Train Strikes – What’s It All About?

The national rail strikes this week have been incredibly inconvenient for those who rely on trains to get to work or for essential trips such as visits to hospitals. In London the strike has also extended to the London Underground. Commuters have been badly affected although the ability to work from home (WFH) has softened the blow and reduced the impact.

Why are RMT union members striking? It’s partly that they want a pay increase to offset the impact of inflation. But it’s also about whether rail management have the power to decide on jobs and working practices. For example, they wish to block any forced redundancies such as the closing of ticket offices. In London they are even intervening over the outsourcing of the contract for underground cleaning by TfL.

It should be a business decision as to whether ticket offices should be closed. There are now generally alternative ways to buy tickets although a few people might be inconvenienced. But if it saves money then management need to decide on a commercial basis whether to close offices.

National Rail Chief executive Andrew Haines said: “We cannot expect to take more than our fair share of public funds, and so we must modernise our industry to put it on a sound financial footing for the future. Failure to modernise will only lead to industry decline and more job losses in the long run.”

In reality the national railways have lost money for the last 100 years and have been massively subsidised by the Government (i.e. by you and me from our taxes). It’s exactly the same in London. With reduced passengers on all services due to the Covid epidemic and more WFH all rail services need to cut their costs to get revenue and costs more into balance.

The rail system is an enormously labour-intensive operation to maintain the track and signalling. Railways are also enormously expensive to build – just look at the cost of HS2 or Crossrail (about £100 billion and £19 billion respectively) – both projects are late and over budget.

The big problem is that railways use old technology and are operated using archaic working practices. The rail unions are trying to protect their pay, their jobs and working practices which is simply unjustifiable. They need to accept that passengers have alternatives and if they are unwilling to use the railways as much as they used to do then management has to retrench.

The unions need to face up to reality or they will go the way of the dinosaurs (like the coal miners did when faced with the Government being unwilling to subsidise perpetual losses).

But the core of the problem is a confrontational approach from both sides. There should be a consensus about how to run the railways profitably for the benefit of both the owners and the workers.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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After IDEAGEN and EMIS, What to Buy? VIP Perhaps?

With bids for Ideagen (IDEA) and EMIS (EMIS), two of my larger and longer-standing holdings, I need to look for new small/mid cap technology stocks in which to invest. I may be willing to hold the realised cash for a short while but with inflation at 10% it’s going to be costly to hold much cash for very long.

I note AB Dynamics (ABDP) has been tipped in both Techinvest and Small Company ShareWatch last week but I already hold that and it does not look particularly cheap to me as yet.

Techinvest reported on their New Year Tips last week. With 12 stocks recommended the average fall is 17.7% to date which just shows how out of favour small tech stocks have been of late. Only one of the 12, Ingenta, rose with all the rest falling. I won’t mention the rest because none look greatly attractive to me.

What I am looking for is companies with good intellectual property, which can provide barriers to competition, in growing market sectors, with good returns on capital, high levels of recurring revenue, positive cash flow and with rising revenue (Ingenta has a poor track record in that regard and has low return on capital).

Readers should add your suggestions for companies to look at by leaving a comment (see left hand column of this blog).

One alternative to investing in tech stocks is property companies and I read the Annual Report of Value and Indexed Property Income Trust (VIP) over the weekend. Property companies are a good hedge against inflation, particularly as VIP has a focus on holdings with index linked rent reviews. Their comments on future prospects make for interesting reading.  To quote:

“Total returns will be lower but still satisfactory over 2022 as a whole. They may be around 12% overall with returns for industrials, retail and the alternative sectors all in the early teens but offices only around 5% with capital values flat, rents under pressure and voids through the roof. Property’s real returns will be far lower, with the RPI already up 9% year on year. It will stay higher for far longer than the Bank or England or the market expects. Stagflation is here to stay for at least as long as the war in Ukraine drags on”.

