Category: Finance

Bella & Duke Investment

We are excited to have closed our a significant seed investment in Bella and Duke (www.bellaandduke.com)  one of the UK’s leading raw pet nutrition businesses.

We have tracked pet nutrition as an interesting area for a number of years, but believe that Bella and Duke have some very interesting defensible qualities and fit with our focus areas of nutrition and food tech.

Bella and Duke (www.bellaandduke.com) founded by friend Mark Scott and Tony Ottley, who were frustrated at the lack of quality meals for their own pets.

We hope to help the team manage the growth by investing in logistics, web and customer recruitment.

We are also very excited to be supporting a business that has come through the Scottish EDGE program.

Just Behave: How to make money by doing the right thing

There’s an enormous amount of research on behaviour that results in better investment performance and, indeed, Robert Thaler won the Nobel Prize for Economics 2017 for his insights and other behavioural economists such as Daniel Kahneman and Amos Tversky have produced valuable research.

Here are some thoughts for how an imaginary online stock broking firm could work if it was trying to use behavioural economics to improve the performance of investors using the platform:

1. Ensuring adequate research

The most basic rule of investing is to ensure that before buying a share the investor has properly researched both the company and the management team.

The investment platform should ask six questions before allowing the user to buy a stock in a new company that they have not invested in before. For each question they get wrong they should be banned from buying the stock for that many months.

2. Preventing over trading

Most stock trading platforms charge a lower fee the more an investor trades. This rewards behaviour that is destructive to creating wealth. A much better approach is for the first trade to be free and subsequent trades to become progressively more expensive as volume increases.

In other words a behavioural platform should have the opposite charging structure of all current stockbrokers.

3. Benchmark investors against their peers

Every investor on the platform should be notified of what performance quintile they are in compared with the other investors.

They should also be shown the behaviours of the top investors and how their behaviour differs.

4. Ensuring sensible diversification

Most platforms report on diversification in terms of category and country. This is very crude.

I’m not aware of any platform that shows portfolio diversification by date of founding of the business or by business stage (loss making, high growth or profitable, stable). Also it would be sensible to split by market capitalisation.

Incidentally, all platforms I’ve looked at show diversification by country based on the registered office of the company. It really should be on the basis of revenue split.

I also think the platform should warn against over diversification. No more than one new stock should be allowed per 6 months.

5. Financial metrics

It’s a very tricky thing to try to come up with a magic formula for investing. A very recent example would Carillion whose huge dividend yield resulted in private investors piling in before their bankruptcy. Institutions meanwhile are busy putting funds into “smart beta” products which sound too good to be true.

The central thing to understand is how good the company is at investing cash. Most publicly traded companies are profitable. The real winners understand how to invest their profits (or other cash flows) to make even more profit in the future. This is the reason I love companies like Amazon and Berkshire Hathaway.

Debt is also a metric that’s worth looking at properly. Debt in itself is not a bad thing but it is concerning if debt is being used to fund dividends or if equity is being replaced with debt during a period of historically low interest rates. However in a company going through growth where debt is rising to fund capital expenditure, increasing debt would be a positive.

My fantasy investment platform would try to show how effective the business was at investing and whether the debt was good or bad.

Valuation is of course the most widely viewed metric. I’m not sure I have a simple answer to this. Everyone wants to buy cheap and sell high but most investors fail to do this.

There have been brilliant investments that have always had a high valuation (such as ASOS or Netflix). However my view would be to avoid overly expensive investments, of course this will result in the investor missing some opportunities but overall it’s a better behaviour to buy at fair to low prices (so-called value investing).

6. Beta blocking

Traditional investment theory is very tied up with volatility (R-squared value in terms of a benchmark). It’s the basis of the Capital Asset Pricing Model (CAPM) which gives a view on what return is required for a given level of risk.

It is however complete bollocks for the great majority of investors (the exception being investors who are just about to need liquidity such as people just about to buy an annuity or with children about to start University).

