Buffett's Oracle? Baltasar Gracián (1601-1658)

 “What the wise man does at the beginning, the fool does in the end.”

A typically pithy encapsulation of worldly wisdom from Warren Buffett – except it’s not one of Buffett’s own, but a quotation from Baltasar Gracián, a 17^th Century Spanish author whose key text The Oracle (1647) is worth exploring for wisdom about life, and thence investing.

I first heard of Gracián from an unlikely source: a quotation uttered by Inspector Frank Haskins in an episode of the classic 1970s British police series The Sweeney, the repeats of which I view avidly, having been too young to watch the programme when first broadcast.

Curious to discover Gracián, a local public library fetched a musty 1962 edition of The Oracle from the reserve stacks.

I’d not expected the book, 300 maxims of instruction for everyday life, profoundly influenced by Gracián’s Jesuit outlook, to resonate with the practice of investing. Yet the more I read, the more I wondered if the work as a whole might be a hitherto largely unrecognised influence on Warren Buffett, and perhaps Charlie Munger, as there were many jolts of recognition as I worked my way through the text. Tellingly, the literal translation of the book’s full title is A Manual in the Art of Prudence, and the book has been translated as The Art of Worldly Wisdom.

Without further comment I have reproduced extracts from ten of the maxims below, numbers and text based on the ‘Everyman Edition’, translated into English by L.B. Walton.

As William Green's insightful recent book, Richer, Wiser, Happier, makes clear through his interviews with some of the world's greatest investors, temperament is at least as important as technique in securing investment success.

Anachronistic though many of them are, Gracián's maxims are a rich source of wisdom for life, as well as investing.

 - “Mix with those from whom you can learn. Let friendly intercourse be a school of erudition, and company be a means of acquiring culture; make teachers of your friends and combine the advantages of learning with the delights of social intercourse.” [11]

- “The man with a well-stocked mind. The armoury of the discreet is polite, tasteful learning: a practical knowledge of all current affairs of an expert rather than a vulgar kind; the possession of a store of spicy witticisms and an abundance of gallant deeds upon which to know how to draw on the right occasion.” [22]

- “To know how to abandon the game when their luck is in is characteristic of famous gamblers. A good retreat is as important as a spirited attack; it safeguards your achievements when they are adequate as well as when they are numerous (…) Fortune soon tires of carrying one too long upon her shoulders.” [38]

 - “The judicious and observant man. He masters things, not they him. He at once plumbs the profoundest depth; he knows perfectly well how to anatomize a man’s capacities. He understands and sums up a person’s essential nature as soon as he sees him. Through his rare powers of observation, he is a great unraveller of the innermost secrets of the heart. He observes keenly, understands subtly, and infers wisely: he discovers, notices, grasps, and understands everything.” [49]

- “The man who knows how to wait. (…) First master yourself and, later, you will master others. You must traverse the domains of time to reach the goal of opportunity (…) ‘Time and I against any two others’ is a fine saying. Fortune herself rewards those who wait with a magnificent prize.” [55]

- “Have a double store of the necessities of life (…) let it be a fundamental rule of the art of living to duplicate your store of those things which provide comfort and well-being.” [134]

- “Never expose your reputation to the test of a single throw.” [185]

- “The wise man should try to have something of the trader about him, enough to prevent him from being swindled and even ridiculed: he should be a practical person for, if practical matters are not the highest, they are the most materially valuable things in life. What is the good of knowledge if it serves n0 useful purpose? And in these days, true knowledge consists in knowing how to live.” [232]

- “Have no heedless days. Fate is fond of playing a trick and will ride roughshod over every probability in order to catch you unawares. Your wit, wisdom, courage, even your good looks, must always be ready for the test, for their day of careless confidence will be that of their undoing. Caution always fails you when it is most needed, for thoughtlessness is the stumbling-block which brings about your downfall (…) Parade days are known beforehand and the shrewd allow them to pass by unheeded; but the day that was least expected will be the day to test your valour.” [264]

- “Always behave as though you were being watched. He is a prudent man who realizes that he is being observed, or will be observed (…) Even when he is alone he behaves as though the eyes of the whole world were upon him, for he realizes that everything will eventually come to light: he regards people who will later hear of his deeds as already witnesses of them.” [297]

Here is a link to an online version of the 1892 translation of Gracian's maxims, The Art of Worldly Wisdom by Joseph Jacobs.

