Song for Quindell

(Here's the tune if you didn't get it)

Quindell, a sell
These are words that go together well
Quindell, a sell

Quindell, une vente
Sont les mots qui vont tres bien ensemble
Tres bien ensemble

I held you, I held you, I held you
As a Full List play
Until they said no way
UKLA said you'd changed too fast
What didn't you understand?

Quindell, une vente
Sont les mots qui vont tres bien ensemble
Tres bien ensemble

I read the, I read the, I read the
I read the RNS
Oh, what a mess
Until you learn to read the rules
Your statements won't impress

I want you, I want you, I want you
To check my hearing loss
At a nine grand cost
Until you do I'm mis-hearing you
What was that you said?

Quindell, une vente
Sont les mots qui vont tres bien ensemble
Tres bien ensemble

I will say the only words I know
That you'll understand, my Quindell



With apologies to the Beatles

Are you buying value, quality or a story? Value Investing panel at UK Investor Show 2014

Bulletin Board favourites are mostly story stocks with poor quality and value ratios

Click to enlarge

The ever-smooth Ed Croft blew bubbles on the screen. Are Stockpedia's Quality Rank and Value Rank the
solution to our tendency to buy a great story stock, most of which will disappoint?
Addressing us in the old-fashioned way without a projector were investors Nigel Wray, Chris Bailey and
Paul Kavanagh of Killik & Co.

To kick off, Croft asserted that evidence is clear that, however you measure it, over the long term (4
years+):

• cheap stocks beat expensive stocks and 
• quality stocks out-perform junk stocks

Cheap means low PE, low PBV, low PCF or some combination.
Quality indicators are companies with strong franchise, positive earnings direction and low risk. ROCE is a strong quantitative measure.

Use Croft's interactive webpage. Click the Top Bulletin Boards button above the bubble chart.

Wray agreed about the out-performance and pointed out a further advantage of shares that generate good long term returns: the longer you hold a successful pick, the better the return if you are a capital gains tax (CGT) payer. The magic of compounding means that deferring the CGT hugely improves the final post-tax value compared to jumping in and out of positions and realising profit every year.

Why do people buy shares whose numbers show them to be expensive or poor quality?

Investors love a good story, promising outsized returns. I would add that 'doing the numbers' is not on everyone's checklist and in any case, once enthused, confirmation bias means we humans are willing to give good stories a lot of slack when it comes to balance sheets, tangible assets and real hard cash coming in.
Croft is not saying avoid all story stocks, just that they need more justification than quality-value ones. And judging a story is a lot harder than looking for booby traps under an otherwise good-value quality-brand car.
I've seen many AIM promotions, particularly mining and oil companies, that entirely rely on CEO charm, an exciting sounding potential resource (that is often a cast-off that cost them a tenner) and the difficulty of evaluating the risks, timescale and costs of development into production. The latter is called information asymmetry. Unethical directors will manipulate you as much as they legally can (and more) and it is your arch enemy.

Kavanagh did admit to picking some oil exploration shares "But it's lottery ticket type money."

Blinkx: Ben Edelman is Not backing Down

"It's the Wild West out there, and Ben is the sheriff" - Alvin Roth, Economist

The UK Investor Show on 5 April scored a coup in getting Ben "Web Sheriff" Edelman to show his latest findings on blinkx. Edelman is an associate professor at Harvard, lectures on the online economy and has a law degree. Ben and blinkx are having a shoot-out which started in January with Edelman's blog The Darker Side of Blinkx.

In a sometimes very technical piece, he accused blinkx of being party to deceptive practices involving web adverts and pop-up windows in which blinkx got paid when users clicked the ads or closed the pop-ups. Blinkx strongly refuted this but without any detail which surprised many market commentators.

Two months later Blink issued a detailed counter to Edelman. Blinkx also sent a lawyer to the UK Investment Show but declined an offer of a ten minute slot on stage and an exhibition stand.

Edelman admits to, indeed revels, in being a geek with an obsession for nailing what he views as people abusing the web for undeserved profit. The extreme depersonalisation and literal distancing of  business transactions by web and email leads him to say that "In some respects the Internet is the best machine ever made for swindling people."

