Quick update on the Obliquity London portfolio: I’ve sold Inditex (Zara, etc) and acquired Asos (internet clothing chain) instead. Sector exposures are thus unchanged.

Inditex: technical and tax reasons

I’ve not changed my mind on Inditex fundamentals as such (nice company, few issues other than family control) but there were technical reasons to rotate it.

It  was my only mid-size non-UK-listed position (all other non-UK stocks are full size large caps), which is untidy.

The second reason is that since I’ve bought it, I’ve properly understood how the taxation of international dividends works in my UK pension account: UK and US dividends are paid tax free, everything else is paid with the maximum withholding tax, 21% or so for Spain, which is arguably not outrageous. It’s often theoretically possible to reduce that tax according to double taxation treaties, that often mutually recognise pension schemes, but the bureaucracy makes it tricky. Thankfully that is another factor that vindicates my strategy to get most of my international economy exposure via London-listed companies in this account. The current excess withholding tax paid due to the continental European stocks is modest. Still every little helps and I may switch some other holdings, or hold them in another account or via derivatives, as opportunities arise.

Asos: quality at a temporary discount?

Asos is a well-run self-funded online clothing retailer, which has seen remarkable success so far. It used to be a darling momentum stock that has more than halved in value, after a profit warning which does not really affect the fundamentals. It’s expanding and investing significantly, and thus variation in sales or slight hiccups in the expansion process, which are normal, produce a profit warning. Nobody is going to do linear growth. Some of the growth is priced in, even after the price correction but I tend to think that clothing retailing tends to be a winner-take-all model with a handful of top players (see H&M and, precisely, Inditex), and so remains cheap if it grows to be a midsize player (say 1/4 the size of the current big ones). Of course they could succumb to poor execution or fickle customers they lose touch with, but on balance it seems the odds are good value balancing failure risk with growth potential. It also seems to treat employees unusually well according to reports on job review sites.

Some extra upside may be obtained if it does another momentum spike, that my max weight rules systematically would catch. It’s a bit more racy than other holdings in this portfolio, but there’s some scope for that given how pedestrian most other holdings are.

OsRam clean up

I had some shares from OSRAM, the lightbulb manufacturer, as a result of its demerging from Siemens some time ago. The company seems fine, but the position was too small — it’s of course tiny relative to Siemens — to be worth keeping.

Tickled by architect John Hill’s wonderful coverage of new storage facilities in New York City, I’d like to discuss the hypothesis that one of the core forces that drives American economics and society, and many others beyond but perhaps not in such a pure form, is the Pursuit of Storage.

What is the purpose of economic activity? In prosperous societies, the basics of food, shelter, and essential healthcare are pretty quickly covered and can only explain a small fraction of the frenzied economic activity that can be empirically observed.

The accumulation of artefacts seems central.

People buy stuff; and store it. Many an economist could then appeal to utility, and say that people buy objects because of the functions they provide to them. This is easy to disprove, because if people were interested in objects from a utilitarian perspective they would, most of the time, rent them. Many objects that people store in their dwellings, or even corporations and government agencies in their facilities, have a one-time or only occasional uses. If you don’t live in a ski resort you don’t go skiing every day, so owning skis makes no sense for most people. Still many part time skiers own skis. It is almost permanently idle capital, with the additional costs of storage and transport adding to the economic loss caused by the choice of ownership other rental. This can also be observed in wealthy people collecting multiple instances of easy-to-rent objects whose use is exclusive — due to petty quirks of the laws of physics, people cannot be in two cars at once — and where the benefits of ownership over rental are oft negative.

A Storage Deluxe facility

The American Dream (source: Storage Deluxe via John Hill)

The primacy of accumulation of inert artefacts over their use can be seen in the organisation of labour: if people wanted objects for their use, a natural balance between the time spent producing objects and the time using them would be attained. But in work-centric societies like America, a cult of long hours and short holidays can be observed, both in a cultural sense — long hours give high status rather than leading the culprit to be ostracised as it does in more relaxed societies — and in a functional sense — the more hours spent on the production side, the fewer left for the use of artefacts. Storage is leverage for the workaholic: it enables the production of many more artefacts than justified by function, by maximising idle capital.

We could further argue that it extends to immaterial things: in insurance and finance, a lot of activity is dedicated to accumulation of titles, deeds and scorekeeping which has no effective purpose other than the self-referential accumulation of inert claims. At least they are more environmentally friendly than their material counterparts, as long as their “storage facilities” (banks, brokerages, etc) don’t blow up causing collateral damage to the truly functional parts of the system.

