60North Investments

https://docs.google.com/spreadsheets/d/13WVrP-qt5HyAzFjoSTFeCkvj06CVh6-T9panfD4VnNo/edit?usp=sharing There's a Google sheet for the two example companies, Reckitt-Benckiser and Henkel, that are mentioned in the McKinsey book. I'd be very happy if anyone had ideas (the sheet is open for commenting too) as to how those TSR decomposition tables below should be done/formulated so that one would get answers that make sense.

Just finished reading this book and I have to say it left me little disappointed. I guess I was expecting more out of it, but feel like it didn't really offer much.

Would you mind sharing your rationale for buying Sampo (not that it is a large position for you)? From valuation perspective, trades at a premium to it's part even if you are quote generous on the values of IF and Mandatum. Unless they get same kind of rabbit out of their hat as they did with Danske Bank, I don't see the risk/reward as very good at these levels. So I'm curious as to what made you increase the position, if you don't mind sharing. Ps. Just to correct a typo, ticker is SAMAS, not HAMAS :) Thanks for the note about the ticker! - now fixed in the original post. Yes, certainly not cheap at these levels, I just wanted to get a bit more of it, after buying a bit a few years ago, before the runup. I really regret not buying a lot more at that moment, and judged now was the time for it, after the minor drop. Bjørn Wahlroos basicly hasen't done any material transactions for long now, I expect to get surprised - in a postive way - at some time in the future. He seems quite opportunistic to me, if one reads up about what he has done so far. Sampo will eventually end up with +50% going to 100% ownership of Topdanmark A/S [TOP.CPH] - one way or another - because TOP is returning capital to shareholders only by share buybacks. [As a TOP shareholder also I'm quite desperate about that fact in the long run]. This is an ultra term position for the family. I can't right now imagine what would provoke a decision to sell. Most likely the position will end up at third generation alive right now at some time in the future. Thanks, I thought it would probably be a "forever hold". :) Just to put out my thoughts on it still, even giving IF a value of €13b (very generous I'd say, implies Wahlroos is able to sell it at a top price) today's price is paying +15% premium on the net assets. Idk how Topdanmark is currently valued, but I'd argue Nordea and Mandatum aren't currently undervalued. Nordea desperately needs higher rates, and carries the risk of Nordic real estate markets being in a state of overheat. I hope it works out for you but I'd be careful at these levels. Although I don't have a good idea of what might bring the premium down, which is an interesting question. Perhaps it needs a bigger correction in the market.

Would you mind sharing your rationale for buying Sampo (not that it is a large position for you)? From valuation perspective, trades at a premium to it's part even if you are quote generous on the values of IF and Mandatum. Unless they get same kind of rabbit out of their hat as they did with Danske Bank, I don't see the risk/reward as very good at these levels. So I'm curious as to what made you increase the position, if you don't mind sharing. Ps. Just to correct a typo, ticker is SAMAS, not HAMAS :)

The book recommended here by many people, McKinsey's Valuation (6th edition), talks about in chapter 4 about decomposing total shareholder return into parts to see what drives performance. I found it very interesting and thought it would be useful in my own investing process. I'm struggling to make a working spreadsheet though. Essentially I'd love to re-create what they have for Henkel and Reckitt Benckiser on page 60, exhibit 4.7. Does anyone happen to already have that built into a spreadsheet and be willing to share it, or would someone feel like reaching a helping on hand on how to calculate those different TRS effects?

Key Tronic (KTCC) - Had a bad Q1, unless something unexpected happens (which is of course possible), it should get back up to +$10 after showing that they can deliver good results and that the company is in a very interesting position. Future Bright (0703.HK) - Similarly, had a bad year due to losses from Huafa mall and Food souvenirs. When those losses aren't showing (Huafa was shut down and doesn't incur anymore losses, Food souvenirs scaled into smaller locations should lead at least to smaller losses) I would imagine the market re-rates the company as it should. Just on an asset basis it should be a double. Quite a lot of names that look interesting at the moment. These two stand out as two that seem most logical to have a good 2016. Quite certain that some names not expected to have a run next year will do exactly that.

Surprised to see so many familiar games! Age of Empires, Command & Conquer, Ticket to Ride, Risk (this is an all time favorite board game, think at one point we had 3 pieces of these when needed to buy always a new one on trips).. So many awesome memories with those games! Makes me miss the times when used to play on PC Age of Empires and C&C, no idea if you could get those on Macbooks even..

Just thought I'd post this here as I came across the link when looking for industry primers. Haven't even looked at most of them yet, but seemed decent although most are 5 years or older. Hope it helps someone.

Thumbs up for the topic, though I also agree with jschembs. That said, I think the below three are ones that have done the right things and done them well, without having huge industry tailwinds behind them. KTCC: Key Tronic's CEO Gates and his team has done a remarkable job, especially in the past few years I'd say. Latest example, the CDR acquisition couple Qs earlier, which I believe will turn out to be a home-run. Read/listen to the CCs. They also seem to have ethics/morale that looks healthy. STRA: Strayer Education, obvious struggles lately, but from what I've gathered the management team seems ethical. Running the business for the long-term. SAMAS: Sampo is a Finnish company, and the main guys, Wahlroos and Stadigh are well-known here. Wahlroos is a controversial person with his strong opinions, but there's no denying he and his "right hand" are heck of a deal makers (in 2006/7 sold Sampo bank @ 3.5x BV) and operators. Edit. Added names of companies as gio suggested.