An Endangered Species? In Search of Value Investing UK Fund Managers

The announcement of a review of investment management arrangements by the London-listed Scottish Investment Trust (ticker SCIN) was yet another reminder of how difficult life has become for fund managers following a 'value investing' style.

The news has prompted me to begin a series of blog posts reviewing the small number of actively managed open-ended funds and investment trusts available to the UK investor and which follow (or at least claim to follow) a value investing.

Given the poor performance of the Scottish investment trust relative to its peers in the Association of Investment Companies'  Global sector (Net Asset Value total return of 52.8% over 5 years to 4th June 2021, compared to 398.3% for the growth focused Scottish Mortgage, or more fairly 115.4% for the arguably value-focused AVI Global Trust) it's easy at first glance to see why the board of the Scottish have engaged Stanhope Consulting to "to assist it in the review of the Company's investment management arrangements".

If this sounds familiar, this is because it follows in the footsteps of one of the few trusts in the Global investment trust sector to fare worse than the Scottish over the last five years, Keystone. Following a disastrous period of returns under the ill-fated tenure of former Invesco fund manager, Mark Barnett (a self-styled value investor of sorts) the board of Keystone also engaged Stanhope and in late 2020 announced a change of mandate. Attracted by the extraordinarily strong performance of Baillie Gifford's sustainable growth investment philosophy and Positive Change open-ended fund, Keystone was renamed Keystone Positive Change (KPC).

The perils of pivoting from value to growth just when the former was starting to outpace the latter has been demonstrated by Keystone's NAV rising by just 4.7% against a 15.1% rally in the Scottish's NAV in the three months to June 4th 2021.

Could it be that the board of the Scottish are (potentially) turning away from a value-based approach just when it's on the way back? Although the Scottish's review announcement notes this recent strong performance, the fact that the invitation for other fund management firms to bid did not specify an explicit value-based philosophy, but was couched in very general terms, "designed to deliver, over the longer term, above index returns through a diversified global portfolio of attractively valued companies with good earnings prospects and sustainable dividend growth", hints that a different investment style is on the agenda.

This would be a shame, were a change in mandate to lead to a change in investment style. The global investment trust sector is short of value investing options, and the relative success (so far) of the Temple Bar trust's decision to stick to a value mandate when it changed managers in autumn 2020 is worth noting. See this 30 minute interview from the Quoted Data site with Ian Lance, fund manager of Temple Bar.

That said, the current manager of the Scottish Investment Trust, Alasdair Mackinnon, undoubtedly has questions to answer. The Scottish has only really rallied since early March (share price up from £7 to £8) whilst the wider market has marked time. The early November-February vaccine-driven rally passed it by. The overweights in financials, energy and materials had not been performing well until very recently. Here is a link to the 30th April 2021 factsheet.

Also, a number of open-ended 'value-based' funds available in the UK have shown stronger returns than the Scottish despite the value headwinds in recent years. For example Hugh Sergeant's River and Mercantile Global Recovery Fund has returned 88% in the 5 years to early June, against the Scottish's 52%.

Besides the self-declared contrarian value style of its current manager, The Scottish Investment trust is also notable as being one of very few trusts to manage itself and have the trust as its sole investment vehicle. As of early June, the Scottish is trading on a discount of around 10%. It has among the strongest revenue reserves of any investment trust, covering over two years worth of dividends, and has increased its dividend (current yield just under 3%) for the last 37 years.

It would be a pity if the Scottish Investment Trust's fascinating independent history , stretching back to 1887, came to an end just when value investing might be coming back into favour. 

In future blog posts I will update the fate of the Scottish and explore some of the other value investing options available to the UK retail investor.

Some thoughts on The Complete Financial History of Berkshire Hathaway

As a former academic I’ve reviewed many books, but none as long, expensive and (potentially) valuable as Adam Mead’s The Complete Financial History of Berkshire Hathaway, published in April 2021 by Harriman House.

Before outlining my response to the book based on a ‘quick’ read lasting a few weeks, it’s important to declare that I have no direct investment in Berkshire Hathaway. I have a small holding in the London-listed AVI Global Trust which in turn has a small position in Berkshire. My closest connection to the volume is having been in the same Philosophy, Politics and Economics student cohort as noted investor Guy Spier, who endorses the book on the cover (he and I never spoke, but must have sat in the same lectures).

