The stamp collection has been mostly left alone since the last update, but let’s catch up with the few changes.

Life line

Lifeline Scientific, a maker of organ transplant transport kit, was taken over as the business was starting to become profitable. The price was decent if not spectacular, but the return from the distressed buy price is pretty satisfying

Tyratech stock class rotation

Tyratech is one of the more speculative stocks in the portfolio, whose product seem to be slowly on its way to some success. The thesis here is that the price is depressed by enough investors being sick of waiting. Having gone down since I bought, it was ripe for re-weighting up to the portfolio standard weight. The growing gap between the two classes of shares represented another opportunity: despite the big spread, the ask of the restricted share (which gets automatically converted to normal shares within a year or so) was well below the bid of the normal share, so I sold all my normal shares and replaced them with restricted shares. The double share class is due to some obscure US listing rules (it’s a US company listed on AIM) that seem harmless to anyone willing to wait for the conversion.

Toxic radiations?

Kromek was added to on the occasion of a fundraising, allegedly but reasonably plausibly to make the balance sheet bullet-proof for institutional customers. They also seem to be slowly on your way. I invested too early here, which is now less likely to happen due to the introduction of the minimum net income rule (> £1m).

Spaces without people

Another reweigthing was Space & People, which has not been doing too well but seems priced for bankruptcy, which seems unlikely. A modest recovery should provide a handsome return.

Last gas

I finally threw the towel on speculative Slovenian gas explorer Ascent Resources on  news of “first gas” being very close, because I expect operations to encounter a series of possibly price-sinking difficulties.

Bye-bye Minotaur

I have also sold out of Minoan, whose management I’ve lost trust in and which is seemingly perpetually loss making (already breaking two of the portfolio rules). Even if the Crete project works out in the end, they’ll likely manage to squander the proceeds.

Delivery failed

Last stock being waved good-bye is DX Group, a recovery situation which seems to have become hopeless. It would have been better to run the legacy business in run-down mode and stop trying to transform into something else, a common sin of legacy businesses.


Three stocks were acquired, matching our rule sets and looking like they’re on an interesting path at a reasonable price: Scientific Digital Imaging (scientific instruments), Elecosoft (architecture and construction software) and Airea (carpet manufacturing).

Special case: solar lawyers

As a special situation, PV Crystalox was acquired, because of the option value based on the possibility of a favourable settlement of a contract conflict in their favour with  a blue chip customer, which seemed to be excessively discounted by the market.

I used to think, like most value and fundamental investors, that market timing is difficult or impossible. I’m starting to come back on this and considering having a market timing component to my portfolio. It’s too risky to do on the market as a whole — moving one’s entire portfolio between stocks and cash or bonds — because this is undiversifiable (a portfolio dominated by whole-market timing has effectively 1 holding), but there may be opportunities for risk controlled allocations to sector or company specific cycles.

As a starting point I’m building a check list for spotting sectoral cycles. It’s a work in progress but here it is:

Bubble Bull/bear trap Bottoming
Dominant discourse “Paradigm shift” “This is a bubble!”, “This is the opportunity of a lifetime!” “Nobody ever made money investing in this!”
Volatility/volumes High/mid Mid/high Low
(Social) media interest High High Low
Closed-funds discount Premium Small/no discount Discount
Themed ETFs and retail products Launching Closing down

Why isn’t everybody doing it?

Most of these factors are reasonably easy to spot. But it’s that easy, why isn’t everybody doing it? A couple of possibilities:

  • The idea here is to capture sentiment, so it’s subject to errors if there are fundamental change that can kill an industry or are real paradigm shifts involved.
  • Knowing broadly where you are in the sentiment cycle seems straightforward, though imprecise and unlikely to find exact tops or bottom. Waiting for the cycle to turn may take longer than most investors’ attention span. Capturing a bottom or shorting a top may require more patience than most people have.
  • Intermediaries will have a hard time selling market-timing products as most clients behave like the herd (by definition).

Prospective guesses

Bubble Bull trap Bear trap Bottoming
Biotech, Internet retail, Unicorns Small caps, Equities Oil, Energy Metals mining, Airlines, Tankers/Shipping

Now the question is: is this confirmation bias? The Obliquity Portfolios have grown slight under/overweight in most of these themes — before I quite realised I was trading boom and bust cycles. I’ve also opened a little long tankers option basket a few days ago.

Finest English toiletries

Today adding Creightons to London Stamps. I was mostly sold from this video presentation. It seems a neat little business for an outright silly price. In addition to passing my check list, it’s very illiquid which I like — I’m happy to wait for normalisation and can survive getting stuck if not. There’s some insider control, which I don’t usually like, but it seems spread between several people who seem benign. I don’t quite understand the market but it does not seem rocket science either, happy to bet on the management here.

There’s very little else to say about it, possibly a good thing.

Diesel fumes

I didn’t buy it at the best time — it was quite fashionable at the time — but I like cyclical generator and chillers rental business Aggreko in Obliquity London, so I’ve put it back up to full mid-cap weight. The portfolio is possibly diversified enough, so consolidating or selling positions that have become underweight seems appropriate at the moment.

