Category Archives: Investing

Time Value of Money

In courses about finance in the past, as part of job-related investment projections, for personal investments and as part of exercises related to posts in this blog I have discounted cash flows several times. Discounted? To those not initiated: it is about the time value of money.

Many course of finance start with the explanation of time value of money. You can find Wikipedia’s article here.

I recently came across the most descriptive and ancient (to my knowledge) explanation of the concept.

A bird in a hand is worth two in the bush”, Aesop, 600 B.C.

Seeking Wisdom: From Darwin to Munger, Peter Bevelin.

Seeking Wisdom: From Darwin to Munger, Peter Bevelin.

I found it while reading “Seeking Wisdom: From Darwin to Munger”, by Peter Bevelin, in which the author retrieved a passage from Warren Buffett’s 2000 Letter to the Shareholders of Berkshire Hathaway [PDF, 93KB, pg. 13]

Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

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Confusion of Confusions

Shuffling books among shelfs at home a few days ago, I came across “Confusión de Confusiones” by José de la Vega (Confusion of Confusions in English). This is a book I had referred to a couple of times in this blog but I never wrote about it.

José de la Vega was born in the province of Córdoba in Spain in around 1650. The family, Jewish, moved to today’s Netherlands to profess its faith. In 1688, he wrote Confusión de Confusiones, the oldest book ever written about the stock exchange business. The book takes the form of a dialogue between a shareholder, a philosopher and a businessman.

I read a hard cover Spanish version of the book edited by Macanaz. The editors did a great job. The book includes a ~30-pages dictionary at the end translating old Spanish words, Latin words, providing explanations for characters and places mentioned, etc. It also includes a 5-pages recap of the main advises José de la Vega provides to investors along the book.

The Amsterdam stock market at that time suffered from all the ailments that stock markets suffer today: hysteria, bulls and bears, irrationality, information asymmetry, etc. It is worth noting that the stock market at that time consisted of: one single trading place, Amsterdam, and one single company, the Dutch East India Company (Vereenigde Oost-Indische Compagnie, VOC). This may lead to think that everything should be quieter at that time, but as the author notes (1):

[…] you shall know that the Shares have three stimuli to go up and another three to go down: the status of India, the disposition of Europe and the gambling of the Shareholders. Thus, very often the news do not produce any benefit, because they take the flows to another direction.

The health of the business, the mood in the market place and the selling and buying of investors and speculators. That is all that it takes to provoke the financial ups and downs that in the end cause stock market crashes.

About the place and the way the market operated, he explained (extract from Google digitized English version, public domain, which however omits some paragraphs):

Extract from "Confusión de Confusiones".

Extract from “Confusión de Confusiones”.

To conclude with the comments on the book I will include here some of the advises from the author, first in Spanish so the readers of the blog who understand it can capture the language and then translated:

“Los necios, que de todo se afligen, de todo se lamentan, de todo se desesperan.”

“Los que están con la soga en la garganta no tienen otro cortejo que de verdugos.”

“¿Qué vale no arriesgar la hacienda, si se pierde el Alma?”

“Si el que compra algunas partidas, ve que bajan, rabia de haber comprado, si suben, rabia de que no compró más; si compra, suben, vende, gana, y vuelan aun a más alto precio del que ha vendido, rabia de que vendió por menor precio; si no compra ni vende, y van subiendo, rabia de que habiendo tenido impulsos de comprar, no llegó a lograr los impulsos.”

“En acciones no se debe dar consejo a nadie, porque donde está encantado el acierto, mal puede lucir airoso el consejo.”

“La máxima de los accionistas veteranos, es No casarse con las Acciones.”

“En perdiendo esperar, en ganando recoger.”

“Es ignorancia haberos dejado engañar, porque precediendo para la constancia tantos avisos, no pueden tener descargo los errores.”

“No quieren apercibir esta filosofía los inquietos, y como son aire, y es aire lo que tratan, para fabricar torres en el aire, juzgan que cuanto más se mueven más se exaltan, cuanto más se agitan más se calientan, y cuanto más se calientan más crecen.”

“Quien tal hace, que tal pague.”

“El punto no estaba en ver cómo se había de entrar, sino en considerar cómo se había de salir.”

