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Posted: 2 March 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

My trusty source at Stern in New York, Finance prof Aswath Damadoran, has updated his  blog with some work on Apple. He is a shareholder and a junkie, so you may feel that he would , wouldn't he, conclude that Apple is worth $716 - well above its current range in the middle 500s.


Here is a snap of his DCF sheet, and certainly his top assumptions, of turnover growth at 8% 6tapering to 2% and EBIT in the low 30% level seem OK where we stand right now:-





Here (below) is Aswath's whole piece, and for Friday rushers, I highlight a few p[oints by extraction:-


"... ironic that a company doing as well as Apple is right now, in terms of operations and stock price performance, is receiving this much unsolicited advice (split the stock, pay a dividend, buy back stock, do an acquisition, borrow money) on how it should fix itself. ...


Cash decision tree



... Having seen how quickly markets can turn on high flying companies (Microsoft and Intel in the early part of the last decade come to mind), ...


... If Apple could invest the $100 billion in cash at 42%, that cash would be worth $350 billion, but put those dreams on hold, because it is not going to happen. First, that high return on equity can be traced back to the blockbuster products that Apple introduced in the last decade, the iPod, the iPhone and the iPad, and those are not easily replicable ...


... Apple should announce a substantial buy back*, but it should use it do so on its terms ...


... lets see an iTV, an iAirline, a iUniversity and an iAutomobile (think of any product you use now that is badly designed or a  business that is badly run and think of how much better Apple could do...). ...


... Apple did not get to be the largest market cap company in the world by finessing its capital structure or optimizing dividend policy. It did so by taking great investments...."


* Buyback fans are welcome to tweak there thinking on capital returns to shareholders here Dividends or buybacks :-







"Apple: Thoughts on bias, value, excess cash and dividends
Apple is hitting or is close to hitting two significant landmarks. Its market cap exceeded $ 500 billion yesterday (2/29) and its cash balance is at $ 100 billion. The twin news stories seem to have set investors, analysts and journalists on a feeding frenzy.  I think it is ironic that a company doing as well as Apple is right now, in terms of operations and stock price performance, is receiving this much unsolicited advice (split the stock, pay a dividend, buy back stock, do an acquisition, borrow money) on how it should fix itself. As we look at these prescriptions being offered to one of the healthiest companies in the market today, we should heed the Hippocratic oath, which is to do no harm.

I am biased
I have to start with a confession. It is impossible for me to be objective in my analysis of Apple and it is not just because the stock has done so well for me over the last decade. My first computer was a Mac 128K that I bought in the early 1980s and I have bought every Apple model since (even the ill fated Lisa and the not-so-great Powerbook Duo). Why should you care? One reason that the debate on Apple is so heated is that people have strong preconceptions about the company and those preconceptions drive their suggestions about what the company should do. As you read the rest of this assessment, you should recognize that my substantial positive bias towards Apple does affect my analysis. To structure my thoughts about what Apple should do, here is how I see the choices for the company:
Is Apple's cash hurting its stockholders?
The first and most critical question is whether Apple's cash holdings are doing harm to the stockholders. Let's dispense with the reasons that don't hold up to scrutiny:
1. Cash earns a low rate of return: It is true that Apple's cash balance earns a very low rate of return. It is, after all, invested in treasury bills, commercial paper and other investments that are liquid and close to risk less. It earns less than 1% but that is all it should earn, given the nature of the investments made. Put differently, cash is a neutral investment that neither helps nor hurts investors.
2. If that cash were paid out, investors in Apple could generate higher returns elsewhere: Perhaps, but only by investing in higher risk investments. Investors in Apple, who were concerned that Apple was investing so much in low return, low risk cash could have eliminated the problem, by buying the stock on margin. Borrowing roughly 20% of the stock price to buy Apple stock would have neutralized the cash balance effect and would have been a vastly more profitable strategy over the last decade than taking the cash out of Apple and searching for alternative investments.