Despite having a notional check list for small caps, I’ve not been very careful with checking it formally. It’s also a good time for a review as my small cap investment style is maturing.

Picture of earthquake survival checklist

Earthquake survival checklist (credit: David Pursehouse on Flickr)

Owner business

As a replacement for the vague “useful business”, I’ll now try to answer the question: “would I like to own, and possibly run, this business as a private company?” However preposterous for a pint-size armchair investor, the idea is that it’s a business I must be interested in and understand enough, and would be happy to be stuck in (swapping CEO roles or even a majority stake in a private business is considerably illiquid compared to flipping listed stocks). This should eliminate a whole class of scams, and encompass classic criteria like “do not invest in things you don’t understand” or “invest like a businessman”. Besides, if one likes a business it’s much easier to weather price weakness, as one can emotionally compensate for (potential) financial failure with satisfaction from higher purpose (within reason).

Takeover potential

I’ve realised that since starting the portfolio many of my small cap exits are companies being taken over by larger groups. This is a pretty nice way to manage small cap exits: no transaction costs, usually a price premium, and no decision to take. And it makes a good sanity check new investment, as a company must be in some shape to be worth taking over.

The wallet test

As a simplified version of the executive character test, I have to ask myself “would I lend my wallet to the CEO for safekeeping?”, trying to guess that from hints in CEO interviews, reading reporting narratives between the lines, or interviews by trusted third-parties. (Idea first seen on the Value and Opportunity blog.)

Access to bank lending

This is about finding out whether a conservative banker would lend to the candidate business. This implies a solid balance sheet and somewhat predictable cash flow. It can be inferred from regulatory reporting on credit lines or covenant updates, or guessed from the balance sheet and business model.

Minimum (expected) profitability

Is this business making at least £1 million (or equivalent) profits annually, or, for recovery situations, can it be expected to reach that within the next 3 years? This takes out things that are too small to be listed, or too far away from break-even. Most story stocks (notoriously disastrous as a class) should drop out here.

The pass rate should be at least 4 out of 5.

In the spirit of the obliquity principle there’s no price or valuation test (other than that implied in the takeover test). Looking at the price too closely is probably counter-productive — I’d expect buying blind based on the above checklist should already give appreciable outperformance compared to small caps as a whole. And in any case I can’t help doing it, which is not incompatible with passing the check list, which is just a minimum standard.

A review of the existing Obliquity London Stamps portfolio holdings is now due.


Here is a belated report on (breaking my rule on writing before trading here) for the sale of Tungsten in London Stamps.

Tungsten is an invoicing network that processes supplier invoices for blue chip companies. The processing network is barely break-even and the business model was to make money on value added services, notably invoice discounting (factoring). It’s a fair idea, and goes well with the theme of banking disintermediation which I think will be relevant for some years to come. The problem here was that the approach was full of hubris, which fell flat so far.

The company has now re-framed its ambitions and management: same business model, less hubris. Perhaps not the time to sell, but it’s still materially loss making, and the market hostile. Break even is probably at least two years away, with probably a fundraising or two in the pipeline, so more one for the watchlist, to revisit in 2017, maybe. The market will forget having been burnt, but in the next few years the memory will probably cap the upside. Basically I think it’s highly likely to get cheaper before it gets better, and that some years away.

I probably shouldn’t have invested in hubris, though my rationale was that they only needed to achieve 20% of what they promised to justify their valuation.

But hubris is costly. For instance, reading between the lines of the latest update one guesses they structured the deal with their financing partner so that it paid off above high volume thresholds, so modest but real factoring volume produces zero income…


The proceeds were reinvested in Toumaz, doubling down an existing position back to median weight. I’m still confident the new health products have a chance of success. Liking the product range, I’m happy to give it a chance longer term.

Losing the bulk

Interbulk, the dry bulk business will soon leave the portfolio as the company is being taken over. This was a bet on their market turning from cyclical lows. The company was heavily indebted but with cash flow just enough to fund the cost, and backed by large logistics company who are the controlling shareholders who could support it through bad times, it did not seem too likely to go bankrupt.

Obviously someone else will get the full upside (if any), but as a 30% profit above cost, and a large premium on the recent share price, I can’t complain. The risk the controlling shareholders would not be nice to the minority was also a potential issue.

Funny news about a granny who shred her cash stash to annoy her heirs. The local central bank will replace the banknotes!

Mattress safety

This bring interesting potential applications. How to make cash under the mattress safer? Just cut it in two and hide it under TWO mattresses in different locations. If you need to spend it, rejoin the two parts and redeem it for spendable currency at the central bank. (This doesn’t though cover the somehow unlikely scenario where the central bank ceases to operate but the banknotes still have some value.)

Paper multi-sig

This could also be used by a group of people who want to share a stash and only spend it when they all agree: cut each banknote in N-pieces where each party takes one. To spend, the parties must collaborate to reunite the parts and redeem them at the central bank. This is pretty similar to multi-sig addresses in Bitcoin — indeed it could be used to explain multi-sig to people who don’t get the explanation in cryptographic terms.