… (see translations below (2))

Each of those sentences would suggest a topic for a whole post in itself; advisors, frequent trading, bubbles, short-term view, banks bail outs, etc…

The book is great, however it is quite difficult to read. Jose de la Vega lived in 1688 and was a philosopher; be prepared for the language he uses and the use of ancient History episodes to illustrate his explanations.

Finally, researching for this post I learned in the Wikipedia that the Federation of European Securities Exchanges (FESE) awards each year a prize honouring De la Vega to authors of outstanding research related to the securities markets in Europe. You can see here the list of winners of the prize.

Curiously enough, the 2013 prize went to Sophie Moinas from Toulouse School of Economics, for her paper “Liquidity Supply across Multiple Trading Venues” (jointly with Laurence Lescourret).

(1) Translations are mine, as I noted the book I have is a Spanish version of it.

(2) Translations of the advises:

“Fools, they grieve about everything, lament everything, despair with everything.”

“The ones with the rope in the throat are not courted by anyone but executioners.”

“What is it worth not to bet the house, if the soul is lost?”

“The one who buy some shares, if they, is angry at having bought, if they go up , is angry because he did not buy more; if he buys, they go up, sells, wins, and the share fly even higher than the price at which he sold, he is angry for having sold at a lower price; if he neither bought nor sold, and he sees the shares going up, he is angry because having had buying impulses, he failed to buy.”

“Regarding shares one should not give advice to anyone, because where success is haunted, it is difficult that the advice looks graceful.”

“The mantra of veteran shareholders, is Not marry the Shares.”

“When losing wait, when winning collect.”

“You have been an ignorant for having let yourself fooled, because preceding such a record of warnings, there can not be excuse for errors. “

“The restless do not want to embrace this philosophy, and like the air they are, and air is what they trade, to build castles in the air, they judge that the more they move the more exalted they are, the more agitated they are more over heated they become, and the more hotter they become they grow more.”

“He who does that, he who shall pay that.”

“The point was not in seeing how to enter in it, but in considering how to exit.”

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On Boards of directors and CEOs

The Economist issue published last week included an article (“From cuckolds to captains”) about the transformation of corporate boards. However, I wanted to extract the following passages:

For most of their history, boards have been largely ceremonial institutions: friends of the boss who meet every few months to rubber-stamp his decisions and have a good lunch. Critics have compared directors to “parsley on fish”, decorative but ineffectual; or honorary colonels, “ornamental in parade but fairly useless in battle”. Ralph Nader called them “cuckolds” who are always the last to know when managers have erred.


The first is that boards should focus on providing companies with strategic advice. This sort of common sense is often in short supply in the ego-driven world of boards. Boardrooms contain too many people with different priorities: corporate veterans who give lectures on how they would have handled things; egomaniacs who like to show how much they know about everything; hobby-horse jockeys who mount the same steed regardless of the race; captives of compliance who are obsessed with box-ticking. The authors say that in their experience perhaps half of the Fortune 500 companies have one or two directors they would regard as “dysfunctional”.

While reading these passages from the article I couldn’t help but remembering Warren Buffett on board of directors in his 2009 letter to Berkshire Hathaway shareholders [PDF, 116KB] (the emphasis is mine):

“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”


“In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.

Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 1 1⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.

If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is plenty of private snickering.)


“I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.

When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

After these paragraphs harsh on CEOs and directors, let me finish with two references to posts I wrote some time ago: “Is talent really worth it?“, a review of a book on CEOs pay, and “Buffett on shares buy back by companies“, excerpt from 1980 letter.

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Warren Buffett’s 2012 letter to the shareholders of Berkshire Hathaway: dividends, books and sport

Last Saturday Warren Buffett’s 2012 letter to the shareholders of Berkshire Hathaway [PDF, 155 KB] was released. As always, I strongly encourage you to read it (23 pages).

From this year’s letter, I wanted to comment on 3 things:

  • Lesson on dividends’ policy
  • Books
  • Running


Dividends’ Policy

In my opinion the great lesson from this letter starts at page 18, when Warren explains the different ways a company has to allocate earnings. He makes a comparison between dividends and what he calls the “sell-off” scenario, where a shareholder can be better off when the company is not paying dividends and instead reinvesting all earnings while the shareholder sells part of his shares to obtain some cash.

