I haven’t post much on this blog this year. That’s partly because I have been writing financial analysis to showcase the features and benefits of Sharepad. My original intention of the blog was to look at financial language, and try to assess it using Natural Language Processing, to make qualitative assessments of how management communicate with their investors. I still think that there’s a future in that, but I have found it hard to focus on the project in 2021. Instead I’ve been using Sharepad to filter for interesting companies using traditional measures (Return on Capital, Price Earnings) to write about and invest in.
The pandemic has caused increased online activity, both old fashioned investing in the shares of companies, and new fashioned crypto activity. I’m not alone in observing some parallels with the internet bubble of the 1990s. Although the personalities are different and the technology has moved on; the psychology doesn’t change. Every bubble has a fundamental idea, that is over inflated until it bursts. John Kay has suggested that the definition of bubble should be when people don’t care about future cashflows, and instead are speculating that they can sell to someone else at a higher price, rather than focusing on intrinsic worth.
The bubble ends when there are no longer enough of the “someone else” to support a price far above fundamental value. Bitcoin’s genius seems to have been to increase the supply of “someone else” while keeping supply of the currency limited. Money stays the same.
Time and insights
With that in mind, below are a couple of links to my Sharepad articles. I think it’s useful to read financial commentary that is well past it’s sell by date, to see what insights have improved with age like a fine wine and what has goes mouldy, like left-overs rediscovered at the back of the fridge. Time is a fine filter for ideas.
So much financial commentary is around big picture “US bond yields X” or “Unemployment does Y” and “China data shows Z” but that doesn’t really help you choose which companies to invest in. You need to get your hands dirty, and read about specific companies, the challenges they face and where they think the opportunities are. That requires more effort, but is psychologically and financially more rewarding.
Here’s a link to an article published Dec 2020, where I looked at Solid State plc, which last year was one of the best performing companies that I own. They make “rugged” computers, power, communications and electronics and was +79% in 2021.
At the time I thought that the outlook statement “sounds rather vague talking about cross-division collaboration (I rather hoped that was already happening!) and being well placed to deliver both organic growth and international sales.” The companies open order book stood at £33.6m as of 30 November 2020 (down from £38m October 2019), so neither the qualitative nor numerical indicators helped predict the outperformance that the company enjoyed in 2021. I also wrote about ULS Technology, a mortgage conveyancing platform whose shareprice went backwards in 2021, despite a very strong UK mortgage market and the company holding cash worth over 50% of it’s market cap.
Investing with Impax
Another company I wrote about is Impax, which doubled last year. And I’ve held for a few years so have a greater 30x unrealised gain on my investment (though I did take some profits at 1299p).
At the time I said that the shares looked at expensive, trading on more than 60x PER ratio. But the economics of fund manager seeing inflows are wonderful (fixed costs, growing revenue = operational gearing), so the shares continued to perform well in 2021. I also wrote about The Mission and Volex in the same article.
I’m sure that there are people who have gambled on meme stocks and crypto currencies who have done better than 30x return over the last few years. But I do wonder what value these alternative assets create, compared to a fund manager that raises money to invest in “green” and “sustainable” assets. When I buy shares in Impax AM, I have a good idea about the activity that they invest in, whereas the behaviour crypto seems to encourage is telling everyone else to think the same way and buy more crypto. Looking back, I’ve found that my best investments are ones that I was embarrassed to share publicly, for fear of looking dumb. Crypto seems the opposite of that. Put it this way: what investment is currently so far from the mainstream that you’re shy to admit that you’ve bought? Gold? A platinum miner? Georgian Healthcare?
The best performing company on AIM over the last 10 years was a concrete screed company: Somero, whose share price has increased at +48% CAGR. This was not without risk, a decade ago the company had a weak balance sheet and was loss making, but since then has been helped by the need for warehouses with flat floors (hence laser guided concrete screed machines) driven by more retail leaving the high street and moving online. The gains to be made from new technology are not normally as obvious as promoters like to pretend. Somero shares have increased in value c. 50x.
Money stays the same, only the owner’s pockets change.
The author owns shares in Somero, Georgia Capital, Sylvania Platinum and other companies mentioned in this article. You can sign up to Sharepad by clicking on the images or on this link.