Tim du Toit - Value investor I greatly respect

9.11.2011 | Kohti taloudellista riippumattomuutta

(Tim du Toit)

I think every investor have their own circle of people that they discuss about investing. I'm no exception. One of the people I exchange ideas with is Tim du Toit. Tim is a 44 years old ex-banker that lives in Hamburg, Germany.

You probably haven't heard of Tim before. He is a value investor and runs a newsletter called EuroShareLab. What makes his newsletter unique is that he actually "eats his own dog food". He invests his own money in the same stocks that he recommends to buy or sell but does that only after sending the newsletter out.

I think Tim's stock analyses are awesome! As you probably don't believe me without reading one yourself I've included Tim's latest issue for download for free here.

Once you get to know this guy you'll understand how exceptional he is. The best way I could think of introducing Tim to you readers is in the form of interview. It's about a time that you get to know how he approaches investing and what he have learned in the way. As the interview was done in english I've kept this blog post in english as well. I hope you find new angles to your own way of investing from it. Here we go!

Not that many finnish investor are familiar with you. Could you tell us about your background. You were born in South Africa but how did you end up in Germany for example?

As you mentioned I grew up in South Africa, mainly in Johannesburg.

After school I wanted to become an electrician. Well, I wasn’t sure of what I wanted to do and my dad said he had a friend with an electrical contracting business and was making a lot of money, so I decided to give it a try.

While studying to become an electrician I enrolled in a stock market correspondence course. I quickly realised that investing was something I was really interested in.

So after completing all the theory I needed to become an electrician I changed my studies to accounting and finance.

This led me to university where I completed a Bachelor of Commerce and Honours degree in financial management in South Africa. After that I went to the USA where I completed an MBA degree in finance and strategic management at Indiana University.

On my return to South Africa I received job offers from Absa bank (the largest bank in South Africa) and Templeton Investments. For reasons I cannot remember I took the position at the bank.

If I think of what I'm doing at the moment I cannot but wonder how my life would have turned out if I took the job at Templeton.

So I went to work in international banking doing everything from capital market activities, risk trading, trade finance, bank and country credit analysis and international tax structured finance.

In 2001 one of my previous managers at Absa became the head of a small German private bank subsidiary of the bank and asked me if I wanted to come and work in Germany.

I wasn't too happy at what I was doing at the time and thought it would be a nice experience. It also helped that I was single at the time.

So without speaking German and without ever having been to Europe before (I worked in London for three months) I sold my apartment, car and furniture and moved to Hamburg Germany with my possessions in about 10 cardboard boxes. Thinking that for one year I can stand anything and if it doesn't work out I can always move back to South Africa.

As you may have guessed I really enjoy living and working in Germany with the result that I'm still here nearly 10 years later.

You're not a newbie in investing. You've invested a long time. How did you first get interested in investing? How did it all begin?

From a young age I had an interest in business. For example I was always trading and selling things at school.

In high school I took accounting as a subject and it really fascinated me.

In 1986, shortly after finishing school, I enrolled in a stock market correspondent course I mentioned above. That really first got me interested in investing.

A year or so later I pooled my limited funds with an investment from my father and started to invest in the real world.

I went on to make nearly every investment mistake you can think of (technical analysis, broker recommendations etc.) until I realized that investing was not a recent human activity and that there must be some good research and books about what has worked. Not in the short term but over long periods of time in up and down markets.

So from about 1998 this is what I have done. Read everything I can find that can help me improve my investment returns.

And this is the reasons I give when somebody asks me why they should follow my investment advice. I made nearly every mistake an investor can make and learned from them (it was very expensive). You can thus make and pay for the same mistakes or you can take a short cut and benefit from my mistakes.

You can read more about all the mistakes I've made here: Tim’s investment journey.

Like many other successful investors you've done a lot of mistakes too. Instead of giving up you learned from them and so got better over time. I know you tried all kinds of different strategies before ending up using value investing. Can you tell us something about those and what did you learn from them?

As I mentioned I made all the classical mistakes a beginning investor could make.