See the explanation below (bit long):

“We’ll start by assuming that you and I are the equal owners of a business with $2 million of net worth. The business earns 12% on tangible net worth – $240,000 – and can reasonably expect to earn the same 12% on reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 125% of net worth. Therefore, the value of what we each own is now $1.25 million.

You would like to have the two of us shareholders receive one-third of our company’s annual earnings and have two-thirds be reinvested. That plan, you feel, will nicely balance your needs for both current income and capital growth. So you suggest that we pay out $80,000 of current earnings and retain $160,000 to increase the future earnings of the business. In the first year, your dividend would be $40,000, and as earnings grew and the onethird payout was maintained, so too would your dividend. In total, dividends and stock value would increase 8% each year (12% earned on net worth less 4% of net worth paid out).

After ten years our company would have a net worth of $4,317,850 (the original $2 million compounded at 8%) and your dividend in the upcoming year would be $86,357. Each of us would have shares worth $2,698,656 (125% of our half of the company’s net worth). And we would live happily ever after – with dividends and the value of our stock continuing to grow at 8% annually.

There is an alternative approach, however, that would leave us even happier. Under this scenario, we would leave all earnings in the company and each sell 3.2% of our shares annually. Since the shares would be sold at 125% of book value, this approach would produce the same $40,000 of cash initially, a sum that would grow annually. Call this option the “sell-off” approach.

Under this “sell-off” scenario, the net worth of our company increases to $6,211,696 after ten years ($2 million compounded at 12%). Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own 36.12% of the business. Even so, your share of the net worth of the company at that time would be $2,243,540. And, remember, every dollar of net worth attributable to each of us can be sold for $1.25. Therefore, the market value of your remaining shares would be $2,804,425, about 4% greater than the value of your shares if we had followed the dividend approach.

Moreover, your annual cash receipts from the sell-off policy would now be running 4% more than you would have received under the dividend scenario. Voila! – you would have both more cash to spend annually and more capital value.”

As always, I believe that the best way is to make (play with) the numbers yourself, so you get to understand it once and for all. I paste here the numbers for those not being number-crunchers:

Buffett's sell-off case vs. dividends.

Buffett’s sell-off case vs. dividends.


Over 2 years ago, I read Buffett’s biography “The Snowball: Warren Buffett and the Business of Life“, by Alice Schroeder (of which I wrote a post); it seems that I will have to get the newest one by Carol Loomis, “Tap Dancing to Work: Warren Buffett on Practically Everything“.

There is another book that I should read, according to the following passage in the letter:

“Above all, dividend policy should always be clear, consistent and rational. A capricious policy will confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can’t switch capriciously between the two and retain the fans of either.”

I’ve got all three books in the shelf since 5 years ago, it’s a shame that I have not yet read or gone through the first one!


I found one final surprising and hilarious passage at the end of the letter embedded in the information related to the shareholders meeting:

“On Sunday at 8 a.m., we will initiate the “Berkshire 5K,” a race starting at the CenturyLink. Full details for participating will be included in the Visitor’s Guide that you will receive with your credentials for the meeting. We will have plenty of categories for competition, including one for the media. (It will be fun to report on their performance.) Regretfully, I will forego running; someone has to man the starting gun.

I should warn you that we have a lot of home-grown talent. Ted Weschler has run the marathon in 3:01. Jim Weber, Brooks’ dynamic CEO, is another speedster with a 3:31 best. Todd Combs specializes in the triathlon, but has been clocked at 22 minutes in the 5K.
That, however, is just the beginning: Our directors are also fleet of foot (that is, some of our directors are).

Steve Burke has run an amazing 2:39 Boston marathon. (It’s a family thing; his wife, Gretchen, finished the New York marathon in 3:25.) Charlotte Guyman’s best is 3:37, and Sue Decker crossed the tape in New York in 3:36. Charlie did not return his questionnaire.”

I would have loved to take part in that race. I will probably do so in some other year :-).

Final confession

Luca and I went a couple of years ago to Berkshire Shareholder meeting. This year’s meeting will take place on May 4th.