That’s a good summary of my own view and investors might be happy with a 3% real return this year as world economies go into recession.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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EMIS Bid and Comments on Capital Gains Tax

Last week was certainly a depressing one for stock market investors. My portfolio was down substantially even taking into account the last-minute announcement on Friday of an agreed takeover bid for EMIS Group (EMIS).

This is a cash offer of 1,925p which is a premium of almost 50% to the recent trading price so is surely likely to be accepted. EMIS is one of my longer-term holdings – first purchased at 485p in 2011, but it has been somewhat disappointing. Overall total return has been 12.7% per annum including the latest bid premium but with a strong position in the supply of medical solutions they should surely have been making big profits in the recent pandemic and in the support of the NHS where large amounts of money are being spent. I think the big problem has been having the Government as a major customer who tend to dictate the pricing.

I did buy a few more shares recently at 1,272p but failed to have the courage of my convictions and should have bought more. Like many investors no doubt, I have gone on a buying strike and am selling as the market trends down rather than buying.

My capital gains tax charge for last year is only moderate but with holdings in Ideagen and EMIS soon to be realised I will be paying a big bill this year. Capital gains tax should be indexed now that inflation is reaching 10%. I will be paying tax on fictitious, not real, gains.

Perhaps ShareSoc should be taking up that issue.

Will the market improve over the summer? I doubt it until there is better news on the economic front. We appear to be heading into a worldwide recession prompted by higher commodity prices. There may be some share bargains appear in the next few weeks but I personally won’t be rushing back into the market.

Meanwhile I am at least out of hospital but have written to the Chairman of the local NHS Trust to complain about the dysfunctional management and waste of resources. There is lots of money being spent on the NHS but the patient experience is still crap.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Keynes Biography and Engines That Move Markets 

 As I am still in hospital I have had the opportunity to continue with my reading. The first book I tackled was a biography of John Maynard Keynes a very famous economist and stock market investor. He helped to found the IMF and the current international banking system. The book was highly recommended by Barton Biggs as I mentioned in a previous blog post and was written by Robert Skidelsky, It’s a biography of a famous person that nobody has ever heard of to quote my wife. But he really was important in influencing government financial policy after the Second World War.

At 1020 pages it’s quite a heavyweight and that’s just the “abridged” version. But I gave up on it after 200 pages. It’s way too long and too tedious. Not recommended.

The next book I am reading is “Engines that move markets” by Alasdair Nairn. This is no lightweight tome either at 545 pages. It’s a historic review of technology investing from railroads to the internet. The authors object is to teach us when to get in and out of tech stocks and how to avoid ones that are likely to fail after the typical market euphoria for a new technology,

It makes for an interesting read but is too long and could have done with some aggressive editing. But it may be of interest to tech investors.

I shall persevere with it as I have time on my hands.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Barton Biggs and Hedge Hogging, plus NHS Dysfunction

I managed to finish reading the book Hedge Hogging last week during my 7 days in hospital. Here is a longer review.

The author Barton Biggs spent 30 years at Morgan Stanley building up their investment management business. In 2003 he formed his own hedge fund named Traxis Partners which was wound up after his death in 2012. But this is no out of date history of past financial events as much of what it covers is topical and relevant to today’s stock markets.

It’s partly a journal of events in his life but with extensive diversions into the big issues most investors face particularly the psychological difficulties that you can face. Topics such as short-selling, private equity, emerging markets, market bubbles and investment cycles are covered – we certainly seem to be in a down cycle at present rather than a temporary correction. As an investment strategist over 30 years he obviously experienced a variety of market conditions. He covers the two main investment approaches – based on growth and value but in essence was agnostic.

He has some interesting comments on Ronald Reagan and Margaret Thatcher – the latter he met more than once. He explains the success of the Yale Endowment Fund under David Swensen and explains to an audience of tech stock fanatics that “the human emotions of fear and greed that drive the stock market to excess have not changed over the course of human history and remain as valid today as in the past. Busts are busts, booms are still booms, and bubbles always burst, but this was boring stuff, and the crowd stirred restlessly. The glitterati understandably had no interest in hearing about busts or bursting bubbles. On to the next IPO and salacious stock idea”.

