Member Info for sageoflondon

Cazoo has now lost 86% of it's peak value - $1.85 versus a peak of $13.60. It isn't the only SPAC to go in that direction. Ui Path has also fallen significantly. Overvaluation at float will have a significant impact on exits - I am still stunned that Cazoo managed to float at the price level it did. It doesn't look like a bargain to me at $1.85. Margins are on used cars are very low. It would need to Turnover of at least $10bn, likely a lot more to get anywhere near justifying its current valuation. That's not likely for a number of years, not 1 or 2, more like 5 or 10. It also needs to be profitable growth as well.

I think long-term this will be fine, but I do see some short term potential for both NAV decreases, early exits on investments that didn't quite come up to scratch and issues exiting some investments. As a 5-10 year investment will be fine, but also quite cyclical in nature, hence lumpy returns. Let's hope we haven't overpaid during the boom years - we won't know that for a couple of years anyway.

I never take any notice of broker targets. They haven't served much purpose historically - in terms of accuracy. We are 14.8% up on the end of 2020, 6% down on 31st March 2021 and 25% down on 31st December 2021 share price. That's quite volatile in reality. I don't really see this going anywhere for a while. Will be ups and downs along the way. I think we will be impacted by a lot more Netflix type scenarios - growth missing targets and the relevant shares getting punished. Depends on the product of course but it's easy to go without Netflix, Disney etc.

Take a read of the Fairfax Financial Chairman's letter to shareholders. He writes one (Prem Watsa) every year much like Warren Buffett. He's also sometimes referred to as the sage of Ontario. Basically Fairfax buy insurance companies and use the float to invest in a range of companies. He is very much the Benjamin Graham value school of investing. A few extracts.

One example used was Zoom - down 69% from its high but still has a market value of $40 billion – with sales of only $4 billion. In the dot.com crash, the NASDAQ dropped 85% from 1999 to 2002 – and none of the tech stocks were
spared. And as in past speculations, very few investors (speculators?) would have made money. If you didn’t know
why you bought a stock (i.e. no earnings, high valuations), what would make you sell it?

The note says that 'we will look back with incredulity at the tech mania we have just experienced! The FAANG stocks have had outstanding growth records – and we missed them! Shame on us! But trees don’t grow to the sky – and we continue to watch from the sidelines. At year-end 2021, the combined market cap of only three stocks – Microsoft, Apple
and Google – was equal to the combined market cap of all of the stocks listed in Canada, France and Germany. We
remember 2000, when Cisco had a market cap more than the whole Canadian market. 21 years later Cisco is still
down 50%.

To finish Inflation and higher interest rates are the big risks the markets face today per the Fairfax letter. Worth listening to given Fairfax Financial over 36 years (excluding dividends) have compounded book value by 18.2% annually whilst the stock price has compounded by 15.7% annually. Over these 36 years, there are only 67 companies of the 6,000 companies listed in 1985 on the U.S. exchanges (NYSE, NASDAQ and American) – i.e. only 1% – that have had an annual
return above 15%. That is one heck of a record!! If you want something proven to compound at that rate over a significant period here you go.

In my opinion there is no way we should be looking at an increase of 10%. If this records a 10% uplift then I fail to see how it has done that. I have worked in a range of Senior accounting/audit positions over the years. How do you record an NAV increase in a market that has seen similar valuations fall significantly? Revolut wouldn't secure the same valuation - no way, just no way. At some point there will be a fall back in NAV. I just don't see how that won't happened. It's fine having a little in the tank to try and smooth but auditors won't allow for too much of that. At some point it will come back to bite you and only benefits if the market then continues upwards. If it doesn't you end up with a much larger NAV hit down the line.

Really good article in the FT today. Title is 'Investor outlook for fast-growing private comapanies darkens'. Basically without copying in summary:
- 95% of early stage venture capital funds and private equity investors (growth investors) anticipate offering lower valuations in the coming 12 months;
- Expectation is that both absolute valuations and multiples will come down;
- Pullback reflects a sell-off in listed technology companies;
- High tech growth stocks are seen as particularly sensitive to rising interest rates and policy tightening that crimp future earnings potential (will have knock on effcted on the valuations of privately held companies.
- supply of capital has created an incentive to invest fast and in some cases lose discipline on pricing
- too many companies able to raise money at valuations that didn't make sense
- could take time for sell-off in listed tech to trickle down to private markets as many companies raised enough last year and won't need to come back for another round just yet
- cooling market for exits, notably IPOS
- Investors fear of missing out on hot opportunities will ease back this year

Good article I thought.

Trustpilot currently around 20% down - that's less than 50% of it's initial float price. Here's hoping Grow has got rid of their holding in that.

Interesting - GS analysts put the odds of a US recession over the next year at around 35%. The bank also thinks that American growth will be flat over the first three months of the year. The risks of a recession are even more elevated in Europe given more exposure to rising energy prices.

