July 2014 artwork

Picture 134b

Close-up on Sebastion, from Black Butler.

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Mind maps: interesting but potentially gimmicky

I have been experimenting with Freemind, a free software app that creates “mind maps”. So far, they are showing more potential than I thought they might, but it remains to be seen if I will stick with them over the long haul.

You are likely to have heard of mind maps, an idea popularised by Tony Buzan. Some might say “over popularised”, implying a lot fo sizzle, but no steak. I have shown an example mind map for my Greenblatt screen below to give you an idea of what they look like:


That was produced by Freemind, a free mind mapping tool available for Windows 7, Linux and OSX; written in Java.

I remember playing with mind maps as a kid, but nothing much ever came to it. One of the touted benefits is that you can draws links between concepts. To be honest, that is more fanciful than useful. Also, whenever I have seen mind maps that are actually drawn on paper, there is basically very little information on them. You might just as well write bulleted lists. It’s not as New Agey as drawing brain-like structures, but it gets the job done.

Buzan recommends 7 “rules”, like colouring your mind maps. They seem little more than gimmicky embellishments.

Having said that, having played with Freemind for awhile, it opens up more possibilities than pen and paper. The principal advantages are:

  • they can hold more content
  • you can make notes on the nodes, thereby allowing you to store useful information (like URLs) that is clumsy to do with pen and paper
  • you can move things arounds and restructure your concepts
  • you can make notes more extemporaneously and free-form
  • it’s quicker than other forms of note-taking
  • the ability to hide and unhide branches makes the layout more manageable for viewing
  • I see it as a way – potentially – of actually holding useful information, rather than being some gimmick revolving around notions of “neural nets”, and suchlike

I also use Treepad Lite, which is available for free. It works on Windows and Linux/Wine. They have payware versions available, but to be honest, a straight-forward enough and does the job for me. I have been using Treepad for some time, and it does have its uses. It is suitable for structured note-taking. I use it as a TODO planner in situations that a simple text file isn’t up to the job.

I am starting to get back into learning difficult subjects. One form of note-taking is the Feynman Method, named after legendary physicist. The idea is that you should write a concept down on a single peice of paper in a way that could be explained to a non-expert. Tacitly, the explanation should take no more than 10 minutes. You might ask: “is it any good?”. Well, it’s something that I need to explore further, but it is at least interesting as an idea with potential. What I like about it is that it respects the limits of human cognition. You need to really pinpoint your understanding of a subject, and keep things simple. It encourages the chunking of ideas into simple conceptual units. Psychologists have shown that after 25 mintues, your concentration has likely gone way down. So, instead of trying to pound the information into your head, you have to explain the concept well within the time the brain drifts off into lala land (enjoy!).

My conclusion so far: an interesting idea, and one that is worthy of a more substantial evaluation. YMMV (Your Mileage May Vary), but it is worth a check-out to see if it interests you.

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$MTC.L – an object lesson on never buying bid targets

MTC (Mothercare) sell baby products. In after-hours on Friday, Desitnation Maternity announced is abandonment of a possible offer for MTC. Predictably, the shares are down – around 4% at the time of writing – although they had been down over 10% at one point.

It has been my observation that the majority of bid situations fail, and that you are well to take some money off the table. The only time I’d consider a bid to have a real possibility if there’s some special reason to suppose it will succeed, like certain shareholders giving irrevocable undertakings to accept the bid.

AZN (AstraZeneca) is another recent example. A good strategy would have been to sit on the fence for awhile after the bid was announced, wait and see if a better offer is made, and then dump the share if you think it is fully valued. You’ll be holding for a month, tops.

KENZ (KENZ) is fairly recent, too, only this time the bid looks like a done deal. On this occasion, though, the directors unanimously recommended the deal, and irrevocable undertakings were given. It wouldn’t have hurt to sell your shares anyway, as, once it was announced, the share price bobbed around in a very narrow range due to the arb guys. You’re fighting over pennies at that stage.

Defence company CHG (Chemring) is another example of a failed bid. I once bought into online poker company 888 (888) as it was in the process of a bid. Bad move! The bidder, William Hill, walked away.

Years ago HMV was involved in a bid, which was subsequently abandoned. HMV shares eventually went to 0, and investors must be kicking themselves that the bid did not succeed. There are, of course, many many other examples I can site, but you get the point. HMV and MTC seem worringly similar in terms of their business model and perilous finance situation.

I had written about MTC back in January 2014 (http://wp.me/p2eZvw-vJ) when the share price was around 420p. It is now 247p. I commented at the time: “the kindest thing I can say is that the market is pricing it “about right””, and expressed the concern that “I’m being generous here”. In light of the subsequent share price action: no kidding.

I was being too generous about the company, chiefly because I knew of an investor that I respect highly was bullish on the stock. That introduced a bias that, with hindsight, I would have been better off without.

I will repeat what I said back in January, because it still seems relevant now: “I think management are going to need to pull a rabbit out of the hat. Possible, but tricky. I don’t own any shares, and think it’s a risky bet to go long here.”