The endless pursuit of storage is also visible in the built environment and in the structure of American cities. People value vast houses with ample basements, where they can store a great number of discarded objects, never or rarely to be used, but proudly stored. A kitchen with vast cupboard space will add to the value of a home, as will ample storage space in all rooms above ground. Technology has largely enfranchised man from objects — a late twentieth century home may have been full of books and engravings of single sound recordings, all of whom now fit nicely on a single USB stick and can be comfortably viewed by a handful of compact devices. Preferences such as vast houses with good storage facilities in distant suburbs over compact places in town near to work express the sacrifices people are ready to make to live near their store of objects. The home is self storage first, and place for living, second. The destiny of man is to be a custodian of the objects they collect, catalogue and keep protected from the elements.

Rendering of Uovo art storage facility under construction

Art storage shed near a rail line, reminding commuters of their life’s purpose (Uovo via John Hill)

This is where I part company with John when he complains that new storage facilities in prominent urban locations are eyesores. When the point of modern life is to acquire objects and store them, with a little bit of quick display for status building — the Uovo display rooms nicely mirror the squeezing of some living space between the storage and display function of private homes. These boxes are not out of place: they are a reification of the American Dream. They can remind people why they get up in the morning: so that they, too, one day, can have inert capital stored in a shed to their own name.

Bonus ball for actuaries

John’s post contains another wonderful nugget. The Uovo art storage facility is spit into two sections separated by some sort of fire wall, because “insurance companies don’t want too much art in one place.” It’s a spectacular realisation of regulatory arbitrage, poured in actual concrete, and as is customary with such constructions likely to fail, as most risks beyond fire seem bound to be extremely correlated — there’s apparently even an internal door between the spaces, presumably to facilitate burglaries. It’s reassuring for the financial industry — in so far as the high end art trade is not a branch of finance — to see that the dishonest practices it pioneered are spreading across society.

If we had to pick one ‘truth’ that economics and finance insiders and innocent bystanders alike agree on, it’s perhaps that money is central to a modern economy. I think it’s a deeply flawed idea. Money is a convenience, and one not without drawbacks, but certainly not, as such, essential to a modern economy. Moreover, I believe that understanding how inessential money is greatly enhances one’s ability to understand how it works.

Money is seen as fulfilling two primary functions:

  • A store of value
  • A mean of payment

Any persistent asset or belief with a mechanism for recording exclusive usage is a store of value

That one is perhaps easier understood. To store value you need an exclusive claim (property) on something you can exchange in the future against things or services you may then want. The property can be of a functional object (e.g. an anvil) or a right (e.g. the right to keep out uninvited guests from a piece of land) or even a scarce but popular abstraction (e.g. fiat currencies, vanity plates). In all cases you need a central record keeper of property claims (though there may be as many as there are assets) which is likely enough to persist (remain recognised by possible future claimants).

Money is one such, but it is in no way essential to the ability to store value. Being at the more abstract end (it’s belief based, worth something as long as people desire to hold it) it may be seen as one of the weaker ones due to the risk of debasement (however low in practice in stable societies) or loss of interest from other users. However weak or strong, it cannot be argued to be indispensable.

A central bank (or all of them) could remove this function by simply establishing punitive negative real interest rate on reserves (after removing paper currency, a distraction, from circulation). People would then move their saving to other assets, exchanging their claims on central bank balances against claims on things, services or other scarce beliefs, of which there is a very great variety in the world (and if classic currencies fell out of use, an incentive to create more).

Any liquid asset with an easy to use property transfer system is a mean of payment

The mean of payment function of money is perhaps more essential, and the one that may seem harder to replace. Before we can replace it, we should think what problems does money as a mean of payment solve?

The first is that, by being used as a pivot asset in transactions, it enables generalised barter at society (market) level. That is considerably more efficient than everyone having to negotiate balanced pair transactions of the goods or services they directly use and produce.

The second one is a common unit of account, basically that enables a single price label that anyone can read.

In other words money is a payment app. The problem central money solves though are largely predating electronic devices and finance systems. It’s a payment app for the paper era.

The pivot function of money can be done with any asset whose ownership title is easy to transfer, either physically (metal tokens, diamonds, cigarettes) or electronically (any electronic register with a trading system, e.g. shares and bonds).

