The price of Guinness Peat Group shares makes no sense

Sir Ron Brierley and his team at investment company Guinness Peat Group (GPG) are some of the smartest investors that I have ever come across, and this makes the current share price for GPG somewhat puzzling.

For those who are unaware, GPG is an investment company domiciled in the UK but also listed in Australia and New Zealand. GPG’s chairman is Sir Ron Brierley (a New Zealander). Brierley is a legendary character to many in New Zealand and Australia due to his exploits over the past five decades (but especially in the 1980s as a corporate raider).

Brierley has always written very candidly in GPG reports – he gives his shareholders a clear picture of GPG and is also quick to admit to mistakes when they occur. Brierley in many ways is a complete contrast to the many charlatans (and young inexperienced money managers) who have appeared on the investment scene in recent years. Brierley and his team have vast investment experience, have made many millions and retain a significant proportion of their own net worth in GPG.

Brierley is an old fashioned value investor. GPG takes shareholdings in companies that it perceives are under-valued, badly managed or “better off dead than alive” (i.e. companies that should be liquidated to release value to shareholders). Sometimes a company qualifies on all three fronts. (Incidentally, it’s not lost on me that GPG itself now fits the exact profile that GPG looks for in other companies, i.e. a very under-valued situation).

GPG directors are well known for showing up at annual meetings of companies that they have interests in (and believe are under-performing) and giving the directors of those companies a very hard time.

GPG (under Brierley) began in 1990 with approximately ₤30 million in equity and as at

31 December 2008 it had ₤720 million (compared with ₤951 million one year earlier).

Every year, GPG issues one bonus share (for every 10 shares held). 2009 will be the 16^th year in succession that GPG has done this. What this means is that if a shareholder started in 1994 with 1,000 shares, they will have (after the 2009 bonus issue), 4,595 shares. This is not well understood by many people who simply look at the share price over time but don’t take into account the large number of bonus shares issued over the years.

In 1995 you could have purchased GPG shares at prices ranging from A$0.446 to $A0.71 per share. Let’s say 10,000 shares were purchased in 1995 at A$0.58 (about the mid point of the selling range for that year), this would have cost $5,800. Once the 2009 bonus issue is made, that 1995 shareholder will have 41,770 shares, (assuming that the 1995 bonus issue was received). Those shares would be worth $22,556 as at 13 March 2009 – even after the current crisis in equities markets. That’s approximately 10.2 percent compound per annum (excluding dividends). For comparison, the All Ordinaries index (Australia) has returned approximately 4.0 percent compound per annum over the same period (31st March 1995 to 13^th March 2009).

It should also be noted that if the increase in book value of GPG (as opposed to share price) was used to calculate the return, GPG’s compound return per annum would be much higher than 10.2 percent. Companies like Berkshire Hathaway have always used the increase in book value not share price when measuring their returns.

GPG pays a standard one pence per share dividend every year. Because of the bonus issue, the actual dividend paid grows at 10% every year. Once again, a very simple concept but not very well understood by people.

Apart from the thread manufacturer Coats (which is wholly owned by GPG), the rest of the equity in the company largely comprises of cash and marketable securities. GPG released a report showing that the book value of each share was A$1.12 on 22 December 2008, versus a 13^th March 2009 share price of A$0.54.

Even if one was to play devil’s advocate and value Coats at half of what it’s on the GPG books at (an improbably low valuation) and then factor in a 10% decline in the value of the equity portfolio since 31 December 2008, a valuation of $A0.85 would still be obtained. Comfortably more than prices of A$0.40 to A$0.55 at which GPG has been recently trading.

Have mistakes been made by GPG? Yes they have.

Coats has been much more time consuming and difficult to restructure than was initially anticipated. In addition, GPG should have pulled the plug on Capral Aluminium a few years ago instead of continuing to support a company that is simply not profitable anymore. The entry into CSR was ill-timed and the attempt to build a major shareholding in Tattersalls has resulted in significant loss (although this was primarily due to the incredibly inequitable policies of the Victorian Labor Government more than anything else).

On the positive side there have also been many exceedingly good investments made by GPG (too numerous to mention). In order to grow equity by 24 times in 18 years, great skill is obviously needed.

Sir Ron Brierley had previously advised of his intention to stand down as chairman of GPG in 2010, however, given the current state of affairs in financial markets, it wouldn’t surprise me to see him extend his chairmanship for a little longer. GPG will want to wait for some level of recovery in markets before it eventually liquidates its investments and this is probably some years off.

Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).

Berkshire Hathaway moves to limit free speech at annual meeting

Warren Buffett’s 2008 letter to shareholders was another classic piece of writing by the best investor we have ever seen. However, I was very surprised when I got to this part of the letter (the text in bold is my emphasis):

This year we will be making important changes in how we handle the meeting’s question periods. In recent years, we have received only a handful of questions directly related to Berkshire and its operations. Last year there were practically none. So we need to steer the discussion back to Berkshire’s businesses.

