Interview with Professor Glen Arnold – Part 1
You can watch the video here: https://youtu.be/5vQDutu4PEo
Kingsley: Good day everyone! This is Kingsley from TheHolyFinancier. Professor Glen Arnold, our guest on today’s podcast is both an academic and a practitioner when it comes to the art of value investing. He has co-written several research papers which seek to find companies that outperform the markets. One of the papers that he wrote was: Testing Benjamin Graham’s Net Current Asset Value Strategy in London. He has also written a number of books that aim to shed light on an arcane topic such as investing. Today, Professor Glen Arnold is a successful full time investor in the equity markets in the United Kingdom and we are delighted to have him on this podcast. Welcome Professor Glen Arnold. Thank you so much for taking the time to actually speak with us.
Professor Glen Arnold: You are welcome and I am looking forward to it.
Kingsley: Yeah … So erm … Shall we begin then? So Professor, how was your childhood like growing up in the UK and how did it actually shape your experiences as an investor?
Professor Glen Arnold: Erm … Well my parents were small business people. They owned a shop. 2 shops actually and I developed an interest in stock markets and money making at about 16. And I wound up in University studying Business Studies with the intention of becoming an entrepreneur. In fact, while I was an undergraduate, I used to have a market store in my hometown. And it all started from there and my various businesses and of course the best way of learning about investments is when you have your own business. And so I have interspersed academic life with having my own businesses. I mean I never really was a full time academic although there were moments where I was paid full time as a full time academic. But I was very busy with things like book writing which I regarded as a bit of a business as well. So the whole thing meshed together because I ended up being a academic duty corporate finance in Salford teaching corporate finance in Salford but I switched over to much more investments and stock markets.
Kingsley: Ok ok. So was it a family business?
Professor Glen Arnold: It was a very simple…small town… owning a couple of shops. That’s all it was. And I happened to buy a book when I was 16 with a bit of money and I developed an interest from there. And I thought well that’s was where I want to be. And so my reading has continued ever since. Now, I have got tons of books. And I have had many many students studying Phd’s [inaudible] within the stock market.
Kingsley: Wonderful wonderful! So what actually inspired you to be an academic and did it actually help you become a better investor along the way?
Professor Glen Arnold: Yes it did. It gave me the space to sit down and think and one of the best places of doing that for me is to write a book on the subject. So I wrote my first book which was about corporate finance. That is a university textbook that is still a bestseller in the UK for university students even though I no longer teach in university. But my second book, I actually left my job in order to concentrate full time to investigate the investment philosophies of the great investors. And so for a year I did not have any income at all.
Kingsley: I see.
Professor Glen Arnold: And I just studied the great investors. That ended up in a book called Value Growth Investing. And I sort of synthesised the ideas of the great investors with knowledge of strategic analysis and with knowledge of finance, I put that together in a book called. That is now published as The Financial Times Guide To Value Investing.
Kingsley: Ok. So the title has changed.
Professor Glen Arnold: Yes yes they thought it was self actualising because The Financial Times Guide To Value Investing so it was switched to that … Not to be confused with another book that I wrote. The third one that I wrote was Financial Times Guide to Investing, that was just a simple introduction to the stock market. And various things like investment trusts and just basic things about finance. So that was just a basic introduction. Whereas the value investing one was much more ‘how to beat the stock market’.
Kingsley: I see.
Professor Glen Arnold: I have written a number of books. Anyway I went back in and I was then offered the chair at University and I went back into an academic role and I had the advantage there…I was only part time … I had the advantage that I was supposed to concentrate on helping PHD students get the PHDs. And of course, my PHD students studied stock market inefficiency, that is, when stock markets get priced wrong, in a systematic way. And that led to a number of incidents. And that led later on to teaching in the city of London. I taught at Schroeder’s for a number of years, teaching them about, I suppose, about how to beat the stock market. What actually really works? What evidence do we have that it works? Why should we believe that it will continue to work? And so that led to the idea of behavioural finance or the field of behavioural finance where there is a number of factors within our brains which seem to stop us from outperforming, which seems to stop us from buying those types of shares that we think “Oh well, I don’t know if I should be in it”.
