Interview with Professor Glen Arnold – Part 3

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

You can watch the video here: 

Professor Glen Arnold

Professor Glen Arnold: Yes I don’t even bother to look at the bond rate. What I know is that in the UK, the average cyclically adjusted price to earnings ratio for the UK market is around about 15. Ok. So I won’t buy unless it is around about 10 at most. But I am often buying them when the cyclically adjusted price to earnings ratio is of around about 8. I happened to buy 1 at about 4.5 to 5. Haynes Publications for example, that was on 4.5 cyclically adjusted price to earnings ratio when I bought about 4 years ago, 3 years ago. February 2015, I bought at ₤1.15. And now, it is ₤2 and I have received 22 pence of dividends. So I have doubled my money on that one and I bought that at a cyclically adjusted price to earnings ratio of 4.5. So that worked out well.

Kingsley: Wow! That is fantastic! Would you say that your modified price to earnings ratio portfolio is actually doing better than the net current asset value portfolio?

Professor Glen Arnold: They both do well. I can’t complain about either. But I think net current asset value has the edge. I think it does. I think it does. If you’d [done your] qualitative analysis as well, you’d really whittled it down to some really fantastic companies. you really would … And by the way, on net current asset value investing, don’t believe this nonsense about cigar butts. They are not all cigar butts.

Kingsley: Tell me more.

Professor Glen Arnold: Cigar butts means that you got 1 last puff. Some of them are like that. PV Crystalox is like that. Northamber is like that. But many of the companies I have invested in, net current asset value investments are more like phoenix companies. They are going to fly. I invested in a company called Fletcher King. I have doubled on that one. And that was selling at almost the same as its cash. And that’s the one I referred to earlier that it made profits in each of the previous 10 years.

Kingsley: Yes yes you did tell me about that.

Professor Glen Arnold: And it was certainly not a cigar butt. It did absolutely fine all the way through a recession. It came out absolutely fine. Its profits were down. But it still made profits. And they doubled after the recession. I bought in 2013 and its profits went back! The London market’s fine. And they are doing fine. And there are lots of companies like that. There is another one, Caledonian Trust, a property developer in Edinburgh. And it is not a cigar butt by any means. It has got loads of property. It has got loads of cash. It is absolutely fine. It is not dying or anything [Inaudible] And there are lots of these companies that are doing terrifically well even though at one point [Inaudible] they are selling at a very low price. Mr Market gets depressed about it, too depressed about it particularly the smaller companies. Mr Market does not seem able to look long term and differentiate between those companies that are having temporary problems from those companies that are destined for failure [Inaudible]. And if you are intelligent about it, you’d really investigate properly, you could find companies that are very very sound. [Inaudible]

Kingsley: By the way, congrats on Caledonian Trust. I understand that you tripled your money on that.

Professor Glen Arnold: Yeah. I haven’t sold them yet. But the share price has fallen back a bit recently.

Kingsley: I realised that you actually bought it again in 2017 but you bought it at a price that was significantly higher than the net current asset value.

Professor Glen Arnold: Ah! This is where you need to do more than just use databases. The trick on that one. It had a market capitalisation of ₤7.7 million. So a very small company. ₤7.7 million. [Inaudible] And then in its balance sheet, it had 2 types of property. It had plots of land and houses and farms that it got planning permissions for. I was interested in this since 2013. So since 2008, it had not sold any property. So as a property developer, it had not sold any properties. What it had done is to keep getting better and better planning permissions for its land, permits to build houses, build lots of flats, to renovate farmhouse whatever it was. And so it got better planning permissions. But if you know the game of accounting, accountants can’t be caught in the balance sheet improvements because of planning permissions. Ok. For most property. For some it can. It can include some at fair value. For others, it includes that property at the lower of cost or net realisable value. So imagine they bought a piece of land or a building and then they got planning permissions which increased the value of that building by 5 fold. The accountant recorded it at the original cost. And that is the secret to this investment. Because it had ₤8 million in investment properties, classified as investment properties. And that was recorded at fair value. But it had ₤11.6 million valued at cost even though it now had planning permissions to do all sorts of things with all these different plots of land all over Edinburgh.

Kingsley: Ah I see I see.

Professor Glen Arnold: Other investors missed this.

Kingsley: And this was located in the current assets portion, the ₤11.6 million?

Professor Glen Arnold: Well this is the secret. One of them was included in current assets. The other was included in non-current assets. Completely illogical.

Kingsley: Ah ok. Chuckles.

Professor Glen Arnold: Because it is a property developer.What they do is they buy and sell land. Or they buy and sell houses. Or they buy land, create houses and sell them. Ok. So why just buy one as non-current assets and the other one as current assets? I said ignoring all of that, including all of them as current assets. So that meant I had a company that had 20 million of current assets, sorry, 20 million property at their valuations, their valuations, accountant valuations. What I did because I am a property developer myself, I looked at each of the properties and valued it with the planning permissions, what they could sell, those pieces of land or that building today, if they just sold it, they didn’t renovate it, they didn’t build [Inaudible], just sold it as a plot, so I worked out the true net current asset value was at least 3 times the current market capitalisation.