Very few homeowners would get an independent valuation on their house done every month yet owners of stocks will obsessively check their valuations even more frequently. Indeed, we even have some stock brokers showing realtime valuations.

The ideal behavioural platform would only update stock valuations once per quarter to try to prevent this sort of behaviour.

Investors should entirely ignore short term ups and downs. The valuation that matters is in the distant future when a stock is sold. There is substantial empirical evidence that investors outperform when they check share prices less frequently.

7. Fund managers

Purchasing funds can be a good investment and there is a lot of evidence that the lower the fee the better the performance of the investment.

Most fund supermarkets promote more expensive funds. In the institutional world the equivalent would be hedge funds who have been a huge destructor of investment value.

The behavioural platform should list funds from the cheapest to the most expensive and fees should be lower for investing in cheaper funds and higher to put investors off investing in more expensive funds.

Of course the problem with these seven rules is that they would result in a transfer of wealth from the financial services industry to the investor. It’s therefore highly unlikely that anyone will create a stockbroker following this advice as the profits would all be with the clients.

Brexit

I’ve been asked by quite a few people to write a note on Brexit. It’s a difficult issue to write about as Move Fresh takes a completely politically neutral view and Brexit is a very political subject on which people have very strong views.

As a company, Kevin and I have taken a view that we should not get involved in political issues. This because a) taking a political view annoys a large number of customers and investors and b) although we are pretty good at running a business that skill is not necessarily transferrable into political subjects. Just because someone knows how to make a lot of money does not qualify them to make pronouncements on the big issues of the day.

Which also brings me on to the subject that what is good for business is not always good for society. A classic example would be the Equal Pay Act 1970 which required companies to increase women’s pay to being the same rate as men who were doing the same job. Nobody today would argue against this. However it was bad for business at the time as it resulted in an increased cost but clearly was a great thing for society as a whole.

Taking a view on Brexit is mainly about making a prediction about the future. As Yogi Berra, the baseball star for non-Americans, said “It’s tough to make predictions, especially about the future.”

It is even harder to make a prediction about the future when i) you do not know what the UK government wants and ii) you do do not know if whatever they may want is achievable.

However what we do know is that somewhere in the region of 70% of the UK economy is dependent to a lesser extent (tariffs) or a greater extent (being prevented completely from operating) on membership of the EU. If we assume for the sake of argument that Brexit will ultimately be economically a good thing we have the issue that we have to move from a situation where 70% of the UK economy depends on the EU to a situation where 0% of the UK economy depends on the EU.

So, if Brexit ultimately turns out to be a good thing then we still need to handle a migration of 70% of the economy away from depending on EU membership. It is very difficult to envisage a way this could happen without it being at least a short term negative, unless there was a very lengthy 5-10 year transition period which has been ruled out by both the EU and the UK government.

A way to think about this would be that the set of opportunities for business outside the EU may be greater than the set of opportunities for businesses inside the EU but the intersection between the two sets is small. Therefore many businesses may fail today, even if the future opportunity is better.

So in summary, Brexit looks like a short term negative with the long term being either negative or positive depending on what policy the government decides to adopt and whether or not that policy is achievable.

The only political point I will make is that for Move Fresh we would appreciate greater clarity on what the UK government’s position is so that we can plan the future.

Monty Python on Statistics

I was reminded today of my favourite Monty Python sketch on statistics. I had a look for it on YouTube but sadly couldn’t find it.

The sketch was set on election night with a reporter who did a vox pop and asked a lady in the street how she was going to vote. She said “Conservative”. They then went back to the studio and extrapolated this to their swing-o-meter which predicted a 100% swing to the Conservatives and all seats in the House of Commons switching to that party.

It was very funny. But like the best comedy it was also very true. We’ve all been in situations in business were very small datasets are extrapolated.

Interpolation is of course much more accurate. But to interpolate my experience of statistics in business I can say that interpolation is something that is much less common that extrapolation.