There is some sort of psychological block. There are many inefficiencies that we have discovered in the past which I am concerned because they are so easy to correct. And it is easy according to psychology to correct. And so I imagine thousands of people have read about this now. And in fact we get what you call factory investing and all sorts of types of investing with big funds investing in these types of strategies that I was talking about years ago. And they are a big worldwide phenomenon. You get vast amounts of money there. They are the ones that are getting [inaudible] It’s the ones that have a psychological block preventing them from investing there. And so net current asset value investing for example. They look like awful companies. And they should do a thorough investigation and they just won’t touch them.
Kingsley: That’s true that’s true.
Professor Glen Arnold: People are afraid of them. Hence you get a very low price And amongst them are some real gems that have been neglected through. And people have overlooked some of them.
Kingsley: Would you say that it takes a tremendous amount of fortitude to actually be an investor in the net current asset value approach because some of these companies look downright ugly but because they are purchased at such a cheap price, a lot of times, what we see is a mean reverting effect. For some reason, the stock prices, you know, seem to actually go up, after the span or in the span of about 12 months.
Professor Glen Arnold: Yes yes you can often wait 2 to 3 years for it to come right. But no. The way which I reduce that fear is by going way beyond simple net current asset value investing. If you actually read Benjamin Graham, you will discover it is much more than just identifying companies which are selling at a net current asset value or a net net and the market capitalisation is less than the net current asset value. Perhaps I want to quickly explain that.
Will your subscribers know about net current asset value investing is?
Kingsley: They may not. I can include a little description about that.
Professor Glen Arnold: A quick summary. It is simply that you look at the current assets, that is basically cash, inventory and receivables and/or maybe one or two other things. You look at those and you remove or minus all the liabilities from the current assets. So you completely ignore all fixed assets, all the non-current assets. You put a zero value on those. And if the market capitalisation is less than that number that you got from the net current asset value (current assets – total liabilities), it is potentially worth buying. And by the way, there are 2 types of net current asset value investing. The mathematical/ mechanical approach.
In Benjamin Graham’s earlier writing, he says you should only buy a share if the current share price is less than ⅔ or under ⅔ of the net current asset value. But in later writings, I was looking at his 1971 writings, the 4th edition of intelligent investor, I was looking at it last night and I just wanted to check, and he actually says in there that you simply just have to have the net current asset value higher than the market capitalisation. So you don’t have to do the two-thirds really. There is an adjustment to mind because he didn’t trust the numbers, or to be really conservative, he says I am not going to trust all the numbers that I see on the balance sheet, I am going to take a third off the inventory level. So whatever I see as inventory I am going to knock a third off. And I shall knock one fifth off all the receivables. And that gives me a margin of safety.
Now you got to go further than that. [Inaudible]So you have got to make sure that the business is reasonably sound. That is a very important element. So you have got to understand the business. This is where it takes some time. You can do that sort of crude mechanical/mathematical approach which is what we have done with our academic papers because you can’t really do qualitative so you just have to do solid quantitative numbers… that’s all you can do and we found fantastic results using that method alone. But what I do in practise is layer on the qualitative. Firstly, whether the business is a reasonably sound business. You are not worried about something going out of business, going bankrupt. It can be cyclical but it is not at the wrong point in time.
Secondly, you investigate the quality of the management. Are the management competent? Are the managers of high integrity with regard to shareholder wealth? Will they actually pass on the wealth to shareholders or to themselves? And the third and final thing is stability. You are looking at operations stability and you are looking at financial stability. You are looking at things like whether it is subject to financial distress. When you have got all of that and if you analyse them…It takes a long time to analyse all of that, to whittle down to the [crude method], you then look for all possibilities in terms of how things might improve.
If the share is that low, obviously the rest of the market thinks that things are going terrible. “This company is probably going to go bankrupt” according to the rest of the market. Even though once you have done all of that analysis, it looks pretty solid. I have had net current asset value investments where its made profits in every year. Every year of the last 10 years, its made profits. But because the market’s depressed about the general recession, it really pushed down the share price and so the share price is way below the net current asset value per share. And I couldn’t see anything that made me worry that it wouldn’t continue to make profits even in a recession. And once the recovery is in sight … So anyway, you are looking for…well that’s the first one actually: economic factors turnaround. You may be looking at like a recession ending or it could be something like you get exits from the industry. So say you got… I don’t know… 10 players in the industry. You get low prices from selling too much.[Inaudible] You get half of them go bust and that alone can raise prices and can lead to a recovery in profits.
