Interview with Professor Glen Arnold – Part 2

This is part 2 of a 5 part series. Read part 1, part 3, part 4, part 5.

You can watch the video here: 

Professor Glen Arnold

Professor Glen Arnold: Very much so. That is the absolute key. And over a long period of time. Keep going back and keep chatting with them.

Kingsley: Do you do it during the annual general meeting?

Professor Glen Arnold: Usually the annual general meeting. Yes. Although there is a company, Haynes, I am going to see a finance director later this month. He is doing a special talk in London. He is being invited by a group of investors to chat with us and once you have been to a few and you gain an interest in how the company is run and you understand its strategy and you understand what the managers are trying to do to the corporation and you have asked intelligent questions, they are more than happy to communicate with you in other ways. You might have email opportunities and you may exchange business cards and you may ask specific questions that are valid. It is surprising how many managers are very open and enthusiastic about talking about how they are growing the businesses.

There is a negative side to that as well. For instance, you find companies you don’t want to touch. I bought into French Connection. I don’t know whether you are familiar with it. I bought into that one. It was roughly selling at half the net current asset value.[Inaudible] It had all these assets and it was getting rid of leases which was causing losses because it had signed up to a whole lot of these shop leases. It was making plenty of money by branding, selling its brand around the world. So I went to the annual general meeting. And the meeting, you know you got these standard things you have to vote on and so the chairman, the founder of the company read out these things that you had to vote on. He did that for 5 minutes and he stood up to walk out. I said can I ask some questions. Can I ask some question please? I have come a long way from Leicestershire to London. I have come a long way to ask some questions. And he just walked straight to the door and then he got to the door, turned around and he said ‘No’ and he walked out. And that tells you a lot. That tells you a tremendous amount about the character of the people and it told me a tremendous amount about his management style.

Now I did hold on to the investment a little while longer because the finance director that had recently been appointed was very good. He spent three quarters of an hour with me on the investment and answered all my questions and I thought wow I will continue to invest while he is finance director and with such a low price below the net current asset value. Then a year later, he resigned. And that told me all I needed to know. The founder was so arrogant, behaved so badly towards his people that he lost all his good people. If you were a good intelligent manager, you would not last long in that environment. So you get out. So I sold my shares. I think I had a small profit in it. But, that’s fine. So it is these sorts of thing, just communicating with directors, finding out how the business is run [inaudible] can enhance the quality.

Kingsley: I see I see. That is really another angle of looking at net current asset value stocks. Because from what I have been reading or rather what I practice as an investor, I actually diversify quite a bit. I suppose you are quite concentrated if I am not wrong?

Professor Glen Arnold: Yes that is right. I am very concentrated. Maybe only a dozen positions at a time.

Kingsley: A dozen positions at a time? Wow. That is really focused. Ok let’s move on to the next question. Let’s see. Alright. There has been a fair bit of research that says that buying net current asset value stocks that do not pay dividends actually outperform net current asset value stocks that actually do pay dividends. What are your thoughts on dividend paying net current asset value stocks versus those that do not pay dividends?

Professor Glen Arnold: I am afraid I can’t help you at all on that. I have never heard of this before so I haven’t seen any evidence on that. My concern is I wouldn’t be particularly interested in finding that out because of what I am already saying. My style of investing is quantitative only to start you off to filter out net current asset value investments, of potential net current asset value investments. The main work is in the qualitative after that. Then select those that appear good purely on mathematics, purely on balance sheet. The main emphasis must be on the quality of management, quality of the business, stability, financial stability and these sorts of things and the potential for change.

So whether they are dividend paying or not dividend paying, I would look at that as a qualitative factor. I would say that there is quite a few of my companies where I openly tell the chief executives “I don’t think you should pay a dividend. I think it is better… I think in your circumstances right now, I think it is better that you don’t pay a dividend.” And in these other companies I would say that “you really ought to pay a dividend almost the same as your current share price.” There was one company that I invested in where they had cash almost the same as the share price. Now it is not, but when I first bought it was. [Now the share price is about 50% of what they would pay as a dividend.] And in that case, [Inaudible] And making suggestions like that. So I wouldn’t do it mechanically, buying those that pay dividends or those that don’t pay dividends. It is not the way I do things.

Kingsley: What about loss making net current asset value stocks? Do you actually look at them?

Professor Glen Arnold: Yes yes. Because I go back many years. When I analyse a company I might go back 10 years and really understand how the business evolved. What are its traits in the marketplace? What are its competitive advantages? Why is the share price currently very low? It might have fallen by 80%, 100%. And there must be good reason, there will be reasons out there that people have for pushing down the share price and I want to figure out in my own mind whether that is justified by the fundamentals. I have got to really understand the fundamentals. And quite often I buy into companies that are currently loss making but I think very soon, although not necessarily very soon, on my way maybe 2,3,4 years , they will eventually be profit making. So there is one company I am following at the moment. I have only got a 1000 shares, ₤500. That allows me to go and chat with the management. I did that a month ago. I learnt so much from that experience. I won’t be buying shares in that company until it halves in value and I am waiting for it to halve in value because I am worried a recession will come along in this particular segment which is commercial property.