Professor Glen Arnold: So yes. So you see how you shouldn’t just take the numbers at face value? Even the numbers you don’t take at face value. So the numbers have to carefully examined. Not just taken from the database. And the qualitative elements have to be carefully thought about. And that is where 90% of the work is qualitative. That is why value investing is much more fun than just taking the numbers from the database and downloading it. [Inaudible]

Kingsley: You know what? I was just reverse engineering your investment. In fact, I even missed it. I missed the part that you were talking about. So that was just brilliant! Amazing stuff!

Professor Glen Arnold: Yeah. I was luckier than everybody else. I spotted it I suppose. And it had a few years of not doing anything. That is the other thing. The stock market doesn’t like it when a company just reports … It was making losses … small losses and small profits because it had costs. It only has about 6 people working for it even though it was on the stock market. It had costs and so it was making losses. But I knew that value was being added every year. Because house prices in Edinburgh were rising. Therefore the value of the land was rising. So it might make a million or two million just from house price rising even though it was reporting losses. So you have got to understand the business and where the value comes from. [Inaudible]

Kingsley: That is brilliant professor! That is brilliant!

Professor Glen Arnold: It is just a simple observation. I was lucky to come across it.

Kingsley: Ok. So I will just move on to the next question. With companies that have a lot of cash on the balance sheet, what would you do to ascertain that the cash is indeed there in the coffers of the company? Any form of forensic accounting that you do in such cases?

Professor Glen Arnold: Fundamentally, you just have to trust the auditors and the management. The biggest check you can do, this is the Warren Buffett approach, the biggest check you can do is to reach the managers and judge their characters. If you have any doubt about the character and the integrity of the managers, then, it is not a good investment for you. You can’t make a good deal with a bad person. You can’t make a good deal with a bad person.

Kingsley: So it is about looking at the manager and his character and the way he treats shareholders I suppose.

Professor Glen Arnold: There are other checks you can do. For instance, never buy into a company without thoroughly understanding the accounts for a number of years. And that means not just understanding the profit and loss, the income statement, the balance sheet and so on , really understanding the notes and how it all fits together, how the cash flow statement fits with the profit statement and how you can see cash flowing through the company from one year to the next. So you need to understand all of those notes. If anything doesn’t quite make sense, you need to investigate further. So that is where having contact with the management really helps. Go and ask them: Well I don’t really understand what is going on here. Can you explain it to me? 9 times out of 10, they are very happy to explain it to you. If you ask intelligent questions they are more than happy.

Kingsley: So one of your purchases was Titon. And it gave you a very good return of 197% over a short period of less than 2 years I suppose. Could you elaborate more on the thesis?

Professor Glen Arnold: I got out of that too early. It went on to double again.

Kingsley: Oh what a waste.

Professor Glen Arnold: But nevermind. I can’t complain really. But that is a common, you might call it a mistake, a common failing amongst value investors. They sell too early.

Kingsley: So that leads me to my next question. When do you determine when to sell?

Professor Glen Arnold: Oh well. That depends on the company. It depends on the character of the company. It depends on the type of investment you are doing. So if you take the different types of net current asset value investments for example, if you are investing in a company that is more like a cigar butt. So you are looking at a liquidation as the best way of gaining, when it is getting close to that liquidation point that is probably the time to sell. For example, PV Crystalox was in a business that didn’t make any sense but it had lots of cash. And it was selling off factories and also raising more cash. I went to speak with the managers 3 times. And clearly they understood the logic of simply gathering [Inaudible]. But a lot of the value was in a court case.

One of its major customers refused to honor a contract. They had not paid it for silicon wafers. And they had sued and it had taken years to go through the courts. As shareholders, we were waiting and waiting. And then I discovered the share price went up and up and up. And a lot of people on the bulletin boards, I look at bulletin boards quite a lot, and they were getting very excited about this court case. They said: Oh I think we will win. Oh I don’t think we will win this court case. We will get 10 million from it or we will get 20 million from it. I wrote a newsletter saying I am not in the game of speculating on court cases. That is not my [Inaudible] I am a value investor I won’t speculate on what’s coming out. And the share had already been pushed up a lot because of optimism of the outcome.

In that case I just sold the shares. [Inaudible] 94%. I had a 94% return. And then, about 18 months ago, the last 18 months, the share’s had gone nowhere. Because they did win the court case. A lot of money did come in but it was already in the price. So the value was already there. There was no point holding onto the shares. That’s why I don’t won’t speculate. So this other company where [I am thinking I want to hold them for maybe 10 years] is producing a very nice income [Inaudible] that give me dividend yields of 8% or more. And there is every reason to think that the fundamentals of the business was so strong, the economic franchise that it holds was so strong, that it will continue to produce very good profits, improving profits over a long period of time. In that case, I will just hold until I think things have gone completely haywire.