So, what could be defensible reasons for worrying about cash? Here are a few:
1. The "low leverage" discount: The tax laws are tilted towards debt and Apple by accumulating $ 100 billion in cash, with no debt, is not utilizing debt's tax benefits.  In fact, the gargantuan cash balance gets in the way of even talking about the use of debt at the company; after all, why would you even consider borrowing at 2 or 3% interest rates, when you have that cash balance on hand?
My assessment: By my computation, Apple's optimal debt ratio is about 40-50% (
download the spreadsheet to check it out yourself) and its current net debt ratio is -20% (using the cash balance of $ 100 billion as negative net debt). Given the risk of the business that Apple operates in, I would not let the debt ratio go higher than 20-30%. Their cost of capital currently is about 9.5% and it could drop to about 9% with the use of debt. That would translate into a value increase of $20-25 billion for the company, not insignificant but that is about a 5% value increase.

2. The naiveté discount: It is undeniable that legions of investors still use the short hand of a PE ratio, often estimated by looking at an industry average, applied to current or forward earnings to get a measure of whether a stock is cheap or expensive. In the process, they can significantly under value companies that have disproportionate amounts of cash. To see why, assume that the average trailing PE ratio for electronics/computer companies is 14 and that the average company in the sector has no cash. If you apply that PE ratio to Apple's net income or earnings per share, you are in effect applying it not only to the earnings from its operating assets (where it is merited) but also to its earnings from its cash balance (where you should be using a much higher PE ratio). Thus, you will come up with too low a value for Apple.
My assessment: I would be more inclined to go along with this argument if Apple's stock price had dropped 50% over the last few years. I find it difficult to believe that after the run up that you have seen in Apple's stock price, stockholders are under valuing the company. The counter, of course, is that the PE ratio for Apple, at 16 times trailing earnings or 13-14 times forward earnings, seems low and may reflect a naiveté discount.

3. The stupidity discount: In a
post on Apple more than a year ago
, I referred to what I called the stupidity discount, where stockholders discount cash in the hands of some companies because they worry about what the company might do with the cash. If investors are worried that the managers of a company will find a way to waste the cash (by taking bad investments, i.e., investments that earn less than the risk adjusted rate of return they should make), they will discount the cash.
My assessment: My personal assessment in January 2011 was that, as an Apple stockholder (which I have been for more than a decade), the company had earned my trust and that I was okay with them holding my cash. I am open to a reassessment and I think any disagreement boil down to the answer to the following question: Do you believe that Apple's success and strategy over the last decade was attributable to Steve Jobs or Apple's management? If you believe it was Steve Jobs, you are now in uncharted territory, with Tim Cook, a capable man no doubt, but capable men (and women) have wasted cash at other high profile companies. If you believe that Apple's management team was responsible for its success over the period, your argument is that nothing has really changed and that you see no need to change your views on the cash.

What if there is no discount?
If the cash balance is not hurting Apple's stockholders right now, the pressure to return the cash immediately is relieved. However, you still have a follow up question to answer. Does Apple see a possibility that it could find productive uses for the cash? While Jobs never broached that question and preserved plausible deniability, I am afraid that Tim Cook has conceded on this issue, when he said last week that Apple had more "cash than we need to run the company".

Bottom line: I am inclined to believe that Apple is not being punished right now for holding on to $100 billion in cash. However, I am more concerned than I was a year ago. While I had the conviction that Steve Jobs could never be pressured (by investors, portfolio managers or investment banks) to do something he did not want to do, I am not as sure about Tim Cook. Having seen how quickly markets can turn on high flying companies (Microsoft and Intel in the early part of the last decade come to mind), in the face of disappointment or a misstep, I am worried that Apple may be one misstep away from a discount being attached to cash. Given that even Tim Cook does not think that Apple needs this big a cash balance, I think that it is time that we ask the follow up question: what should Apple do with all this cash?

What should Apple do with the cash?
In the broadest sense, Apple can either invest the cash or return it to stockholders and it seems that even Apple does not believe in the first option. Investing the cash internally in more products and projects sounds like a great idea, given Apple's track record over the last decade. In 2011, for instance, the company generated a return on equity of 42% on its investments; if you net the cash out of book equity, the return on equity exceeds 100%. If Apple could invest the $100 billion in cash at 42%, that cash would be worth $350 billion, but put those dreams on hold, because it is not going to happen. First, that high return on equity can be traced back to the blockbuster products that Apple introduced in the last decade, the iPod, the iPhone and the iPad, and those are not easily replicable. Second, there are other constraints (people, technology, marketing, distribution, production) that essentially limit the number of internal projects that Apple can take.