He is especially exercised by adware: programs running in the background on a PC that causes
unwanted adverts to be displayed. He has developed automatic methods to capture and trace some of these companies that are spoiling our browsing and pinching pennies or even dollars on every click.

Click to enlarge slides

Edelman sounds and frankly looks in his blog pic (right) like a nerdy computer dullard who rarely exposes himself to sunlight, but I was pleased to find this is far from the case. On stage he was energised, confident and witty, which is just as well as much of his case is pretty technical. As he bounded about the stage explaining his slides it was clear that he loves
the challenge of bringing the hot breath of justice down on these modern age cheats.

He soon presented some new research on blinkx that his obedient and dilligent robot PC servants have
found. To boil it down, he makes two key allegations:

• blinkx's affiliates or sub-affiliates con people into installing blinkx adware on their computers
• blinkx breaches the US regulator's (FTC) rules by not doing enough to stop those affiliates or sub-affiliates from doing so

The blinkx adware does not say it's by blinkx. This is a deduction Edelman has made. The FTC requires that an adware program creator should know if there is widespread failure by affiliates or sub-affiliates to provide adequate notice of their adware installation and obtain consumer consent to its installation.

Disclaimer: I do not have enough expertise to judge whether Edelman's claims about blinkx are true, I am merely reporting what he said.
Slides reproduced with permission.

Other articles on Edelman's talk:

Doc Layman
Would I rather be long or short of blinkx? Dunno! - Tom Winnifrith (registration req)
Impressions of a self-publicist, and Blinkx - Roger Lawson, ShareSoc
View following the UK Investor Show - Steve Moore (reg req'd)
Telephone interview with Edelman - Doc Holiday
Edelman critics continuing to play ‘the man’, as the PR machine struggles to play ‘the ball’ - Steve Moore (reg req'd)

The best quotes from the UK Investor Show 2014

The first in a series of pieces on Tom Winnifrith's UK Investor Show, held on 5 April.

 

Quoted are:

• Ben Edelman AKA The Web Sheriff, Harvard associate professor
• Terry Smith, fund manager, CEO of Tullett Prebon and exposer of investment rip-offs
• Ed Croft, co-founder of Stockopedia. Damn good looking for an investment geek.
• Roger Lawson, Deputy Chairman of ShareSoc
• David Lenigas, Executive Chairman of Leni Gas & Oil
• Simon Cawkwell AKA Evil Knievil. Has he lost weight?
• Cathal Friel, Chairman of Fastnet Oil & Gas. Fast-talking Irish charmer.
• Paul Scott, AKA Paulypilot, Stockopedia writer and activist. A legend.
• Clem Chambers, CEO of advfn & market commentator. Writes thrillers.
• Dominic Frisby, actor, comedian & financial journalist. Like Auric Goldfinger, he loves gold.
• Vin Murria, CEO of Advanced Computer Software Group (sorry about the pic Vin)

Apple iPad5 feature brainstorm

New (new (new)) iPad launched today but will it have a Wow feature?

We never got 3D, haptic display, keyboard cover or a bezel-less screen that pundits have previously predicted. Maybe this time. But what about some really radical advances?

Here's my brain storm.
Vote at the top right of this page.
PS the Widescreen option is there for laughs and is Not Going To Happen.

Folds in half

Not a half-assed effort like the Sony tablet P (right) where you still have a bezel and an air gap between the two
LCDs. Can Apple get the LCD to to right to the edge of a case and but up against a mirror half? 

No connector - wireless charging & video

The change from the old iPhone connector to Thunderbolt caused plenty of anguish. What if there was no connector at all? Nokia and Google mobiles already have optional contactless charging. Samsung offers wireless video streaming.

Micro airbags for drop protection

Built into the corners. Imagine how much Apple stores would charge to replace them!

Shaped like Steve Jobs' head

The ultimate memorial and tribute to The Creator.

Eye-tracking cursor

Gaze-tracking is a hot research area. Samsung's partial effort on the Galaxy 4 hasn't been a hit. Pin-point accuracy probably isn't achievable yet.