To be of enduring value, any work of non-fiction must pass three tests:

• Does it offer new information about the topic? 
• Does it prompt fresh thinking about wider subjects?
• Will be it worth referring to again?

Adam Mead’s 744 page text passes these tests most emphatically.

Firstly, the book provides page after page of facts about Berkshire Hathaway arranged chronologically, segmented into sections summarising each year, and chapters spanning a decade at a time. Particularly noteworthy is the revelation (to me at least) that Berkshire Hathaway not only owes its origin to Berkshire Fine Spinning Associates and Hathaway Manufacturing, but that these original businesses survive only in the company’s name, all vestiges having been abandoned in the 1980s. Failed investment in textiles is thus inscribed into the very identity of BRK – a salutary reminder of the necessity of evolution and humility if a corporation is to have a long life.

The general reader of Adam Mead’s painstaking research needs to appreciate that the numbers are the narrative in his way of relating the Berkshire Hathaway story. Reading the book quite rapidly is akin to watching the time-lapse photography of a natural history documentary. In the mind’s eye it feels like an ever-widening spreadsheet is unfolding as the history of the business is told and tabulated through the chapters.

The numbers are not simply cut and pasted from the Berkshire Hathaway reports. Adam Mead provides his own calculations of the company’s underlying value and lays out the implied multiples paid for major acquisitions. He also explains some of the intricacies of the insurance and reinsurance businesses that provide the capital, the ‘float’, for deployment in the wide array of investments that have come to define Berkshire Hathaway.

The keyword in the book’s title is financial: this is a financial history, primarily a quantitative biography of Berkshire as a business. A complete historical understanding of Berkshire Hathaway would need to complement this book with the character-focused Buffett biographies of Roger Lowenstein or Alice Schroeder, and writings by/on Charlie Munger such as Poor Charlie's Almanack or the summary by Tren Griffin.

The second test mentioned above – stimulating fresh thinking about broader subjects – is also passed, but for me in ways with which the author might not entirely sympathise.

It’s clear that Adam Mead has a deep admiration for Berkshire Hathaway. I wouldn’t say love is blind, but by the end of the book I started yearning for more critical questioning.

How are capital allocation decisions made today, and by whom? What is the role of the Berkshire Hathaway Board? What can be learnt from some of Berkshire’s investment mistakes e.g. the $444m loss on the UK supermarket Tesco; not investing at speed and scale in March 2020; investing into and then exiting the airline industry? Is Berkshire’s response to environmental considerations fit for twenty-first century purpose?

I also started contemplating whether Berkshire Hathaway has become too diverse, too sprawling, to be coherent?

Perhaps the most interesting question the book provoked is: If you were starting a holding company today, what approach would you take?

A comparative analysis of Berkshire Hathaway with other holding companies would be instructive. Examples might include Kinnevik, the Stockholm-listed vehicle for the Stenbeck family; Investor AB, the Wallenberg family controlled holding company; more controversially perhaps Softbank.

Does the large-scale investment vehicle of today need greater thematic focus and a greater willingness to embrace disruptive digital technologies?

Does the growing tendency of companies to postpone public listing require a differently structured investment vehicle to exploit those opportunities: a private equity or SPAC element?

But here I’m starting to project my reservations about Berkshire Hathaway onto the book, and expecting things it did not set out to provide.

Finally, is the book worth referring to again?

Despite the above reservations, since reaching page 744 I’ve already dipped into parts of the book once more: to reflect on Buffett’s remarks from the 1980 annual letter on the pernicious effects of inflation; to understand how Berkshire Hathaway through its sheer longevity provides a living reminder that all investment involves a combination of capital allocation and risk mitigation.

Reaching the end of the book hasn’t made it any more likely that I’ll invest in Berkshire Hathaway, but I’ve attained a deeper appreciation of what an extraordinary legacy Buffett and Munger will leave when they depart. As that time draws nearer the value of Adam Mead’s immense achievement in documenting their work so assiduously will become more evident. Anyone seeking to understand Berkshire Hathaway will need to read and re-read this book, and the companion website The Oracle's Classroom.