Kingsley: Ok. I shall not probe! [chuckles]

Professor Glen Arnold: I am not saying the name of the company. I really want to build up a very significant stake [Inaudible] It will be public information.

Kingsley: Well I believe that you actually write a newsletter with a website called ADVFN.

Professor Glen Arnold: Yes. They are data providers for investors and they asked me to… Well I started off doing a very simple blog for myself. So I just wrote down my thoughts why I am investing in something. I quit university 5 years ago to start on this full time and I thought it was important for me to write down the logic why I am investing in a company. And then, my wife created this website which still exists, this very simple website and I put on there my reasoning and I also put on all sorts of stuff, the academic evidence as to what works the best and all sorts of stuff like, Warren Buffett , Benjamin Graham and maybe some behavioural finance stuff, all sorts of stuff.

Then ADVFN contacted me a year after we started and said will you do it commercially, will you put it on our site and let other people read it on there. So they charge ₤6 per month for people to read on investing and my other thoughts. So for instance, I am writing about Warren Buffett at the moment, one of his deals and what lessons we can learn from that. So I posted that this morning. But next week I should be writing about another company that I am currently investigating. I can’t tell you which one it is. I have not done the full analysis on it. But after that one, I will be doing Haynes publications [Inaudible] producing manuals if you are renovating a car, doing repairs on a car [Inaudible] It is a very famous british company. So you know I do that sort of [Inaudible]. People can subscribe to it.

Kingsley: Ok. I will put the link down at the end of the article in my blog. Alright. So with regards to these stocks that you actually look at, do you look for a particular catalyst, do you see something on the horizon, do you project cash flows, do you project what earnings are going to be 1 year out ?

Professor Glen Arnold: No no not really. Because I have to take a very conservative approach and have a margin of safety of what I am investing in. So if you project for a trend for example, that is putting a value on hope. You are hoping the trend will continue. But I don’t know whether that trend will continue or not. So all I have got is the facts and the facts are in the past and the present. So we have talked about net current asset value investing. That is just one of the approaches that I take. Another approach is to look at price to earnings ratios. Instead of looking at the earnings for the past year, I look at the earnings for the last 10 years. And I look at the current share price relative to the average earnings per share over 10 years. And I look at each of those years and I try to understand what made up those earnings. And the reason for doing this, this is another idea of Benjamin Graham’s [Inaudible], is that within a 10 year span you are likely to get all sorts of industry conditions and macroeconomic conditions. You might get a recession as well as a boom and that averages out.

Now, I can take that as my fact if you like, and think if I am buying at say 5 times the average earnings for the last 10 years, maybe I have got myself a bargain. I can’t say whether it is going to go to where earnings will something like double or triple. I would like to think they are. And probably the reason why the share price is low is because the last 2 or 3 years had seen falling earnings. But that could be simply cyclical or it could be that the company just made a few mistakes. But fundamentally, the business is sound. Maybe that is what is going on. We could find that earnings have gone down and share price has gone down even more.

Again, it has very low 1 year price to earnings ratio and also a very low 10 year cyclically adjusted price to earnings ratio. Now, I don’t know when things are going to turn around. I can’t put specific numbers on the future. But I know if I buy these types of shares and I have checked out everything else. I have checked out the financial distress risk. So I use Piotroski factors for that. I will check out the industry economics and whether the business has any competitive advantages. I will check out the quality of the management and the competence and the integrity. [Inaudible] So I will check out all those things. And if it is sitting on a very low cyclically adjusted price to earnings ratio, the odds are in my favour of that going my way. That’s all I can say.

Kingsley: This sounds very familiar. Are you looking at a cyclically adjusted price to earnings ratio of a single digit and that means that the earnings yield is twice that of the AAA Bond yield which was advocated by Ben Graham?

This is part 2 of a 5 part series. Read part 1, part 3, part 4, part 5.

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.

 The Deals of Warren Buffet

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.

Financial Times Guide - Value Investing

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

The Great Investors

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.

Financial Times Guides: Investing

Harriman’s Book of Investing Rules

This book is a shared project by Professor Glen and others.

Book of Investing Rules

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.

Get Started in Shares Trading for the first time 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.


Other Articles

Floyd Odlum : The Deep Value Investor You Have Never Heard Of

Net Current Asset Value Investing In Japan

65% Profit In 1 Year For Beaten Down Cash Bargain : AEI Corporation

Junkyard Net Nets From Japan : Leader Electronics Corporation 6867 > 100% Profit In 6 Months

A 10 Bagger Net-Net – A Look Back At Barratt Developments PLC : A Net-Net In 2008-2009

Paying Up For Growth: You’d Better Know What you Are Doing

Books On Net Current Asset Value Investing : Case Study Driven

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.

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I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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