lördag 29 november 2014

Turn your failure into fortune in 3 simple bullets (Murphy's law says you'll have to - or perish)

Have you torn a muscle? Then you know it hurts.

Tearing a hamstring today
Picture taken hundreds of a second after the injury,
weight still in the air and
hands flying back to the location of the injury

Simple as that; it hurts (a lot). Yup, 10/10 on a scale. 95/100 on another (you always have to save room on the scale).

Worst of all, however is the sense of dread regarding the future. Hopelessness. A black hole about to swallow you. Time lost. Replaced with pain and boredom.

Have you gone through major surgery and rehab? I can tell you it sucks. I've done both my ACLs - both times using the hamstring tendon from the same leg as the ACL injury to reconstruct the ACL. The rehab is boring and tedious and there are mini-injuries and steps backward every now and then.

Today, I tore my left hamstring (I used half as reconstructive tissue for my left ACL 18 months ago and perhaps it wasn't fully healed yet). From being 1 second away from a given new personal best in deadlift, I was on the floor feeling I was robbed of my future.

Then, just seconds later, I thought:

"So what? It will take exactly the time it needs. Actually, I will get time to fine-tune my technique, and I can focus on building mass instead of strength (a priority I have wavered about)".

I even reckoned I could hit higher highs sooner, thanks to starting all over again with better form and coming from below, which is good when you want to break plateaus in lifting. In addition, I thought of how lucky I was to first attempt a slightly lighter new record (and succeeded) before going for this one. That means I can think back with joy to this day.

As soon as I got the chance I googled the best rehab program for hamstring injuries I could find. I'll keep looking, but this one resembles what the doctors ordered previously after my two ACL/hamstring operations.

If I didn't think this way, I might give up on lifting weights. At least rehab would take longer and probably never get me back to 100%.

So, my three-point list for dealing with failure:

1) Embrace your automatic inner optimism - You have it, just listen for it instead of digging your own grave
2) Frame the incident in a positive manner. The brain is extremely capable of making you feel lucky with just a little help from you. So, put whatever happened into perspective, and consider how truly lucky you are that only experienced this little thing in your otherwise wonderful life.
3) Turn the failure to fortune; use the opportunity for getting even better, or acquiring other skills

I promise you I have set a new 1RM in deadlift within 12 months.

torsdag 27 november 2014

5 foods that enhance muscle growth, cognition, longevity and guarantees you'll never get a cold again - Are You Missing Out On Winter's Miracle Food?

Never miss school, work or the gym again

Have you been ill yet this season, a benign sniffle perhaps or the Cold From Hell or even this year's influenza?

Ho ho ho! I guess you were one of the naughty ones then


Well, the good news is you are not alone: A typical westerner catches a cold or the influenza once every two years. On the other hand, a typical westerner is a couch-dwelling, overweight junk-food-ivore who couldn't care less about time to recovery, brain health or longevity.

Just reading this proves you are not average.

Even you and I can catch a cold, despite working out and eating a varied diet. I had a cold in 2006 that made me miss workouts for almost an entire week. But since then, at worst I've had a "raw" feeling in the throat and a two day stint associated with all kinds of naughtiness in Costa Rica.

As I wrote back in August, there are ways to defend yourself against the season's germs, simply using the season's (Swedish) food. Okay, I admit I can't guarantee a cold free life, that was a white lie, but to me it feels that way. I actually deliberately play chicken with the influenza; throughout October and November this year, I have regularly walked around barefoot, wearing just shorts and a t-shirt. Yes, in Sweden.

The following foods are everywhere in Sweden in the winter, and should be in other countries on the northern hemisphere too.

The top 5 Swedish winter foods that will keep you on top
  1. Ginger - anti inflammatory, increased bloodflow, good for the heart (prevents stroke, lowers blood pressure), brain (migraine, nausea), stomach (less gas, no diarrhea), joints. All of the above explains why you become a kind person from eating gingerbread (as the Swedish saying goes).
  2. Cinnamon - regulates blood sugar and insulin sensitivity (which may be needed since most people only consumes it in cinnamon buns. I add moderate amounts in my porridge and protein drinks but no more than a table spoon a day. Don't overdo it says the liver!)
  3. Saffron - contains crocin, which protects nerve cells and prevents ALS, Huntington's, MS and Parkinson's. Your choice is saffron buns or Parkinson's disease... Hmmm, difficult

  1. Fat fish (salmon and herring) - contains Omega 3, 200g mackerel, salmon or herring per day reduces inflammation, speeds recovery, enhances cognition, prevents depression, increases insulin sensitivity, protects agains diabetes, fatty liver, high colesterol, reduces the stress hormone cortisol, lowers the heart rate and increases protein synthesis (more muscle!)
  2. Oranges - vitamin-C is essential at all times, but particularly during the physical and mental stress that the holidays bring. Good for immune system, skin, skeleton, blood vessels, connective tissues, used in burning of fat, reduces DOMS. There is some evidence vitamin-C mitigates hangovers as well. Do NOT substitute with orange juice. Eat whole oranges or lemons. Raw; never cooked in any way.