How about a few acquisitions? I am sure that there are willing and eager bankers who will find target companies for Apple. The sorry history of value destruction that has historically accompanied acquisitions of large publicly traded companies leads me to believe that this path of action will provide justification for those who attached a stupidity discount in the first place. So, to those who are counseling Apple to buy Yahoo!, Pandora, Linkedin or go bigger, please go away!

If Apple cannot find internal projects of this magnitude and the odds are against value creation from acquisitions, the company has to return the cash to investors and there are three ways it can do this: initiate a regular dividend and tweak it over time, pay a large special dividend or buy back stock. In my view, there are four factors that come into play in making this choice:
  1. Urgency: A company with a large cash balance that has been targeted by an acquirer or activist investors has to return cash quickly, cutting out the regular dividend option. Apple's large market cap protects it from hostile takeovers and its stock price performance and profitability give it immunity from activist investors.
  2. Stockholder composition: When a company that has never paid a regular dividend initiates dividend payments, it attracts new investors, i.e., investors who need or like dividends, into the company. While this "investor expansion" has been used as an argument for regular dividends, I think it should actually be an argument against regular dividends. While some of my best friends are "dividend investors", I think that they are temperamentally and financially a bad fit for Apple, a immensely profitable company that also operates in a shifting, risky landscape. If Apple initiates a dividend, the demands for increases in those dividends in future years will come and the company will find itself locked into a dividend policy that it may or may not be able to afford. 
  3. Tax effects (for investors): The choice between dividends and stock buybacks is also affected by how investors in the company will be taxed as a result of the transaction. While both dividends and capital gains are still taxed at the same rate, that will change on January 1, 2013, when the tax rate on dividends reverts back to the ordinary tax rate (which could be 40% or higher). If Apple drags its feet into 2013, the choice becomes a simple one: buy back stock.
  4. Valuation of stock: Finally, there is the question of whether the stock in the company is under or over valued. A company, whose stock is over valued, should pay a special dividend since buying back  shares at the inflated price hurts the stockholders who remain after the buyback. While I am normally skeptical of the capacity of management to make judgments about the "fair" value of the stock, I decided to take my best shot at valuing Apple using an intrinsic valuation model. Using what I thought were reasonable assumptions (8% revenue growth for 5 years and a 30% target margin, both significantly lower than the numbers from recent years), I estimated a value of $716 per share for Apple. You can download the spreadsheet that I used to make your own judgment. Once you have made your own estimates, please enter them in this shared Google spreadsheet. A buyback at the current price would provide a double whammy: a reduction in a "too large" cash balance and a buyback at a price lower than value. 
Closing thoughts
Apple should announce a substantial buy back, but it should use it do so on its terms. First, the buyback should leave Apple with enough of a cash balance (my guess is about $15-$20 billion) to invest in new businesses of products, should they open up. For the moment, I would avoid the debt route, even though Apple has debt capacity. Second, Apple should follow the
Berkshire Hathaway rule book and set a cap on the buyback price. While Berkshire Hathaway's cap is set in terms of book value (less than 110% of book value), Apple should set its maximum as a function of earnings or cash flows (say, 16 times earnings). Third, Tim Cook should stop talking about whether Apple has too much cash and get back to business. Make the iPad 3 a success and lets see an iTV, an iAirline, a iUniversity and an iAutomobile (think of any product you use now that is badly designed or a  business that is badly run and think of how much better Apple could do...). Apple did not get to be the largest market cap company in the world by finessing its capital structure or optimizing dividend policy. It did so by taking great investments."



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Posted: 7 March 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Cell carrier MTN has just released 2011 full year results.