I first lost a substantial part of the money my dad invested with me using technical analysis to purchase gold shares.

This taught me two important lessons. One, be very careful of companies that have no control over the price of their products and secondly, technical analysis was not the Holy Grail I thought it was.

I then lost even more money investing in ideas from ”helpful” brokers who of course wanted me to trade as much as possible.

With none of my ideas working I continued to read as much about investing as possible.

I somehow stumbled onto a short 84 page book called “Winning on the JSE” by Karl Posel an engineer and former professor of applied mathematics.

This book was my introduction to value investing. It broke investing down into a logical process with the following steps:

  • If an investor does not know what he is doing then the stock exchange is no place to be doing it.
  • Purchase only after the announcement of interim or final results.
  • Buy only where interim or final results indicate increased earnings per share and/or dividend per share.
  • Only purchase shares where the calculated value is more than the market price using sector price earnings ratios and earnings per share.
  • Realize that the price of a share can behave illogically and have the courage of your convictions to realise that logic will once again return to the market.
  • Do not purchase a company's shares if its long term loans are more than 20% of its share capital and reserves.
  • Do not purchase shares of a company where its pre-tax return on capital employed is less than 15%.
  • Do not purchase shares that have a weekly trading volume of less than 20,000.
  • Have some knowledge of the company concerned. Satisfy yourself about its history, track record and modus operandi. Read Managing Director's and Chairman's reports.
  • Sell when the price earnings ratio or net asset value exceeds the sector price earnings ratio or share price is higher than its net asset value.

The book made immediate sense to me, giving me a framework that can be applied to investing.

And for the next 20 plus years I studied the results of every possible book, research paper and investment study I could lay my hands on that showed superior long term performance – and I still do.

This of course led me to Graham, Buffett, Dreman, O'Shaughnessy, Greenblatt, Pabrai, Lynch, Piotroski etc.

You can read about my favourite investment books in the article Nine books every investor should read.

All this research led me to develop my own unique investment approach that is completely value investing based.

You've had a long career in banking. I would think that would give you more insight into business than ordinary people can have. Have that helped you in investing? What are the "lessons learned" in here?

The main reason I went into banking is I really enjoy working in finance but never really liked accounting.

Also, especially if you work in a big bank, you can effectively change careers every two years by moving to a different department and learn something completely new while the basics remain the same.

Also banking is a fascinating business where you continually have to consider possible gains against losses and the likelihood that the losses will take place.

Because of small margins and large amounts involved bankers are very conservative. This means that not only should each loan transaction have a very small probability of losing money also should a loss take place it must be small enough to be absorbed by the profits and capital of the bank.

The main thing I learned in the banking industry is that for one you need a lot of data gathered over long periods of time to accurately say if a business is worth pursuing. And once you've invested in a business you have to monitor it all the time to be sure the size and possibility of losses have not changed.

This is basically the same road I have followed that made me successful as an investor.

I look for investment strategies that have worked over long periods of time in up and down markets. Once you follow a strategy like this you have a high probability of making money over the long term.

Compare this to an investor that invest in a hot tip or that simply buys a company because it's got a good product. The strategy has no past record of success and the likelihood of it making money, in the short or long-term, is completely random.

What never ceases to amaze me how many investors use this approach to investing. That's most likely why at social events when I tell people what I do, I hear all the stories of how they've only managed to lose money in the stock market.

Now you've decided to pursue a bit different path. You changed your career to work on your investment newsletter full time. I know from my own experience that leaving a steady job isn't that easy thing to do. Was it difficult decision to make?

I started my investment website in June 2009, working on it in the evenings and when I had a few hours free over weekends.

It was very rewarding and as it grew I realized that this is what I really would like to do on a full-time basis.

As my thinking moved more in this direction the financial crisis came along and like all banks my employer experienced a few difficulties.

About a year later the bank had to cut back substantially on its activities and retrenched a lot of people, me included.

So even though it was something that I really thought I would like to do on a full-time basis the financial crisis in a way pushed me in this direction.

I'm really glad things turned out the way they have as it is really something that I enjoy doing.