Bonus list: 5 additional nutritional miracles
  1. Vitamin D - anti inflammatory and good for more or less everything, and almost everybody north of Italy/Los Angeles is getting too little. I eat 4000 IE/IU = 100ug per day. Spending a summer's day at the beach maxes the body's vitamin-D production at around 20 000 IE. Swedish milk contains added vitamin-D but even a full liter only adds up to 180 IE which is way below the minimum requirement. Vitamin D has good indications for skeletal density, cancer, asthma, eczema, allergies, low testosterone, strength, mobility, blood pressure, diabetes, epilepsia, heart disease, MS, colds
  2. Honey in your green tea - anti-inflamatory, i.e., good for everything -and it tastes good
  3. Garlic in your sallads - anti-inflammatory, good and tasty
  4. Chili anywhere you can - vitamin c, capsaicin for joint pain, cancer, blood sugar
  5. Protectis - Lactobacillus Reuteri: promotes healthy bacteria in the gut, throat and mouth which strengthens the immune system. It was the combination of vitamin D, Omega3 and Lactobacillus that made colds nothing but a sad memory for me.

Stay strong and healthy. Stay classy

A picture of health at 42-43

måndag 24 november 2014

7 reasons to deal aggressively with TRILLIONS of photos and other useless memorabilia

1 000 000 000 000 photos a year - for what?

Around a trillion photos are estimated to be taken in 2014. If you are anything like me you are responsible for several thousand of those.

Not only are billions of superfluous and unnecessary pictures taken every day, they are stored and backed up as well. Most should never have existed at all, let alone keep hogging digital space.

I use Memopal (and Google) for backing up important files, including pictures, but I'm constantly close to capacity due to pictures I will most likely never look at. Not only do they eat paid-for space, they also make it difficult to locate the actually important items.

Are you wasting space on vinyl records? CDs? VHS cassettes?!

Digital pictures are one thing, but what about physical products? The average living space per person in the US has doubled in 40 years. Meanwhile, the storage business has exploded, because everybody is hanging on to so much more useless stuff.

Should you hang on to memorabilia? What is it really worth if you never look at it but simply keep "just in case"? Hint: nothing.

I am acutely aware of these issues now that I'm cleaning out the office for good. Today, e.g., I collected two books on valuation and macroeconomics, as well as took stock of the fund's prize cabinet.

The picture below shows me posing with a few of the hedge fund awards. Right now, I definitely want to keep those. They represent the pinnacle of my career - and I find them quite beautiful as well. They can definitely hold their own in a book case.

Time to look forward instead of backward?

But, where do you draw the line for what to keep? Your notebooks from school? Your drawings from kindergarten, like this one? (I hadn't yet figured out how to draw a person realistically - I thought I had to start with the skeleton but didn't know how to hide it when I proceeded with the skin and clothes)

I'm glad I've kept that one, but I'm also pleased I've thrown away many more, that I now don't miss at all.

Throw things away everyday

I think you should try to get rid of something everyday. Everytime you think of going shopping, do the opposite and rummage through your things until you find something to give or throw away. Alternatively, a tip I read about the other day, put what you haven't used for a year in boxes and mark them by date. After three years, throw them away without opening - unless you actually remember and want to keep what is in the boxes.

That leads to today's list of Reasons To Declutter Aggressively:
  1. You don't miss what you don't remember
  2. Your focus should be on the present (or possibly the future), not the past
  3. You save money on storage, both digital and physical
  4. You waste less energy thinking about or worrying over dead objects
  5. It's easier to keep the house clean
  6. A decluttered house frees up your mind
  7. And most important of all, focus on your experiences instead of the documentation

torsdag 20 november 2014

You can observe a lot by just watching - 11 barefoot lessons

The easy zen route to intelligence and health

You can never be too healthy, too smart or know yourself too much, so you should take every opportunity to increase your score on those three accounts. Walking barefoot in winter is a nice way to practice all three.

Mindfulness, being present in the now, feeling, listening and looking, paying attention to your surroundings and yourself is a great way to gain insights and to learn.

If you don't go for walks regularly, you should. You should try to be wondrous like a child before the world when walking. Use all your senses and truly take in both details and the whole as if your life depended on it (or at least your degree, or ability to pay rent).

Your internal monologue could be something like this:

-Oh, a bird, how does it fly really? What's that sound; is it the wing tips touching at the top? How can it take off so quickly? Look at it soar! Is that autumn tree beautiful? People say so, do I think that? Yes, but why. It's red, green and yellow. Why is that, I know I heard the explanation recently?