See them at


This company has been in the news, with its:-


- Syrian operations in a war zone, where the "Arab Spring" is running late

- Nigerian business facing a 'normalisation' of the previously low fuel price there, compressing consumer spend

- Iran business in what the Israelis believe is a nuclear pariah state, and facing what seems an opportunistic US court action to challenge its license




So a few points


1. Top line - grew 6.3% or 9.7% in constant currency terms. (Subscriber volumes up 16%.)

2. Profitability - EBITDA up 3.4% to 44.9%. Profit before tax (PBT) up from 24.5% to 30.9% !

3. Cash flow - down R7bn, or 20% - suggesting a change in the working capital dynamics

4. Dividend - up to R7.49 for the full year, up almost 50% on 2010 as the payout ratio increased as promised.




My quick discounted cashflow model, updated to include the results released today,  suggests a valuation of R148, as shown here






DCF in context of price


This picture illustrates my valuation, which is somewhat above the spot price, and the red line shows the imputed retrospective valuation - a fair fit within the range of market moves.




So - I am very happy to own MTN at this price






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Posted: 8 March 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

 Our trusty goverment is pushing green buttons on a lot of infrastructure projects, so one's thoughts turn inevitably to how an investor might position oneself for better activity in that sector.


The activity, although it doesn't yet seem to have filtered up from the domestic market., has certainly enlivened national volumes of cement sold. See this graph from Adrian Saville:-




His comment was "South Africa's cementitious sales +13.7% for 2012 YTD. Also, figures look more World-Cup like than recessionary." and another pundit from Independent Securities also commented "Important thing about the cement stats is that they reflect seven consecutive months of growth and indicate the market has bottomed." 


So if the SECTOR has bottomed, would you rather enter via a cement miller (like PPC), which has no contract execution hassles, but which sometimes has to sit on its very capital intensive hands when things go slowly, or a  contractor (like Murray & Roberts MUR) which ought to run on a smaller fixed asset base, and which ought to manoeuvre more nimbly as the tides of fortune shift.?


Well, MUR is raising new cash, in shares and in equity, so they may not have been as adroit in the recent shifts as their owners might prefer. The new shares are going out at an underwritten R18, relative to a current price of around R27. One assumes the underwriters (JP Morgan and Standard Bank) had a look at every damn thing they wanted to before agreeing to be backstops for the R2bn, and some sighters on the trajectory of the company are included in  

 Comment on Murray & Roberts rights issue


An alternative is cement miller PPC, which  appears on a DCF basis to be worth R34, against a current price of R30.


Here is the DCF calc and assumptions, note how profitability stayed in the 20s even as volumes "froze" in 2010/11 ... ...




And here is a telling test of the "reasonability" of this DCF thinking - the price has under- and over-shot the imputed value line, and no doubt will continue to. I haven't updated it for the last few months of price action, but please do if it helps your thinking:-




So, it seems the easy money is in the cement miller. Lets see if the contractors can disprove that notion - good luck Murrays!






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Posted: 14 March 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

Late addition - GS official response:-



Is this the trajectory of a banker's attitude, and of his right to slate his profession?




A bloke, called Smith, leaves illustrious investment bank Goldman Sachs. Hardly news, except he writes about it in a global paper, the New York Times' International Herald Tribune. The article is accompanied by a cartoon of a vulture (presumably sated?) flying away from a kill. (bottom)


Greg Smith Article "Why-i-am-leaving-goldman-sachs"


2.       Its going wild, all over – for example, debate thereon led a finance tutorial at UCT this very day.



2. 3.       The firm’s culture is set out on their web domain. See for yourself Careers page Why-goldman-sachs? Our-culture



"Goldman Sachs is a meritocracy built on the belief that collaboration, teamwork and integrity create the right environment for our people to deliver the best possible results for our clients. When we’re recruiting we look for people who we believe will thrive in this environment, prioritizing quick thinking, passion and communication skills above specific qualifications. So whether you’re still at school, a recent graduate or have been working for a few years, if you’re excited about the potential of working at Goldman Sachs, we’re interested in hearing from you.



At Goldman Sachs we talk a lot about teamwork, but what does that actually mean? All our business units are made up of teams from different divisions, often working across multiple offices. Within those teams everyone has their own areas of expertise but the overall responsibility for the project is shared. For this to work all our people have to be able to work flexibly and collaboratively. This creates a flat organizational structure, where everyone’s point of view is valid (even the newest intern) and ideas can come from anywhere.



Our distinct corporate culture is one of the things that set us apart from other firms. We expect everyone at the firm to be a contributor; no one is just an employee. This is why we make an unusual effort to identify and recruit people who, in addition to their intellect, share our commitment to leadership in business and to the communities where we work and live. A degree in business or finance is not necessary, but seeking out great opportunity and responsibility is. At Goldman Sachs, everyone has a place at the table."