The interaction with investors and the sharing of ideas turned out to be a lot more rewarding than what I ever thought it would be.

So not only bad things were caused by the financial crisis.

Most of the newsletters that I've seen are all about "hot stocks". They're more about creating a hype around a  stock than investing. Yours is very different. Your recommendations are mostly of companies that many investors have never heard of. You also invest your own money in these AFTER you've sent your newsletter to readers. Same goes to your sell recommendations. Can you tell us what your newsletter is all about?

When I originally started the newsletter I used it mainly to make the analysis of companies I was investing in available to a few friends. More of a way to make sure I do thorough analysis and have a record of my thinking.

I first distributed the ideas by email but later started putting it on a website. Shortly thereafter people I didn't know started subscribing.

My thinking with the newsletter has always been from the point of view of a subscriber. I asked myself what would be the clearest signal I can send them to show that my advice is impartial and my incentives to do well is exactly the same as theirs.

The only way I could find to do this was if I invested in all the ideas myself.

In terms of the companies I recommend, I have an extensive screening methodology that I use combined with in-depth financial analysis. These are all based on the long-term successful investment studies I mentioned above.

Also when I first started the newsletter I looked at ideas worldwide. In the last year I have changed my focus so that the newsletter now focuses on European value investment (including the UK, Scandinavia and Switzerland).

I did this mainly because there are a lot of value investors in the USA but not so in Europe. This means the companies in Europe are a lot less followed and thus they are more undervalued than US companies.

Let's talk about how you do your analysis a little. Before you start making any deeper analysis of a company do you recognize a potential stock using a bottom-up or a top-down approach? What tools do you use?

I only look for investments by identifying undervalued companies. Thus always bottom up. Even though I do follow macro-economic developments I do not use it to find investment ideas.

I use screeners a lot. Over time I have put together a lot of criteria I screen for to identify undervalued companies.

In the past I had access to a Bloomberg terminal where I did a lot of screen programming but now I just use the screener at MFIE.

I was really looking for a Magic Formula screener for Europe when I discovered it. Since I have started using it I find that I don’t need anything else.

I also read letters by investors I admire to get ideas. But I always do my own research.

Here is an article that can help you get investment ideas from other great investors: Get investment ideas from the best fund managers delivered.

OK, so you recognize a potential stock using these tools. What happens next? What things do you look at in the companies that you analyze? What's your analyses process like?

As I mentioned, I only really start a look at the company if it is undervalued, I therefore use stock screening a lot.

Once I've identified a company that is undervalued I pull together five years of financial statements in a spread sheet where work through a 50 point checklist that allows me to quickly determine if a company is worth analysing further.

The checklist is something I have developed over the last 15 years. It mainly consists of items I have identified reading the investment newsletters and books of other great investors as well as newspapers and/or magazines.

It’s not rocket science but it forces me to think systematically and not to overlook anything. You can read more about the check list I use in the article What does your investment check-list look like?

Only after I have worked through the checklist and still find the company attractive do I start reading the financial statements and presentations on the investor relations website.

In the financial statements I look to clarify any anomalies or other points I identified when I worked through the checklist.

The main point that make an investment attractive to me is:

  • Low debt to equity, not more than 35%.
  • High return on tangible assets (classic magic formula companies in other words).
  • A low price to earnings ratio or ebit to enterprise value ratio.
  • A dividend payment (ideally over 3%).
  • Management ownership of over 10%, or for a large company more than five times management’s yearly gross salary.
  • Share buybacks are a definite plus but only if the company is undervalued.
And something I have only started looking at recently is that the company share price must have good relative strength.

This is something that I still find very difficult to implement because as a classic value investor the more a company share price has fallen the more I tend to like it.

However a lot of good research by very credible investors have shown that companies with positive momentum tend to perform a lot better than companies that don't.

Once I am comfortable that it’s a good business and there is a margin of safety I invest.

We all have make terrific and disaster investments. Can you share with us your best and worst moments? What did you learn from them?

This is an easy question to answer.

Isn’t it funny how you remember losers but quickly forget winners?