This year, Luca and I will get married on May 11th, but one of the dates we considered was April 27th, and one of the drivers behind it was to be able to attend 2013 BRK meeting during the honeymoon…


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Buffett on shares buy back by companies

I was reading last weekend Warren Buffett’s 1980 letter to Berkshire Hathaway shareholders, when I encountered the following passage about shares buy back by a company (emphasis is mine):

One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price? The competitive nature of corporate acquisition activity almost guarantees the payment of a full – frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise.”

Then, sometimes, we see companies that decide to hold excess cash while waiting for opportunities of what to do with it, or to protect themselves against uncertainty, etc. Some do as Buffett says and buy back at minimum prices. Others do the contrary, they buy back shares at maximum prices.

There is always an explanation to taking one option or the other, even if the final reason is not always told, understood…


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Our investment fund in 2012

It is 4 years now since Luca and I started investing together. This is the 3rd year publishing this post in which I explain how our investments fared along the year. In previous years’ post I had explained how we had adopted for our personal investments the same approach mutual open-ended funds have.

Brief recap for newcomers:

As I explained last year, we had to define a net asset value per share (valor liquidativo de la participación) at the beginning of the period. This net asset value per share rises and decreases as the aggregate share prices of the stocks in the portfolio rise or decrease. When an investment fund informs about its yearly results it is referring to the performance of this net asset value per share.

Each time that there is an addition of capital (new investments, in this case by Luca or me) it is treated as an issue of new shares to ourselves. It doesn’t matter that we are the only “shareholders”. Depending on whether the net asset value has increased or decreased we are acquiring the new shares at a higher or lower price than we acquired the previous ones. Exactly as it works in a fund.

Let’s go to this years results: How did the year 2012 go? As last year, this is going to be a humbling exercise :-).

In 2012 we have not been very active investors, not doing many transactions nor adding lots of funds to the investments (with a wedding in sight we had a preference for cash). We mainly held previous investments and sold a couple of positions which already earned what we expected (1).

During 2012 I took note of the fund value about 30 times, so we could get an idea of how the fund evolved. As you may see in the graphic below, the net asset value per share at the beginning of 2012 was 47.28€ while at the end it fell to 44.63€, that is -5.6%. This was the performance of the fund in 2012 (again not good enough to sell subscriptions to the fund! :-) ).

"J&L" investment fund 2012 performance (built in Google spreadsheet linked to Google Finance data, thanks to a friend's invaluable suggestion).

How does it compare with the main indexes?

  • S&P 500 ~ +13.41% (this is the target index)
  • Dow Jones ~ +7.26%
  • NASDAQ ~ +15.91%
  • IBEX 35 ~ -4.6% 
  • Euro Stoxx 50 ~ +13.65%

The gains of the fund since its creation in January 2009 have been+53.69%, with a compounded annual gain of +11.3% (remember this always refers to the net asset value per share – marked by the first 2 positive years – and cash gains cannot be directly derived from the net asset value performance times the total assets).

Two years ago, I introduced the comparison with leading Spanish value investing fund managers from Bestinver (2). Let’s do the exercise again:

  • Bestinfond ~ +16.52%;
  • Bestinver Internacional ~ +16.89%;
  • Bestinver Bolsa ~ +14.88%.

All in all, 2012 has been a good year to present general results, except in Spain and for us, due to some shipping and mining stocks that didn’t fare well in 2012. Let’s see how they go in the coming years.

I’ll keep you informed next year of this year’s results.


(1) Unhappily we are not any longer shareholders of Pzifer, with its bluish star pill

(2) Disclaimer: Since sometime in 2011, we have also positions in Bestinver (which we increased in 2012), though I don’t get any fees for promoting it in the blog. (Our positions with Bestinver are excluded from the calculations of “J&L” fund to allow for clean comparisons).

NOTE: “J&L fund” numbers are pre-tax of capital gains realized, include dividends (twice taxed) and are net of transaction costs & brokerage commissions.

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The Cosmonaut: date of release and update

I became an investor (for 100€) and producer (by buying a T-shirt) of the movie “El Cosmonauta (“The Cosmonaut”) about a year ago. I wrote then a post (in Spanish) about it as I had done when I first learnt about the movie in a TEDx conference two years ago.