In our first change, several financial journalists from organizations representing newspapers,

magazines and television will participate in the question-and-answer period, asking Charlie and me questions that shareholders have submitted by e-mail. The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be emailed at cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the

journalists will pick some tough ones and that’s the way we like it.

In our second change, we will have a drawing at 8:15 at each microphone for those shareholders hoping to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with those from the winning shareholders. At least half the questions – those selected by the panel from your submissions – are therefore certain to be Berkshire-related. We will meanwhile continue to get some good – and perhaps entertaining – questions from the audience as well.

Personally I think it’s outrageous that shareholders are being asked to submit questions to journalists (at least two of whom are friends of Buffett) who will then decide if it’s worthy enough to ask at the meeting. Who are the owners of the company?

It’s hard to envisage that any other publicly listed company would avoid a shareholder backlash over such a proposal.

If you own some “A” shares, you have made a significant investment in Berkshire and you are now told that a journalist will decide whether your question is interesting and important. That doesn’t seem right to me.

This proposal coming now is all the more unfortunate given that many shareholders will want to ask questions regarding the financial crisis as well as Berkshire’s recent share purchasing activities and they will now have a much diminished chance of doing so.

I know that in previous meetings there were questions being asked which had nothing to do with Berkshire Hathaway. I know Buffett doesn’t want to answer these types of questions and that’s ok, just say “no comment”. But please don’t limit your shareholders’ ability to ask questions – they should be allowed to ask whatever questions they like (free from journalistic interference).

There will always be questions that are not related to the company’s business, anyone who has been to these meetings knows that.

I was once in a very long meeting where one shareholder asked perhaps a dozen questions of Rupert Murdoch. The shareholder was actually a journalist with a very small holding in the company and was just using the event as an opportunity to ask lots of provocative questions in order to get a reaction for an online article that he was writing. To his credit, Mr. Murdoch remained very good natured and attempted to answer the questions as best he could. I never thought I would say this, but on that front, maybe Warren could take a leaf out of Rupert Murdoch’s book.

As an aside, can you imagine the tough questions that Carol Loomis and Becky Quick are going to choose to ask? Some of the interviews that Becky Quick has conducted with Buffett leave a lot to be desired. The very fact that Buffett has agreed to so many interviews with her clearly shows that he is very comfortable that she will not ask any “tough” questions.

A better way to handle questions, given the huge number of people attending the Berkshire meeting, would be to give all shareholders the opportunity to write down one question (well in advance of the meeting) which could then be aggregated and from which a certain number of questions could be chosen at random by an independent person. Those questions could then be asked by the journalists. At least this way, the journalists’ opinions on the worthiness of questions are not required and a random draw gives everyone a chance that their question may be asked – no matter what that question is.

The other problem of course with Berkshire’s proposed method is that if the journalists receive 10,000 e-mails they are highly unlikely to read all of them! Would you attempt to read thousands of e-mails? These people actually have other jobs to do. Many questions will therefore have absolutely no chance of being asked regardless of whether they are “interesting and important” or not.

You can also put money on the fact that many non shareholders will submit questions by e-mail – are they going to check every e-mail address back to a shareholder list? Is this even possible? What if I know the names of various Berkshire shareholders (which I do), I could create bogus e-mail addresses and submit questions on their behalf. I have no intention of doing this, but I simply ask the question: who knows who is who?

On another matter, I don’t see why Berkshire Hathaway shouldn’t make available a pod (or vod) cast of part of its annual meeting (maybe have a one hour pod cast of the highlights).

Many people can’t get to Omaha, Nebraska and many others who are not shareholders follow Berkshire closely. Obviously, many companies now use pod and vod casts as an effective means of communication with shareholders (and other interested parties) that cannot make it to a meeting.

There always seems to be this silly level of secrecy at Berkshire meetings. No video, no recording devices, despite the fact that Buffett and Munger never provide any information that could possibly be detrimental to Berkshire (if reported). Absolutely nothing would be given away through a pod cast. Even if they were to make comments of a sensitive nature (as I said, they never do), those comments could simply be taken out of the pod cast.

Given that there are two very prominent IT people on the Berkshire Hathaway board of directors, there doesn’t seem to be any legitimate excuse for not making better use of technology at Berkshire.

There are always those people who attempt to provide a transcript of the meeting (on their web sites) and they furiously write down as much as they can (probably missing half of what’s said, actually misquoting Buffett or Munger in parts and detracting from their own enjoyment of the meeting). So come on Warren, let’s give those people a break and let’s get Berkshire into the 21^st century.

Jim Rogers and his Hot Commodities

To use a Charlie Munger analogy, Jim Rogers reminds me of “a man with a hammer”. To a man with a hammer, every problem looks like a nail. Jim has a hammer (his own commodities index) and every commodity looks to him like a nail.

