Gyngell’s pay packet is an insult to NEC shareholders

On the topic of outrageous remuneration packages, the Australian Financial Review has reported today that Nine Entertainment Company Holdings (NEC) chief executive, David Gyngell’s 2014 remuneration is $19.6 million.

According to the Australian Financial Review, Gyngell was quoted at the time of the NEC float as saying: “If I get that money – and I’m not saying it’s not a lot of money – I think everyone else will be doing pretty well.”

“Everybody else” are the poor shareholders of NEC, and are they “doing pretty well”? Of course not, how can they be when the share price of NEC is below the float price? If you are an NEC shareholder would you rather be in your place or Gyngell’s place? Stupid question, isn’t it?

I don’t know about you, but I’m sick of these kinds of remuneration deals, where hired hands take excessive amounts of shareholders’ money and then deliver mediocre to awful results. It just has to stop.

Gyngell is running a relatively small and poorly performing Australian television network, not BHP or Newscorp or Microsoft or General Electric. As such, his pay is out of all proportion to what reasonable minded people would think appropriate.

You will recall that Gyngell publically disgraced himself earlier this year when he was involved in a street brawl with James Packer – yes, these are our business leaders folks! Apparently punch-ups on the street are now acceptable behaviour for chief executives of publically listed corporations in Australia! Gyngell didn’t get sacked, so I can only conclude that this behaviour was acceptable to the Board of NEC.

A friend of my father always use to say that Australia is a country that rewards mediocrity in politics and business. I’ve thought long and hard about that statement since I first heard it as a child. Unfortunately, nothing I’ve witnessed subsequently has allowed me to refute that statement. Australia has mediocrity at all levels of government and business and to a greater extent now than ever before. Mediocrity is one thing, but to pay the sums of money we do for it is a travesty of monumental proportions.

Caledonia’s Will Vicars very pricey real estate purchase

Just a short post on some articles that I have been reading recently on Caledonia Investments Chief Investment Officer’s purchase of some incredibly pricey real estate.

It has been widely reported in the media that Will Vicars, the Chief Investment Officer of Caledonia Investments spent $21 million (last year) on two adjoining apartments in Sydney (one costing $10.9m and the other $10.1m). Apparently he was planning to join the two apartments together to form one residence.

Now, unless Will plans to donate those apartments to charity, or the media reports are incorrect, the purchase raises some interesting questions:

1.    What does the Chief Investment Officer of Caledonia get paid? (Perhaps way too much, judging by this lavish expenditure?).

2.    What sort of person would spend $21m on a residence? (Certainly not a Buffett disciple, expenditure on that scale is much more closely associated with those who enjoy ego-driven displays of wealth).

3.    Did he get value for money? (I doubt it).

Whatever the answers to these questions, it’s not a good look for Caledonia (as a firm that is open to investments from the public). It informs an opinion in my mind regarding Caledonia’s Chief Investment Officer that is far more revelatory than any public relations material ever could be.

It’s even worse when you consider that Caledonia has (supposedly) always worshipped at the altar of Warren Buffett, a man who despite being vastly wealthier than Mr Vicars, would never dream of living in such ostentatious surroundings.

If I was a Caledonia investor (which I’m not and never will be), I would be scratching my head about this one. That “simple” purchase seems to invalidate a lot of what Caledonia supposedly stands for. But then again, often what people do in their private lives is far more informative than what they do in public.

Food for thought.

The Medibank Private IPO

Just a quick post for those of you considering applying for shares in the Medibank Private IPO.

The float price looks reasonable, but the Government certainly isn’t giving it away, especially considering the backdrop of an anaemic equity market in Australia. And no, it won’t be anything like the gold mine that was the Commonwealth Bank, CSL, or the first tranche of Telstra, those days are well and truly gone.

Medibank is a very solid business that is growing, it currently has no debt, good returns on equity, requires limited capital investment and has healthy cash flows. It does have low profit margins and this is something that can potentially be improved as a publically listed company.

The announced price range for the float is $1.55 to $2.00 per share and you will have to pay the funds across prior to knowing what the final price will be (i.e. you will have to apply for a certain dollar amount of shares, not knowing how many shares those dollars will ultimately represent). This is certainly a negative aspect of this float. There is a fairly significant difference between paying $1.55 or $2.00. This situation could have (and should have) been avoided by holding the institutional book build prior to the opening of the retail offer, but of course, that would have been in the interests of the retail applicants not the vendor.