16x zoom camera

It is very difficult to get the folded optical path needed for such a large zoom into a 9mm case. When will we be released from the horror of digital-zoom?

Transparent

The battery is the obstacle here. The electronics could already hide behind the current thick bezel.

AC pins for direct mains charging

Spring-loaded US-style AC pins could mechanically fit in the case. There may be regulatory/safety reasons to prevent this. Hanging your iPad from a mains socket with non-latching pins would not be a winner with the cack-handed either.

Full screen solar panel

Can be done as an MIT project has demonstrated. Ingeniously they avoid the problem of impeding screen brightness by capturing only non-visible photons.

Hybrid always-on e-ink/LCD display

Apple are already thinking about this.

Looking for Ten-Baggers is a Losing Strategy: You are not Peter Lynch

7 reasons why these 8 10-bagger picks have lost 42% in 3 years

"One of the most damaging concepts in investing has come out of one of the best books"

This is how I began my first ever investment article. I got a freelance spot on the Motley Fool UK in 2006 and, being a big-head, used it to attack one of the most popular ideas among small investors. I have listened with my head in my hands as friends have told me about their latest share buy, a 95% chance of failure punt wrapped in a great story.
Peter Lynch's idea, buying into a long-term growth company at an early stage, is a great one. There are 24,000 hits on Google for the phrase. How can such a good and popular idea be so damaging?

1. You are not Peter Lynch
2. Promoters of shares make them sound way better than they are
3. Journalists prefer exciting stories over solid but dull firms
4. Most journalists are writers, not investors
5. Survivorship bias and prominence bias conspire to make you think exceptional growth companies are commonplace
6. Misplaced faith in efficient markets - you are probably paying more than a fair price for the supposed next Coca-Cola
7. You may be diluted many times over in fundraisings - it's like a negative dividend

Eight potential ten-baggers from three years ago

I came back to this hobby horse because of a glitch on Investors Chronicle's website. They re-published an article from three years ago but gave it last Friday's date. Tomorrow's 10-baggers chooses eight shares that could ten-bag. The article is gone from the site but here's Google's cache of it. 

"The next blockbuster is just around the corner, you just have to look out for the signs – a niche but valuable product, a genuine growth market, or a recovery about to kick-start. Tomorrow's 10-baggers have already started their journey, you just have to hitch the right ride."

That sounds so straightforward. How have these potential portfolio-makers done?

Name	Ticker	Buy price	price now	change	Note
Firestone Diamonds	FDI	39.5	2.62	-93%
MDM Engineering	MDM	175	129.5	-26%
Falkland Oil & Gas	FOGL	177	26.62	-85%
Faroe Petroleum	FPM	107	110.25	3%
Monitise	MONI	20.25	35.38	75%
Ocean Power Technologies	OPT	432.5	#N/A	-69%	(only NASDAQ now)
SeaEnergy	SEA	38.25	22.25	-42%
Asterand	ATD	16.5	0	-100%
Average				-42%
FTSE Smallcap		2752.93	3907.39	42%

 

Not a single share has even two-bagged in three years. The best one, Monitise, is a very good company, in a great sector. Its turnover is up 1250% in three years. But it's losing more money than ever and fundraisings have nearly trebled the number of shares in issue

"Not a single share has even two-bagged in three years."

£1000 put into a portfolio of these shares would now be worth £520. £1000 in the closest index, the FTSE Smallcap, would be worth £1420 or 145% more.

[Edit] A comment here on this article points out that eight shares over three years does not prove anything. This is quite right. You'd need something like 100 over ten years to start getting a statistically significant result. It's a massive problem with learning to invest compared to say tennis, where the feedback is significant and immediate.

A Modest Proposal #1: Recapitalise UK with Good Gov't / Bad Gov't split

If it's good enough for banks it's good enough for Government

The Gov't has appointed Rothchild to advise on splitting problem bank RBS into a Good Bank and Bad Bank (report). The idea is to speed the recovery of the useful parts (mortgages, business lending etc) by shoving the toxic loans and some matching debt into a sack to rot and fester at the end of the garden.