Shredded will

Back to the granny, a central bank representative is quoted as saying that “If we didn’t pay out the money then we would be punishing the wrong people.” I think it is the wrong attitude. Destroying a banknote is equivalent to making a donation to society, as the value of everyone’s remaining currency increases (there are fewer of them going around). From an accounting viewpoint it decreases the central bank, thus the state, liabilities as there are fewer banknotes to redeem (paper money in circulation show up as a liability on the issuer’s balance sheet). So, the act of shredding the notes was obviously a wilful act of spending on the granny’s side. She could have equivalently bought an expensive object and destroyed it so as to destroy its value.


The ECB says that they do not redeem banknotes damaged intentionally. The Bank of England seems more tolerant. Arguable if people started to use the procedure for mattress safety and paper multi-sig en masse, central banks’ damaged notes redeeming service could be overwhelmed, though economically or morally I don’t see a problem with operating the service, perhaps with a fee to cover direct costs.

London holdings up to date

I’ve belatedly updated the Obliquity London portfolio page in the same style as the other (holdings, reweightings, disposals tables) with up to date data, which shows the full history of the portfiolio. Most of the slow movements have been reported in blog posts but the page wasn’t up to date pending an ever procrastinated automation. No automated process yet but this is backed by a little toolset I’ve been building in numeric Python (pandas) which should make future reporting easier.

IRR benchmark units reporting

The concept I’m playing with at the moment is using IRR (Internal Rate of Return) on cash flows expressed in benchmark units. That is for any given position I extract all the cash flows (trades, dividends and corporate actions), which I get from my broker in sterling, and then convert them in accumulating units of a benchmark ETF, as if it was a currency — remember that in essence any tradable paper is a currency. So each sterling flow is translated to an ETF units flow at the price (“exchange rate”) on the day of the cash flow. This shows the balance someone doing nominal accounting in benchmark units, or equivalently using the benchmark as their “cash” asset, would see.

This makes relative performance very clear: the sign of the nominal PNL (portfolio value change) tellls you if you have out- or underperformed the index. Basically if you had funded every buy by selling units of the benchmark, and bought them back on sales, it tells you if you’d have more or less units following trading than passively sitting on the benchmark units.

The use of the IRR also implies a normalisation of time effects, to capture that a N% change over 2 years is not the same as N% over 2 months, which is hard to see in classical nominal PnL reporting.

Stamps IRR charts

So here are a few of the result for the small cap London Stamps portfolio, valued as of 2015-05-08. This is early software so subject to errors and bugs, the numbers have merely passed a plausibility test.

The benchmark is iShares MSCI UK Small caps (CUKS) which is a good substitute economically (I’d happily buy it as a replacement allocation if I stopped playing stock picker in this segment) though a relatively poor short term benchmark technically. The reasons for that is that it uses a worldwide definition of small caps, which basically in the UK market captures the bottom of the FTSE250 — which are traditionally viewed as midcaps in the UK markets — and the top end of the local small caps section. So the average market capitalisation is significantly higher than my mostly AIM oddballs stock picks. A pure AIM index index wouldn’t be a good benchmark either as it would have a would bunch of junior resources stocks and overseas scams that I don’t touch, and I would never buy an AIM index as an economic substitute. The MSCI methodology is pretty good at excluding the darker corners of the market, so it is a valid benchmark in sector and industry terms.

Predictably the portfolio as a whole has underperformed by almost 10% since inception in money weighted terms. We’ll blame midcaps doing well while really small caps had a lacklustre year and say the jury is still out on my stamp collector skills or lack thereof.

Now, let’s do some digging down. Here is the IRR of each stock since inception, including closed positions, as a monthly return in benchmark units.

London Stamps IRR Ranks 2015-05-08

This is not very precise chart because the more recent positions produce outlier IRRs — the computation makes less sense in the very short terms. This excludes positions younger than 100 days (only AMD at the moment).

Other than that no surprises really, and apart from the GW Pharma pot bubble the next winners are tech companies that got taken over (indeed I held them for relatively short periods).

Now let’s watch our underperformance by plotting an histogram of these same returns (with AMD back in).

London Stamps IRR histogram 2015-05-08

So we’ve got the reasonable level of symmetry, as predicted by theory, the problem is only that zero is on the wrong side of the chart for the time being. It’ll shift if the performance reverses.

A thing to note in these charts is that the average monthly moves are not big, mostly within the -5/+5% range, which implies that with the typical spreads in small and micro-caps, long holding periods are essential. This is well known but nice to have another confirmation. Anyone flipping their portfolio every couple of months, in addition to having trouble to find alpha, would get trounced by transaction costs. It should also mean that long term returns should be better, so let’s do a little trend check by plotting our returns against holding period (remember this includes closed positions):

London Stamps IRR Age plot 2015-05-08

That one looks good. Patience pays so far.

That’s all for IRR analysis for today. Let’s finish with a little check we don’t have any undue overweight, with a simple visual check of portfolio weights for current holdings:

London Stamps weights 2015-05-08

So far so good.