In the presence of electronic devices and real time data communications, it’s perfectly possibly to buy a loaf of bread by transferring a claim on any asset to a claim to any other asset that’s liquid. If the client likes to store value in Apple shares and the baker in Palladium futures, it is now perfectly possible to make a quasi instant transaction that will decrease the ownership claim of the buyer in Apple shares and increases the baker’s claim in Palladium futures by the value of the loaf of bread. This is made possible by electronic devices connected with the central property registries. Incidentally the electronic devices also solve the “common unit” issue, as the customer can display the loaf of bread’s price in terms of Apple shares on their screen, converted from what the baker entered in metal futures terms in their own terminal. No paper price label is needed any more.

Essentially everything liquid can be used as money, and indeed functionally is money. Dollars and Apple shares are not functionally distinguishable: both are based on a register of a finite number of units, whose issuance and record keeping is managed by a central entity. Members of the public can swap their claims with each other on electronic system (bank accounts and brokerage accounts are functionally the same thing).

What about credit then?

Credit is probably the weakest way in which money could be considered as essential. Credit is always a swap of resources in exchange of future recompense: “I give or lend you today an anvil that I have, and in exchange you give me a share of the metal widgets you’ll make with it”.

It’s just a trade with a temporal element that as such, very obviously, does not require money to exist.

Money is only, at best, a convenience. As the favourite payment app of the pre-electronic era, you may wonder if it’s not past its prime.

Why not close down all central banks and convert their HQ to flats then?

Why keep currencies then? Old habits die hard, mainly. It is convenient to still be able to use paper price labels, and have a relatively stable unit that one can talk about without using an electronic device. That does not make it essential though.

Beyond a better understanding, the world could benefit in financial robustness if the role of central money was reduced  by making it less of a store of value (real rates should be kept negative) and encouraging diversity in disintermediated payment and credit systems (so as to make the bakery example less clunky than it is today).

Following a surprisingly well written Business Insider story on Google, I ended up watching this TED Talk from Larry Page:

Google's Larry Page at TED talk

Larry Page (credit: TED)

First, it’s nice to notice that a nerd with even less charisma than yours truly — no mean feat — can get that far. We can also dispatch that what he’s doing is obviously interesting, and the question whether it’ll end up being unadulterated good or a case of hell being paved with good intentions will likely remain open for a long time. I would like to comment specifically of how it impacts the investment case for Google, the listed company, and more precisely what it tells us about property rights, which are so often misunderstood.

From his talk, background and biography it’s clear that he’s on a mission to change the world. Operationally Google is really an applied science research foundation, trying to find novel solutions to hard problems with direct application in human life.

The search engine, or any profitable business they might stumble upon during the process of research, or otherwise, are like an endowment — providing funds for further research, supporting the foundation in perpetuity or until it runs out of fund trying. This is very admirable as such, and good for them, and possibly society at large, that they can do that. I’d happily do the same if offered the opportunity. It’s also refreshing to see a US corporation not fixated on quarterly “shareholder value”, often in such a myopic way that actual value gets vaporised in the process of trying to hard to maximise it directly (John Kay’s Obliquity idea, again).

In that context though, it doesn’t make sense for Google to ever return funds to holders of the equity, as it would impair Google’s primary raison d’être and goals as a science foundation.

Prudently, the Google share capital is structured in such a way, more often encountered in Italy or Sweden, that a small number of magic closely held shares have overweight voting rights, to ensure that Larry Page and the other founders control the company, and not the flimsy public shareholders. Holders of the lower ranking common shares have effectively no vote and cannot remove or change Google management.

Such shares a are a funny product: they are not classical equity with an interest in the company’s governance (where holders of the paper can use their vote to bargain for a share of the company’s successes, or sell them to someone who will) nor notes with predefined returns like in the case of bonds. Perpetual zero coupon bonds, maybe.

The only case where the company’s principals need to care about the market (second hand) value of such shares is when they either want to raise new money in this way (issue new such shares) or sell any existing such shares they issued to themselves in the past (exit or some form). Indeed apart from regulatory reasons that encourage large US corporations to be listed, the main reason Google is a listed company seems to be that the listing provided a way for the early venture cap investors to exit.