Bondholders are concerned that they might have a haircut forced on them if they wake up on the wrong side of the sackcloth. It may seem unjust for the bonds, which rank ahead of preference shares, Gov't B shares and ordinary shares, to suffer a loss when the bank is solvent and whose equity still has a value of £30bn. Always remember that, when in a tight spot, the politicians' expediency card trumps all.

If bondholders in a solvent bank can be burned, why stop there? Britain is struggling to recover under a mountain of state debt, so let's split off the bits we don't want and draw a line under it (© Tony Blair).

Good Gov't / Bad Gov't split

Good Gov't	Bad Gov't
NHS Education Transport Culture, media & sport Communities & Local Government Justice etc	£1200bn debt Defence Home Office DEFRA PFI Unfunded liabilities etc

Holders of Gilts can take an immediate 25% hit and more later if we feel like it.The Good Gov't can move ahead with reviving the economy with plenty of spending on jobs, roads and health. Income tax can be cut to 15%, corporation tax to 12%, making it the lowest in the EU.

A disadvantage of the split is the need for two General Elections, one for each Gov't. Perhaps Gordon Brown and Tony Blair will come back to jointly run the Bad Gov't, tied together like bickering conjoined twins in an uncivil partnership.

A 1.25% charge to manage a bond fund targetting LIBOR + 2%? This advert doesn't even tell you the annual charge or that there's an initial fee.

A miserable return at the top of the market from Crystal Man

BNY Mellon have taken to using risible Iron Man style imagery to promote their Newton Global Dynamic Bond Fund, whose performance ought to be predictable and dull. Money Week (13 June) has a teaser ad (right) followed by a full page ad.
It was the dissonance between the dynamic, futuristic and exciting Crystal Man and the performance aim of LIBOR +2%* before fees that caught my attention. Woo-hoo, LIBOR plus two percent! I'm going to smash my way through concrete walls to reach that sort of return.
* over five years

"The Power of Ideas"

You can see that Crystal Man's chest logo is The Power of Ideas. Only the idea here is for BNY Mellon to make guaranteed easy money while you take all the risk of buying bonds at the top of a bubble market. They omit the level of the performance fee even from the feint small print. And why do they do that? Is it because it's over half the plus two percent?
Also the ad does not even say that there's an initial fee of up to 4%.

"If a bond fund can make a 25% cap gain as bond prices rise that can reverse"

The fact sheet gives the management charge as 1.25% PA. With 1 month LIBOR at 0.2% the charge is 57% if the targeted gain.
Now the fund has done a lot better than LIBOR+2% over the last three years, averaging 5.1% PA including the management fee.

I doubt that bubble-boosted returns (these include capital gain) will continue. In 2009 the fund returned 31.6% of which 25% was capital gain. If a bond fund can make a 25% cap gain as bond prices rise that can reverse. There's a very strong chance of you losing money in this fund if you buy now, especially after the initial fee of up to 4%.
I shall ask the Financial Conduct Authority (FCA) to ban this advert unless it states the fees. It's not enough for the manager to say that you should read the documents for the fund in which you want to invest. Obviously you should but there's plenty of room to be transparent about charges in the ad. Ryanair ads got banned for hiding charges on the website.
It's a shame that the Advertising Standards Authority has no remit on financial press ads. They are much tougher and quicker than the FSA were. Will the FCA be any better?

If you see a financial advert that you think the FCA should act on, email fintrom1@fca.org.uk

A career on Wall Street? Consider first the gospel of the drunk drivers and the cheating spouses.

The 32-year-old investor who spotted the subprime bubble in 2004 warns students against mortgaging their futures for short-term gains

Immortalised in the brilliant book The Big Short as the man whose "mind had no temperate zone", Mike Burry spoke to UCLA economics students last year.
After relating how he was hounded by US authorities merely for speaking out on their failure to see not just what might happen, but what he was sure would happen to the financial system as the poison of subprime coursed through the veins of the banks, he cautions his young audience against the seductions that will come their way.