A good paragraph that gives you an impression of his writing style is the following: “If you hang around the investment business long enough eventually you experience some mysterious, almost supernatural events because the stock market is a capricious beast, almost a force of nature like the sea or the arctic. It can be bountiful and loving in its embrace but also hard and cruel and sadistic. Making your living from the stock market is a strange, hazardous, yet beguiling occupation. It’s a little like being a ship’s captain back in the time of wind and sail. As the master of a whaler out of Nantucket in those days of yore, in good fair, you blissfully rode the ocean’s friendly currents. Then suddenly without warning, the sea would turn and you would find yourself driven helplessly toward some distant rocky shore by one of its fierce, irrational storms. Men and women who live at the mercy of the whims of the sea and weather are a superstitious lot”.

He ends with a review of the biography of John Maynard Keynes by Robert Skidelsky which I have lined up as my next book to read. In all Hedge Hogging is a fascinating look at the world of hedge funds but there are many lessons to be learned from it for ordinary investors.

Lastly let me say about a few words about my stay in an NHS hospital, which was not for the first time. The popularity of the NHS is falling and quite rightly. It is a dysfunctional organisation that does not compare well with the systems in other countries (bar the USA).

I cannot complain about the treatment I had but the big problem is the culture. Treating patients as children to be organised and disciplined, not as people. It was also very wasteful, keeping me in bed when I was only “walking wounded” as the army might say when I could have been treated at home for most of the time at less cost. How do you reform the culture of an organisation? With great difficulty is the answer. Easier to start from scratch.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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FT Article on the NHS

There is a very good article in the Financial Times today concerned with the panic over privatising the NHS. I added this comment on-line: ” I write this from my NHS hospital bed. There can be wonderful service from the NHS but it can also be very bad – waiting lists for surgery or cancer treatments are examples. I would hate to have to rely on the NHS solely for medical treatment as most people do. Over 30 years I have learned that the NHS is slow to reform and adopt new technology. It’s a bureaucracy and not run like a business with customers. The NHS still treats you in what they consider is best and most efficient for them. There is little response to customer demands or views. That is what needs changing with more financial incentives”.

It looks like I may be here some time but I expect they will keep me alive as they have done for the last 30 years (I am a kidney transplant patient). It does enable me to finish reading Barton Biggs book Hedge Hogging which I mentioned in a previous blog post. This is a really good book that everyone involved in the financial world should read. I’ll try to do a more expansive review at a later date as it’s not easy to use a laptop in bed. It’s not just relevant to hedge fund managers!

Glad to see the market is in soporific mode with no big movements in my holdings. Trading from your sick bed is never a good idea as treatments can affect your brain or your emotions.

Roger Lawson

Scottish Mortgage Results

I am sure many of my readers hold the Scottish Mortgage Investment Trust (SMT), as it has been one of the most popular UK trusts in the last couple of years. They published their preliminary results this morning.

The commentary from the Chairman and the Fund Manager made lots of positive noises about the long-term success of the company but the share price has fallen by 5% today at the time of writing, continuing the negative short-term trend. That probably is a result of the S&P 500 falling by 4% yesterday. In addition the negative impact on investors has been compounded by the company moving to a discount to net asset value (6.5% as at last night) when it is has often traded at a premium.

The NAV declined by 13.1% last year while the company’s benchmark (the FTSE All-World Index) rose by 12.8%. The discrepancy is simply down to the fact that SMT hold many technology stocks. Apparently the Managers have “remained calm and focussed on what they have been entrusted to do” in such bumpy market conditions. Which is good to hear but it does not help with answering the question of whether to continue holding the stock or not.