Seek randomness, threats and novelty for increased brain plasticity

To spice things up, I try to take different and random routes when walking, actively identifying what the differences are. I also listen to science podcasts, to make sure I hear completely new, interesting and slightly complicated things. This October and November I have stepped it up yet another notch and have been walking barefoot, wearing just shorts and a t-shirt.

Being underdressed has increased my contact with nature; I feel more, I have to pay attention more in order not to hurt myself. I learn more (about various surfaces, about which body parts need protection the most etc) and not least I harden myself; the soles of my feet, my balance and ankle strength, the amount of brown fat I have, my brain's perception and tolerance of discomfort and so on.

I am sure my brain's plasticity increases even more than it does from "just" walking, observing nature and listening to science. I think all kinds of contrasts, and pseudo-dangers challenge the body and the brain in similarly productive ways. Personally I "overdose" on wasabi, on habanero, on Vindaloo and sauna steam and ice baths - regretting it for a minute and then loving it.

High brain plasticity translates to all other areas of learning. A recent study (this Tuesday?), e.g., showed that playing action games on a computer increased general learning ability in other areas.

Study yourself and enhance your integrity

Going against the grain also means other pay attention to you, which in turn gives you the opportunity to study their reactions. Being the observed is also a little stressful, some like it, some don't, and you get a chance to study your own reactions to being slightly off-centre. Not least, you get to practice your integrity and sense of self.

That finally leads us to today's list of...:

11 things you can learn from walking barefoot in Sweden in November

  1. Hands are more sensitive - gloves are more important to shoes; I can hardly unlock the door when I get back from a 90-minute walk underdressed
  2. You practice your integrity - I feel a certain need to prove I'm not a retarded bum but actually a retired hedge fund manager, so I take comfort in the fact that I'm wering a 45k USD watch
  3. The maximum discomfort from low temperature occurs within a few minutes
  4. White stones are more slippery than black
  5. The streets of Stockholm are cleaner than I imagined
  6. A certain rough sort of blacktop is particularly tough on the skin
  7. Drain lids are so uncomfortable to walk on that I actively avoid treading on most of them
  8. The ground temperature on hills is lower - probably an aerodynamic effect that cools the ground
  9. Small kids get jealous of my apparent freedom, larger kids want to know why - and ask
  10. Parents get uncomfortable and wish I didn't break the rules they are trying to teach their children
  11. Feet adapt quickly to not having shoes, hands and underarms not so much

/White Walker Sprezzaturian

onsdag 19 november 2014

How To make the most of your spare time in 10 points

Plan your day and then break the plan

During a video talk with an accomplished multi-entrepreneur in the US a few weeks ago, he asked me what my days are like.

I realized I had no schedule whatsoever. I was proud and ashamed at the same time, suddenly realizing I kind of wanted to impress this guy - just a little, to make him find talking to me worthwhile. Up until then I lived by my sprezzaturian credo that ad hoc was my way; the way.

It was a weird experience to get my recently established (and enjoyable) retirement questioned (albeit casually) by a friend's friend... and by myself too.

Sprezzaturian planning
-Yup, that's my sheet of macro variables in the foreground

I then found myself planning my average day in detail. This is the result:

  1. Sleep midnight - 8 am
  2. Input 8-10 am (reading blogs, usually my 33 favorite peer blogs)
  3. Exercise, podwalking 10 am - 12 noon
  4. Food 12 noon - 1 pm
  5. Workout blog (Swedish) and planning future workout sessions: 1-2 pm
  6. Outdoor activities 2-4 pm (preferably outside the house, but washing and cleaning count too)
  7. Blogging 4-6 pm (learning about "online", as well as writing articles)
  8. Creativity 6-8 pm (writing on my current book or painting, composing, etc...)
  9. Quality family time 8-11 pm (hanging out with my girlfriend or friends, dinner, relaxing)
  10. Book reading in bed 11 pm - midnight

The main point with the list is to make room for around 4 hours of productive work (blog/book), 4 hours of more or less physical activity, 2-4 hours of input and learning new things - and of course 8 hours of sleep. During the four non-workout days per week, I plan to walk for a couple of hours, listening to science podcasts, which combine input/learning and physical activity.

As long as I on average hit these overall targets I am fully allowed to freestyle. And one completely bunked day (or two), in particular when travelling, is more or less encouraged.

You can actually feel more free, once you know you have a productive system in place. Then you know that you won't just happen to watch 5 epidodes in a row of your favorite TV series, unless you really, really want to. Hey, it's your life!

It took me about one month of complete leisure, to conclude that I actually needed some structure - not to imprison me in my habits but in order to have something to break out of. Since I now know I on average have time allocated for being productive, I feel much more free to leave the computer, rather than sit sround doing some half-assed combination of leisurely surfing and reading various blogs and newspapers.

Actually scheduling "outdoor activities" and "podwalks" is something I can recommend to regularly get you off the couch and away from surfing the net or watching videos.