For the life of me I cannot say what my best investment was. I can however easily say what my biggest mistakes were.

The largest one was a company called Lambert Howarth and the huge loss I suffered in 2007 when the company went into administration.

You can read the whole story in my article Worst investment ever - My story and how you can avoid it.

Here is the summarised version.

In July 2006 I identified Lambert Howarth on one of my screens.

It was trading at book value with a price to earnings ratio of 6,5 times, had no debt and cash equal 8% of market value.

Its market value was £34 million and the previous year had bought back shares with a value of £10.2 million.

And it was trading on a historical 14.7% dividend yield.

You must admit the company was cheap.

I invested in August 2006 and after I invested the share price kept on going down. I re-did my analysis and bought more. The share price declined further and I kept on buying until the company made up 12% of my portfolio.

Shortly after I bought the last time the company announced that it had lost the Marks & Spencer shoe account, this was 50% of their business.

Not much later the company announced it was going into administration as it lost the remainder of Marks & Spencer’s business.

Looking back at my notes and analysis my decision to invest was correct. What was wrong was me continuing to buy as the share price went down, allowing the position to make up such a large part of my portfolio.

Since then I am a lot more conservative with investments in small companies. And I consider stop loss levels a lot more, especially if an investment continues to decline after I have decreased my average price by buying more as it is falling.

I am also a lot more careful of buying more as a company’s share price falls. This also fits with the research I mentioned above concerning positive momentum or relative strength.

My other large mistake is the sofa retailer SCS Upholstery that also went into administration after credit insurers cancelled its cover.

You can read more about my experience with SCS in a comprehensive post mortem. It’s never too late to sell.

But enough bad news, now for some investments that turned out well.

In 2004 I made 115% return in one year from investment in the tobacco company Reynolds America. I bought shortly after some very negative the liabilities of tobacco companies, mainly because of the company's high dividend yield I thought was sustainable. Not only was it sustainable but the share price quickly rallied afterwards as the legal problems turned out a lot better than expected.

Also in 2004 I made a profit of 79% from the German steel company Salzgitter. In the depths of the market crash following the bursting of the Internet bubble I bought this outstanding steel company at 30% of book value with no debt and a good steel and stainless steel business. As the world economy recovered quickly thereafter the company’s share price really took off.

But as with a lot of my investments I sold this one too early.

If I had hung on, along with the huge rise in the steel price from 2004 to 2007 I could have easily earned a further 300%. But that was not to be.

As a value investor you of course sell when the company gets close to what you think is fair value. When the company was trading on a price to book value of 1.5 times I sold out.

Another company that I sold too early was the salt and potash producer K+S also in Germany. I bought the company at a low price to book value with no debt in 2003 and in September 2005 sold out with a gain of 215% or 108% per year.

Exactly the same as Salzgitter this company also went on to increase another 300% or more because of the huge boom in the price of agricultural commodities. However I was more than happy with my 215%.

From 2003 to 2006 I earned a return of 130% or 46% per year from Germany's largest perfume retailer, a company called Douglas. I also bought the company in the depths of the market decline following the Internet bubble crash when it was trading on a price to earnings ratio of less than 10 times. As the market came to its senses the company was quickly re-valued which led to this outstanding return.

From March 2003 to June 2007 I made 130% or 38% per year on an investment and ABN Amro bank. The bank was trading at them unbelievably low price to earnings ratio of under nine times. Because of its low valuation the bank became a takeover target and was eventually bought mainly by the Royal Bank of Scotland.

More recently between 2008 and 2011 I earned 110% on my investment in a German closed end investment company called Shareholder Value run by arguably one of the best small cap value investors in Germany.

And the list goes on.

The common thread with all my best investments is that I stuck to the value discipline and continued to buy undervalued companies even though I had some losses in between.

The only reason I could do this was because of all my research I was sure that value investing works.

What things have had the most influence to your investing? Any "life changing" moments? I'm a great fan of James Montier and I know that you are as well. Have James or other well known investors affected your investing?

There are quite a few people that have played a major role in how my approach to investment has developed over time.

