Category: Investment (page 1 of 2)

Looking back at Amazon

As anyone that has ever met  us knows we love Amazon (and obsess about how to compete with them!)

What we love most about it is the clear strategy that delivers long-term shareholder value, it uses the cash flow from its businesses to invest in the future rather than returning this cash to shareholders.

It is by far one of the most misunderstood companies that we have come across

Luckily we bought Amazon in July 2014 at $316.65 per share. The share price this week passed $1,900, but I think its just the beginning so we are not sellers!

Like Mr Bezos we believe in the long term.

You can look at what we most admire about Amazon here

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.

Move Fresh update Q1 2018

When we bought back Diet Chef from Piper Private Equity (who are a great investor!) in 2015 we did this to leverage the massive investment we had made in systems and infrastructure (see Andrew’s post on this).

It took us a little longer to move Diet Chef into a couple of adjacent categories and optimise our marketing but we are very pleased with the 2017 financial results which have exceeded our expectations and generated around £1m of EBITDA.

Our growth strategy wasn’t simply focused on generating cash from Diet Chef but more to invest this cash flow in adjacent categories that our infrastructure can serve.

In 2017 we invested and launched Parsley Box (www.parsleybox.com) a reimagined elderly nutrition brand that is growing very strongly against a stagnant revenue comparison of our two larger competitors.

We have achieved this by letting the management team focus almost 100% of their time on customer recruitment and building the team. Move Fresh has provided the logistics and supply chain to allow the scaling of the marketing at a rate most startups would fail to keep operational efficiency at.

So as we get into 2018 we plan to invest in other adjacent areas and to reach the consumer in different channels, one of the reasons we appointed Henrik Pade to our board of directors.

We will both look at doing this organically and through acquisitions if we can find the right ones. Let us know if you think you can help us on this journey, either as an experienced startup founder or if your company would be interested in joining our journey – its going to be fun!

Book Review: The Black Swan

I finally got round to reading The Black Swan by Nassim Nicholas Taleb. This is continuing my habit of reading business books about a decade after everyone else.

A “Black Swan” is a highly improbable event that happens much more often than would be expected.

The first thing that struck me is that Taleb and I seem to have read almost exactly the same books over the last couple of decades. I felt that I was experiencing a Black Swan event myself as I turned page after page and came across book after book that had also influenced me.

There’s certainly plenty of things that I would agree with Taleb about. Regular readers of this blog will know that I’m not a fan of using statistical models to drive investing. To paraphrase Joseph Goebbels, “When I hear R-squared I reach for my revolver”. However it’s quite a leap to decide to ignore statistics completely.

I think Taleb goes way off base when he begins to suggest practical advice based on his philosophy. For example: his suggestion to hold bonds over equities. There is enormous historic evidence that equities outperform bonds. It’s also entirely false to view bonds as low risk: virtually all bonds are exposed to the risk of inflation and most bonds are exposed to default. Other than people who are about to experience a short term need for liquidity, bonds are highly unlikely to be a good investment*. It’s a classic case of heads I win (growth goes to equity holders and bonds may be called if they end up delivering good value) and tails you lose (business failure will result in wipeout of bondholders) proposition.

Equally, his suggestion to focus on good Black Swans (i.e. very high growth businesses) is a very poor recommendation for the average investor. It is true that Diet Chef returned 89,999,900% over three years but it’s hardly good advice to suggest most investors should look for these opportunities. It’s not reasonable to expect most investors to identify these start ups in advance. It is however a very high risk area that is likely to result in destruction of hard earned savings.

A much better way to look at investing is that it is multi modal. You need to understand the industry, accountancy, classical economics, behavioural economics, marketing, psychology, statistics, software and other areas too.

It’s massively flawed to adopt a single criteria and Taleb does an excellent job of demolishing the case for an entirely statistical based approach. But he goes too far by suggesting statistics are completely without value.

As is so often the case, truth lies in a middle ground. Statistics are very important but can’t be relied on exclusively.

I think a big problem business books have is that it’s very hard to write a book saying that investing is a huge grey area that is best tackled using dozens of techniques but not relying on anything exclusively and accepting that you will make mistakes. People want a simple certainty in their business books.

Classical statistics are a bit like my sat nav. It’s not 100% accurate so I wouldn’t want to rely on it completely but neither would I completely ignore it.

The Black Swan would have been a better book if Taleb had done his takedown of statistical models but then said that they are a useful datapoint but should not be relied on exclusively, rather than saying that they are completely useless.

* The £1.5 million issue of Move Fresh bonds are obviously the exception that proves the rule with their exceptional 7% yield. I bought some myself.

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.

Why I wouldn’t invest in meal kit companies

Over the last week or so Hello Fresh became a public company on the Frankfurt stock exchange. This follows Blue Apron listing on Nasdaq earlier in the summer. Both companies (along with Gousto in the UK) have raised many. many millions of investment, mainly pumped into customer recruitment.

I do agree that FMCG will move – more and more online – as consumer habits change from large central supermarket purchases to more local smaller retailers (such as Sainsbury’s Local or Tesco Metro) but  I don’t agree that any of these companies have yet grown into their current (and sagging) valuations.

Customer recruitment costs continue to increase with stiff competition and poor retention and margin statistics does not suggest that growth will continue.

There is a business here, but I think trying to force growth with more discounted offers and higher recruitment cost is only good for new customers – not for shareholders.

Some consolidation may well happen to remove duplication over geographies and headcount – but until then I will stick to shopping for myself either online or at my local store.