Hopefully any potential scale backs won’t be too severe (with 2.7 billion shares on offer, there should be enough to go around, but you never know). Anyone who remembers the privatisation of the then NSW TAB (around 1998) will recall the fiasco of that offer, where retail applicants were scaled back to absolutely trivial numbers of shares. That company performed ok, but was not worthy of the level of over-subscription that it experienced on floating. Medibank is also unlikely to be worthy of heavy over-subscriptions and this will be especially so if the price is closer to $2 than $1.55.

I believe that anybody who thinks they will be able to make a quick profit shortly after the float will be disappointed. However, if you are looking for a longer term investment with a bit of capital growth and a reasonably attractive dividend yield, I think you will probably achieve your objective.

Personally, I will probably apply for shares. I don’t expect spectacular things from Medibank, just a return that should comfortably beat the fixed interest rates I currently earn from cash holdings.

As always, the above does not constitute investment advice.

Australian free to air TV takes a turn for the worse

Anyone investing in free to air television in Australia today is asking for trouble. Apart from the Seven Network, the sector has been a disaster for investors. This is fundamentally because the people getting paid insane amounts to run these networks are not in touch with the subtle changes that are taking place in society.

At its core, free to air TV is no different from a whole host of industries that have been adversely impacted by technology – newspapers, book stores, stockbroking, the music industry, movie rentals etc.

 

The Australian free to air industry introduced digital television (with far more channels) about six years ago and promoted this heavily as an alternative to pay television. The idea seemed reasonable at the time, but what has been delivered?

 

The digital channels today largely consist of very cheap (and often tasteless) programming. Much of this is sourced from the UK, a country that today makes some truly reprehensible television. What is it with the UK these days? Is their television just a sad reflection of a society that is increasingly losing its way? I don’t know, but many of these programs are so bad that they are basically unwatchable. Even if you had nothing to do and were bored out of your mind, you wouldn’t watch these shows.

Most of the shows I’m talking about would have had no chance of getting on air in Australia prior to the introduction of digital television. They would have been rightly regarded as merde (to borrow a French term). But in the rush for “content”, network management has taken the view that merde will do.

The Nine and Ten networks do not even have enough quality programming for their main channel, let alone digital channels. And this is why both networks are in a financially parlous state. It is also why you will see the same shows repeated ad nauseum (and this is supposed to be about more choice!).

Nine’s fall from grace has been spectacular. A once leading network with plenty of quality programming is now a basket case because of mismanagement on a grand scale and an inability to discern viewing trends. If Nine’s management is worth what they are paid, I’m a monkey’s uncle.

Ten had a brief period in the mid-1990s to early 2000s where it employed a successful strategy of targeting a younger demographic with very popular shows such as Seinfeld (one my favourite shows ever), The Simpsons, Australian Idol and The Panel. However, when these shows either ended or people simply got sick of them, Ten had nothing to replace them with. And so began the slide into irrelevance and financial turmoil.

Then we have the ABC, which runs a national news network based on public service principles from the 1970s. Take the imaginatively titled The Business show on 24 with Ticky Fullarton. This show is not screened on Fridays – why? Does no business news happen on Fridays? The show also has a summer break for over two months. How can this be a serious news network? 

Counter-intuitive as it may seem, the proliferation of very low quality digital channels is actually an enormous boost for alternative platforms (the internet and pay television). This is because it insults the intelligence of many viewers and also naively assumes that quantity is better than quality (which is a patently false assumption).

Many friends and family members tell me that they don’t watch any free to air television at all. Not one minute of it. If so many in my immediate circle don’t watch it, there must be many more in that category too.

 

Advertising on television is a very “hit and miss” affair, 99.9% of people seeing your advertisement will not go out and buy the product. I don’t think I have ever bought a product or service that I saw advertised on television simply because I saw it advertised on television.

How many people actually watch ads these days anyway? As soon as an ad break occurs, most people change the channel, go and do something else or watch recorded programs where they can screen out advertisements. Where do you go when you want to find a product or service? The internet. Which medium targets advertising specifically to your interests? The internet.