4.       How does fhe firm respond to the article? Maybe they shouldn’t at all - maybe the article will reinforce the firm’s brand, and also get Mr Smith an offer he wouldn’t otherwise have seen.


5.       See also this blog and the cynical trajectory sketch (above) from the FT's Andrew Hill (my emphases)


Culture questions for Goldman’s Blankfein


To misquote from the work of Hanns Johst, the Nazi playwright: “When I hear the words corporate culture, I reach for my pistol.” Few other management themes encourage as much cant and hypocrisy from companies, and as much waffle from those who study them. Yet a healthy corporate culture is vital to the well-being of most organisations. I’d go further and say that given the complexity of the largest multinationals – and the impossibility that their chief executives know what is happening in every corner of the companies they purport to run – the right culture is indispensable.

This is why Wednesday’s New York Times op-ed, in which Goldman Sachs’ Greg Smith resigns in spectacular fashion as executive director and head of the firm’s US equity derivatives business in Europe, the Middle East and Africa, is so interesting and – for Goldman – so potentially damaging.

His central allegation is that the “trajectory of [Goldman's] culture”, as he puts it, has taken a catastrophic nose-dive. The implication is that Goldman’s business will soon follow:


Smith:- "The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief."



It is hard to judge whether this is true of Goldman as a whole: the ill health of any corporate culture is usually difficult to diagnose from the outside until it is too late, because it is hidden behind the flab of mission statements, heartwarming rhetoric and PR pabulum. Sometimes, like all cultures, the corporate version contains a mix of good and bad. The FT’s Tokyo bureau chief Mure Dickie, for instance, points out in Wednesday’s paper that for all the criticism of Japan’s closed corporate culture (think Olympus), it was also the source of a spirit of admirable corporate solidarity that served the country well in the aftermath of last year’s tsunami.



But the underlying allegation that Goldman has turned its back on clients is far more toxic than 2010′s highly coloured Rolling Stone “vampire squid” article about the investment bank. Even if Mr Smith was not among the highest ranking bankers and it took him 12 years to reach his epiphany, the fact that a previously loyal insider is moved to voice his protest so publicly compounds the potential damage.



Lloyd Blankfein, Goldman’s chief executive, and his brand new head of communications cannot simply shrug this off. A strong culture – like a strong reputation – takes years to build, but can disintegrate rapidly. The company’s initial statement makes clear it thinks there is no problem:


Goldman Sachs:- "We disagree with the views expressed, which we don’t think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves."



Mr Blankfein should still ask whether there are ways in which the company’s good culture could now be reinforced. But I suspect the main question he will pose to his lieutenants will be harder-nosed: “Are there are any long-standing customers out there drafting an op-ed explaining why they are leaving Goldman?”








ps see also






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Posted: 19 March 2012 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
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 Apple is on and at a high.


It has now announced inception of dividends, as well as a buyback initiative. Apple-Announces-Plans-Initiate-Dividend-Share-Repurchase


Apart from the daunting nature of a buy decision, either for the company or for new investors, as illustrated in this picture, 




one really does need to like buybacks to endorse them.


Read this to help you decide:-


Tickertalk blog:-Dividends or share buybacks


While yes, it is possible for Apple to go up from here, I don't intend taking that position in the market at current levels.







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Posted: 26 March 2012 - 2 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

We all need to pay our taxes, else the state will be underfunded and will be unable to deliver or perform.


So the dividend withholding tax (DWT) warrants no more than cursory attention. 


Having long been flagged by the state as a 10% tax, it starts (next week) at 15%. That is 50% higher than expected - or is it?



Lets take a look:-



                                                                              STC @ 10%            DWT @ 15%

Profit available for distribution                   110 000                                 110 000

Dividend declared                                        110 000                                 110 000

STC Cost /DT Cost                                        10 000                                    16 500

Dividend received by Shareholder            100 000                                    93 500

Shareholder worse off by                            ------                                            6 500 (65%)


Now of course, the SARS account is worse off by the STC, but the net effect is harsh.