Will growth companies, which SMT focusses upon, come back into fashion? Two of their biggest holdings are vaccine maker Moderna and Tesla. Moderna has fallen 70% from the highs of last year because of doubts about the longevity of the Covid vaccine market but SMT argue that the company’s technology can be applied to other diseases so they have increased their stake in the company by part selling Amazon and Tesla. It’s worth reading the announcement for more details of the bets they are making.

I have no reason to believe that their investment choices are not sensible ones but clearly the market perceives growth stocks as being unfashionable at present as investors move more into commodity stocks. How long this trend will last is difficult to say as predicting global economic events is a fool’s game. In the short-term it may be best to follow the trend, i.e. join the herd who are selling while keeping a close eye on any rebound or change of market perception. But that only makes sense if you are not crystallising any capital gains tax by selling – unless of course you are crystallising a loss. Moving in and out of investment trusts in the short term while ignoring the tax implications is never wise.

I do hold some SMT but I certainly won’t be giving up on the company completely.

Please take note of the warning about investment advice given on this blog here: https://roliscon.blog/about/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Inflation and EKF AGM

Inflation is certainly a big problem with the news that it is now at 9% and heading higher in the UK. Most advanced countries have been hit in the same way due to higher energy and food costs but the UK is certainly leading the bunch due to past mistakes over energy policy.

What annoys me is not so much the price inflation as when companies shrink their packaging as happened recently to Kellogs Cornflakes and Nescafe’s Azera Coffee tins, while no doubt maintaining the same price.

I thought the price of microwave ovens had suffered from gross inflation when my wife bought a replacement for £529. That’s after I managed to fry the old one by leaving a potato in it. But looking at the market you can buy a perfectly good one for £60. I don’t think my wife is very price sensitive! She clearly thinks we are rich when with the stock market declining we are getting poorer.

With the sun out, the sky is blue and there is no cloud in the sky it’s difficult to focus on financial matters. But I did watch the EKF Diagnostics (EKF) Annual General Meeting this morning. This was run as a hybrid event run via Zoom with about 9 people on-line and at least one ordinary shareholder physically present. The acoustics were not good though so difficult to hear the questions posed by the one present and at some point multiple people speaking at once was confusing.

There were a number of questions posed on-line or received in advance. I’ll only mention some particularly interesting comments. The company has plans to launch a sepsis test for use in critical care environments in 2023 with clinical trials at the end of this year. That would be of great use as I almost died from sepsis in hospital after a minor surgical procedure a few years back. It can be difficult to diagnose at present.

There were some interesting comments on the difficulty of getting approval for medical devices in China. Regulations are used to block foreign products it appears. The company needs to change its strategy for that market.

The point of care market is growing at 6% per year but there is higher growth in the enzyme market hence the focus on that.

The meeting lasted about 50 minutes and was of some use.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Hewlett Packard Confusion and Berkshire Hathaway Stake

The Investors Chronicle (IC) published an article last week entitled “What does Buffett see in HP?”. I read it with interest as I used to do a lot of business with HP and its customers before I retired from a proper job. But I think the article might have confused more people than it enlightened.

The article referred to the acquisition of a “large stake in printer manufacturer and software company Hewlett Packard (US:HPE)” by Berkshire Hathaway. But the latter actually acquired a stake in HP Inc (US:HPQ).

The Hewlett Packard company split into two companies in 2015 these being HP Inc (HPQ) focussed on printers and PCs, and HP Enterprise (HPE) focussed on software and services. The latter made the disastrous acquisition of Autonomy although they did win a legal case on the issue of misleading accounts in January this year.

The printer/PC business was seen as being slower growth and of course as being in a highly competitive sector and hence achieved a relatively low market rating. It’s now on a historic P/E of 7 but as the IC article indicated the free cash flow of HPQ has been improving greatly. Return on assets has improved to 17% as well so one can see why Buffett might be attracted to this business.

