FREE KIC - NO. 110 JUN 19
TOSSERS IN THE CITY
"I have absolutely no respect at all for the brokers, fund managers and all those other tossers in the City".
This is just one of many interesting opinions he expresses about the investment world in the book and as much as I would have liked him to have learned a different lesson from his Nomura experience, (do your homework and find a better fund manager or invest in a passive/index equity fund) I still think it is worthwhile for people to hear what he has to say, and given that I have never seen this book on any recommended investment reading list, I thought I might share his thoughts on one of the most central questions in investment: how to value a business.
How to value a business
In the book, he first mentions valuation when he writes about the original flotation of Amstrad on the London Stock Exchange back in 1980. He suggests that the way used by investment bankers to value a company at that time was to compare it to companies in the same sector, but the problem with Amstrad was that it was in a new sector for the London market. On page 204 he states: "as Amstrad was rather unique, there was no sector to compare us with and as such he had to "stick his finger in the air" and break new ground and invent a P/E"
That may have been what happened in 1980 but I somehow have my suspicions that in 2019 when a company in a new sector comes to the market the same approach is probably used. When Pinterest or Zoom or Lyft were about to be listed, I would guess that the investment banks involved struggled to find comparable companies and therefore ended up "sticking their fingers in the air". This is how you can have a situation where the Zoom share price goes up 72% on the first day of trading or Pinterest trades up 28%.
The next time Alan mentions Valuation is in relation to the situation he found himself in 1992. By that stage he says on Page 389: "I guess the market was losing confidence in us, seeing us shrinking our subsidiaries, shutting things down in Hong Kong, selling off computers at low cost and with profits dropping year on year". In other words, the excitement of 1980 had turned into the pessimism of 1992 and the Amstrad share price had collapsed resulting in a valuation where "the market value of the company was below its asset values- lower than the cash balance in the company! I commented on this several times in the media, explaining that this was crazy".
By 1997 Dancall had developed and was selling a mobile phone that Alan realised was fairly advanced for the time. He thought that somebody like Siemens might be prepared to buy Dancall to get their hands on the technology so he contacted his bank, Rothschild to see if they could find a buyer. Once again Alan was faced with a situation where the investment banker did not know what Dancall was worth so Alan said "This company will not be sold by Amstrad unless we are offered at least a hundred and fifty million US dollars" while at the same time he admits that he thought it was worth around $30m because he says "If someone had offered me £35m there and then, I'd have bitten their hand off". In the end he didn"t sell it to Siemens but he did end up selling it to Bosch for the $150m and as he says himself "What an amazing coup!"
Moving on to the year 2000 and instead of the pessimism of 1992, Alan found himself caught up in the crazy optimism of the dot com mania. On page 506 he describes this amazing time: "Amstrad shares were starting to rise for no reason other than we were in the technology business. We hadn"t done anything " there were no massive profits. It just goes to show how stupid the stock market can be. On page 511 he goes on to say the following: "the email phone was launched on 29 March 2000 at quite a big bash organised by Nick Hewer. On the day, the share price rose to 610p putting a market capitalisation on the company of €500m. There was no rationale behind the share price rise, we were simply caught up in the internet boom, which had just peaked out by then."
Finally, in 2007 a combination of reasons led to Alan deciding to sell Amstrad. BskyB paid €130m for it and I presume that Alan regarded this as a fair price (given that it had minority shareholders, the independent directors must have believed that to have been the case).