Television’s day of reckoning is coming. It will not completely avoid the fate of newspapers, recorded music and book stores.

Personally, I have traded Seven Group Holdings on many occasions (I’ve never made a loss trading it), but I wouldn’t touch Nine or Ten with a barge pole, unless I decide to short them at some stage.

The Copycat World of Hedge Funds

In the world of bookmaking, there always has to be one bookmaking firm that comes out first with the odds on a particular event. Once the odds are visible to other bookmakers, they will invariably copy them, safe in the knowledge that a fair degree of skill went into the formulation of the odds by those leading the field. In fact, taken to its extreme, you don’t actually need any skills as a bookmaker if you are able to quickly copy and adjust your odds based on what your skilled competitors are doing.

Another analogy, when I was in high school, I had two classmates (in mathematics) named Jeff and Peter (not their real names). They were both friends. Jeff was very smart (he went on to become a doctor). Paul wasn’t so bright. For about half a year, Jeff allowed Peter to discretely copy his answers in tests. Jeff got As, Peter got Bs. The teacher eventually woke up to what was going on and separated Jeff and Peter. After this, Jeff continued to get As and Peter got Ds.

Now the world of hedge fund investing is exactly the same as the bookmaking scenario and the story of Jeff and Peter. Of the thousands of funds out there, very few are truly skilled. This is why there is a huge industry in “copycat” funds.

The general partner of a copycat fund has no real skill as an investor, but like the fast moving (but unskilled) copycat bookmaker, he (it’s almost always a he), can scour SEC filings to determine what his much more skilled competitors are doing.* Once he sees that the highly skilled Baupost Group (for example) has just established a major long position in BP Plc, he can simply copy it. He might have read that the famed Carl Icahn has been accumulating Apple stock and he may join in too. Or he may have perused Greenlight Capital’s recent letter and read about its position in Micron Technology and decided to copy it.

There is nothing wrong with you as a private investor copying the great investors of this world. But if you are managing money on behalf of others and taking a cut of the profits and all you do is copy, then you are running a sham organisation.

As Nassim Taleb has pointed out, in most professions, if someone is no good at it, it will be obvious. Imagine an incompetent chef, or dentist, or plumber. Their incompetence will be quickly seen. However, this is not the case in money management. The incompetence will eventually become apparent, but it may take years, and in that time the charlatanic fund manager can make himself a multi-millionaire**.

The skilled hedge fund managers actually love the copycats. They love them because their buying pushes prices higher and this means that their disclosed long positions are getting a free boost. (This is why some successful hedge fund managers will kindly tell you in their investor letters exactly what they are purchasing [and why] and what price they purchased at and then make sure the letter becomes available online).

I was more than a little amused when I noticed some time ago that an Australian based hedge fund had suddenly disclosed a position in an obscure US company. I knew immediately that they had simply copied it from a very prominent US hedge fund. They could not have possibly known about this company prior to the US fund disclosing its stake (and helpfully providing its investment thesis).

Of course the problems with copying are that you will almost always buy at a worse price than the fund you are copying, further, you don’t know what the fund is doing between SEC filings and you also don’t have any knowledge of short positions (i.e. is the long position a hedge for an undisclosed short position?). Also, if you are not very selective in whom you copy, you can potentially be suckered into copying an unskilled manager – the ultimate sin.

Personally, I don’t often copy others (although I have done it at times, with mixed results). It can be fraught with danger and it’s also very hard to deal with the inevitable losses that come with copying when the idea was never yours to begin with! I have found time and time again that the best ideas are always my own, sounds arrogant, but it’s true.

I basically think about my own investing as a private hedge fund, in the sense that I’m the only investor. I can pretty much do most (but obviously not all) of what a major hedge fund located in New York, Greenwich (Connecticut) or London could do, but I do it all from the peace and quiet of my home office and have no one to answer to.

The take home message is, don’t waste your money investing with copycats. Why invest with Peter when you can go with Jeff?

 

*          I refer to SEC filings as the US is home to almost all of the best investors. I wouldn’t waste time trying to copy any of our high profile Australian fund managers.

**         Thanks to Nassim Taleb for the word “charlatanic”. I’ve not seen it used anywhere outside of his book – The Black Swan.