There are too many to mention but thinking back these are the people that have made the biggest impact.

The first one I've already mentioned, the mathematician Karl Posel with his book called winning on the JSE.

David Dreman also had a big impact with his research showing that analyst forecasts are not worth the paper they are written on as well as all his long-term studies that showed value investment is a market beating investment strategy irrespective of what measurement of value you use.

Sir Jon Templeton with his advice that you cannot outperform the index if you look like the index and that you have to find your own ideas. But maybe more importantly his advice is that the only thing that matters is the after-tax real return on your investments.

James Montier as you said had a big impact. The main thing I learned from him was that a well-researched quantitative approach to investing is most likely the best investment strategy you can follow because it gets rid of all the behavioral investment problems the human brain is prone to.

Joel Greenblatt with all three of the books he wrote also had a big impact. Especially the book called The Little Book That Still Beats The Market that introduced me to the Magic Formula for selecting investments. This also confirmed what I learned from Montier that a quantitative approach to investing works well.

The research paper by Joseph Piotroski where he successfully showed that buying low price to book value companies along with a fundamental quality score can vastly improve your investment returns. If you're interested Piotroski's research you should take a look at the article Academics can enhance your returns.

And last but not least my friends at MFIE with the excellent stock screener that they developed that improved on the already outstanding investment approaches of other great investors.

As you can see my investment approach started with no structure at all, went to classical value investing and it slowly but surely moving on to more of a quantitative approach to investing.

What I find really encouraging is all these factors have contributed to the building of an investment approach where the returns keep on getting better.

Free word, Tim. Anything else you want to say to my blog readers in Finland?

Let me end on a more philosophical note.

Investing is not a difficult subject to master but it is definitely more difficult than it looks.

And like a lot of things in life, if you're not really interested it’s probably not worth your while to get involved.

If this is the case then it's much better for you to spend time to find somebody that is really interested in investing and who’s interests are hundred present aligned with yours. That means that she only makes money when you do.

Of course you have to check each year that she is still doing a good job but you must remember that even the best investors underperform from time to time. Sometimes even over a period of 3 to 4 years.

So once you've decided on somebody, made sure his or her long-term track record is good, make a long-term commitment to follow his or her advice.

If you are however interested in investing my best advice to you would be ignore the popular media completely. Read books and research studies by other investors that have been successful over long periods of time in up and down markets.

Learn from each of them but build your own investment strategy taking the best from what you've learned.

Each person has got a different temperament and invests in a different way. However if you follow time-tested investment strategies and build your investment strategy on what has worked you cannot do anything else but have outstanding returns over long periods of time.

Also be careful of becoming obsessed by investing. Always position your portfolio, taking only so much risk that you can sleep well at night.

Making money with your investments is a means to an end, not an end in itself. Your goal in growing your wealth should not be to have more money than all your friends but the ability to:
  • drive the car you always wanted,
  • leave the job you hate and be able to take time to look for something you really enjoy doing
  • take the holiday you and your wife have always dreamed of
  • buy the second home in a warmer climate you have always thought of
  • send your children to the university of their choice
  • simply spend more time with your wife and children.

In life the person the most money does not win or as they say in German “your last shirt does not have a pocket”.

I wish you and your readers all the best with your investments.

Thanks for the thorough interview, Tim!

I discussed with Tim and was able to convince him to offer all my blog readers 20% to 30% off of his newsletter subscription price. This offer is available only for 7 days. To sign up click here: EuroShareLab value investment newsletter. Tim's newsletter have a six months full money back guarantee in case you're not satisfied. No questions asked! To see what kind of newsletters Tim writes you can also download the latest issue for free here.

Tulos lokakuu 2011 (+9,86%)

1.11.2011 | Kohti taloudellista riippumattomuutta

(Salkun tuotot lokakuussa 2011)

Huh hah hei! Jo on meno markkinoilla hermostunutta. Viime kuussa salkkuni sukelsi yli kymmenen prosenttia ja nyt tultiin ylös lähes saman verran. Tämä kuvastaa hyvin sitä kuinka epävarmuus leimaa tällä hetkellä päällä olevaa kriisiä. Yhtenä päivänä sijoittajat pelkäävät koko Euroopan hajoamista ja euron katoamista. Seuraavana taas sitä, että jäävät kyydistä jos pahimpien kriisinoitien ennusteet eivät toteudukkaan.