In that context, valuation becomes a really funny game. Google B shares being unlikely to pay out, a discounted cash flow model, of whatever kind, does not apply. The shares are more like a museum membership scheme, designed to promote but not own the institution, in exchange of a feel good factor and possibly status for the member. It is thus remarkable that many people still look at Google shares as if they were full voting shares of a for-profit company. Google’s profits, EPS or financial metrics matter very little yet the market still reacts to these numbers, if with its usual capriciousness. One could argue that there is a chance that successors of the current leadership, some decades from now, may turn the foundation into an ordinary for-profit common stock company and that the current price represents the discounted probability of that happening, times the financial valuation at the conversion point. My guess though is that It should be much cheaper than it is now, if one follows that view. Indeed the “risk” they do research that may not turn into profitable products (even if it may change the world) seems pretty substantial.

This though does not lead us to any obvious exploitable effect, other than making Google uninvestable for outsiders as a credit product. If the shares’ price freely follows the mood of a motley crew of people who don’t understand the structure, and supporters of scientific research, it’s a tough game to make predictions of how it might evolve.

Here are, belatedly, the trades for this year so far for the Obliquity London portfolio. Reporting software is a work in progress, that may come to fruition soon.

Renishaw: idiosyncratic lab equipment

A somewhat eccentric business, I like the long term view and the product set, seems a good mix of staid and trying to innovate. Valuation and criteria matching are all right. The main possible cloud on the horizon is that the founders are ageing and it’s an open question whether succession will pan out. I’ll bet that there’s a good chance given the long established nature of the business and its apparent strong corporate culture. It could also be acquired, possibly at a good price.

This mid cap entry was funded by accumulated dividends and the rebalancing down of two positions that had increased more than 50% away from target weight: Associated British Foods and Berendsen.

C(r)apita out

While Capita is the like of stock that’s almost automatically matching the Obliquity criteria, many people who have experience of Capita services, including myself I had to remind myself, seem to not enjoy the experience, hence the Crapita moniker. Notably they seem to do things in labour intensive and inefficient ways which I can’t make out whether it’s due to outright incompetence, or to inflate what they charge to their public sector customers. Either way, I don’t want to be involved in that. Moreover, the bean counting management and the long time CEO leaving while the party is still going great was the cherry on the cake and I sold the entire holding.

This is only the second (full) sale since portfolio inception, almost 2 years ago. At this rhythm I’m set for an average holding period of 20 years, which is as it should be.

AstraZeneca: a bet on medical research

Following the meteoric rise of Hikma Pharmaceuticals the position was trimmed down according to the target weight rule, but I wanted to keep pharma exposure and considered AstraZeneca as possibly one of the best of the bunch of big pharma companies. This is a full size large cap position funded by the Capital sales and some spare dividends, along with the Hikma reweighing proceeds.

Like big miners, you’re partially insulated from single blockbusters success and they may buy successful biotech startups that have come up with a working med, similar to a biotech sector fund. It’s difficult to pick one of them; I just like the research centric aspect here, the management seems to be pulling more or less in the right direction, and it seems to pass OK the portfolio criteria. It may be partly a negative choice: they benefit from not being embattled and accident prone GSK, and a bit more nimble. It seems to still be relatively cheap, like most of the big pharma segment since the “patent cliff” issues came to the fore, so we get some immunity to the bio tech small caps bubble.

Reweighing rules: tweaking the rules to trading costs

I am adjusting my “top slice when 50% above target weight” for non-UK stocks, to “2x target” to prevent excess trading — my broker has increased their forex markup recently. The happy holding that triggered this thinking is St Gobain, which touched the 50% rule and that I’m happy to keep. This takes it to a 2.9% weight, which is not really a barking mad overweight — the portfolio is well diversified, with 59 holdings.

I’m outrageously late for making seasonal new year predictions, and sorry for a title that sounds like Business Insider, but I want to keep a record to see if I have some predictive power. So, I would like to introduce my 5 best London-listed stocks to short, not for 2014 but for (end) 2016 — three years is a good time frame for short theses to develop, one year may not be enough for failure and they could easily keep being supported by momentum.

Ninenteenth century train crash with steam locomotive going through the wall of an end station.

The track was a bit too short. (source: Wikimedia)

I’m not short any of these stocks (or any individual stock at all) as in real life shorting is a major pain and I would only do it when a limited risk instrument (e.g. options) is available at an affordable price, which is not the case for this set.

That said I’m also not long these stocks, which is really half the value of the Obliquity strategy: there’s probably more insight in what I don’t buy than what I do (I’m short relative to an all inclusive market index). These are just some of the more egregious examples — there’s also stuff I don’t like for more mundane reasons.