Kingsley: So it is like Economics 101 really.
Professor Glen Arnold: Entry and exit into the industry. And that shifts the whole demand and supply curves. Suddenly, the management might pull up their socks. It could be that the managers had been awful. Once they have had 2 or 3 years with a downward share slide and they are being told by shareholders “Look this is bad and you have got to do something”. Maybe they actually do wake up and do something so that is a possibility. If they don’t, there is another possibility. That is you remove the managers and get some new managers in.
Kingsley: Yes yes.
Professor Glen Arnold: Another possibility is they get taken over. If the share price is that low, and it is trading way below its net current asset value, counting all fixed assets as nothing, perhaps another company wants to takeover it.
Kingsley: Yes yes. I have seen that happen a lot of times in Singapore as well.
Professor Glen Arnold: And finally you have got liquidation. It doesn’t make any sense for a company to continue if you have got all those assets and the business is not doing very well. It’s pointless to continue. I invested in a few of these. There is one that you would want to talk about later and that is called PV Crystalox. And they are in the process of liquidating. Because they have got a business that got particularly wiped out by Chinese [tariffs] […solar power…] that it was not worthwhile to continue the business. But there was cash. Masses of cash. And so they might as well pay it out to shareholders.
There was another company I invested in called [Thelma?] where its got masses of properties and masses of cash but it had been making losses for each of the last 10 years So I went into that company thinking that the logical thing to do was to shut this company down if it keeps on making losses but the old man that runs it, he wants to carry on doing it so I ended up selling my shares. I think I made a small profit but it wasn’t worth continuing to hold because of the psychology. This is another element to net current asset value investing. You have got to know the people.
So over time you go to a number of meetings with the directors. You chat with them and you get to understand their psychology. You get to understand what motivates them. In that particular case, he was motivated but he was carrying on what he has done… He was in his late 70’s. And he just wants to carry on even though he was losing money every year. And the net current asset value was falling so that wasn’t worth holding onto. So that’s the way of filtering out bad net current asset value investments. Not simply by mechanically buying all of those at a low share price.
Kingsley: So Professor Glen, do you actually make it a point to actually speak with management and get corporate access to to controlling shareholder or the founder?
Professor Glen Arnold’s Books & Other Resources
The Deals of Warren Buffet
Did you know that it took 40 years for Warren Buffett to amass a wealth of $100 million? Professor Glen took time painstakingly studied the deals of Warren Buffett in his formative years as an investors and includes many key insights other books may have missed.
Financial Times Guides: Value Investing – How to become a disciplined investor
This book was originally published as Valuegrowth investing. If you’d like to learn how to beat the markets, this book is a great investment.
The Great Investors – Lessons on investing from Master traders
If you want to learn lessons about Graham and Buffett, this is a book that may shed some light on some of the greatest investors in the world. As
Financial Times Guides: Investing – The definitive companion to investment and the financial markets
If you want to know how to start out investing, I suppose this is the book that you can look towards to get you started on the basics of not just equity markets, the debt markets, derivative instruments such as options and also basic accounting as well.
Harriman’s Book of Investing Rules
This book is a shared project by Professor Glen and others.
Get started in shares – Trading for the first time investor
And another great book for getting started in investing in shares for the amateur investor.
Professor Glen Arnold’s Blog/Website
Professor Glen writes nearly daily but publishes his articles every week for readers of his newsletter. In his blog, you get an introductory glimpse in these articles. You can see more at the link below.
Professor Glen Arnold’s Newsletter
For more of Professor Glen’s wisdom on real time stock considerations, you could subscribe to his newsletters at ADVFN, a data service provider. In his newsletters, he talks about his current stock picks and includes many case studies on companies that had once been purchased by Warren Buffett. I suppose if you are short on ideas and want an expert’s opinion on what to buy, this is the place to be. Also, he has written such a great number of articles over time that getting access to them seems to be a good idea to get started in investing. If you truly want to know what works in investing, this is one of the better places to be. More importantly, you also get a chance to interact with Professor Glen on ADVFN. Do click on the links below.
These books which I have written are case study driven and discuss strategies, mindsets and situational approaches to employing the net current asset value strategy.
What Is TheHolyfinancier About?
- A database of net net stocks or net current asset value stocks
- Investing ideas in members section
- Blog articles and investing education
- Investing research of deep value stocks