Oma näkemykseni on, että mikäli ratkaisut ongelmiin löydetään on osakkeissa reilusti varaa nousta. Jos taas ei niin kyllä nykyisiin tasoihin on jo leivottu varsin huonoja tulevaisuuden kuvia sisälle. Niiden toteutuessa en usko pudotuksen olevan kuitenkaan niin suuri kuin monet olettavat. Asioiden mennessä hyvin nousuvaraa siis löytyy, mutta huonosti mennessä joustovaraa alaspäin ei ole yhtä reilusti.

Se hyvä puoli nykyisessä asioiden kärjistymisessä on, että poliitikot alkavat viimein olla pakotettuja toimimaan. Tätä ennen poliitikkojen toiminta on keskittynyt enemmän käsien ja huulien heiluttamiseen päätöksien sijaan. Sinänsä tämä ei ole mitenkään yllättävää, sillä poliitikothan hmm...politikoivat. Mielestäni Kreikan lainojen tukanleikkuu ja pankkien pääomittaminen ovat oikeansuuntaisia päätöksiä. Markkinathan ovat hinnoitelleet lainojen leikkausta jo pitkään ja niiden välttämistä on pidetty väistämättömänä. Poliitikkojen pitkään ylläpitämä teatteri siitä ettei (hallittua) konkurssia olisi tulossa on viimein päättymässä. Tämä on hyvä asia.

(Salkun kehitys verrattuna markkinatuottoihin vuoden alusta)

Oma salkkuni löi pitkästä aikaa käyttämäni vertailuindeksin (STOXX Europe 600 Gross Index) ja katkaisi indeksille häviämisen putken. Salkku tuotti kuukauden aikana +9,86%, kun STOXX Europe 600 GI tuotti "vain" +7,73%. Eroa vertailuindeksiin kertyi siten 2,13 prosenttiyksikköä.

Mutta hyvin meni myös kotimaisella sijoittajalla. OMXH25 indeksi nousi kuukauden aikana +9,39%. Salkkuni kehittyi myös OMXH25 indeksiä paremmin. Tosin selvästi vähemmän: 0,47 prosenttiyksikköä.

Koko vuoden perspektiivillä jatkaa portfolio tutulla paikalla: STOXX Europe 600 GI:n ja OMXH25:n välissä. Tässä ei siis mitään uutta ja tilanne on lähes sama kuin aiemmin.

Lokakuu on perinteisesti vilkasta kolmannen kvartaalin osavuositulosten julkaisun aikaa. Tätä kirjoittaessa on suurin osa yhtiöistä julkaisseet tuloksensa. Varsinkin isot yhtiöt. Tulosyllätysten ja -pettymysten vaikutukset ovat menneet pitkälle indeksiin kuukauden aikana. Oma salkkuni poikkeaa tältä osin paljon indekseistä. Salkun yhtiöistä ei nimittäin yksikään ole vielä julkistanut osavuosikatsausta! Ne jotka Q3 tuloksia julkaisevat tekevät sen marraskuun aikana. Suurin osa salkun yhtiöistä ovat julkistaneet tuloksensa marraskuun puoliväliin mennessä. Onkin mielenkiintoista seurata eroaako salkkuni kehitys indekseistä seuraavan parin viikon aikana kuinka paljon.

Start-up yhtiömme SM-liiga Hokkari mobiilisovellus saatiin viime yönä julkaistuksi Applen AppStoreen. Käyhän lataamassa sovellus iPhone puhelimeesi mikäli satut sellaisen omistamaan.

Hyvää loppusyksyä ja muistakaahan käydä vaihtamassa talvirenkaat ettei liukkaus yllätä!

Yhteenveto (tuotot indeksoituna)
Kuukauden tuotto: +9,86%
Tuotto vuoden alusta: -16,00%

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