The Complete Financial History of Berkshire Hathaway has an intrinsic value well in excess of the costly initial investment required, and will generate compound growth in the investing wisdom of the attentive reader.

• Several interviews in which Adam Mead discusses the book are available on YouTube, for example with Tobias Carlisle on The Acquirer's Podcast

Infra-DIG: Investing in Digital Infrastructure

The dictionary definition of infrastructure - “the basic physical and organizational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society” - and the derivation of the prefix ‘infra-’ - meaning below or underneath, combine to give the word 'infrastructure' that reassuring solidity of something foundational, underlying, in which one should have some of a diverse portfolio invested. Investing in infrastructure has been on my mind for some time.

In 2019, spooked by the prospect of a potential Labour government in the UK intent on renationalisation (a prospect that came to naught in the subsequent December 2019 General Election), I sold the last remaining privatisation shares I’d inherited on my parents’ death – National Grid and Severn Trent.

Looking askance at the hefty premiums on which UK investment trusts investing in infrastructure traded, and reasoning that it might be worth exploring whether I could invest in digital infrastructure, I sought UK-listed vehicles in this field and found none.

Eventually I alighted upon Crown Castle in the United States. In essence a REIT whose income generating 'properties' are the wireless towers and 5G communications cells underpinning mobile communications devices in urban North America.

The investment was moderately successful with some uplift in both capital value and increased dividends over the eighteen-month holding period.

However, with a strengthening sterling and the ongoing deduction of what was a quite modest 3% dividend income due to US withholding tax, the recent announcement of not one, but two, London-listed IPOs of trusts investing in digital infrastructure caught my attention.

First to launch in February 2021 was Cordiant Digital Infrastructure which raised £370m at launch. Targetting an eventual annual dividend of 4p per share, but only 1p per share in the first year, for an income investor like myself this was trumped by the second trust to launch in the UK shortly thereafter: the Digital 9 Infrastructure Trust.

So, I have switched my Crown Castle holding to Digital 9, which is managed by Triple Point.

Two things make Digital 9 a more appealing income proposition than Cordiant: the proposed initial year dividend of 6p per share is to be mostly covered from the outset by the trust’s investment of £160m of the £300m raised in the March 2021 launch in a cash generative existing asset: Aqua Comms.

Aqua Comms operates one of the transatlantic seabed cables which carries data from the United States to Europe (and vice versa). 98% of the globe’s digital traffic passes through cables like these – you can’t get much more 21^st century infrastructural than that.

The ‘renters’ of space along these cables include corporate giants such as Facebook, Google, Amazon, who according to this company presentation (scroll down for video) are on lengthy inflation-linked contracts. 

With a pipeline of further assets to be invested in over time the income prospects of this trust seem quite bright. Interestingly, whereas Cordiant currently trades just below its £1.00 IPO price, Digital 9 has as of April 16^th, gently ascended to £1.02 in the two weeks since launching.

What could go wrong?

One of the appeals of digital infrastructure is that offers exposure to online traffic in general, without being directly exposed to some of the growing regulatory ‘interest’ in large online businesses. Of course, over time it may be that subsea cables attract the attention of tax-hungry governments - data taxes (?) tollgates at either end of the subsea cables (?).

There’s also the likely need for future capital raises (*) both to acquire further assets once the IPO proceeds are fully invested and to replace the fibre optic cables which have a 20-year lifespan. Whether a rise in interest rates might adversely impact such ‘long duration’ real estate assets is also a moot point.

That said, I look forward to the first quarterly dividend from Digital 9 in September 2021.

* Update 24th May 2021: As hinted in my original post, although more rapidly than I expected, Digital 9 has announced a placing seeking £100m to invest in further assets. Priced at £1.05, a discount of 7% to the 21st May closing price, the shares fell from £1.13 to £1.07 on Monday 24th May.

Rubbing my nose in some investment mistakes

Returning to a blog that hasn't been updated in over two years is like looking at one's questionable sartorial choices in old photographs.

One of Charlie Munger's most quoted, but perhaps least practiced observations, "I know I’ll perform better if I rub my nose in my mistakes" is apt.

Some of the portfolio decisions mentioned in the last two blog posts before this attempt to revive the blog, When the Facts Change... from March 2019, and When Deep Value Surfaces... from December 2018 provide plenty of soil in which to indulge in some nose-rubbing.