I realize every day is a Saturday for me, but I think it can be just as important structuring the hours you do have at your disposal, not least the actual Saturdays and Sundays.

tisdag 18 november 2014

Sticking to your habits during travel increases the risk of Alzheimer's disease

Have you felt bad about skipping your mobility exercises, reading, meditation or other daily habits when travelling?

I have - but you shouldn't. Sometimes, I have even avoided travelling just to make sure my good habits are intact. During my last three years as a portfolio manager I actually all but completely cut out company and client visits if they were outside Sweden.

Imagine that, the European hedge fund manager of the decade cowering in Sweden just to keep his routines intact! If that 's not counterproductive, I don't know what is.

Even worse, on some vacations I vowed to stick to my good daily practices, only to become miserable. Failure meant breaking my vow to myself and thus feeling useless. Success meant the purpose of the vacation evaporated; exploring, relaxing and recharging turned into ordinary weekday drudgery instead.

I do recommend you implement a detailed daily agenda, with specific time slots for activities like reading, writing, walking and learning, i.e., formalize your daily routines, your habits. It can help you juggle parallel endeavors and not least avoid prolonging your relax slots. Good habits certainly are productive and should be built into your life.

But, you have to allow for following your flow and break your habits. Yes, even the good ones.

I recently implemented a detailed daily routine to keep track of my time and make sure I spend it intelligibly. However, I am vigilantly checking myself, so I don't end up in the same unproductive cul-de-sac as I did with travelling.

The point of travelling is to break your routine; to put you in a situation where you can't rely on habits. You wake up in a room with other colors, other furniture, you can't get your food from your refrigerator because you don't have those nearby. You don't know where the shops are (not exactly anyway) and you might not even know the language. You have to observe and think before every little thing you do.

The good thing with travel is that it shakes up your routine and puts you in the now. Take that opportunity to be mindful, to open your mind, to explore new things, even if it's just having wine with your breakfast or ordering coffee in Portuguese.

Break your habits willfully and ruminate over if there is anything you can leave out when you get back. Don't feel bad for ten, twenty or even fifty days of missed routines in a year. You still have well over 300 days to be a productivity robot on. It's much more important for your overall efficiency and quality of life, to introduce novelty or follow your flow every now and then.

Change trains your brain's plasticity, capacity for learning and slows down your retrospective perception of time. Your life will feel longer and more meaningful, not to mention you will actually be smarter and postpone certain age-related brain diseases such as Alzheimer's and dementia.

So go ahead and book that trip - and remember to leave your yoga mat at home, You'll enjoy yourself more, and as a bonus become healthier and smarter too.

söndag 16 november 2014

The magic 2-STEP Sprezzaturian formula for fantastic investment performance

Most people make fools of themselves in the stock market. Even most professionals invest like losers, constantly underperforming. So, how can you avoid the worst newbie or pro mistakes?

All you need to do, to outperform stale index hugging mutual funds and schizofrenic panglossian/worrywart newbies is the following:

1. Check the present context intelligibly; is it a fad or sustainable
2. Imagine the future environment; the economy, profits, valuations, interest rates etc

Buy or sell accordingly.

If you want a little more detailed guidance to outperforming the market, here are...:

8 easy but essential checks you must perform before buying stocks (okay, maybe its 50 check points, but easy ones...)

Newbies typically invest too emotionally; they buy on a tip, because they "like" the company's products, because they know somebody working there or because it is trending upward. They often buy stocks when they are relatively expensive, when the hype level is high, since that is when they hear about the company and they have a "good feeling". Then they sell, cheaply, when the stock is trending downward, when the hype has faded and they have a bad feeling.

No matter what their time perspective is, 1 month, 1 year or 10 years, newbies tend to buy high and sell low, and then give up altogether and get out - disillusioned and fleeced like a newcomer to a poker table or poker site.

Professional portfolio managers at large institutions like mutual funds or pension funds play a completely different game. Their main objective is to keep their jobs or rather not lose their jobs.

Their performance is measured not in terms of absolute profits or returns but relative the market (a benchmark index) and their competitors. By "hugging" the benchmark, they make almost perfectly sure they underperform the market slightly (due to their fees and paid commissions), albeit never by much. As long as they don't make a big mistake and underperform the market or their competitors by a lot, they get to keep their clients and their jobs - even if the market and their portfolio drop by 50%.

Any rational individual would be better off just buying the market average and holding the stocks forever than purchasing mutual funds, since you would then bypass most of the costs while still making market average returns. Unfortunately you would still have to ride out the big downturns, aka Bear Markets. However, if you are willing to do a little more work to avoid the worst mistakes, you could beat both the cowardly institutional investors and the uninformed masses.

