“[We] have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.”
– Warren Buffett
In most endeavours in life, we get more reward for more stepping up in grade. A middling player in the AFL makes more money than the best player in the Adelaide local league. A triple back somersault with a half twist is going to score higher than a pin drop at the Olympics, no matter how well the latter is executed.
Many people think the same thing applies to investing. It is an intellectual exercise and many of us are drawn towards solving highly complicated problems. When is the next recession going to hit? Are house prices going to rise or fall? What’s going to happen to the Aussie dollar over the next six months, 12 months or five years? Which technologies are going to thrive over the next 20 years and which are going to fall by the wayside? Will electric cars replace the combustion engine? Is global warming going to upend the insurance industry as we know it?
These are all fascinating questions, ones I love reading about, learning about and arguing with friends and family. When it comes to investing my clients’ money, though, I tread a path as far from these complicated issues as possible.
The reasons are several fold.
First, let’s assume that these questions are complicated but answerable. Who is going to be better at solving them? Our small funds management business based in Sydney, with a bunch of computers bought from the local JB Hi-Fi (ASX:JBH), or the world’s biggest hedge funds armed with the most powerful computers and mathematicians? The answer to that is straightforward.
Second, I have severe doubts that many of these questions are actually solvable. Of all the pundits asked to proffer their opinions on the Australian dollar at the start of this year, I don’t remember one forecasting that it would rise, yet the Aussie has rallied since January.
In March this year a computer, armed with Google’s artificial intelligence, beat the world’s best player of the Chinese game Go. A computer beating the best human at this game, with many more combinations and permutations than chess, is a big deal. But it also shows why we are no chance of predicting the future direction of the economy or exchange rates. Sure, Go is a complicated game, but it’s nothing compared with a world that has more than 7 billion players each making their own moves every day.
Finally, and most importantly, I don’t get paid any more for playing in the big leagues.
Focus on simplicity
Our Australian Shares Fund has returned more than 14 per cent a year since inception seven years ago. Most of that has come from “jumping over one-foot hurdles”, in the words of the world’s greatest investor.
Researching a stock will often take a Forager analyst weeks and the full research runs to dozens of pages. But the last thing an analyst must do before putting the idea forward is summarise it in less than a page. If they can’t do that, the idea won’t make it into the portfolio.
One advantage of this focus on simplicity is that if forces us to be patient. A complicated idea can become simple if you wait around long enough.
One of the largest investments in our international fund is an Austrian business called Kapsch TrafficCom (WBAG:KTCG), listed on the Vienna stock exchange.
The company’s tolling technology is used on most Australian toll roads and the tag in your car is likely to have been manufactured by Kapsch. It has recently won contracts for the Sydney Harbour Bridge, the Golden Gate Bridge in San Francisco and most of New York’s bridges and tunnels.
This one is a fascinating business with healthy prospects, but working out how much money it will be making in 10 years’ time is a complicated problem. Will it keep winning new contracts? Will it reinvest the profits sensibly? In a world where every car has GPS and is connected to the internet, will we even need Kapsch’s tolling systems?
We don’t have the answers to those questions. But in January last year the share price had halved from its peak to less than €20. At that price, the thesis was a simple one. In Austria and a number of eastern European counties, Kapsch has long-term contracts where it collects a percentage of toll revenue rather than an upfront payment. Our calculations suggested the present value of these annuity streams was worth more than the share price at the time. You were getting the complicated future for free. A low enough price makes for a very simple idea.
Granted, it doesn’t draw much of a crowd at parties. “This company has a piece of technology that is going to change the world” is a more interesting topic of conversation than “I bought company XYZ because its market value is only half the amount of cash it has in the bank”. But my clients don’t care. Their money is the same colour as everyone else’s.
This article was first published in the Australian Financial Review.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.