"If you're considering a career on Wall Street or Washington DC you should be aware of the social proof that operates there. This is that many if not most people will be doing questionable things that obviously make money and obviously earn respect from common peers. 
If you find yourself in such a place I would ask you to consider a rule I learned as a physician - 'First do no harm'.

Besides life is not that short. Life is well and long enough for you to come to regret any activity or habit involving an exchange of long term risk for short term benefit. This is what many if not most Americans did during the refinancing and consumption boom of the last decade and it is what our government did riding on the boom. This is also the gospel of drunk drivers and cheating spouses.

Of course, when you encounter the opposite, the short term risk exchange for long term benefits, consider hitting that button again and again and again."

You can skip to 14m in the video if you are in a hurry but I recommend watching his whole speech from 2m30 in.

A flavour of The Big Short is in the Vanity Fair article Michael Lewis wrote about Burry and subprime crisis.
Notice how untidy his office is despite knowing a photographer was coming. He just did not care what judgement readers might make. In fact it probably did not even occur to him to tidy up.

Evil Knievil's Life and Times at T1ps.com

For Evil to succeed all it needs is for good men to do nothing except make sure he's comfortable

After many years of attending the Master Investor Show I have never, ever

seen Simon Cawkwell standing. He is either seated within very comfortable distance of several good bottles, walking to the stage, or sitting in a two-seater sofa.

Not only did I witness Evil Knievil (EK) standing, but reading a prepared text. This is the second Miracle of Upper Street, for I have been assured by Tom Winnifrith at previous shows that it's useless to ask EK to give a presentation, he cannot be relied to write it in time.

Jim Mellon must be cracking some extra-large whip, for EK delivered a long speech complete with jokes to warm us up for his peroration. This had little to do with a history of t1ps.com.

EK laboured though his jokes like a diesel lorry up a motorway incline, mentioning Tom Winnifrith six times with varying conceits in a vain effort to repudiate the claim he had been forbidden to mutter the sacked founder's name.

"This is not going well," I thought. But soon the top of the hill was past us and he powered down into his comfort zone of shorts, malfeasance and the uselessness of our regulators.

A very clever bear

EK boasted he is the only person he knows to have won on the capital of t1ps [Rivington], claiming he invested £1500 at the outset and sold out for £250k.
Jim Mellon eventually stepped in to save the t1ps parent, with a £3m of cold, hard cash.
EK prefers to see t1ps as the purveyor of suggestions not share tips, despite its name.

The problem with stockbrokers

One of EK's bete noirs is the stupidity of modern day brokers [compared, I imagine, to the gentlemen of good breeding he used to speak to on his Bakelite dial telephone.]

"Those over 40 are driven mad by compliance officers, those under 40 don't know anything"

Evil Knievil's Diaries - a caution

He asks readers of his diaries on t1ps to take account that their isn't enough time to take in all the morning's news and to "use their brains" when reading his online diary.

The importance of asset value

Always have the tangible asset value in mind when evaluating shares - it has to be the basis of all investments. Why buy companies that can be replicated by spending less than the equivalent capitalisation?
[As a long time fan of his I can tell you that principle has gone spectacularly wrong on occasion - ASOS (ASOS.L) and Regus Group spring to mind. He has a blind spot for brand value, perhaps because it is the hardest part of the balance sheet to quantify.]

Oranges are not the only short

Apple ($AAPL) is still brainwashing investors including 'The Debonair One'

Jim Mellon. EK again used the TNAV argument. A PE of 10 is used to argue by supporters that Apple is cheap. In his view it is still a short for the next 2 years.
He was told that Apple plan to buy a television station [really? Is he confusing Apple's rumoured launch of an actual television?].  That doesn't make any sense he asserted. It took 50 years for ITV to reach a value of £6bn and even then that's pennies compared to Apple's size.
Apple is facing more and more competition and that will push up the PE ratio.

An old plastic adversary 

3DM [now reborn as Environmental Recycling Technologies ENRT.L] had many accounting stories to be explained but the old management got clean away. An example of their dubious accounting: £2m was 'invested' only to ping back to the company as a 'receipt for a licence' i.e. revenue.
He blamed the FSA and its totally supine performance. The 3DM problems were relayed to it in detail and yet they did nothing.