Caledonia Mining

The March 2019 post referenced what now seems a hasty sale of what had been a successful holding of this small-cap Zimbabwe-focused goal miner from 2016. Spooked by what turned out to be a temporary problem with power supply, and a fear of a dividend reduction that never came, that portion of my dividend-paying gold miners allocation went to Trans-Siberian Gold. Yet within a year I decided to reverse the trade and return to Caledonia as by early 2020 it was clear that the multi-year central shaft project was going to plan, and what has turned out to be five successive quarters of dividend increases was underway.

Although Caledonia has fallen some way from its peak of nearly £19 in July 2020 (against my January 2020 re-entry price of £7), today's announcement of the shaft completion and another dividend increase shows my original 2016 decision to invest in Caledonia should never have been reversed. 

Lesson: If the course of an investment is clear and the management displays consistent competence and transparency (as is the case here) then the inevitable minor squalls should be ridden through.

OPG Power Ventures: What was I thinking?

In late 2018 my search for dividend-paying deep value drew me towards OPG Power Ventures, a thermal power generator in India. Not for the first time, and probably not for the last time, an over-eagerness to move my capital towards perceived cheap dividend streams ultimately disappointed.

In summer 2019 OPG announced the divestment of a solar plant project and that it would be paying its dividend in scrip form rather than cash. As an early retiree cash dividends are paramount, so I sold the holding. On reflection an investment in coal power at a time of heightened environmental concerns was not wise. Harshly, the fact that by then the serial under-performer M&G Recovery fund had been a long-standing OPG holder could have been a warning against investing in the first place. I had also given insufficient attention to the considerable debt on the balance sheet, let alone the vagaries of coal pricing.

Although OPG shares are today about 15% higher than when sold, there have been no cash dividends since then.

Lesson: There are other, potentially more exciting, ways of securing income from emerging markets, not least Airtel Africa, of which more in a future blog post, perhaps. 

An 'interesting' two years...

I can't believe it's been two years since I updated this blog. A lot has happened since then...in life and thus investing, as the two are intertwined for me, as an early retiree. 

The fact that I'm typing this in April 2021 confirms I've survived, and for any human being over 50 survival into spring 2021 is a major achievement, not to be taken lightly.

I will try to post more regularly from now on, but for now as the end of another tax year brings that uncanny combination of necessary administration and thereby induced self-reflection, what follows is my attempt to make sense of recent times and provide myself with an aide memoire for future reference. If anyone else reads this, I hope you find it useful.

Lessons and reflections amidst (not quite after...) the COVID-19 pandemic

1. Think more deeply about resilience and how to put Taleb’s antifragility into practice:

Response: A cushion of surplus cash or near-cash liquid assets (currently Premium Bonds!) has a return well in excess of the negligible interest it may yield: the psychic income of reassurance in the face of adversity; the future returns NOT foregone as the cash cushion means there is less chance that investments will be sold at the worst possible moment amidst a March 2020-style drawdown.

2. Think more deeply about diversification.

Going into the pandemic I had too much in very similar UK-focused small cap dividend paying funds and companies, many of which [temporarily?] suspended or severely curtailed their dividends.

Responses: Increased allocation to large cap growth strategies: Scottish Mortgage, Chawton Global Equity Income, and specialist areas such as BB Healthcare.

Consider/invest in 'alternative assets' such as infrastructure, commercial property, loans, and some areas of the bond market: Digital 9 Infrastructure; Urban Logistics REIT; Schroder Strategic Bond; VPC Specialty Lending.

Gold mining equities are still equities: they may pay dividends but suffer stock-specific slings and arrows like all tradeable investments. An invidious example of this was the take-out of a profitable longstanding investment in Highland Gold at a ‘bargain’ price for the oligarchs, not shareholders like me, since ‘forced’ into lesser gold plays like Anglo Asian Mining to keep the allocation in income-generating gold producers. That said, the partial diversion of that reluctantly received capital to Sylvania Platinum has worked well, so far…

Monitor markets you don’t invest in, but which shape the wider investment landscape, particularly the government bond market, corporate credit, commercial property, above all the path of US interest rates and break-even inflation rates: US 10 Year Treasury Rates

3. If you’re going to panic, panic early, slightly, and be prepared to swallow pride and U-turn once the mistake becomes apparent.

