1
Oct
2016

Old news

Occasionally, I like to read out of date newspapers. With hindsight, what we thought we knew, turns out to be wrong. What we thought was serious, turns out to be trivial. What we dismiss and throw away, many years later is sought after and valued as “vintage”. And sometimes, what we once ignored as irrelevant, turns out to be prophetic.
I came across the article below, published in The Sunday Telegraph, 14th April 1963. I haven’t asked their permission to reproduce it – but it is so old that I hope they won’t mind. Especially since the Telegraph is a free website. The author, Nigel Lawson was a financial journalist. But later he became a Conservative politician, and 20 years after he wrote this article he was appointed Chancellor of the Exchequer in 1983. He then de-regulated The City, and brought in tax cuts which resulted in the “Lawson Boom.” Allowing banks (whose main business is making loans) to buy stockbrokers (whose main business is capital markets) probably inadvertently led to the flawed “universal” banking model and the 2007-8 financial crisis.
He resigned over a difference of opinion on interest and exchange rates with one of Margaret Thatcher’s other advisers. He ended up in the House of Lords, as Baron Lawson of Blaby. He is, of course, also Nigella Lawson’s father.
I like his article, it ages well. I have always thought you can learn a lot from reading between the lines of what companies’ management say. Rather than just the accounting numbers they report. Two of the companies he praises (Legal and General, Unilever) are still around and the decades since the article first appeared have been kind to them. Whereas the Lancashire Cotton Corporation and Pressed Steel which he disparages, have disappeared into obscurity. Which suggests there is something to his approach.
I also am interested in “simple rules of thumb”, and how these can be applied to investing. This approach is clearly not as original as I thought, as the article below shows. I hope you enjoy reading it too.

 

Seven rules for investors

The Sunday Telegraph 14th April 1963

I am delighted that my colleague “Capitalist” is doing so well with his portfolio of shares. His careful system of selection is plainly a very sound one. But I can’t help feeling that – like most accountants – he is obsessed with figures, with the purely statistical facts.
Earnings growth rates and dividend yields are all very well in their way. But the shrewd investor will want to look beyond mere figures, just as the trained psychoanalyst looks beyond the patient’s words to discover truths deep in his subconscious.
Happily, I am not alone in this view. So great an authority as the well-known investment trust expert, Mr George Touche, remarked in the midst of a learned, 25 page address on investment to the Institute of Chartered Accountants at Oxford last summer that “general impressions may be obtained from many sources, apart from the conclusions to be drawn from the financial results. The cult of a chairman’s personality, combined with constant repetition of his photograph, rarely inspires confidence in the management of a company.”
Sole contribution
So we have investment rule number one:

Avoid companies whose chairman’s photograph is published more than four times a year.

Unfortunately this was Mr Touche’s only contribution to the important science of non statistical investment analysis. But I strongly recommend the following as rule number two:

Avoid companies that publish their balance sheet in front of their profit and loss account in the annual report.

The Companies Act stipulates that both these be published, but it does not lay down the order in which they should appear. So companies invariably put first the document of which they are proudest (or least ashamed).
Obviously a company that is prouder of its assets than its profits is one to be avoided at all costs. This is the very hallmark of an unprogressive company earning an inadequate rate of return (if any) on its capital employed.
How many fortunes might have been saved, for example, had investors noticed that Pressed Steel publishes the parent company’s balance sheet in front of the consolidated profit and loss account. You would not catch a growth stock like Elliott-Automation doing that. Again, the Lancashire Cotton Corporation, short of profits but long on assets, publishes its balance sheet first; whereas expansionist ICI…but I needn’t elaborate…
But perhaps at this stage I ought to warn investors that this particular rule, although in my experience invaluable, is not an infallible guide. Take the two cement companies, for example. Associated Portland Cement puts its profit and loss account first, Rugby Portland Cement its balance sheet. And yet it is Rugby that has by far the better growth record. The explanation of this superficially startling phenomenon brings us to rule number three:

Invest in companies whose chairman is less than 5’8” tall.

What you must look for is the Napoleon of industry, those dynamic individuals who make up for lack of physical stature by making their companies grow instead. Sir Isaac Wolfson and Mr Charles Clore are obvious examples.
This is also the explanation of the cement conundrum. Rugby’s chairman Sir Halford Reddish qualifies with flying colours under the height rule. But APC’s Mr John Reiss, although a charming gentleman and fine chairman, is over six feet tall.
Points system
It is always advisable, therefore, when considering a purchase of any share, to ask your stockbroker to let you know the precise height of the company’s chairman. But you should also take a scientific interest in the rest of the board. Which brings us to Rule number four:

Assess the board on the points system as follows-one point for every director, and an extra point for every peer, admiral, general or air marshal. More than 15 points disqualifies, or more than twenty in the case of banks and insurance companies.

Plainly no board meeting will ever reach rapid agreement if there are too many directors; equally, an excessive number of peers and military gentlemen is dangerous because such people were taught by their nannies to believe that trade is no calling for a gentleman.
The shares of Sun Alliance Insurance, for example, are lower today than they were four years ago; whereas those of Legal and General have doubled. The Sun Alliance has 33 members, including eight peers: 41 points, which means instant disqualification. Legal and General’s board, however, has only 16 members, including one peer and one admiral. Eighteen points is all right for insurance.
Inner Three
Then again Rank Organisation board runs to 18 points (which means disqualification for an industrial company) whereas the Financial Times, another leading group in the entertainment field, easily qualifies with nine points in spite of its three peers. But you have to be careful. The Unilever board contains 24 members, which might lead an unsuspecting investors to look elsewhere. But in fact an inner board of only three is what really counts.
This should complete your study of the company’s report and accounts, except perhaps for two minor points, rules five and six:

Avoid companies who hold their annual general meetings at awkward times or in unlikely places.
Avoid companies who have just moved into a lush new head office.

The first of these is obvious. A company that announces that the annual meeting will be at 8:30AM at Chipping Sodbury Town Hall is evidently not going out of its way to encourage shareholder participation.
The second derives from one of Professor Parkinson’s laws, viz that new offices are built just as the company reach its peak, from where it can only decline.
…In 1961, when the Bowater Paper Corporation moved into its lavish Knightsbridge skyscraper, profits fell sharply and the company lost its growth stock rating.
But as well as the annual report, it is also well worth paying attention to the announcement of preliminary figures. Here we come to my final, and most important, rule seven:
Longer to Add

Bad figures take longer to add up

From this follows a simple conclusion: you should sell any share in a company whose preliminary profits figures fail to be published within five days of the date on which they were published the previous year. By following this simple rule, you will save far more money than you lose.
Shareholders in both Lombard Banking and Firth Cleveland, for example, could have sold in advance of bad news on three separate occasions.
It will be interesting to see what 1963 brings.
Here, then are my seven rules for investment for Easter. There are, of course, others. But that’s another story.

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