"The bare faced tolerance of fraud is degrading."

EK has lost count of the frauds the FSA has waved through mainly through idleness and stupidity.

Libel law

Major firms of solicitors turn out to be "conniving filth" when it comes to helping clients bring libel cases. There has been no punishment for failing to substantiate libel claims when challenged to do so.

Short and curlies

It has become ever more expensive to short shares listed in New York. American banks have lost confidence in a lending US stock in London. Qihoo360 ($QIHU, an alledged Chinese internet fraud) has a borrow charge of 20% PA in London but only 2% in the US.

The equity death spiral

A recent financing innovation, the Standby Equity Distribution Agreement (SEDA) is a death spiral, an invitation to fraud.  [Also called an 'Equity Finance Facility', it involves ongoing dilution at whatever the prevailing share price is] He cites Noventa [a junior miner NVTA.L] which were at 1.5p with 100m shares in issue  When they hit problems the proper thing to do in his opinion was to liquidate the company. Instead the SEDA financer Darwin sold 500m shares (as a hedge, driving down the price?). In affect he alledged £500k was filtched from shareholder. Cash is now only 0.02 p per share. The authorities should clamp down on SEDA.

The British economy

EK is staggered how the Pound holds its value.

 "Our debt position is terrible and has been swept under the carpet by politicians."

The trade for 2013

The government bond markets will break and it'll be huge. Short Gov't bonds and don't delay on the grounds that we don't know when the collapse will come.

Disclosure: I am short of Qihoo360

Nine Quotes From The Master Investor Show 2013, London

I had yet another very enjoyable visit to the sixth Master Investor Show I've attended. It was the first year under new management but with a few familiar faces.
This is a quick blog for now, I'll cover the speakers I saw over the next few days.

"The Euro is the greatest short I have seen in my thirty years of foreign exchange experience."

Jim Mellon

"Hold 5 to 10% of your portfolio in gold as insurance and hope it doesn't go up because that would mean everything else is bad."

Merryn Somerset Webb

"Those over forty are driven mad by compliance officers, those under forty know nothing." 

Simon Cawkwell on the problem with stockbrokers

"Gold is the Anti-Christ of investment. It's what everything else isn't."

James Ferguson

"Interest rates at a 300 year low tells us that nothing is normal now."

Merryn Somerset Webb

"I don't know why they've asked me to the Master Investor Show, I'm a rubbish investor. In fact I ran my own Rubbish Investor Show but it wasn't very successful."

Richard Reed

"President Truman demanded to see a one-handed economist - all the others began their advice with 'On the one hand...but on the other hand."

Jim Mellon

"The bare-faced tolerance of fraud by the regulators is degrading."

Simon Cawkwell

"QE is now running at three times the rate the Bank of England used during the worst of the credit crunch."

James Ferguson

Presentations

Master Investor have started publishing presentations from the show:. For viewing compatibility, I have put Powerpoint files through an online viewer:

Managing the t1ps legacy - Peter Webb

Zinbcoin, the Elephant in the Bitcoin Vault

The supply of Bitcoins is restricted, sure, but what if...

" Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more." - http://www.zerohedge.com/news/2013-04-25/guest-post-bitcoin-cryptographic-gold

 "Bitcoins could be worth thousands of Dollars per coin" - http://www.runtogold.com/bitcoin-price/

I haven't had a cab driver tell me he's buying Bitcoins yet, perhaps because I'm too cheap to take cabs, but we are heading that way. The key to the fevered speculation is the absolute limit to the supply of Bitcoins, set at 21m. If there were no limit, if a new cyber-seam could be discovered tomorrow, the current speculation would be madness. It probably is anyway. God, maybe if the upside is infinite that's actually a good risk-reward opportunity.
Whoa! No it isn't. The problem with the limited supply argument was staring me in the face: May I present:

Zinbcoin

WTF is Zinbcoin? Zinbcoin is not Bitcoin! Geddit? *

Bitcoin has first-mover advantage but guess what? It's easily replicated. What if Goldman Sachs backed a rival to Bitcoin, Zinbcoin? Zinbcoin would still live in the cloud - a peer-to-peer mediated currency. But the Goldman imprimatur and perhaps some attractive sounding twist (a shrinking supply?) could see it overtake Bitcoin as the speculator's weapon of choice.