Make these 8 simple checks before rushing into an investment on the stock market


  • Is the company absolutely cheap? If not, you are speculating on a bigger fool buying it from you even more expensively in the future. That's gambling, not investing.
    • Check valuation multiples. Assessing cheapness is material for a whole book in itself, but at least check P/E, P/B, EV/EBIT, P/FCF and P/S valuations for the coming 3 years. Anything above 10x EV/EBIT, 20x P/E and 2x P/S or 2x P/B, respectively, warrants a deeper evaluation. However, nota bene, just being cheap on these multiples, let's say 1/3 of mentioned values, does not necessarily mean the stock warrants a buy recommendation.
  • Is it relatively cheap? If not, why and how is that sustainable? If you skipped the absolute valuation recommendation, you should check whether tha multiples are higher than several benchmarks:
    • Is it cheaper than its own history? If not, what has changed to warrant a higher valuation now compared to before. If it is cheaper than before, is it actually cheaper or is there a reason?
    • Are other similar companies even cheaper? Check the obvious industry peers (locally and globally) before buying the first stock you come across. Avoid proximity bias. If your company is cheaper, make sure the peers really are similar.
    • Is it cheaper than the average market

  • Is the sales growth rate sustainable? Assume the market counts on recent trends to continue, but do you think that is likely? Compare the growth rate to
    • its own recent history,
    • to the average economy,
    • to its industry peers. If differs significantly, why and for how long is that sustainable? What is unique, what is the competitive advantage that could explain continued outperformance?
  • Are profit margins sustainable;
    • vs. history?
    • vs. peers?
    • vs. the economy? Remember that if one company is making super profits it will attract competitors as well as could revolt some clients.
  • Are tax rates stable and sustainable?
    • Check historical range for the company, why does it vary?
    • Compare paid tax level with actual official tax rates
    • Do they have tax deductions? How long can they keep paying lower taxes?
    • Is the official tax rate reliable? Natural resource companies, banks and other industries, or foreign companies in certain countries, often have to pay extra taxes if they make large profits, sometimes huge back taxes on many previous years. Beware if this has happened before or if the company is making super profits.

  • Are economic returns sustainable for your company (Return On Equity, Return On Capital Employed)? If higher than
    • history,
    • peers
    • or the economy, why and for how long do you expect it to continue? Why is it unique?

  • Check trends in receivables; are they getting paid on time. Compare DSOs to
    • historical range,
    • to peers,
    • to what might be reasonable (30 days, 60 days, 90 days,,, even longer?, why?). The trend is most important, since the market is already aware of the recent level, so
    • check if DSOs are trending higher. Higher DSOs mean clients are delaying payment which is a bad sign. The company might be invoice stuffing, overselling or having to adjust sales practices to compensate for poor demand or poor clients. DSO=Days Sales Outstanding=Receivables/Sales*Days in period.
  • Check cash flow conversion trends.
    • Free cash flow/Sales,
    • FCF/EBIT,
    • FCF/Earnings. If cash conversion is trending downward something is wrong with the business model or competition is heating up or the economy is weakening.

  • Check debts:
    • Check the debt/equity trend. If leverage is increasing, find out why.
    • Contemplate the risks involved with rolling the debts in the future, if interest rates rise or if cash flow is poor. When do the loans reset or need to be rolled?
    • Check debt covenants for highly leveraged companies, particularly in recessions.
      • A typical covenant clause states a maximum debt/equity, debt /FCF or debt/EBITDA multiple before new conditions or interest rates apply.

  • Where is the general stock market going?
    • If it's expensive it might roll over and drag down your investments as well, unless they are very cheap or secure.
    • How did your stock fare in earlier bear markets? How much did the stock fall. How much vs the market? Why would this time be different?
  • Is the stock market trending upward or downward? The tide could lift or sink all boats. If the market is both expensive and trending downward you should have extremely good reasons to buy a particular stock. Do you? Do you really?
  • Is the stock price above or below its own moving average (20 days, 50 days, 100 days, 200 days), Has MAV worked well for that stock historically? Which MAV had worked better, mor consistently (100, 200)?
  • What price range has the stock price moved in during the last 3 months, 6 months, 12 months, 3 years, 5 years? If your investment is based on a change in trend or range, why and how would that happen?
  • Check the yield curve(s)
    • Check the 10yr-2yr = government debt yield difference. A negative yield difference ("curve") signals recession and can be a harbinger of poor profit growth. Nowadays this signal has been distorted by central bank manipulation.
    • Check Junk bond yields vs. government yields.
      • The higher the difference, the more risk avert the market is becoming. Professional junk bond investors care about not losing the entire principal, so they make sure to be the first to panic. When they sell their holdings they push yields higher. Higher-trending junk bond yield spreads indicate increasing risk aversion.
      • Low absolute junk bond yields can signal extreme bullishness, e.g. if they are lower than average historical losses on similar debt instruments. This typically occur close to market peaks - and that's a point where you want to avoid investing in stocks.

