion about whether these things are proper. But they certainly can serve as fodder for discussing the performance of stewards. Here are a few examples:

A company employs or has business ties with 17 relatives of senior officials.

An executive is reimbursed for making business trips on his airplane.

A company buys “financial advisory services” from a director’s company.

Directors receive hundreds of thousands of dollars in consulting fees, above and beyond their directors’ fees. The fees reward the director/consultants for supplying “general information” or “maintaining and enhancing the company’s strategic alignment.” In the latter case, the recipient happens to be the company’s second-biggest shareholder.

A lawyer serves on a corporate board, and the company gives legal work to his firm.

The son-in-law of a former board chairman runs a real estate joint venture involving the company, to which the company guarantees a minimum level of profitability.

A company sells an amusement park to its controlling shareholder, with the buyer paying half the purchase price in the form of passes to the amusement park he just bought.

The Journal put it succinctly. “All these deals present the risk of conflicts between a company official’s two roles: representative of the shareholder and individual seeking to get the best deal for himself.” They raise significant questions:

Are these deals negotiated at arm’s length? Are the terms the best the company can get?
Who negotiates on behalf of the shareholders? How vehemently?
Where a deal is proposed by a shareholder or shareholder/director with a dominant ownership position, who stands up for the minority shareholders?
How can we be sure director A won’t simply vote for director B’s excessive deal in exchange for director B returning the favor?

As I mentioned above, there has been no allegation – even in Enron, Tyco and Adelphia – of actual director impropriety. Rather, the questions surround the energy put into governance.

After working together for many years, directors develop congenial relationships with each other and with the executives. How strongly will they then fight to resist questionable transactions between the company and their colleagues?

Directors’ fees can run into the hundreds of thousands, perhaps with stock options and perks in addition. Will a director risk this package to fight for some faceless shareholders?

In short, can a director who serves at the pleasure of the chairman police the chairman and his other handpicked directors and executives? How can directors be guaranteed the independence that shareholders need them to have?

The industrial economy achieved great strides because of a number of advances, one of which was the separation of management from ownership (and the accompanying development of a class of professional managers). The caveat, of course, is that managers and directors must serve diligently as stewards, protecting the interests of the firm’s absentee owners. The system only works if the stewards – entrusted with responsibility on behalf of others – are up to the task.

The Bottom Line

As you prepare your estate plan, you count on fiduciaries – lawyers, accountants, executors and trustees – to ensure that your assets will be disposed of as you intend. Would you want one of those fiduciaries to buy assets directly from your estate? Rent office space to your estate? Employ his relatives to serve your estate, for additional fees? Enter into a joint venture with the company you left behind? You’d expect the stewards of your estate to be “purer than Caesar’s wife.” Even with motivations that are entirely honorable, it would be impossible for your fiduciaries to simultaneously represent themselves and your heirs on opposite sides of a transaction and still maintain both the fact and the appearance of fairness. Thus they must content themselves with the compensation they’ve been assigned by you or by law. They must resist the temptation to do business with your estate in a way that could benefit them further . . . and to possibly move a little from your heirs’ pockets to their own. We must expect no less from the stewards that we and our companies do business with every day.

In my memos I try to resist citing Oaktree as the paragon of virtue. But when we founded our company, we established an acid test that we routinely rely on to keep us on the right track. It was stated in our original brochure in 1995, and it has served us well ever since.

It is our fundamental operating principle that if all of our practices were to become known, there must be no one with grounds for complaint.
To put it more simply, we assume everything we do will show up on “page one” some day – that nothing will remain a secret. Will there be a negative reaction? Will anyone object?

It’s a simple test, but it seems every day that the newspapers describe someone whose actions could only have been premised on the assumption that no one – not media, shareholders, clients, auditors or regulators – would learn the truth.
Will directors approve of executives’ actions? Will shareholders feel that directors did their job correctly? Will clients conclude that fiduciaries have put responsibility to them ahead of their own interests? We think the standards for stewards’ behavior are pretty clear cut, which means making these assessments shouldn’t be that hard.

March 16, 2004
Howard Marks

Executive Compensation

What is necessary to change a person is to change his awareness of himself. – – Abraham Maslow

Dear fellow business owners

Executive Compensation is a hot topic these days and rightly so! There seems to be almost unanimous agreement that it got out of line in the “bubble” times, unless you are one of those that are able to somehow justify that earning $100 million bonuses is defendable? Those bubbly days are gone, but how do you “reset” these expectations of executives? How do you overcome the “anchoring bias” of people to recent levels? Charlie Rose had a very interesting interview with Paul Volcker here Sept 29, http://www.charlierose.com/view/interview/10631 , in which he makes some very sensible comments regarding executive compensation around the 45 min mark.

I am a firm believer of “everything is relative”. There is many evidence and studies done show people value and compare themselves relative to what their peers have or earn. Leaving aside the argument of whether this is the correct way of valuing one’s self worth, it seems to be the judgment in the business world at least. As a simple example, a top banking executive earning $10 million, but earning 10% more than his closest peer with $9 million, would be just as satisfied as if he was earning $100 million vs his peer’s $90 million. So instead of focusing on absolute values of compensation, i.e. $5 million or whatever, the focus should return to relative values and what appropriate compensation at certain levels of executive management are. I would want to see more intelligent debate in the media and public about what “appropriate” is and how to define and measure the definitions and/or requirements of these different levels. Compensation committees can then go and set relative packages around these levels combined with the correct structuring of long term goal achievement instead of rewarding short term speculative behavior with no real long term commitment from management with their own money. But the debate needs to be public, or it run the risk of staying a closed club of boards, executive CEO’s and compensation consultants in which “ you keep on raising me and I keep on raising you!” stays the motto.

But this is my own “utopia” thinking again. What do you think?

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