There's no limit of the number of Bitcoin rivals. Another degree of uncertainly will have undermined the mine.

The domain zinbcoin.org etc are available. Will someone register it? What will be the next puncoin? Will Google create one? How about Nioctib? Why Nioctib? Nioctib is often compared to innovator Bitcoin.

* Older geeks will remember an operating system called Xinu. Xinu is not Unix.

Insights and tips from the UK Investor Show: The Long, the Short & the Wide

A good Christian loves his enemy but good shorter knows his enemy

Most of the notes I wrote during Tom Winnifrith's UK Investor Show will remain in my book since Paul Scott has made far better write ups of fund manager Mark Slater's presentation (excellent as always) than I could. You'll find them on Stockopedia: Pt1 and Pt2.

Shares mentioned in this blog

Alliance Pharma (AIM:APH)
Derwent London (LSE:DLN)
Shaftesbury (LSE:SHB)
Zoltav (AIM:ZOL)
Gulf Keystone Petroleum (AIM:GKP)
Churchill Mining (AIM:CHL)
Ocado (LSE:OCDO)
Cupid (AIM:CUP)
Proteome Sciences (AIM:PRM)
Quindell Portfolio (AIM:QPP)
ASOS (AIM:ASOS)
Juridica Investments (AIM:JIL)

The Long: Nigel & Nick

Tom conducted an interesting interview with small cap investor Nigel Wray and property developer Nick Leslau. Both are sure Britain's economy is heathier than the media, particularly the BBC, portrays.

"The UK is doing a great deal better than we're being told. A lot of companies are being created, there's real energy out there."

Retail property

House prices are too high according to the property man. Buy-to-let is dangerous, particularly in London. "Overseas buyers see London as a safe place to be" but it could go sour for instance if a new Gov't made a tax raid on non-doms.
Wray was not as negative, venturing that London & SE will continue to outpace the rest of the country and "There are houses in the south east worth buying."

Retail retail

Whole rows of high street shops were unanimously condemned, if not to demolition, at least to residential conversion. Tesco et al bully local councils to allow new superstore sites by playing them off against neighbouring councils, threatening to close stores and move.

"Pricing pressure will squeeze high street shopping into a third of its present size"

There are plenty of walking wounded chains who will pre-pack shrink themselves on the next blow. In a few years all you'll be doing is sipping a Starbucks while you plan whether to buy more shoes/clothes/bling in the boutiques.

The magic of franchising

A lot of Wray's fortune has come from his Domino's Pizza (LSE:DOM) holding, "The most predictable business I've ever been involved in." The outlets have remained 100% owned by franchisees, against his early expectations. That has helped the company's growth since a franchise owner will run the stores better than HQ ever could. It's a tough business late at night when the weirdos and drunks turn up. Wray is slicing his stake only because, at £1bn cap, Domino's no longer has the exponential growth potential he looks for.

Wray's wrap up

"Buy good small companies, on modest PEs, where directors own a meaningful percentage of shares."

He did mention Alliance Pharma (AIM:APH) where he is a 15% holder. I've noticed over the years that he does talk his own book.

Leslau's warning

"Leave property investment to the property specialists"

He recommended niche operators: Derwent London (LSE:DLN) and Shaftesbury (LSE:SHB).

The Short

Lucian Miers gave a walk through his process for selecting shares that deserve

short shrift, and particularly how to avoid disasters in these unlimited downside plays.
Miers finds short selling comes to him more readily than ownership simply because he finds it easier to spot companies that will fail than those than will win, especially in smallcaps.

Market timing and God save us from QE

Shares are being pushed up by negative real interest rates. "People think they are smart enough to see the warning signs and get out." They are deluded. History shows that optimists claiming QE will not end badly are wrong. The consensus is that QE countries will gradually inflate themselves out of trouble. In fact we will probably see a sovereign debt crisis.