I wonder what the longer term effects will be?






A must-read in this area is Ivo vegter's piece


If you have read any Vegter, you would be unsurpised by his tone or content. An example:-

"More generally, taxing something discourages it. You tax smoking or drinking when you want less of it."



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Posted: 27 March 2012 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
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 How many breweries should there be? An interesting question as the big world brewers, like SABMiller, consolidate (i.e. merge with each other) yet further.


And it does seem to differ from market to market. SAB regard Germany as an unattractive beer market, being very fragmented. I gather there are over 900 breweries in Germany - a moderate sized country of some 80 million.


Here is a snapshot showing the count of brewers in the US





The comment at right is mine - and apart from the mad prohibition years (is it true that the Kennedy clan accumulated big bucks meeting the nation's thirst then?), there was a secular decline in number of brewers during the ascension of mainstream media and advertising, until a more recent re-emergence - coinciding with the emergence of that anarchist's dream - the internet.


Here is a view of the real dollar trend in old media advertising, to reinforce the point:-





Quite interesting, in terms of the big picture. Forecasters should really drink a glass of humility - trends can turn on a threepenny bit!


And how many breweries does SA need? There seem to be some huge ones in the SAB stable - around six, able to do say 3bn litres a year between them. But of minor brewers, by far the largest is the Sedibeng one of Heineken and company, also a large industrial entity like its SAB peers. Then come a sprinkling of little guys - the so-called micro-brewers, or pico- or nano-brewers if they are more modest. How many of these should there be, and as of now how many do we have in SA?


Guesses please in the comment section below ... ...





pps get yourself to to



And if you already know your beers, to rate a SA craft beer or brewer, go to or straight to Rate Beer or Rate Brewer




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Posted: 29 March 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

One can find wonderful links all over the web, and here are two which crystallize some of the ironies of regulation in the financial markets.


In the first, from the Wall Street Journal's Total Return blog, Jason Zweig challenges the very existence of the notion that "sophisticated" investors have not and will not suffer dreadful losses. He is characteristically frank, and if his terminology escapes you just know that the municipal market in his country is the large market for bonds issued by city finance authorities. Equivalent to our "government bonds". [Doesn't the evolution of complexity remind you of the estate wine market?] And the Californian who was so big he knew enough? Remember, half the money beats the market/index. The market beats the other half of the money. Every day, every decade.


I have highlighted what I thought were some pearls, but please also go to the source at



Zweig:- "Some financial myths never seem to die. One is the delusion that the markets are full of “sophisticated investors.”

This week, the Municipal Securities Rulemaking Board, which helps regulate the sale of tax-free bonds, proposed a new definition of what makes a sophisticated investor. A “sophisticated municipal market professional” would be defined as an institutional client that “the [bond] dealer has a reasonable basis to believe is capable of evaluating investment risks and market value independently…” and “affirmatively indicates that it is exercising independent judgment in evaluating the recommendations of the dealer.”

As I wrote when Bernard L. Madoff’s Ponzi scheme broke, George Carlin would have loved the term “sophisticated investor.” It’s a natural addition to his famous rant on oxymorons like “jumbo shrimp,” “military intelligence,” “business ethics” and “plastic glass.”

Among the classic examples of “sophisticated investors” making idiots out of themselves:

* Robert Citron, the former treasurer of Orange County, Calif., leveraged the municipality’s investment portfolio with complex derivatives that exploded, blasting the county into bankruptcy. When Citron was asked how he could be certain that the portfolio was protected from the risk of rising interest rates, he declared: “I am one of the largest investors in America. I know these things.

* Giant banks and investment firms worldwide gorged themselves on hundreds of billions of dollars’ worth of mortgage derivatives that quickly turned putrid. In fact, the most powerful firms on Wall Street used the supposed existence of “sophisticated investors” as a primary justification for dumping off their own risk.

* In 1995, some of the wealthiest and most “sophisticated” investors in America – including former U.S. Secretary of the Treasury William E. Simon, venture capitalist Laurance Rockefeller, hedge-fund manager Julian Robertson and the foundation of former Goldman Sachs co-chairman John Whitehead — were snookered out of millions of dollars by scam artist John G. Bennett Jr. (Their “sophistication” evidently didn’t make them immune to his claims that he had secret donors who knew how to double the value of donations every six months.)