Thanks for the example merkhet. Frankly, banking is one of those where I feel like I have a certain understanding of what is important and what is more or less noise. Anyway, I agree with your whole post, and think it's a good explanation of what drives the banking industry. It is a relatively simple industry to understand as a big picture, but as you too mentioned, comes with some things that are close to impossible to figure out with reasonable certainty (balance sheet/loan quality, litigations). Actually, what I am saying is that there are quantitative variables that will impact your investment in the short term. These tend to get quickly priced into the stock and will be discussed in every earnings release. There are sector specific variables and more generic variables. But there are qualitative aspects that will determine your long term returns and these are less efficiently priced. For retail stocks, same store sales growth and new store openings are key variables. But there are qualitative differences between ANF and TJX which made TJX a much better investment. Yet Mr. Market actually gave ANF a slightly higher multiple over the last 20 years. Agreed on the quantitative vs qualitative assessment. I may be repeating myself needlessly (and perhaps expressed it unclearly at first), but initially I was looking for the key variables causing for example SSS growth for clothing retailers. In a sense, going down the ladder in a search for the few (qualitative) root causes; TJX sales growth -> new stores + SSS growth -> amount of money consumers have for spending on clothes, something else..

Thanks everyone for the responses, interesting points from different angles. merkhet: If you don't mind, it'd be great to hear an example of how that process worked for you with some industry/company. KCLarkin: I tend to think that things like capital allocation, valuation, balance sheet/leverage are more or less always important things. Though I assume I understand what you are after for example when putting capital allocation under IBM; that it is especially important in the case of IBM because a lot of their returns are coming from capital allocation. For example with Vistaprint and depressed margins, do you think it'd be reasonable to go a step or two forward, and think what are the variables affecting those margins? I don't know the company, but since you said "economies of scale", would the thing that you need to follow be whether or not their sales grow above some threshold (although it's not an exact number)? And then what would be thing(s) to look at to get an idea whether they're being successful about reaching that threshold? KinAlberta & rpadebet: Dupont analysis is great. Perhaps my wondering is about finding the drivers behind for example sales growth, and if there's a few key things. Easiest to illustrate with the example of oil companies and oil. Oil comps' returns, among other things, are driven by increases/decreases in sales. One of the primary drivers of those changes is the price of oil. I think Dupont gives you the first level (though a crucial, yet simple first level), and then you can try and move to the next levels from there? To give a recent example: I've been reading about Colfax. It has three different operations in it with ESAB (welding), Howden (gas handling) and Colfax (fluid handling). I could say with reasonable confidence that Colfax as an investment case depends largely on sales growth + margin expansion. What I'm less clear about it is what could be the few key things that I could try follow to get a grasp of whether those two are materializing or not. For margin expansion I don't know if there's a lot else than just looking at Q numbers and whether they're executing on the CBS etc. improvements.

This topic has been on the back of my mind for a long time now, and John Huber's post reminded me again of it. He mentions in his post a few examples, like Wells Fargo's ability to take in deposits cheaper than anyone else, or an obvious one with oil prices and oil companies. I tend to fall in the camp that believes in the power of finding these few key variables for different companies/industries, and focusing the analysis on understanding those first and foremost. Sure, things like management quality and integrity are important, and you can get hints regarding those from the smaller details. But I feel like without the understanding of what are the most important variables for this specific company to turn in decent profits, I'm standing on shaky ground. Because my key variable identification skills are no doubt lacking, I'd be curious to hear people's thoughts on how they go about recognizing the most important variables for different businesses. Do you use some form of a root cause analysis, going back step-by-step and eventually ending up with the "forest" / key variables? Understanding a wide array of different businesses is important, but I tend to think that's not necessarily enough. Thoughts?

Mark Spitznagel and Nassim Taleb have been partners for hedging in convex tail risk for a number of years. Yep, Taleb is a "Distinguished Scientific Advisor" at Universa. All in all, thanks everyone for the comments so far. writser's comment seemed especially interesting, can't say I had thought about that before. Though it's probably very hard to know for certain what the motives of those people are but writser's idea makes sense. I'm not sure whether I'd say Spitznagel's ideas are market timing presented in a new wrapping paper. Being 99.5% long and dedicating 0.5% of your portfolio each month/two months to buying puts isn't at least the "boldest" way of market timing in the sense that you're still +99% long. Just an interesting idea I thought, though not really anything new. As Jurgis and Green Kind demonstrated, if the big drops happen often enough (seems like you need them quite often and fast) it'd probably be worthwhile. Not that I'm introducing this to my portfolio now though, currently feel better going to cash if I don't see things to buy. I'd be curious to hear more about people's thoughts on the Austrian School and the problems with it. rb, and others, could you expand a bit on what you see being wrong about their views and thoughts about how the economy works, interest rates etc? I have very shallow knowledge on the topic, but I left the book with the feeling that the Austrian school's view is one of leaving the free market to basically do its own thing (so the idea is that central banks effecting interest rates, government bailing out companies etc in best scenario works short-term but ends badly in the end).