Jim Rogers founded the Quantum Fund (an early hedge fund) with George Soros in the early 1970s. The Quantum Fund increased in value by approximately 4,200% during the 1970s.

The reader should note that the only way one can get a 4,200% appreciation in anything over such a short period of time is by using significant leverage and then making some very good calls. Leverage is never mentioned when the returns of the Quantum Fund are recited.

As a prelude to the article below have a look at the following two charts. The first chart shows the compound return per annum of oil, gold and the S&P 500 (excluding dividends) as well as showing the US inflation rate (CPI) in each decade from the 1950s to 2008.

The second chart shows the cumulative value of $1,000 invested at the beginning of 1950 in oil, gold and the S&P 500 (excluding dividends). Also shown is the cumulative increase in $1,000 needed to keep pace with US inflation (CPI). The value of that $1,000 is at the end of each decade (31 December 2008 for the current decade).

I won’t comment on the charts, they speak for themselves (particularly the second chart).

Some quotes from Jim Rogers (in italics) and my comments below:

I think agricultural commodities are probably going to do better than others for the moment because many agricultural prices are still very, very low on a historical basis. Sugar is still 80% below its all time high, just to give you an idea. Cotton is 60% below its all time historical high. You know, there are not many things that are 80% below where they were 35 years ago. Sugar futures are one of them.

Why are sugar futures 80% below where they were 35 years ago? Simple answer: There is plenty of sugar being produced. Absent supply disruptions (due to weather events or diversion to ethanol production), there is no logical reason why sugar futures will rally to historic highs. The fact that sugar futures are 80% below their high of 35 years ago clearly demonstrates what a poor investment sugar has been over time.

Always in the past, when people have printed huge amounts of money or spent money they didn't have, it has led to higher inflation and higher prices. In my view, that's certainly going to happen again this time. Oil prices are down at the moment, but that's temporary. And you're going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what's happening.

If the fundamentals of commodities are enhanced by what's happening, why have they all fallen by similar (or greater) percentages to that of the world’s stock markets? (I’m excluding some precious metals). Answer: Because you simply cannot have a global recession and at the same time have significant demand for commodities. That makes sense doesn’t it? Sure, people start to view precious metals as a safe haven during a crisis, but they’re sure not viewing zinc or nickel as a safe haven are they? Demand for base metals is dependent on the health of the economy and the global economy has a bad case of the flu.

Agriculture is the best place – one of the few places - where I would put money in the investment markets right now. I’d buy agriculture. I’d buy the renminbi, the Swiss franc, the Japanese yen, but beyond that, there’s not much I see that I would be buying.

Everybody should become a farmer. Farming is going to be one of the greatest industries of our time for the next 20 to 30 years. It's going to be the 29-year-old farmers who have the Lamborghinis.

I’ve always said that anything that relies totally upon weather conditions and keeping diseases and insects at bay is risky (just ask a farmer if you want proof). Agriculture is extremely important but lots of people have suffered enormously trying to make a decent living out of it. If agriculture is such a wealth creator, why do so many farmers periodically need assistance from the government to make ends meet?

I still own my US dollars. I plan to get out of the US dollar some time this year. It seems that the short covering rally, it is an artificial rally, people are forced to cover their shorts in the US dollar and there were huge short positions.

The United States is in serious trouble, the people in Washington do not have a clue of what is going on. In two years this has been brewing and for two years they have been making mistakes. So the US is going to have its worst economic time since the 1930`s.

It's pretty embarrassing for President Obama, who doesn't seem to have a clue what's going on—which would make sense from his background.

All the US had to do was put Jim in charge – he would have fixed everything! He managed a hedge fund so he could manage the whole US economy!

Jim has actually written the US off. It’s all about China for him. Jim: Don’t write the US off just yet. Most of the technological innovations of the 20^th century came out of the US – there is no reason why that will not continue. Japan, South Korea and China are good at taking US technology/products and improving upon them as well as producing them very efficiently. But remember, someone had to invent those products to begin with and those people were Americans. It’s technological progress that creates enormous wealth – far greater wealth than cultivating corn or sugar.

And finally, Jim also thinks that anyone can profitably invest in commodities (the words are emblazoned on the front cover of his book Hot Commodities). I say nonsense.

If you have Jim’s timing skills (Jim says he isn’t a timer, but he is) you could make a fortune in anything, but saying that the average person in the street can become a successful commodities investor is just not true.

Regardless of what Jim says, trading commodities futures is very risky. The average person who wants to try their hand at trading commodities will be competing against people who do it for a living. Suffice to say, these professionals are far more skilled at it than some “average Joe” reading one of Jim’s books.

However, I will agree with Jim that index investing is the sensible way to go if you really do want to get involved with commodities (or anything else for that matter).