The IC article also talked about the management in-fighting at HP not prevented by weak management at the top of the company. In fact the company want through a series of top management changes after the founders departed and the worst of them was the appointment of Carly Fiorina as CEO. To quote from Wikipedia “Fiorina’s predecessor at HP had pushed for an outsider to replace him because he believed that the company had become complacent and that consensus-driven decision making was inhibiting the company’s growth. Fiorina instituted three major changes shortly after her arrival: replacing profit sharing with bonuses awarded if the company met financial expectations, a reduction in operating units from 83 to 12, and consolidating back-office functions. Fiorina faced a backlash among HP employees and the tech community for her leading role in the demise of HP’s egalitarian “The HP Way” work culture and guiding philosophy which she felt hindered innovation. Because of changes to HP’s culture, and requests for voluntary pay cuts to prevent layoffs (subsequently followed by the largest layoffs in HP’s history), employee satisfaction surveys at HP—previously among the highest in America—revealed widespread unhappiness and distrust, and Fiorina was sometimes booed at company meetings and attacked on HP’s electronic bulletin board.”

The company’s record of investing in software was also abysmal when hardware was becoming ever cheaper and generic. This cumulated in the disastrous acquisition of Autonomy.

But the fact that the company has survived (albeit it in two parts) is no doubt due to its strong historic reputation for well-engineered quality products and strong brand name.

But there are two key lessons to learn from the history of HP: 1) Changing the culture of an organisation is always exceedingly difficult and is likely to fail unless done very sensitively; and 2) Management incompetence can damage even the most admired businesses, as Hewlett Packard used to be.

To quote from my book Business Perspective Investing: “One of the key factors that affect the outcome of any investment is the competence of the management and how much they can be trusted to look after your interests rather than their own. Incompetent or inexperienced management can screw up a good business in no time at all, although the bigger the company, the less likely it is that one person will have an immediate impact. But Fred Goodwin allegedly managed to turn the Royal Bank of Scotland (RBS), at one time the largest bank in the world, into a basket case that required a major Government bail-out in just a few years”.

At Hewlett Packard it was not quite so disastrous and the company certainly faced challenges as the computer technology market changed but the damage done to a once great company was unhappy to see.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Hedge Funds Scale Back Big Bets

An interesting article published over the weekend was one in the Financial Times headlined “Hedge funds scale back big bets”. It said “Hedge funds focused on US equities are pulling back sharply on their bets after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses”. It also reported that “Long-short equity funds, which pitch themselves on the ability to protect client money in down markets, have lost 18.3 per cent for the year up to and including Wednesday, according to Goldman Sachs estimates”.

The opaque and murky world of hedge funds is well described in a book I am currently reading entitled “Hedge Hogging”. This is by Barton Biggs a former hedge fund manager and contains lots of interesting stories about his experiences. For example, he covers going short on oil stocks based on fundamental analysis when the market started going in the other direction and he was in danger of clients taking their money out of the fund.

But it’s a book that any investor can learn from. Just looking at some of the chapter titles gives you some flavour of the content: The Odyssey of Starting a Hedge Fund: A Desperate Frantic Adventure; The Violence of Secular Market Cycles; Nature’s Mysticism and Groupthink Stinks; The Internet Bubble; Great Investment Managers are Intense, Disciplined Maniacs; Three Investment Religions – Growth, Value and Agnostic; Bubbles and the True Believer; Divine Intervention or Inside Information – a Tale That Will Make Your Blood Run Cold.

It makes it clear that the hedge funds world shows the natural survival of the fittest in the extreme. Those who make big bets and win are the survivors but those who make big bets and lose disappear and are soon forgotten as investors move their money elsewhere. Whether there is clear out performance in the long term by anyone is not clear but the high fees charged mean it can be very lucrative for the fund managers who can stay in business.

In summary it covers a wide range of topics including the dangers of shorting stocks if anyone has an urge to dabble in that as the market falls.

Ideal summer reading on your holidays.

FT article is here: https://www.ft.com/content/8495545c-74e1-4150-8207-4855c66c9750

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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