Our gain on capital employed going into 2020 was £1,064 with a value of £12,383 and total investment of £11,774. This represented an enterprise ROCE of 9.04% and an adjusted partnership ROCE of 6.52%.
We ended 2020 with a return on capital employed of £10,305 and a value of £47,654.
Total investment at the end of the year was £37,349, giving an enterprise ROCE of 28% and adjusted partnership ROCE of 16%, far surpassing our aim of 4%.
These numbers speak for themselves, 2020 was a good year.
We received our biggest influx of net invested capital which totalled £25,575.
We achieved our highest ever recorded enterprise value since inception, which reached £47,944 on December 17th.
We invested our largest amount of capital in one year into publicly traded companies, which totalled £28,550.
With all this happening, Camlas Trading operated through its first pandemic.
I am also pleased to announce that we earned a dividend for the year of £247 which was paid out on December 24th. All partners have already instructed me to reinvest their share of this payment, which will both increase their ownership further as well as allow this capital to go back to work.
Camlas Trading would not have achieved this record performance if it was not for the commitment and patience of all of its partners. Despite the whirlwind of negativity that has come out of 2020, you all held onto your positions and as mentioned above topped up to an all time high which I am extremely grateful for.
Although admittedly 31% of this new investment is pegged to be removed at some point in 2021, the timing could not have been better.
The influx of additional capital has allowed us to really take advantage of the bear market we have experienced throughout 2020, as much of this cash has been distributed to the stock market.
At the start of the year, we had £13,583 invested across 6 public companies. We are now sitting on an investment of £27,159 across 17.
When it comes to marketable securities, I never recommended the conventional wisdom that dictates diversification is essential to long term investing success. The idea of scattering your money across several areas just scatters your attention and makes it close to impossible to track and understand what you are doing. Warren Buffet has often said “diversification is a protection against ignorance”. So when you see a portfolio of enterprises that has mushroomed from 6 to 17.. you are probably thinking I sound a tad contradictory. However I want to explain what diversification actually means when it comes to investing and why most inexperienced operators do it and get it wrong.
When you look at a story such as the Enron Scandal, it is clear to understand why the notion of putting all your eggs in one basket is dangerous and stupid. Enron was once an energy company and a typical rise and fall story. At its peak it was trading at around $90 a share, a few months later after the scandal was publicised it dropped to $0.30 a share, with bankruptcy following soon after in December 2001. I won't bore you with the entire history and scandal but basically the company was falsifying it’s accounts and earnings. As usual these Harry Potter-wand-swinging-numbers attracted an influx of investors which caused the extreme rise and inevitable fall later on. If you do want to know the full story I would recommend the book “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron” by Beth McClean and Peter Elkind.
Anyway, the scandal didn’t just hurt investors and the overall economy, it also affected the value of employee investment portfolios, who were encouraged to invest their entire money in the company's stock. When the company fell in 2002, their savings were eradicated overnight.
This is one example of why diversification is widely considered an investing basic and is taught as gospel by any personal finance courses etc.
The idea being that by spreading your investment across multiple sectors, industries, vehicles and investing techniques you mitigate any loss you may incur if one of these declines in value. As the other areas of investment will maintain your overall value. This strategy is perfectly logical to those who are not financially experienced or refuse to put in the time to study and learn about either specific industries or stick and master one particular investment technique.
So to defend our portfolio. Although we have invested in multiple businesses, we have and always will take a stoic attitude to our investing technique and what we consider a valuable enterprise, trading at a discount to this perceived value. The research that goes into this approach takes a long time, but fortunately I enjoy it and I’m always confident with my executions. These positions have not been taken as a means of reducing our risk.. These businesses, despite being spread across a diverse range of industries, from steel manufacturing to online retail, they all share certain fundamentals that have made them attractive to me and have been priced at either a fair or undervalued figure. What is also key to these positions is that I have studied and understand each and every one of the businesses and how it operates.
When inexperienced players join the game, they are somewhat blind, spoilt for choice and also afraid. The easiest way to reduce this fear is to spread as much money as they can with very little conviction. Somebody could have a portfolio of 20 businesses but could only tell you, say, 5 of them what the business actually does or what they value the company at.
Majority of the time, outside forces or the media fuel the scattered approach. A constant need to rejig and diversify a portfolio attracts activity that only makes the brokers rich. The whole industry is built on convincing people to buy and sell rapidly and often, as this feeds them their commissions. So it is very common to see news reports suddenly advising people to invest in Gold and then the next week a software company, then the following week a certain industry and so on.
This year due to COVID is a perfect example. A stream of new individuals have been keen to play the stock market, this has come from more time on their hands due to lockdowns as well as a FOMO mentality, particularly surrounding the surge of tech stocks. Everybody has been recommended to diversify away from covid affected industries and businesses so there has been a crazy level of trading throughout the year hence the rollercoaster movements of the stock market.
I am in no way discrediting any of the new folk joining in, as there has been a large number of people who have done extremely well off the back of COVID, picking some exceptional winners. Some have used this period as a way to gain knowledge on the stock market and so I take my hat off to the ones who have proven to show dedication to the field.
COVID has presented an opportunity for us like everybody else, but in a different manner. We have not once this year changed our investment technique despite the flurry of opportunities and gains that were available. Whilst the majority of the market have been chasing and piling into the latest buzz stocks, which admittedly have performed fantastic due to COVID, we have just continued picking out companies that are away from the herd and the noise that fit into our fundamental analysis. Yes, COVID has in some places influenced these decisions, in terms of deciding whether a company’s economic prospects are still impenetrable or infact better due to the new world we may live in, this is one (but a very important) factor to evaluating the overall quality of a business. Of course throughout the year I’ve looked back and seen a whole pile of companies that have got away. But at the time, they must not have ticked all the boxes, and by me investing in something that does not tick all our boxes would be a sign of diversifying, speculation and ignorance.