  • Check the prices of commodities
    • Check the price trends in oil, gold, soft commodities, commodity indices. What has happened when they behaved like that before? If they are really extreme it might be relevant for future growth or inflation - otherwise most often not.
  • Check the state of inflation and central bank policy
    • Is it high vs policy rates
    • Is it trending higher
    • What is the central bank likely to do the coming year - any reason to expect an unexpected hawkishness?
  • Check economic indicators
    • check coincident/lagging indicators - most economic indicators are complete bunk. However, taking what are considered coincident indicators and dividing them by the lagging indicators has given a rough estimate of future economic growth. Just remember that GDP growth and stock market returns have shown zero or even negative correlation historically. 
  • Check if the market has fallen - Past performance can carry informational value
    • Buy more after negative market years (see strategies such as Quatro Stagione and Dogs of the Dow/World that will need its own post) - the market seldom falls for an entire calendar year. In any case, stocks are cheaper after a fall than after a rise. Buy after a sharp fall or after a particularly negative year for the market. Buy even more after two or three consecutive years of negative returns

  • Is the investment reasonable in a general sense? Good company, good product, not hyped, is it producing real value or is it just a fad. Do you understand the product, what's driving demand, what the competition is?
  • Is the risk level appropriate for you? Can you afford to lose the money? How much of it? When would you be forced to sell to stop your losses. What might take the price there? Will you actually sell then or will you be locked in?
  • What do you expect to gain from the investment, when will you sell and based on what?
  • How do you picture the future environment for your investment?
    • Imagine the state of the company, its industry and the economy 1-3 years from now
    • Imagine the state of the stock market and investor preferences 1-3 years from now
    • Imagine interest rates and valuation multiples 1-3 years from now
    • Will there likely be a better time to buy in the coming 1-3 years, then wait for that. 2 years' waiting in 2000 or 2007 would have saved you a decade of regret and worry
  • What's the warranted absolute fundamental value and what is the likely price range under certain circumstances and time periods
    • Check the expected future return. Start point absolute valuation is EVERYTHING when it comes to expected returns
    • Check previous price and valuation ranges. Trends, fads, interest rates, relative valuation etc can and regularly do push the actual price of a typical stock to extreme highs and lows vs the fundamental value. The historical range of stock price and valuation multiples serve as a rough guidance of the likely future range. 


"OK, thanks for nothing", you might say. "That's not 8 easy steps, Those are 50 cumbersome and difficult procedures" and then you didn't even include how to actually perform absolute valuations.

So, let's summarize and make it even simpler...

  1. Check the present context. Does this seem like a good time to invest? If not, wait.
  2. Imagine the future environment or context. What will it look like when it's time to sell? Better? Then buy today.
Just remember to check the present and imagine the future contexts in a thoughtful way, including relative and absolute valuation, earlier price ranges and likely future ranges, investor psychology and basic economic understanding about sustainability. The five most important questions you can ask yourself before investing are:
  1. Why do I expect things to change?
  2. Why would it be different this time?
  3. Why would the currently extreme situation continue?
  4. What has happened before in similar situations?
  5. Does anything need to change for the investment to produce the required/expected return?

So, get to it! Or do you need anything more to get started?

onsdag 12 november 2014

Why you should delay your purchase of Apple shares

A more detailed model can reveal surprises regarding likely patterns of growth and profitability.

This time it didn't. Apple still seems about reasonably valued. I would nevertheless hold off buying their shares until Apple or the market stumbles - and you can buy Apple shares more cheaply.

The exercise below is still worth going through to build your own model of Apple or other companies. The difficult balancing act is to choose how much information to include, to make the model informative and useful without making it inaccessible.

Refining the Apple model

Enhance the Apple model with forecasts for the individual product categories, to make total sales forecasts more robust and more closely linked to reality.

Get Apple's latest publicly filed 10K report. Flip to page 29 and check the product break-down. Start building a model for total sales based on the various product areas. Calculate your own Average Selling Prices (ASP).

iPhone, #125046150257169219
iPhone ASP629607603
iPhone sales7869291279101991
iPad, #583107103367977
iPad ASP531450445
iPad sales309453198030283
MAC, #181581634118906
MAC ASP127913151274
MAC sales232212148324079
iPod, #351652637914377
iPod ASP160167159
iPod sales561544112286
iTunes, s/w and svcs: sales128901605118063
Accessories (incl 3rd party)514557066093
Total sales$156,508$170,910$182,795

Read the footnotes on the following pages in the 10K, to see what Apple is saying drove the changes in unit sales and dollar sales. Then make some initial forecasts based on your best guesses on what might drive sales going forward, or by just intelligently extrapolating previous trends.

I imagine increased competition on phones will make unit sales growth gradually drop toward the industry average (which itself is likely to drop toward global GDP). I think the iPod form factor will disappear and I think Apple will struggle with both unit growth and ASPs for iPads and MACs due to Apple being less unique, less cool and being much larger. Apple is becoming a BMW instead of a Ferrari or Porsche.