Last week a received an update of the project via email. The team confirmed that the movie will be released in April 2013 and what it’s more important, it showed the update of “The Plan [PDF, 3.9 MB, in Spanish], a revision of the budget and the cash-flows to date. The Plan is 50-page document where the team explains the strategy for the product, which in this case is not just a movie.

My brother uses to remind me “it will only be success if the movie is good, no matter how fancy or novel the project behind is”. It might be true. But the project behind is indeed fancy and novel.

Reading the update of The Plan, one can see the variety of activities that have gone and go with the movie, the breadth of contents, formats, etc., to name a few:

  • The use of crowdfunding: to raise up to nearly 400k€ from over 4,500 investors (equity, almost 500 of them) and producers (buyers of merchandising prior to movie release).
  • Creation of a community: having organized several meet-ups and parties with investors. Planning to organize a big event with them for the release of the movie.
  • The use of Creative Commons: releasing the movie free for the viewer under Creative Commons licence.
  • One single release of the movie: which will be available at the same time in cinemas, TVs, free online, DVD…
  • Awareness: having appeared in dozens of media, hundreds of blogs and several festivals.
  • Case of study: in universities, business schools, subject of PhDs…
  • Prizes: having won several prizes for its innovation, entrepreneurial side, etc.
  • 4 classes of content: free to use, creative commons, under subscription, branded.
  • Webisodes: the movie will be accompanied by 37 short episodes showing secondary pieces, which will not be part of the main movie.
  • Documentaries: about the process of filming the movie from the perspective of a hummingbird and a crude making off.
  • Facebook profiles of the movie characters which will interact with fans at the time of the movie release.
  • Poetry book about cosmonauts.
  • Educational materials: developed for cinema schools and students.
  • Workbook manual of cinema.

If you want to know more, take a look at The Plan :-).

The project is really fresh and captivating, I wish the movie matches it. I leave you for now with the trailer of the movie:

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Crowdfunding science

I have written sometimes in the blog about crowdfunding. How I started funding loans for small entrepreneurs in developing countries via Kiva, or how I invested a small amount in the movie project “El Cosmonauta”, and more generally I have shared yearly contributions to other non-profits.

I heard for the first time about crowdfunding science some time ago, but didn’t keep track of it. Thus, when I read the last week in The Economist an article featuring some platforms where to crowdfund science I decided to take a look at those and to post about it in the blog. The purpose of the post is twofold: raise awareness about an initiative that I support (even if not yet with money) and to let myself keep track of them from now on.

The article mentions 4 platforms. Two of the platforms look more science-focussed and the other two more generalist:

  • Petridish: “Petridish lets you fund promising research projects and join first hand in new discoveries.”
  • Microryza: “We’re researchers and scientists. We live and breathe this stuff. We know that too many important research ideas go unfunded. So we created Microryza. We believe that the discoveries made through research help make the world better, that researchers should keep 100% ownership of the research and results, and that a community of people who care about science is all that’s needed to help seed fund new ideas.”
  • Rockethub: “RocketHub is the world’s funding machine. RocketHub is an international and open community that has helped thousands of artists, scientists, entrepreneurs, and philanthropists raise millions of dollars. We offer an innovative way to raise money (Crowdfunding) and tangible opportunities to take creative products and endeavors to next level (LaunchPad Opportunities).”
  • Indiegogo: “Everyone should have the opportunity to raise money. Now everyone does. People all over the world use our industry-leading platform to raise millions of dollars for all types of campaigns. No matter what you are raising money for, you can start right now with no fee or application process.”

I will let you know the moment I opt to engage with a particular scientific research :-).

Note: I leave aside the debate of whether budget for science should be ensured by the states.

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EADS and BAE Systems merger talks

I first learnt about the merger talks between EADS and BAE Systems via a tweet from my brother:

I then suggested that the possible kind of “last supper” might have been the “Defence and Security Co-operation Treaty” signed almost 2 years ago between France and United Kingdom.