Investment in the future

Although this is quite a heavy hitting title, many businesses say this but few actually believe it. Investment in the future sometimes is quite short term.

Building great brands takes a long time and investment sometimes takes years if not decades to recoup.

By building a balanced portfolio of brands that are at different lifecycles we can use the associated cash flows to invest in the future and for the long term. We are long term shareholders and our focus is to be measured in decades not quarters.

Marketing investment is frequently curtailed if immediate payback is not available (on your first order for example) but being able to take a longer term view allows you to really benefit from the long term value that customers see in a great product.

We see marketing as an investment – not a cost – and just like buying companies that require investment for growth – we want to ensure that marketing is measured as an investment. We are very analytical but don’t only listen to the numbers, we take multiple data points to measure our marketing investment.

A typical by-product of believing marketing is an investment is that we know that not every activity that we carry out will work, but we are relaxed as long as the majority work!

Deal & Dealmakers Finalist

We are delighted to announce that Move Fresh has been nominated for MBO/MBI of the Year at the Deal & Dealmakers Awards for our acquisition of Diet Chef.

Our E-Commerce Business Model

At Diet Chef we achieved a total return on equity of 8,999,900% over a three year period. If we had the same growth over the next three years we would be ten times larger than HSBC, the biggest company in the FTSE100.

Sadly, this is an outcome that will not happen. It’s just not possible to deploy the larger capital that we have today as efficiently as we did in the old days.

However it is worth looking at the business model we used as this is still very relevant.

First off, most of the funding for Diet Chef was not provided in the form of equity. Most of the funding actually came from suppliers who initially sold to us on 30 days while we received cash from customers within one day. This negative working capital requirement then scaled up as the business grew.

For our first TV campaign we requested that suppliers increase their terms to 60 days to fund it. They agreed to this and the result was that both our business and the suppliers benefited hugely.

This is quite a well worn path in retail, however in e-commerce there is less capital expenditure required to support growth (shops, etc) so the equity requirement is substantially reduced.

It is also a poor man’s version of Warren Buffett’s strategy of investing his insurance float, where the insurance premiums are invested over the years between receipt of the premiums and payment of the claims. Thus he makes a double profit: once on the insurance business and once on the investment of the premiums.

Back to Diet Chef, the other key was that we recruited customers so that they were profitable within 60 days. Generally, in direct businesses it will take a longer period for customers to become profitable which can result in a form of overtrading. This allowed us to grow the business to market capacity pretty quickly.

It’s not realistic in all e-commerce businesses to recruit profitably, particularly those in more mature markets. However these businesses should all have databases which will provide a profitable retention business which should then fund the loss making recruitment business.

There were of course a lot of non-financial reasons for the success of the business which I will cover later. But getting the business model right did allow us to scale the business up dramatically with no external equity funding.

Kevin and I have both spent a lot of time in Silicon Valley and one of the interesting things there is the focus on business models. But it’s something that is seldom discussed in Britain.

Art v. Move Fresh

I was recently speaking to someone into art investment and was comparing it with e-commerce.

According to WikiPedia King Francis I bought the Mona Lisa for 4,000 écus in 1519.

What is that in today’s money? A tricky question but someone’s had a good go of working it out here over at Yahoo Answers.

So let’s say the King paid about $270,000. We don’t currently have a value for the Mona Lisa and as far as I’m aware nobody has taken it to the Antiques Roadshow. Let’s just give it a pretty ridiculous valuation of $1 billion.

On that basis the Mona Lisa returned the King’s investment 3703 times over 497 years. Diet Chef returned our investment 899,999 times over 3 years. Therefore Diet Chef as an investment was 24,304% better than buying the Mona Lisa.

So if you are certain that you can identify the next Leonardo da Vinci then the lesson of history would seem to show that it is not a great financial investment.

© 2018 Move Fresh

Theme by Anders NorenUp ↑