I'm modelling growth gradually dropping for iTunes too, and GDP-like growth for accessories. Apple enjoyed a first mover advantage and does have a faithful installed base, but competition is heating up and it's becoming easier every day to buy digital content from any source.

Use what you know about the last ten years' change to consider risks in the future

Once again, Apple was unique for a while, for longer than most consumer companies but it won't last forever. Just think about how unbeatable the combination of Nokia, Sony, Motorola, Blackberry seemed in 2007 before the iPhone. Going forward, Xiaomi, HTC, LG, Lenovo, Google, Microsoft, Motorola and yet unknown companies are ready to give Apple a run for its money in phones and computers.

I know I should include forecasts for Apple Watch, as well as unknown future products. On the other hand I think new products will basically replace, cannibalize and more or less just lead to a continuation of previous trends anyway. The Watch, e.g., is likely to be an inconsequential niche product in my view, similar to the iPod.

Refine the product category model, with unit growth, sales growth and forecasts like this:

iPhone, #125,046150,257169,219186,141201,032215,104228,011239,411
unit growth20.2%12.6%10%8%7%6%5%larger grows slower
iPhone ASP629607603603603603603603inflation vs novelty/uniqueness
iPhone sales$78,692$91,279$101,991$112,190$121,165$129,647$137,426$144,297
iPad, #58310710336797764,57861,34958,28255,36852,599
unit growth21.8%-4.3%-5%-5%-5%-5%-5%less favored form factor
iPad ASP531450445441437432428424
iPad sales309453198030283$28,481$26,787$25,193$23,694$22,284
MAC, #18158163411890619,09519,28619,47919,67419,870
unit growth-10.0%15.7%1%1%1%1%1%
MAC ASP12791315127412741274127412741274no particular guess
MAC sales232212148324079$24,320$24,563$24,809$25,057$25,307
iPod, #3516526379143778,6265,1763,1051,8630
unit growth-25.0%-45.5%-40%-40%-40%-40%-100%form factor disappearing
iPod ASP1601671591511441361300sales necessary
iPod sales561544112286$1,303$743$423$241$0irrelevant anyway
iTunes, s/w and svcs: sales12890160511806319,86921,45922,96124,33925,556
unit growth24.5%12.5%10%8%7%6%5%competition, Apple less unique
Accessories (incl 3rd party)5145570660936,3986,7187,0537,4067,776
unit growth10.9%6.8%5%5%5%5%5%
Total sales$156,508$170,910$182,795$192,561$201,434$210,086$218,162$225,220
sales growth9.2%7.0%5.3%4.6%4.3%3.8%3.2%
Current forecast in model155,970170,910182,795193,763203,451213,623224,305235,520

Finally, compare the bottom-up forecasts for sales and sales growth with top-down guesstimates from earlier. The new forecast is less optimistic than before, and I trust that more than my first guess.

I have no new information on gross margins per product. You could guess what the margins are, but I don't think that would add anything useful to the model at this point. However, on page 82 in the latest 10K, the quarterly total gross margins for 2013 and 2014 are listed. If the level and trend look stable we can use that for the entire company. Just throw the quarterly numbers into a spreadsheet like below.

Notice that there were a lot of launches in Q4 2014 and Q1 2015 (including the Apple Watch). That probably means I should upgrade my sales forecasts for 2015 compared to what I have in my model now. I bump up sales growth for iPhones to 13% (previously 10%) in 2015. In addition I change iPod unit growth from -40% in 2015 to 0% to account for Apple Watch.

Know what you don't know

Margins, however, might actually fall, due to the cost of several launches and fine tuning production. I keep them stable nevertheless since I really don't have any idea.

Quarterly data from page 82 in the 10K report:

Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2104Q3 2014Q4 2014
share of year sls31.9%25.5%20.7%21.9%31.5%25.0%20.5%23.0%
quarter "strength"-0.4%-0.5%-0.2%1.1%relative strength of quarter
Net sales$54,512$43,603$35,323$37,472$57,594$45,646$37,432$42,123
growth5.7%4.7%6.0%12.4%y/y growth rate
Gross margin$21,060$16,349$13,024$13,871$21,846$17,947$14,735$16,009
margin %38.6%37.5%36.9%37.0%37.9%39.3%39.4%38.0%
y/y margin change pp-0.7%1.8%2.5%1.0%y/y chg in margin
Net margin$13,078$9,547$6,900$7,512$13,072$10,223$7,748$8,467
margin %24.0%21.9%19.5%20.0%22.7%22.4%20.7%20.1%
y/y margin change pp-1.3%0.5%1.2%0.1%y/y chg in margin

I think margins look stable enough for now to simply extrapolate them at the current level. Competition puts pressure downward, but economies of scale act as a positive counterweight.

Link the new bottom-up model for sales into the main forecast sheet. At the same time you have to change the growth inputs on row 22 to a calculation of what's going on on row 5 (sales).

