Saturday 21 December 2013

Investing in investment companies

A Swedish investment and real estate companyA Swedish investment companyA Swedish investment company

An American investment companyAn American investment company

There has been two comments concerning my way of analysing investment companies of which both have considered that I am doing it incorrect. One was fairly aggressive and written in Swedish and can be found here with my attempt of translating it. The second one can be found here and is from PoomK who seems to be an excellent investor and a person that I instinctively know I should learn from but obviously still wants to disagree a little with in this case... ;)

In my response to the second comment I wrote that I would write an article about my thoughts concerning investing in investment companies and this is it! I am sure that many of you will not like this article but please never forget that I am a wet behind the ear investor with much to learn and many miles to travel so please keep the comments civil yet harsh if you do consider me to be wrong but make sure that your points are valid and not based on some old well-known rules of how things should, must and have to be because those I give very little value to.

I my opinion investing in an investment company that cares for their shareholders and not only their own salaries is one step better than an index fund. Why do I state this? Because they are continuously scanning the horizon for new good value companies at a level which I can not do as a private person with a day time job, they are usually paying a dividend and sometimes even extra money when they sell off one of their investments, they do not follow the index and finally they seem to get valued similar to the investments that they own.

Especially the two final things are of importance to me.

Since they do not follow index I have a greater chance to buy them at a low price and at a moment when other companies, in completely different branches, are very expensive. This means that if I would have bought parts in an index fund I would have paid a lot for those shares unless I would decide to stay out of the market for a while to wait and see what will happen. With the investment companies this is then different and I can still invest in them with the downside that their low valuation can be going on for a very long time which means that compared to index they can look bad and have a poor development which value-wise and in real euros and cents is actually not the case.

If we look at the investment companies there are all kinds of them. Some of them have a growth portfolio, some have a value portfolio and some have a more speculative portfolio. From my very little experience I would say that the overall investment company gets by the market a valuated based on their portfolio. So if they are speculative or have a speculative nature to them then the P/E today of them are very high. If it is mainly a growth investment company then the valuation today would be in the mid-P/E-range and the value investment companies with the extremely boring out of favour companies are today well below 10 in P/E and are even closer to a P/E of 5 in most cases. They have probably also been there now for a long time meaning over 10 years. First it was hip with internet, then it was hip with real estate and today the boring value companies are still not treated well in Europe but starts to be acceptably valued in the US.

What does this then mean? To me it means that the boring companies that are turnarounds, that are today out of favour on the market are owned by these value investment companies. And since the shares that they own are out of favour they themselves become out of favour and the shares of these investment companies can be bought at a very low P/E.

The argument has been or is still today for many people that the valuation is far too high within the investment companies. One must calculate with a discount of their book value and remove that from any calculation, their earnings are fluctuating etc. etc. Sure one can sit and make all kind of useful or useless calculations to try to strengthen ones opinion about why one should buy shares in a specific company or for that matter why one should not buy shares.

If I calculate with a discount of 50% then the P/B becomes 1.5 instead of 1 or the P/E5 becomes actually 8 instead of the P/E of 5. And? They are still cheap! One can say that they have never (the last 10 years at least) been valued above P/E 10. To that I say ok then that has been the case for the last 10 years and there is no telling how the next 10 or 20 years will be when it comes the markets valuation of investment companies. Meaning it might again become hot with value companies which will then have a catalytic effect on the valuation of the investment company.

Therefore I stick to my idea that the investment companies are being valued according to what they own. Currently and for the last 10 years that has been, according to the market, boring companies, which has then also lead to a very low P/E of not only the companies that the investment companies own but also of themselves, but what was once boring shall rise again and become the new hip and the new in. I see no difference in fashion trends created by people in comparison to market trends created by the very same people. The human being as such behave according to a certain pattern when one steps away from the individual person and start looking at us in numbers.

My guess is that I will get some objections to this article and I am looking forward to that because there is nothing better then to be proven wrong and to improve ones way of thought. In the end, I write this blog to become a better investor.

So what do you say about investment companies?

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