[amazonsearch]Dao of Capital: Austrian Investing in a Distorted World[/amazonsearch] Just finished reading this book from Mark Spitznagel, founder of hedge fund Universa. I'd be interested in hearing whether fellow board members have read the book or have thoughts on the subject? He is cheering for a roundabout strategy, that sounds very similar to that of Taleb's, where you sacrifice near-term (small) wins to position yourself better to take advantage of future opportunities (and realize the larger wins). Being patient, going where others can't go, finding your own niche, and being in a defensive position in order to take advantage when something happens that sweeps others out. He says that the same principle applies to investing, forests, running businesses etc. The ideas are coming from ancient Chinese (?) philosophies and Austrian school of economics, from people like Mises, Menger and Böhm-Bawerk. He discusses all of these in length, using 8 out of the 10 chapters basically discussing the Austrian School etc. There were some quotes I found worth putting down, among other notes. For example regarding our time preference, "There is merit in stopping to smell the flowers. Our carpe diem attitude, however, should be to seize every day, each individual slice of time, but never at the expense of all the others to come. As Einstein said to a grieving friend to hold past and future moments as equals to present." In the last two chapters he goes on to (shortly) explain his Austrian Investing principles. Basically these were about finding high ROIC companies that are priced cheap (surprise surprise), looking at the overall level of the market (MS Index), considering the amount of distortion introduced by central banks and buying 1-2 month OTM puts with for example 0.5% of your portfolio and rolling these over as they mature. I had some struggles reading the book, especially when almost the whole book talks about stuff that I first found quite hard to associate with investing/business. Also felt a bit disappointed in the end at the depth that the book gave. If you've read the book or have thoughts about the ideas, would be great to hear from you. I haven't done the math even on a theoretical level, but I'd be curious to see if someone has looked at what buying those kind of puts with for example 0.5% of your portfolio could do to your returns in different scenarios? Nov 2014 NYTimes piece on Spitznagel & Universa

In addition to the above mentioned special events etc. it would be great if someone knew a way to stay updated on earnings releases. First I looked them up with Google Finance/calendar. After noticing that for many companies that have the dates in there had them more or less wrong I decided that I needed a more reliable way (and many non-U.S. and small cap stocks don't have them in google finance). Now I gather the dates for all earnings releases from the company websites, and if they aren't stated then take an estimate from past dates. Obviously this doesn't help in having to follow less news streams and use time in things that aren't very productive. So, here's another person very interested in how to have earnings releases and more special filings automatically in some form, be it email, calendar notification, simple list.

I can't say I know this for sure, but my guess is that it's going to be one difficult battle for Kremlin to get Sistema's stake in MTS as much of it is listed in the US. The plan of listing the Bashneft stake partly in London was perhaps partly an effort in reducing the likelihood of getting wiped out of it.

For me the long thesis WAS couple of weeks ago that Sistema was trading at a 30-40% discount to its stakes in MTS and Bashneft, not even considering all the other smaller stakes they have. Now, with the increased possibility of having the Bashneft stake taken away for nothing, I think the case is more like betting on the possibility that the Bashneft stake won't be taken away for 0 and that it's currently trading at a 15% discount to its MTS stake (again not considering the smaller stakes which could surely be worth 1bUSD). It's quite clear to see that the case now looks worse than couple of weeks ago, and depends quite largely on the probability of Bashneft stake being 0 for Sistema. If you give it a +90% chance that Bashneft will be zero, then it seems that today's price isn't a real bargain.

Sistema down another 20% today. Have to say that it's not pleasant to look at all. Now it's priced at 5bUSD EV, which is less than the value of their stake in MTS. There's all kinds of rumors that they need to pay back Bashneft dividends worth some billions, raise cash, Evtushenkov still being in home arrest etc. It certainly does feel at times whether it's a dumb thing to just hold on (not really cash to buy more) even though it looks worse and worse every week. I'm planning on staying with it though, I've got time to wait and see whether the whole thing gets taken away or what happens (looks like it's priced according to Bashneft stake being taken away). Would be very interesting to know who are the entities on the buying side of all these trades.

This is a very interesting case in many ways. Frankly, I have no idea how this will end but was invested in Sistema and bought yet more yesterday. It does look more and more like the arrest etc. is just to get Bashneft cheaply to other hands, although this naturally might be false. At the moment you can Sistema for less than their stake in MTS is worth. It might be the case though that this doesn't matter in the end, if they decide to take the whole Sistema then this will proove to be another Russian adventure where you're liquidated for basically nothing. If it's Rosneft boss + Putin going for Bashneft, this will be another textbook example of what happens when you combine greed and power.