investing etc. 0020

Ten types of person, unproductive AI, me and the Booker Prize, Associated British Foods, Bioventix, Churchill China, Dotdigital, Primark, Softcat, Solid State, YouGov. Happy Christmas!

Sometimes it is only after you have written something, that you realise there is more you want to say. That’s how I felt, once I had sent investing etc. 0019.

That edition described the joy of witnessing investments making our lives better “in the wild”, companies doing a good job.

But there’s also joy in the day to day work of reading annual reports and compiling spreadsheets.

I experienced “in the wild” joy about Volution this month, but I also experienced its more geeky sibling, let’s call it “at the keyboard”, or “in the notebook” joy. What a month!

In the wild, I met a friend and former colleague for lunch. As usual we sat in a Cambridge cafe, where the conversations around us were about peptides, proteins, and polysaccharides, and we talked about business and DIY.

He told me that earlier the same day he had ordered two extractor fans from Screwfix.

“I bet they were made by Vent-Axia”, I said, making a calculated gamble. Volution makes ventilation systems, and Vent-Axia is one of Volution’s subsidiaries.

To my delight, he checked his email receipt, and confirmed he was expecting delivery of two Vent-Axia fans.

The chief executive of Volution is Ronnie George. Before he was chief executive of Volution, he ran Vent-Axia.

To get back to my theme, that there is joy in the nitty gritty, you will need to bear with me. A modicum of nitty gritty is unavoidable.

An initial investigation into Volution had convinced me it was a promising candidate for the Decision Engine, the forty shares I routinely score and rank.

But there was a problem. Volution has been profitable enough to qualify, but I could not say even roughly how much it exceeded my expectations. I was certain that Volution’s return on capital, a measure of profitability, has typically been more than 10%, but it could have been much higher.

The uncertainty stems from how companies account for intangible assets. Like tangible property and equipment, intangible assets represent money invested in the business (capital), but they are not things that we routinely buy or sell, which makes them difficult to value. Under certain circumstances a company’s “customer base” can be an asset. So can a brand, but only sometimes.

The inconsistency in defining intangible assets is not the fault of companies, it’s stipulated by accounting rules, but companies rarely provide investors with the information we need to untangle the mess the rules create. Sometimes they don’t have it.

I use rules of thumb to adjust the numbers. These rules of thumb can have a big impact on the return on capital calculation, but may not always apply well.

If you’ve got this far, here’s the joy bit. I decided to bring Volution into the Decision Engine (see the links below). While I was sitting at my spreadsheet applying rules of thumb, I received an email.

It was from Ronnie George, the Volution chief executive.

Volution calculates its own version of return on capital to account for intangible assets more consistently. Ronnie George offered to take me through the calculation.

An email conversation with Volution’s chief financial officer gave me the numbers I needed, and even more joyfully, my rules of thumb were validated, which has increased my confidence in them.

I think the stereotypical view of investing is that it is all about making money, but that cannot be true. Share prices are capricious, and if they were all that mattered, much of the time we would be experiencing sadness.

The joy of investing is the joy of figuring things out. That and I get to work in some really wonderful places, like Cambridge University Library...

Gratuitous picture of the entrance to Cambridge University Library!

Research - more candidates for the Decision Engine

• Two firms past the test
  Associated British Foods is the kind of business I am looking for but about sixteen times bigger. Don’t judge Softcat by its revenue.

• Probably the most profitable manufacturer in the UK
  Bioventix is like an exotic orchid that flowers once a decade. Dotdigital is a software stalwart.

Score - the latest Decision Engine scores

• The best stock on my subs’ bench so far
  Volution is promoted from idea to subs bench, as I score it for the first time.

• A UK tech firm with an ace up its sleeve
  Softcat’s irresistible corporate culture confronts technological change

• Reassessing two of my top 10 stocks
  Profit warnings from Solid State and Churchill China trigger me, with different results

• A high-profile firm worth your vote?
  YouGov is focusing on its big advantage, but it has its eye on AI too

Trade - actual decisions!

• Share Sleuth: tweaks to two shares I’ve held for over a decade

The Share Sleuth portfolio gets more FW Thorpe shares, at the price of some of its Cohort holding

etc

• Orbital by Samantha Harvey has won the Booker prize. This was what I thought of it in investing etc. 0011: “a work of fiction describing life on the ISS that is hardly a story at all. It is more like the literary equivalent of a painting that is so realistic you wonder whether it is in fact a photograph.”

• John Kay’s critique of modern capitalism, The Corporation in the Twentieth Century, feels like it is building up to something, but I haven’t got far enough to know whether it will be useful. My notebook is scrawled with comments like, “since capital is no longer a reliable measure of the value of the “assets” of a business, what is?”

• I picked up The Ten Types of Human in Waterstones a week or two ago and have barely put it down. It’s by Dexter Dias, a human rights lawyer and a student of human nature. His day job made him ask why we behave the way we do. His search for answers, and the answers themselves are fascinating.

• I asked Notebook LM (an AI) to make one of my articles into a podcast (everyone’s doing it). It turned a short piece into a 19 minute two-header that bowled Rachael, my wife over. I got bored with it though, and it sometimes misrepresented me. Google Gemini can’t write articles for me yet either...

Happy Christmas!

Here is a gratuitous picture of Christmas lights outside The Eagle pub in Cambridge. It’s the boozer Crick and Watson used to go to after a hard day cracking the DNA code.

investing etc. 0021 should be with you on Saturday 11 Jan.