If anything, I judge MTC to be further out on a limb. Their prelims, issued in May, show total sales down 2.6%, and net debt up. The sales are a bit schizoid, though, as the international sales are up, but are being dragged down by UK sales.

In July, Matt
Smith resigned as Chief Financial Officer and Executive Director. Mark Newton-Jones was appointed Chief Executive Office, having previously been its interim CEO. He joined MTC in March 2014. He does have turnaround experience. He has not made any significant share purchases.

Analysts have pencilled in some robust gains for the group for 2015 and 2016. I have severe doubts about that!

In my view, it’s not impossible that MTC will turn itself around, but it is incredibly risky, and I’d rather be out than in.


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Mathematician, physicist and an engineer joke

A mathematician, a physicist, and an engineer were all given a red rubber ball and told to find the volume.

The mathematician carefully measured the diameter and evaluated a triple integral.

The physicist filled a beaker with water, put the ball in the water, and measured the total displacement.

The engineer looked up the model and serial numbers in his
red-rubber-ball table.

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Magic Hat portfolio: RB out, WIN in

It’s time to fiddle with my Magic Hat portfolio
(http://www.stockopedia.com/fantasy-funds/magic-hat-463/). The exit candidates are BSY, RB, SMWH. I chose to eject RB (Reckitt Benckiser) because it had a PE of 19.2 and an earnings yield of 5.98%. It’s also fairly stodgy.

There’s not going to be much analysis on my buy. I’m basically going to rank the Greenblatt stocks in descending earnings yield, weed out the bad ones, and first past the post wins.

Here’s some that were rejected:

INM has an EY of 83%. That seems to be distorted by exceptional income, though.

CTEK Chinese company. Instant rejection.

RMG Looks like another data anomaly due to exceptional income.

QPP gets a dishonourable mention. Paul Scott has written negatively about it for quite some time. The M-Score puts it as an earnings manipulator. The number of shares in issue has more than doubled over a short timeframe. Revenues were £14m for 2011, and are expected to rise to £1022m for 2014. Seems too good to be true. Receivables are 86% of revenues, which seems suspiciously high. There’s a very distinct whiff of fish about this stock. I see that Stockopedia has an article pointing out that Fidelity has doubled its stake, though. So what would I know?

I’ve decided to put WIN in the portfolio. WIN (Wincanton) is a logistics group. It’s a tricky decision, because Paul Scott has described it as univestable, on account of its balance sheet. However, it did negotiate a new and improved financing agreement on 19 June. It does have a Piotroski score of 8, and a stock rank of 99. It also makes it into the screen of screens. So. Man versus robot. Let’s see who will win.

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$TSCO.L Tesco and the Buffett Test

I found this interesting PDF (http://is.gd/D93PHD) about Buffett’s purchase of Coca Cola from The Odd Lot blog (http://is.gd/6jGWEc).

The idea is disarmingly simple: you want at least a 10% earnings yield (not actually defined by Buffett, but the reasonable presumption is EBIT/EV), AND you want to convince yourself that that the “coupon” will grow. The sustainability of the coupon will likely depend on a few key factors, and it’s your job to identify and resolve them.

So let’s look at TSCO. According to Stockopedia, it has an EV of £30.75b, based on a share price of around 291p. Its Operating Profit reported on 16 April 2014 was 2631m. Taking that to be EBIT (and we can get into all sorts of arguments about how it needs to be adjusted), we get an earnings yield of 2631/30750 = 8.6%. This is below 10%. Could this be why Buffett was offloading some of it in late 2013?

TSCO’s mean operating income over the last 5 years was 3314m. That would give it an EY of 3314/30750 = 10.8%. So, arguably, it could be considered a purchase – although that depends on your view as to whether declines in profitability over the last two years is a permanent shift. Is it a price war that is only expected to be temporary, or are the likes of Aldi and Lidl changing the
landscape forever? Answers on a postcard, please.

Buffett increased his holding in TSCO on 13 Jan 2012, a day after TSCO announced its results, causing the share price to drop 19%. I’m not going to dig into filings, so let’s say that Buffett bought at 320p – probably close enough.

I’m being a bit broad-brushy, but let’s suppose Buffett was working with the latest available full year results at the time. So that would be annual fiscal data as of Feb 22 2014, with operating income of 3917m, net debt of 6790m and 8046m shares in issue. That gives me an EV = 6790 + 3.2*8046 = £32537m. Thus the EY is 3917/32537 = 12.0%.

So perhaps we should not have been surprised at Buffett topping up on TSCO at the time he did. His crystal ball seems to have gotten a bit hazier since then.

Happy investing to you all.

Update 04-Jul-2014 I have been reading around, and it seems that Buffett wants 10% in pre-tax earnings. So we want to look at things from an equity basis, rather than a firm basis. This actually makes our calculations easier. The latest reported income before tax was 2259m. The market cap is 23050m, based on a share price of 290.85p. So the pretax earnings yield is 2259/23050 = 9.8%. This is below a buy threshold, although only just.

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This is what 6 months of regular drawing can do for you


To the left is one of my first drawings. To the right is my latest drawing. It took long enough to draw, mind.

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