Our methodology is fairly simple. We want to invest in a great business that I believe to have long term economic prospects, managed by intelligent and honest people who are capable of achieving consistent high levels of return on capital without requiring eye watering levels of debt and is of course available at a fair or discounted price to its overall intrinsic value.
Before COVID, most of the great businesses we were looking at were not at a fair or discounted price. Only a handful have been fair and a tiny portion were discounted. Now, with COVID, businesses that were once overpriced or fair have dropped down a notch, to fair and discounted. This has presented us with buying opportunities like never before which means we can afford to be slightly more diluted in our weightings.
Having said all this, it is not to say that we shouldn’t evolve and tweak our approach. With our thirst for value and high levels of return on capital employed we have to adjust to match the new economies and businesses of today. This means a lot of the foundations that created the idea of value investing are obsolete. Sure enough, these types of businesses will always be available, but the expectation of long term returns are very hard to come by. These businesses I am referring to are ones that are trading well below their book value. Net-book value stocks (NBVs for short or Net-Nets as they’ve been called) were very popular back in the day for value investors and what I began hunting for. These are basically companies that trade below their enterprise value. For example if a company has a tangible book value of £10 a share (tangible book value meaning it’s plant, property, machinery, etc.. in order words, things that can be easily converted into cash, plus the actual cash on the books), but is traded publicly at £6 a share, this would have been a perfect buying opportunity to certain investors. If you remove the stock market out of the equation and you were simply a businessman, having the opportunity to buy a business for say £6m when it’s book value is £10m would be a no brainer. You have two options: Acquire the business at £6m and sell of its assets, making a £4m profit. Or you continue the operations of the business and hopefully grow it’s profit and value further knowing you have a margin of safety of £4m should the business not perform. This simple business behaviour can be applied to the stock market and these types of businesses still in fact exist, if you did a stock screener and filtered a price to book value ratio of under 1.0 you will find a whole pile of them. A known value investing technique is to purchase a basket of these stocks trading at low book values and sell them off when the market realises it is undervalued, the problem is modern business does not necessarily make these valuable anymore.
NBV stocks are usually quite sluggish industrial companies or businesses that are no longer operating in industries with long term prospects. This means they don’t offer much value anymore. From a business perspective they are still perfectly rational and you can still find the odd diamond, we actually own a business that was bought in terms of its price to book value. I will always keep hunting for these too, if there is a very rare occasion when a business is trading below its tangible value and operating in a good industry, this will always be the most intelligent way of investing, but as mentioned they are now extremely rare to come by.
This means we have had to be more forgiving when it comes to analysing certain characteristics, and approach accounting and business valuations from a more modern perspective. An example of this would be intangible asset valuations. Over time, intangible assets have become ever so more important and in some cases are more valuable than tangible assets, we’ve now had to factor this into analysing the overall prospects of a business. There are still certain intangibles that I disregard. We don’t like a company for example with a high level of goodwill on its books if they haven’t been converting these acquisitions into high levels of tangible returns. But valuable examples of intangibles are things like Software, Patents, Culture and Data (today’s oil) , they are just harder to put a true figure on then say for example an office building. There is a good book on how to approach intangible asset valuing called “Capitalism Without Capital: The Rise of the Intangible Economy” by Stian Westlake and Jonathan Haskel - I would recommend if you want to learn this in particular.
Another approach we’ve had to bake into the mix are “Growth Stocks”. The reason I’ve used quotation marks is because in the stock market community Growth Stocks and Value Stocks are complete opposites and are often the topic of heated discussions from both camps. When you hear about a Growth Stock, this is usually a business that generates exceptional levels of revenue and is expected to outperform its peers in the market it operates in. They are usually young companies and are despised by value investing disciples because they tend to trade at ridiculous prices in comparison to their fundamental values. This is indeed the case, and 90% of the time I burst out laughing when I see what people are prepared to pay for certain companies that are just total fads or are unlikely to make any actual money as a business. But they are still extremely popular in the investing world and they do create the contemplation of what a business is actually for? A traditional reason for a business is to simply provide some sort of service that generates a profit for that organization which it then reinvests to provide a better/additional service. Modern economics, greed and capitalism have made us lean more to the idea that a business is designed to create shareholder value. If a company simply continues to increase its stock price, at a crazy pace, ultimately enriching its shareholders, regardless of whether it ever realises a profit or whatever it actually does in terms of a service, some may argue that is a better business than most? I will let you decide.
However, despite the controversial reputation of growth stocks, in my opinion if you are investing intelligently, growth and value are interwoven and should not necessarily be considered different businesses. We obviously like the prospect of investing in a business that is growing, but only organically. A lot of people look at those top line figures showing year on year revenue increase, but don’t actually realise the majority of that revenue is just finance/debt. I’m not comfortable investing in something that is just riding a debt train and heading into the abyss. Other ones I avoid are young companies that, as mentioned, are bloated with debt, not making any money, but the CEO is earning a fat salary or receives ridiculous stock options that will incentivize them to manipulate the share price as much as they can. Those are just two examples, again there are a lot of other calculations at play but ultimately these kinds of companies are the ones that fall out of the value basket immediately and are simply growth/speculative vehicles for stock market traders and will never sit in our portfolio. We have picked up two businesses this year that would be considered growth by some, but to us they offered value.
This letter, as usual hasn’t been constructed with any particular goal or topic in mind, more or less just my thoughts at the time of writing, but as always, I hope it has been informative and interesting.
As usual, thank you all for your continued support and investment commitments. We are going into 2021 in a very good position and I hope to have more good news later on this year.