If you need to know more check this video out on marketing as a percentage of sales

What we all want

With the Harvey Weinstein allegations and recent news from Westminster sexism and discrimination is very much on the agenda.

As a child of the 1970’s I do feel very old when I look back on the media of my youth and see what was considered acceptable at that time.

Watching Benny Hill or the Carry On films today is quite hard: essentially the jokes are about sexual harassment or in some cases sexual assault on women. It’s very hard nowadays to see how that could possibly have been seen as funny.

The positive side is that it is great to see the progress we have made and how unacceptable the humour of the past is today. What would have been regarded as radical feminism is the 1970’s is today completely mainstream.

A couple of days ago my parents celebrated their 50th wedding anniversary and I said a few words about life in 1967 when they married. In the UK in 1967 it was illegal to consummate a male gay relationship and jobs were advertised with one salary for a female employee and a higher salary for a male employee doing the same job. Racial discrimination was also legal and widespread although 1967 saw the very first black policeman in the UK.

At Move Fresh we have a very diverse customer base, more female than male with many races and religions well represented. Kevin and I are both middle aged white men but we love having diverse customers and staff. We both have daughters which I think makes both of us think more about sexism.

All of us are looking for healthy, tasty food and drink delivered to our homes in a convenient way at a good price. We very much hope that everyone feels welcome at Move Fresh.

Welcoming Parsley Box

This month we launched Parsley Box,  a new innovative food service for seniors in the UK.

Having researched the sector for a number of years, we believe that current providers haven’t thought enough about the consumer in this segment and what they want.

We offer next working day delivery throughout the UK and a great range of meals that can be served in 3 minutes.

The ageing population in the UK and the focus on care at home has increased this market significantly.

Early indications are very positive with some great reviews from new customers and significant levels of reorder.

 

 

 

Why is Amazon so successful?

Amazon

At Movefresh we are obsessed by Amazon – they are a great role model for thinking long term (this isn’t that popular in the current economic environment)

I am still amazed that sophisticated investors can’t get their head around Amazon as a business and investment opportunity. Firstly, having been born around the dot com boom, it is certainly associated with the many businesses that failed within this cohort.

Secondly, investors really struggle to understand businesses that can continue to find ways to effectively invest their cashflow/profit. Many investors look at Amazon as a business that is “marginally” profitable, I see a business that can actively invest in the future and give bigger returns to shareholders who are willing be part of that.

I always recommend reading the Amazon letter to shareholders that have been published annually. The 2015 shareholder letter makes some interesting reading.

1. “The fastest company to reach $100 billion in annual sales”
2. AWS reached $10 billion pretty quickly too
3. “Customer obsession rather than Competitor obsession”
4. “Willingness to fail”
5. “Patience to think long term”

All of this is contained in the first paragraph – it is totally clear that that the business knows how to invest its cash flow.

They also included a copy of the letter from 1997 (reprinted from the 1997 Annual Report). They haven’t really changed their strategy since this original letter – something that I admire greatly.

Michael Fish

Michael Fish announced on TV on 15 October 1987 that there was no hurricane on the way. That evening the worst storm to hit South East England caused record damage and killed 19 people.

Andy Haldane of the Bank of England recently said that the failure to predict the 2008-09 financial crash was a similar moment for economists and has resulted in economics forecasting being “in crisis”.

It is true that the record for prediction of economists, financial analysts and accountants is very poor. When we look back over the last half century it is indeed true that all three groups failed to predict the big crashes in US public companies.

But conversely they also failed to identify the ten days over the last fifty years which accounted for roughly half the return of the same US public companies.

In other words, out of 18,250 trading days just 10 days accounted for half of the return. So surely it was a failure of economists, financial analysts and accountants that they did not identify these days in advance? Or identify the days in 2008-09 that resulted in dramatic reductions in market value?

I would disagree with Andy Haldane on this. I don’t think it is reasonable to expect economists to identify in advance the 0.05% of days in which markets move dramatically.

My favourite book on this subject is A Treatise on Probability by John Maynard Keynes who wrote in Chapter 3:

Is our expectation of rain, when we start out for a walk, always more likely than not, or less likely than not, or as likely as not? I am prepared to argue that on some occasions none of these alternatives hold, and that it will be an arbitrary matter to decide for or against the umbrella. If the barometer is high, but the clouds are black, it is not always rational that one should prevail over the other in our minds, or even that we should balance them, though it will be rational to allow caprice to determine us and to waste no time on the debate.

Keynes understood that some probabilities are measurable. He gave an example in the book of pulling red and black balls out an urn of which half are red and half are black which is clearly a system that can be easily measured but many probabilities are inherently unmeasurable such as his example of the requirement for an umbrella or his discussion of an ern where the the proportions of red and black balls are unknown.

However although there are many probabilities that are not measurable but are comparable. The example Keynes gave was the possibility of surviving a walk home in a thunderstorm: this is not measurable but it is clearly less safe and therefore comparable to walking home during good weather.

So to get back to our trio of economists, financial analysts and accountants. It is unreasonable to expect any of them to predict a dramatic period of recession or growth however it is reasonable to expect them to suggest that a situation is more or less comparable i.e. more or less likely to result in a period of recession or growth.

I do not think that it is a failure of economics to predict the ten best trading days of the last half century. I do think that economics is useful in producing data that makes the best trading days comparable with poor trading days or the best investment opportunities comparable with the worst while accepting that neither are measurable.

So in my investments I accept that I cannot make predictions as to when it will rain. But I can see clouds in the sky as Micheal Fish did successfully over his career at the Met Office from 1962 to 2004.

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