Maybe Mr Market is not very excited about it and the price had just been bid up far too much. And then I will sell when it is excessively priced. Titon, I sold too early. And the reason for selling Titon was because most of its income actually comes from Korea. It makes very simple products for closing windows, for holding windows closed, metal bars, very simple products. And I was concerned it was a commoditized industry, that there would be competitors and I had benefited from a cyclical upturn and very good performance in Korea. But that would disappear because it was a commodity product and there would be competitors that would come into the industry. And there was no way it would continue with these high high margins. And so over a cycle, I was concerned and so I thought I was selling at a peak. It turns out I wasn’t. The share price is still going higher relative to the price I had sold it.[Inaudible]

Kingsley: I suppose you have got to be content with a 197% profit as well. [Chuckles]

Professor Glen Arnold: That is probably so. Yeah. Nevermind. I will put up with it.

Kingsley: What are your ideas on debt and the comfortable amount of debt that the company can actually service? Is there a number that you are looking at? Like you would prefer the debt to equity ratio to be less than say 30%, something like that?

Professor Glen Arnold: It is a combination of factors. I wouldn’t want to invest in a company that had very high debt levels. But I don’t look at that directly.[Inaudible] The major thing I look at are combination factors that indicate financial distress. So the first one on that is whether the company is profitable. If it is profitable it gets a point. Whether it has positive cash flow. So if it has got positive cash flow, it gets a point. Whether over the last year or so, the return on assets employed have improved or not. Then where the cash flow is greater than profits. Because profits can be artificially boosted. In the short term, cash flow really matters. And then we come to things like long term debt relative to total assets. So yes that’s a factor in there. [Inaudible]

First of all, for Piotroski, I am asking whether that was improving or not improving. But if it was excessively high to start with, that would raise a [Inaudible] . But that is a very flexible thing. I would have to look at it [Inaudible]…compare it to overall levels of cash flow, compare it to its asset backing. It depends on circumstances. So there’s other things that you look at, whether the current ratio is improving or not, whether it has been forced into a share issue, whether gross profit margins are improving and whether sales to asset levels ratio are improving or not.[Inaudible] It is that combination of looking at a company [Inaudible] that gives you an impression of whether it is vulnerable or not rather than just a single number on debt.

Kingsley: I see… so you rely a lot on… I believe what you are talking about is the Piotroski score?

Professor Glen Arnold: That’s right. I find that more complete. And also I have seen academic evidence and in fact I have done research with the PHD students on the academic evidence whether that is a useful set of criteria that shows you whether a company is going to perform or not, whether the share is going to.

Kingsley: Ok ok.

Professor Glen Arnold: Piotroski himself applied it in the context of value investing, that is those with high book to market ratio. He first of all got all companies in the relevant stock market with high book to market ratios and then separate, within that category, separated out those that had good high Piotroski scores, low distress risk and imagined that he was investing just in those and the other categories.[Inaudible] He imagined that he was investing in all possible different categories and then found the one with high piotroski scores did particularly well.

Kingsley: So by high piotroski score, are you looking at something like 6 or more?

Professor Glen Arnold: Yes yes. 5 or more. It depends on the case.[Inaudible]It depends on the circumstances of the company. It could be 5 or more. Or if I had a reason for thinking that things just wants to turn around. Then I won’t maybe won’t be so mechanical. Maybe there is a court case coming up on the company just about to receive ₤10 million. Or maybe I know that they are just about to sell one of its properties which will completely change the balance sheet, change the profit even though it wasn’t reported in the last annual report. I am thinking well it is just about to happen [Inaudible] so having spoken to the management and there might be a chance of that.

Kingsley: I see I see. Ok. Well, that is very interesting. Ok. So moving on to the next question, I would like to ask you, I was looking at your portfolio and I noticed that there was only 1 Warren Buffett style stock in your portfolio, Dewhurst. And I was wondering are such stocks harder to find or are they actually harder to evaluate?

Professor Glen Arnold: Yeah they are very hard to find. You rely a lot on serendipity in order to come across them in the first place. It takes many years. So there are companies that you might think are possible excellent economic franchise, excellent manager, top businesses. Most net current asset value investments are not that category. Ok. One or two net current asset value investments may make it past, may eventually become Warren Buffett style investments. But it takes a long time waiting for the company to get to the point where you are confident that it will over a long period of time have a strong economic franchise [ and a strong moat]. So it does take a lot of effort and a long time familiarising yourself with the business. So they are few and far between.

For Warren Buffett, it is the same. He can be … a year or maybe 2 years before investing in any company. If you notice [Inaudible], he has got over $130 billion of cash because he can’t find anything to invest in. Just think about that. $130 billion. Not million. Billion. And the whole of Berkshire Hathaway is only valued at $400 billion. Actually in my newsletter I put a chart, going back 30, 40 years of Warren Buffett’s cash levels, how much cash he has got. And you can see he had high cash in 1999, he had high cash in 2006, 2007 and he has got very high cash right now. And then after those years so in 2002, he had low cash, in 2010, 2011, he had low cash. So you can see how his mind is working. He has got an exceptionally high levels of cash right now. That tells you something.

Kingsley: Are you predicting something on the horizon?


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

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
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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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