investing etc. 0015

The Ethics edition. Investing versus trading. PayPoint. Bloomsbury Publishing. Oxford Instruments. Auto Trader. The Dropout. Theranos. Peter Drucker. Milton Friedman. Postcard giveaway.

Wimbledon, the Euros, and now the Olympic Games, holiday, season, tennis season, actual good weather, it’s a great time to be alive and a tricky time to be a newsletter writer!

Wimbledon. Second Monday. We were there 😀

I wanted to call this edition of investing etc. the Olympic edition but a different topic beckoned. Welcome to the Ethics edition.

Tangentially though, I have been running a lot, training for my tenth Snowdonia Marathon.

I’ve also been running down rabbit holes...

What investing is...

Since investing etc. 0014 (the election edition) I’ve examined payments business PayPoint, a classic rabbit hole. 

Judging by the financials, PayPoint looks relatively straightforward. But scratch beneath the surface and things quickly get complicated. 

Learning about PayPoint, one question led to another, which led to another. This is nightmarish when time is limited, deadlines loom and you have a tendency, as I do, to try and square every circle.

We cannot know everything about a company, knowing when you know enough - either to make a decision or to quit - is an underrated skill. 

I like companies that explain themselves well, so that we do not have many unknowns to ponder. PayPoint’s annual report contained a lot of information, but it didn’t help me. 

I received some push back from a reader on the modest score I gave Bloomsbury Publishing earlier in the month. They wrote:

“I don’t understand your share selection. Bloomsbury is ranked 34, share price has been  excellent. Focusrite ranked 2, share price poor. Cohort share price excellent ranked 33. I hold BMY and Cohort.”

The first thing to say is I own all three shares, so we’re allies. The Decision Engine compares the 40 shares I’m most interested in, so by definition I reckon the’re all good businesses.

The second thing to say is that my correspondent is right. Bloomsbury and Cohort, a defence technology company, have experienced soaring share prices and digital music equipment maker Focusrite’s share price has been in freefall. 

Sales of Sarah J Maas’ House of Flame and Shadow propelled Bloomsbury Publishing to record revenue and profit.

The Decision Engine rewards shares that have low share prices in comparison to their normalised profits (that is to say the profit they would have earned if they had earned their average return on capital through the cycle). 

That is because I am looking to pay as little as possible for shares that I believe have good long-term prospects. 

I am indifferent to movements in share prices, which represent the impact of the cumulative decisions of other traders. They will have their own reasons to buy or sell shares. 

Backing our own judgement on the long-term prospects of a business is, to me, what investing is. If we are swayed by the share price, we will be buying and selling whenever it changes direction, and that is a game called trading.

Less contentiously, I have also scored used car marketplace Auto Trader and Oxford Instruments, which makes the guts of electron microscopes and other imaging technologies that reveal the world down to the atomic scale. 

Auto Trader is a tremendously impressive business that may have to work harder to grow in the future than it has in the past. Its annual report is a great read, probably even better if, unlike me, you are actually interested in cars, and it reveals a lot more useful information than PayPoint’s does.

I worried about Oxford Instrument’s new chief executive when he was appointed, but he has refreshed an already good strategy, and may have improved it.

Thanks for reading

We’ve finished watching The Dropout. 

When it was big news, the story of Elizabeth Holmes and Theranos, the fraudulent blood testing business she ran, by-passed Rachael, my wife. She is not particularly interested in business, having other noble pursuits to follow. 

While I really enjoyed the series, I think she had the advantage of surprise. Many times her jaw dropped, and for the same reason. She was incredulous that a long line of experienced and authoritative investors, businessmen and American grandees allowed a young, attractive, flattering young woman to seduce and bully them into believing in a product that did not exist. 

The Dropout stretched that incredulity without breaking it. It showed us that ends do not justify means, and that once you have told a big lie you must live it until it consumes you.

It also reminded me of when I interviewed chief executives. Usually I came away impressed. Time told me though, that I was right to be impressed about 50% of the time!

I thought about Elizabeth Holmes when I read a profile of the founder of an Ethics consultancy in FT Magazine. It marshalled a few famous names in support of the argument that businesses need firm ethical foundations.

The first, Adam Smith, may come as no surprise, but:

 “Management writer Peter Drucker saw ethics and integrity as the foundation of healthy enterprise. Milton Friedman, the great proponent of the supremacy of “shareholder value”, wrote that “ethical custom” was one of the “basic rules of society” that constrained business owner’s desire to “make as much money as possible”.”

The writer, Andrew Hill, who as well as being senior business writer at the FT is also a member of the Advisory Council of the Institute of Business ethics, says: 

“I thought Enron [a fraudulent entergy trading company that collapsed in 2001] would be a landmark, after which serious corporate malfeasance would surely decline...”

But...

“My post-Enron optimism about a permanent sea-change in business ethics was misplaced. Each new generation of executives feels the tug of temptation to behave unethically. Some are bound to succumb. But that is no reason not to try to teach them how not to.”

Perhaps the same could be said of investors who do not consider the ethics of the companies they back.

When was the last time you received a postcard?

I still have a few postcards featuring beautiful artwork from Tanzania, so come on, ask me anything, or send a comment to richard@beddard.net and I will reply on the back of a postcard*.

* While stocks last. For further details, see investing etc. 0013!