From a humanitarian perspective a ceasefire and compromise would be great. I think this will have limited impact on markets overall. It's not the conflict that markets are concerned about as such - it's the inflation - some of which results from the conflict, some of which is now present regardless of a ceasefire - i.e. Ukrainian wheat production, Russian energy, metals etc. The end of the conflict won't immediately reduce this risk or further inflation. Further escalation of the conflict will make the current situation even worse - i.e. sanctions on China of some description if they assist Russia with weapons etc. This will exacerbate the supply chain issues further still. Lots of moving bits. I think markets are in for a rocky couple of years. Doesn't mean they won't move up, but lots of obstacles.

Regardless of whether it is over more quickly than expected Russia will be isolated for years to come, again resulting in an uptick in inflation from where it was. The Ukraine's ability to produce wheat and metal will be seriously damaged for a significant period. All of this will push inflation up. It's not the war that will result in the recession that's likely at some point, it's the inflation. It is already entrenched and is likely to get worse. I have no idea what will happen to interest rates - probably the same as before, I don't think that will change. More spending on defence across Europe also means less money to spend elsewhere or even more borrowing. It doesn't bode well.

Just look at how many Oligarchs there have been - quite an amazing number over the years. In China they are entrepreneurial and it isn't all state given. The ability to continue to develop, get bigger, support etc is often a gift of the state (as we have seen) in China but they are required to come up with the ideas in the first place. That drives growth. Russia doesn't look like it has had that, but it probably has the richest President in the World by a long way.....even beyond Saudi Princes etc.

They don't have riches because a lot of the smarter middle class leave for pastures new as they don't appreciate the autocratic government. Plus the Oligarchs have most of the capitalist gains in a UK company there would be a number of senior individuals earning millions in a giant oil company, even more earning at the next level down, over there its political and the Oligarchs keep virtually everything, providing Mr Putin says they can. They are basically general managers for the state - they have never had to be that innovative as it has just come to them if they fall into line. That's why we don't have lots of Russian technology companies etc - along with the fact that a lot will be working in other sectors developing tech there that can't be monetised - arms, weapons, espionage etc.

I work in that sector. Given Russia aren't really that integrated with the world economy in many respects it isn't a big problem. There is a lot of operational stuff that goes with it, sanctions screening etc, but that has been in place for years anyway with Iran etc. There will be some areas of stress but our banks don't have that much exposure to Russia compared to their overall balance sheets. Primary risk comes in via inflation.

Of course the Russian oil will still sell - at a discount to those willing to purchase - an an appropriate premium on the 'non-sanctioned' black stuff!

There will be an in between. If the West embargoes Russian oil it will likely spike up to circa $200 a barrel at least. If that happens alongside Russia cutting European gas supply we will have a mass recession, alongside inflation that is out of control. What happens after that is anyones guess, but market turmoil under those conditions is almost guaranteed.

Beazley may have some political risk, terror exposure, along with some potential Cyber exposure (but only if things go down that route as part of the escalation, over and above the normal level of Cyber events). Nothing there I am overly concerned about and they will have limits and reinsurance. This is what they do. My only area that I would like more information on is their exposure re financial guarantee - i.e. aviation piece, guarantees / insurance provided to leasing companies. I believe a considerable portion of this sits with the company market, but some will be Lloyd's. I would imagine this is still a moving piece and they are still estimating exposures etc.

As I said, I am not convinced. Significant inflationary pressure on top of that already present. Inflation in the West could run to 15-25% in some areas. That will cause carnage. Who knows what will happen to interest rates. I have no idea re the pressures that the Russian financial system will place on global banking - I suspect that in itself will be relatively limited. I'm not buying anything more here for the moment. Mid £4s, early £5s I will start to think about it. 25% cash as I stand.

I hadn't even thought about sub £6 as a possibility at the start of the year. Wow. This has taken a leap down like everything else. At some point things become a bargain......

I don't entirely agree. I think this will have a profound and lasting impact on earnings in the West for the next 5 years or so. It's the impact on the energy market particularly in Europe. Inflation was already running hot and this won't help at all. I do think it will be an opportunity to acquire some companies at knock down prices. Grow is 45-50% off its peak, some are considerably more. The only big concern I have is that this is without a decent technology pullback which will come eventually. It hasn't yet. The war itself has more impact on companies making a profit - i.e. they are going to make less. Impact on yet to make a profit technology is here nor there - inflation and willingness to invest will however have an impact. It's also likely to suppress valuations. We are where we are. All the talk of £14 etc by the end of 2022 isn't going to happen here. We will be fortunate if we manage to get to £8.

This could well go lower as could a lot of other things. The discount to NAV has widened considerably. Quite normal when a market is somewhat distressed with given non listed investments in the core portfolio.