The shorting process

1. Read the accounts. Miers reads three or four years of his prospect's RNSs.
2. Look at the corporate website to get a feel for how the company presents itself to the public. Is it all substance or show?
3. Know your enemy: who are the company's owners, brokers etc. Are there bulletin board cheerleaders?
   An example of a share he did not short is Zoltav (AIM:ZOL). It is "grotesquely overvalued" but Roman Abramovich's son is part owner so it is too risky a situation.
4. Instinct: Miers has often been advised to short Gulf Keystone Petroleum (AIM:GKP) but there's something about it he can't put his finger on. Thats' not much help to the rest of us who have a fraction of Mier's market experience.
5. Timing: Avoid selling when the price is hitting new highs every day. He is currently monitoring Churchill Mining (AIM:CHL) whose only asset is interst in a court case in Indonesia. It has zoomed up on no news. Risk manage your short by waiting for it to drop 15% or even 25% from its peak.
6. Patience: If you are forced out of a position don't try to get your money back ASAP. Wait until it's coming down the mountain.
7. Getting out of a disaster: He doesn't hang onto soaring shorts like Evil Knievil does. He took a loss on Ocado (LSE:OCDO) at 100p from a 74p start. The newsflow was relentlessly positive, buy notes were appearing. It's on his watch list, waiting for sentiment to turn negative again.

Top tip - if a company tells you the shares are probably worthless then guess what, they are probably worthless. The RNS will use a phrase like "there is likely to be little or no value left in the equity" yet the market cap will often continue to levitate at well above worthless.

Lucien's top shorts

1. Cupid (AIM:CUP) - the dating site operator. The business model is non sustainable - they are not providing the service the clients expect. The related party deals are "reprehensible" and it's not OK for those deals to be brushed aside in an RNS. The business will unravel quickly when it happens.
2. Proteome Sciences (AIM:PRM). Previously known as Electrophoretics International, its shareholders have been waiting years for the jam. The CE is bailing it out and he's kept the balls in the air for nearly twenty years. The rule of thumb is:
   

   "The longer the potential has been there, the less likely it is to be realised."

3. Hibu (LSE:HIBU) = Yellow Pages. The company has implied that the equity is worthless.

He also added one for the watchlist: Quindell Portfolio (AIM:QPP). It ticks all the boxes but it's too soon to short. The cap is £485m. The CE tweets every time a broker buy note comes out. The website is more focussed on pushing up the share price than explaining what the business does.

The Wide

I caught the end of a ding dong between the alarmingly large but charmingly civil bear Evil Knievil (Simon Cawkwell) and the CE of advfn.com, Clem Chambers. Evil said he did not know why he got ASOS (AIM:ASOS) so wrong - his short has cost £250k so far (and that's not his most expensive mistake by a long shot).
Clem: "Because it's an Internet company."
Evil: "Be that as it may."
Clem, even louder: "Because it's an Internet company."

And so on twice more. It was more of a heckle than help and Evil had had enough (and so had I). Being a bear of good manners he merely said "Please desist" but I'm sure the words in his head were shorter than that.

Evil's latest long tip is Juridica Investments (AIM:JIL) which is throwing off cash. I looked at this share a month ago. It has very tasty value ratios but the corporate governance* is unacceptable to me.

Evil's short tip was also Cupid (AIM:CUP) which to my amazement he called "a fraud, and I'm prepared to take a writ on Monday."
Find out why Cupid is a hot potato from these tweets.


* Juridica's funds are managed by a 36% owned company, Juridica Capital Management Limited (JCML). JCML charges its parent hedge fund type fees: 2.5% flat plus a performance fee that starts at 20%. This climbs in steps up to an incredible 50% of the increase in adjusted NAV. There is a hurdle but still. Oh and all three of JCML directors/managers are directors of Juridica. Why don't they just work full time for Juridica's shareholders instead of creaming off profits in the good times. More views on the Motley Fool boards here and here.

Disclosure: I am long of Alliance Pharma and short of Ocado.