For accounting the success or failure of these choices, I plan — if I remember by 2016! — to check the total return of an equal weighted short position in all 5, including dividends and capital actions. Should a stock be delisted, the exit value should be the closing price on the market day following the day the delisting was announced. Suspended stocks should (probably) be considered to have exited at zero.The drawdown allowance is hard to decide in advance, minimum would be 2x I’d say (so allow £2000 running loss for £1000 notional short position for the full portfolio).


Lots of accounting trickery with the headline product a me-too product nobody uses. Matthew Earl has written more than I could dream to about it.

Quindell Portfolio

The business model seem mostly about enabling insurance fraud, layered behind piles of creative accounting, all run by characters that do not inspire great confidence. If the business doesn’t fail, the likeliness of their leaving anything on the table for outside shareholders seems low.


Don’t you love the name? Spinning open source software they do not own or author, and selling add-ons of limited value seems both gross and ingenious. There’s probably enough mugs who don’t understand open source to have them run for a while and have the principals exit at a judicious time…

Naibu Global International

A Chinese shoe manufacturer, which despite the name doesn’t export outside China (why not? not starting well, are we?) and is a field of red flags hinting at possible accounting or corporate structure misrepresentation. It’s already heavily discounted relative to published accounts, so failure is largely already priced in, but I think the end game is delisting or the price languishing further down.

Judges Scientific

This is actually a much more legitimate business than any of the others here, but I’m not a fan of private equity masquerading as an operating business. Brilliant financial engineering, but I fear that the acquired businesses, left to their own devices, with founders pacified with a cash windfall, or retiring, may not prosper. Also the window it exploited where it was possible to buy private companies in this sector at a massive discount to a public market valuation could close as both sellers and competing buyers wise up to it. Combine that with it being a fashion stock on the back of past successes, and it seems more likely to go down than up in my view.

We’re really in the self-evident department here, but many arguments still float around which seem to forget the basics, so a little refresher may help.

Let’s start with the definition: what is inflation?

Inflation is too much money chasing too few goods.

From there it follows simply that to get inflation these two conditions must be fulfilled at the same time:

  1. Too much money
  2. Too few goods

People tend to watch reason #1 too closely, and often even get that wrong. For instance Quantitative Easing (QE) is an operation which is mainly about swapping different kind of money with each other to twist the yield curve at the margin which has a much smaller impact than really “printing money” and throwing it away through the central bank’s window would have. Most countries’ central banks are either not actually allowed, or do not actually practice, direct money printing. So it is in reality quite hard for a central banker, should they wish to, really to “print money”.

Now let’s just  assume that excess money is successfully injected in an economy. We still need condition #2, too few goods. If people find themselves with bundles of cash, and spend them — they must “chase goods”, if they save, no inflation — we’ve got suppliers of stuff and services facing facing an influx of customers. What do you do if you’re in business and see customers coming your way? You push your production/servicing capacities to the max, get more staff, etc. Under competition, you can’t really put your prices up by much in the medium or long term, otherwise someone will turn up and undercut you, opening a new café next to yours when they see yours is full.

So, in peacetime in a functioning economy, the supply side is very responsive: you can always get more staff or more equipment, for this to become strained you need to run out of staff so that staff become scarce and can name their price when negotiating wages. That is full employment, which brings us to the simple truism:

Inflation = Full employment

Exceptions to this require either inflation so frantic that it’s faster than people can advertise for jobs, or political disruptions that prevent normal operations of the jobs and equipment market. As far as I know all the historical episodes of major inflation occurred in time of full employment or major political disruption (war, civil or otherwise, etc).

Further it’s worth noting that full employment requires not only employing the people looking for a job, but people who are not currently looking but would if they saw opportunities, which in current circumstances are probably quite numerous in most mature economies (less people who are chronically unemployable due to personal or systemic circumstances, probably a percent or two of the workforce).

It also requires, in technological societies, running out of jobs that can be relatively easily automated but have not yet because staff was cheap and plentiful.

Conclusion: if you want to predict inflation, don’t ask an economist but a geopolitics expert re their views on major upcoming wars. If there is a green light here, and there are still plenty of people wishing to work, inflation risk is very low. Moreover, there’s a natural hedge for people of working age: if there’s inflation, it will be easy to get a job.


Get every new post delivered to your Inbox.