The great economist Tibor Scitofsky, in his classic 1950 essay “Ignorance as a Source of Oligopoly,” pointed out that when goods and services are highly complex, buyers struggle to determine fundamental value and often end up relying on price and reputation as indirect signals of quality.

“The expert buyer has always been an exception,” wrote Scitofsky, “and the consumer is not only an inexpert buyer but the increasing complexity of consumers’ goods is constantly increasing his ignorance.”

As Scitofsky argued, the deliberate escalation of complexity enables sellers to compete on dimensions other than price and quality. In the ultimate irony, the sellers of complex products will promote themselves on the basis of their specialization in making ignorant customers feel “sophisticated.” (Just think: You used to have merely a “stockbroker” or a “financial planner.” Now you can have a “wealth manager”!)

As Warren Buffett has said, what matters isn’t how expert you are, but how well you understand the limits of whatever expertise you have. Psychologists have highlighted a critical pitfall with human expertise: The more people know, the more they come to believe they know even more than they actually do.

We’d all be better off if the term “sophisticated investor” were taken out to the back of the barn and buried under the manure pile, where it belongs."


And the second piece, from Michael Kitces on Nerd's Eye View, highlights how we obviously expect different expertise and bias from high street purveyors of product as against service providers. Yet we often conflate the terminology and the expectations in the financial world - at our peril!


Follow the whole link (and Michael's blog if you like), here,-Dieticians,-Brokers,-and-Advisors.html but the point is clear in this neat 2.5 minute video








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Posted: 29 March 2012 - 2 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Are you on twitter?


Here are some helpful pointers for successful tweeting courtesy of “Be Better at Twitter: The Definitive, Data-Driven Guide,” an article from the Atlantic based on a study :- “Who Gives a Tweet? Evaluating Microblog Content Value,” The originator was Lauren Foster.

• Old news is no news: Twitter emphasizes real-time information, so information rapidly gets stale. Followers quickly get bored of even relatively fresh links seen multiple times.

• Contribute to the story: To keep people interested, add an opinion, a pertinent fact, or otherwise add to the conversation before hitting “send” on a retweet.

• Keep it short: Twitter limits tweets to 140 characters, but followers still appreciate conciseness. Using as few characters as possible also leaves room for longer, more satisfying comments on retweets.

• Limit Twitter-specific syntax: Overuse of #hashtags, @mentions, and abbreviations makes tweets hard to read. But some syntax is helpful; if posing a question, adding a hashtag helps everyone follow along.

• Keep it to yourself: The clichéd “sandwich” tweets about pedestrian, personal details were largely disliked. Reviewers reserved a special hatred for Foursquare location check-ins.

• Provide context. Tweets that are too short leave readers unable to understand their meaning. Simply linking to a blog or photo, without giving readers a reason to click on it, was described as “lame.”

• Don’t whine: Negative sentiments and complaints were disliked.

• Be a tease: News or professional organizations that want readers to click on their links need to hook the reader, not give away all of the news in the tweet itself.

For more on how financial advisers are using social media to get an edge, read “Social Graces” from CFA Magazine. And to better understand some of the risks and challenges that social media pose for your wealthy clients and their families, she recommends the white paper “Family Security & Social Media: Protecting Your Family from Security Gaps in Social Media.”




 ps - for the more formal, and for any teachers out there, here is a US varsity's rubric for twevaluation:-

 pps - please be sensitive if contemplating use of the pluperfect subjunctive.




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Posted: 30 March 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

 MTN has been faced with what may be a speculative courtcase, which, if proven even in small part, would do the company no good.


You really ought to read up on this whole saga, here is a one page graphic summary, or look on the Mail & Guardian at




So what to do, while Lord Hoffmann clears the air?


Obvious thought is to buy Vodacom, given that cell frenzy is still red-hot. But my Q&D discounted cash valuation of Vodacom shows a value of only R68 !




And it would need to widen its before tax profit margin to 30% to warrant the current price. Tough to get that right.


So - just maybe, my modelling is so far out that Vodacom is a buy, or you can safely take Iran away, pay the claim, and still buy MTN!

Or maybe not.






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