Response: An ill-timed sale of most of a holding in Chelverton UK Dividend Trust (SDV) at what turned out to be the very bottom in March 2020 (75p a share) has been gradually reversed at subsequently higher prices. As of April 2021 the number of SDV shares held is higher than in March 2020. SDV in early April 2021 is now priced at just over £2.

4. Invest decisively in special situations even if they involve repurchasing previously unsuccessful or only partially successful past investments.

Responses: 

- K3 Capital radically restructured in summer 2020 with equity-funded acquisitions at a placing price of £1.50. By March 2021 K3C shares were just under £3 with a clear dividend strategy mapped ahead to 2023 (9p, 12p, 15p).

- Coral Products in December 2020 sold off unprofitable parts of its business, made acquisitions of profitable firms, rented out one of its factories and ended up with approx. 1.2p per share of earnings, 5p per share of cash, book value approx. 15-16p per share, with a share price of 10p. Subsequent buy-back of shares has helped increase the share price to 13.5p by April 2021. Not quite as compelling as in late 2020/early 2021, but arguably still below intrinsic value.

5. Think more deeply about what ‘value investing’ means.

 ‘UGO’ might be an apt acronym: Undervalued Growth Opportunities: not just discount relative to ‘inherited’ assets on the balance sheet, but current share price relative to growth potential and/or a clear catalyst for the realisation of value.

Response: AVI Global Trust (formerly British Empire Trust) is an exemplar here: a set of growth assets, but at sizeable discounts to instrinsic value, which has at last invested in Berkshire Hathaway.

6. When in doubt choose the investment trust version of a pooled investment strategy.

Revenue reserves plus the ability to pay dividends out of capital = greater sustainability of yield (relative to open-ended funds).

Public listing plus independent Board plus annual and interim reports = greater transparency (relative to open-ended funds).

Response: shift of UK income allocation to investment trusts e.g. Diverse Income Trust.

7. The China question.

In the light of potential geopolitical conflicts be cautious in the allocation to ‘emerging’ markets and limit the China exposure of such investments.

Response: Modest increase in exposure to Blackrock Frontiers Investment Trust

8. Monitor and consider adding to existing holdings before buying new ones.

Response as of spring 2021: if wanting to add more small cap value, consider adding to Chelverton UK Dividend Trust, Aberforth Split Level Income Trust

If ‘growth’ continues to be as 'temporarily' (?) neglected as it seems to have been in Q1 2021 consider adding to Edinburgh Worldwide and/or Scottish Mortgage 

9. Have a continually evolving watchlist (in my case with a contrarian or income generative tilt).

Response as of spring 2021: Jarvis Securities plc; The Scottish Investment Trust; Nippon Active Value

10. Remind yourself of the extreme emotions investment can bring and resist short-term mistakes by trying to keep a long-term perspective.

- Remind yourself how bleak things looked in mid-March 2020.

- Remind yourself how quickly and sharply sentiment and stock market prices reversed.

- Remind yourself of selling Chelverton UK Dividend Trust at 75p on March 23^rd 2020 and buying it back at much higher prices for the next 12 months.

- Remind yourself of the better decisions made in 2020: buying Scottish Mortgage at £5.12 on 24^th March 2020; buying European Assets Trust at 77p on 1^st April 2020.

11. Keep learning

Sources of investment insight turned to in 2020/21:

- The ‘After Hours’ Video podcast every Tuesday evening on The Acquirers Podcast.

- The blog A Wealth of Common Sense and its weekly ‘Animal Spirits’ podcast on Wednesdays

PI World videos geared to UK smaller company retail investors

The writing of Morgan Housel

His book, The Psychology of Money and a blog he regularly posts: Blog · Collaborative Fund

The websites of investment trusts and asset managers with a value tilt:

- AVI Global Trust/ AVI Family Holding Companies has some illuminating presentations

- RWC Equity Income (appointed managers of the Temple Bar investment trust in autumn 2020 just as a vaccine-induced 'value' rally strengthened): 

- The Value Perspective: useful blog from The Schroders UK team of value investors.

Twitter accounts of investors and investment writers

Tobias Carlisle (@Greenbackd)

Ian Cassel (@iancassel) / Twitter