The model didn't change that much from earlier, but the confidence in it has increased somewhat. You now know what's happening to the various product categories, and you have a feel for ongoing launches, as well as quarterly growth and margin progression.

The value of Apple's stock still comes out around 107 USD per share.

Cost of sales106,606112,258139,507145,716151,872157,670162,700
Operating profit18,54034,21055,76050,15553,48356,98259,51862,03264,40166,455
Income tax(13,118)(13,973)(14,815)(15,475)(16,128)(16,744)(17,278)
Diluted nr of shares6,521,6346,122,6635,877,7565,642,6465,416,9405,200,2634,992,252
Earnings Per Share5.686.457.177.818.479.169.85
Revenue per share26.229.933.436.439.542.745.9
Market cap at current share price667,370,267640,675,456615,048,438590,446,501566,828,641544,155,495
sales growth9.6%7.0%7.5%4.5%4.2%3.8%3.2%
tax rate-26.2%-26.1%-26%-26%-26%-26%-26%
Share count evolution-6.1%-4%-4%-4%-4%-4%
cost of share purchases at current price26,69525,62724,60223,61822,673
Buyback cost as proportion of earnings63%58%54%50%46%
Dividends per share DPS1.641.822.002.192.392.602.81
Cost of dividends and equiv.10564111261175612352129521353014052
Shareholder's equity47,79076,620118,210123,549111,547115,263121,328129,678140,187152,638
Long term debt16,96028,987
Equity per share18.918.219.621.523.927.030.6
Return on Equity = Earnings/equity54.2%54.5%31.3%32.0%37.8%38.2%37.8%36.7%35.1%
Net income14,01025,92041,73037,03739,51042,16744,04345,90447,65649,177
Depreciation and amortization etc1,0301,8106,55713,52015,90017,09117,85218,60619,31619,933
Deferred taxes1,4402,8704,4101,1402,3502,4422,5512,6582,7602,848
Other, net working capital9031,170(1,740)2,2502,8601,0891,1371,1851,2301,270
Total operating Cash Flow17,38331,77050,95753,94760,62062,78865,58368,35370,96373,227
According to Apple53,66659,71362,78865,58368,35370,96373,227
Financing including stock repurchases(16,379)(37,549)(38,450)(37,979)(37,553)(37,148)(36,726)
TOTAL CHANGE IN CASH3,513(415)3,8296,1828,47310,63612,582
Free cash flow excluding dividends and Buybacks42,27944,16046,02647,78349,308
End of year equity115,263121,328129,678140,187152,638
Discount rate, required return7%7%7%7%7%7%
Discount factor107%114%123%131%140%
Present value of cash flow39,51338,57137,57136,45435,156
Sum of present value of cash flow (Net Present Value)39,51378,085115,656152,109187,265
End value of business after last cash flowCF yield requirement6%6%6%6%6%6%
CF multiple16.6716.6716.6716.6716.67
End valueNext year's CF times warranted end multiple736,008767,102796,391821,797862,887
Discounted end value (End value divided by discount factor)687,858670,017650,092626,945615,226
Sum of NPV (disc CF stream + disc end value)727,371748,101765,748779,054802,492
Discounted cash flow value per share (end of 2014); sum of NPV divided by nr shares today (eof 2014)119122125127131
Other approaches
Required return on equity7%7%7%7%7%
RoE next year38.2%37.8%36.7%35.1%
Warranted equity multiple546%540%525%501%
Warranted value629,188655,769680,806702,525
Discounted warranted value588,026572,774555,741535,953
per share (today's number of shares)96.093.590.887.5
LT market PE105PracticalHidden assumptions
DCF125CorrectExplicit but sensitive
RoE91Crude but correctVery rough measures of Eq and rRoE

The next logical step would be to forecast sales for individual iPhone models, since iPhones make up more than half of Apple's sales. That information could be used for forecasting individual quarters tro possibly speculate on share price movements around company earnings presentations. I wouldn't recommend that. I actually think it's mostly a waste of time. Apple is already managing its product launches the best way it can, which produces a quite smooth yearly growth trend that gradually tapers off due to GDP growth, industry growth and competition.

I think, once again, this basic model proves that Apple is quite boring, very big, neither obviously expensive, nor cheap as long as nothing "unexpected" happens. Whether a surprise is likely to be positive or negative is anybody's guess. My personal estimate is that a recession, a product failure, competition, a stock market fall, a natural disaster, increasing risk aversion and required return or something similarly negative is more likely than Apple suddenly boosting its growth or margins. Sure, Apple could launch the iCar or iGroceries, iHotels or whatever, but I just don't see it and wouldn't advise betting on it.

Buy Apple shares later

If you feel you just have to buy Apple shares, do yourself a favor and wait for a stumble, a product miss or a stock market correction. Then buy. Don't buy Apple shares now, right when both Apple and the market are at their respective peaks of the game.