Last supper. First, what is that “last supper” my brother was referring to? It refers to a meeting that was called in 1993 by William Perry, then US Deputy Secretary of Defense, in which he explained defence contractors the post-Cold War defense strategy which called for defense industrial base consolidation. In the chart below, you can see the spree of mergers and acquisitions that took place in the following years:

US defence contractors consolidation after “last supper” in 1993.

In Europe at the time there was a similar consolidation trend, which ended in mainly 3 big European aerospace and defence groups: EADS, BAE Systems and Finmeccanica.

Setting the record straight. Prior to the definition of those 3 groups, several discussions took place at the end of the 90s between different companies. Some articles that I have read about the EADS and BAE talks mention that after conversations between German DASA and British Aerospace failed in 1998 (when BA opted for acquiring GEC Marconi), DASA underwent the acquisition of the Spanish Construcciones Aeronáuticas SA (CASA). Well, this is not true. It never happened. DASA merged with French Aerospatiale. Some months later CASA joined the merged when EADS was created. This is well reflected in many other articles. Just as a side note: Tom Enders, current EADS CEO took a role personally in those conversations between DASA and BA already in 1998.

Balance between Defence and Civil business. Most of the articles that we can read today mention the strategic goal of EADS in balancing its defence portfolio with the civil one. Two years ago I wrote a post which included some graphics comparing the then largest world defence companies. I compared the relative size of each company and how defence-oriented their businesses are. Today, I will make use of one of those graphics to show the profile of the two companies, EADS and BAE Systems to weigh that strategic fit:

EADS vs BAE. Size and defence profile.

Stock Market response. The merger talks were announced last Wednesday 12th. The closing prices of each company the previous day were:

  • EADS: 29.67€. This is, a market value of 24.3bn€.
  • BAE Systems: 328pc. This is, a market value of 13.3bn€ (taking that day exchange rate of 1.25).

That is, the combined merger would be 37.6bn€; 64.6% coming from EADS, 35.4% from BAE. However, the announcement mentioned a 60/40 split of the parent company. That is, the announcement pointed investors that either EADS was overvalued (up to +17.7% to get a 60/40 split keeping BAE’s value constant), BAE undervalued (up to -21.5% to get a 60/40 split keeping EADS’ value constant) or somewhere in between.

In the following days, EADS price fell down and then stabilised, BAE went upwards. On Friday they closed at:

  • EADS: 25.31€. This is, a market value of 20.7bn€.
  • BAE Systems: 347pc. This is, a market value of 14.1bn€.

That is a split of 59.5%/40.5%… thus, the market understood EADS was overvalued around -15% while BAE was undervalued around 6%.

Self praise. Taking that price in which now EADS sells, 25.3€ (undoubtedly guided by the 60/40 split), I wanted to bring back another post I wrote about a year ago. In that post, I mentioned that I valued EADS at a price of 24€… Not bad :-).


Filed under Aerospace & Defence, Investing

Stocks & media hype

Last Friday after US stock markets closed I went to check the performance of the portfolio and meanwhile saw some headlines for business and general online papers: “Worst day of 2012“.

I didn’t feel that the day had been especially bad regarding stock markets. Both the Dow Jones and S&P 500 fell -0.69%, which indeed had been the worst day so far in 2012, but so far both indices had returned over 7.5% and 5.5% in the first 5 weeks of the year. So, I guess that what wasn’t the norm was the positive trend with only about 3-4 bad days so far.

S&P 500 in 2012 through February 10.

I went further and compared the -0.69% to 2011 numbers, in this case only with S&P 500.

How many days did the index go below -0.69% in 2011?

64 days out of 252 trading days, that is 25% of the time. The index went up more than +0.69% for other 67 days (27% of the time). It went down but less than -0.69%, 51 days and up but less than +0.69%, 70 days. Quite an even distribution.

So, compared to 2011, a market move of 0.69%, up or down, was rather the average. During the whole year the S&P 500 returned barely 0%, so it’s true that 2011 wasn’t a particular good year, and it was as well especially volatile, indeed the average move along the year was ~1.04% and the median was 0.74%, either positive or negative.

S&P 500 in 2011.

This is just to point something not new: Mr. Market’s moves coupled with media hype aren’t good companions for taking investing decisions.

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Filed under Investing