Stephen Clapham's Blog, page 8
June 20, 2023
What I learned from a £2000 investing course
One of the things that struck me from my podcast with Sir Clive Woodward was his commitment to continuous learning.
In case you didn’t know, Woodward took the England rugby team from #6 to #1 in the world and left no stone unturned in his pursuit of excellence and a winning edge. During the podcast, Clive talked about how he wanted a team of sponges (people willing to learn), not rocks (people set in their ways).
Source: Sir Clive WoodwardHe recalls being pilloried by the UK tabloids when he issued laptops to every squad member and insisted they learn to use them. One tabloid suggested he should give the team red meat instead. But his strategy worked and he continues to promote the idea of continuous learning. He talks about teachability:
“Teachability is a common trait that I’ve seen across all Champion performers in sport or business. [It’s] essentially your ability to learn and your ability to take onboard new knowledge and have a passion for what you do.”
Check out the podcast.
My ExperienceAs you may have gathered, I’m not an international rugby player. But, like you, I am an investor. And the idea of continuous learning is just as important for us. For example, I recently went on Russell Napier’s course, A Practical History of Financial Markets. It’s not the cheapest course (it’s over £2,000, with the proceeds going to a charity). But with high quality lecturers including Russell, Edward Chancellor and Peter Warburton, I thought I would get two important benefits:
I run investing courses, so I thought observing practitioner-teachers in action would improve my training skills.I would learn from the lessons of history and benefit both in my personal investments and in my writing.Both turned out to be true. It was a full-on course – starting at 8am and finishing at 8pm for two days, then a half day to finish. So what did I learn?
A central tenet of the course is mean reversion in valuation. We looked at valuation over nearly a century and a half, and it was certainly a recurring theme. The issue with looking at data over such a long time span is that the world is obviously very different today. For example, the move from tangible assets to intangible assets, which has been pronounced over the last quarter of a century, must affect the use of measures like Tobin’s “Q”.
Tobin’s Q is the ratio of market capitalisation to the replacement cost of a company’s assets.
I enjoyed the section on monetarism and how money is created through the commercial banking system, and learned a lot. Even though I had to leave for a part of that session, I came away with a much clearer picture. The section on economics wasn’t new to me, but again I was able to observe the different cycles in history and put today’s inflation into context.
The final part of the course was the most interesting as Russell explained bear and bull market cycles and a hosted a good discussion on what might come next. I enjoyed Edward Chancellor talking about the capital cycle, a subject I am very familiar with from my friends at Marathon and Hosking & Partners. There was also an excellent, lighter look at demographics and similar non-financial trends with Jon Compton.
But was all this worth over £2k? Would I be able to get a stock idea out of it, for example? Well, there was no short term money to be made in the market as a result of my doing the course. But it was absolutely worth doing, if for no other reason than it made me stop and think. There is huge value in education like this. Improving your knowledge and understanding is always worthwhile, even if the topic is not directly relevant to your immediate work needs.
When I do a Zoom call with an institutional client to introduce my Forensic Accounting Course, I tell them that even if I am useless, their team will benefit because they will think in a different way. They will be more aware of the risks in the stock market and if that helps them avoid a single blow-up, it will more than pay for itself. I’ve been told that my course is actually very good, but it doesn’t need to be. Half of the gain is from recognising that there is scope for improvement.
Ironically, as stock markets and economies get choppier, the need for more intensive training increases, particularly awareness of forensic accounting. But as AUM comes under pressure, so do institutional revenues, and training is often a discretionary item. I am not expecting to have a busy year in 2023 as budgets will be constrained. Yet looking at what my clients actually need, I ought to be flat out.
How this applies to private investorsThe concept of continuous learning obviously doesn’t end with institutions. As a private investor, it is also essential. And as I see it, there are seven main ways to improve your investing technique:
Lose moneyLearn from booksLearn from podcastsLearn from videosLearn from blogs/newsletters/magazinesLearn from online coursesLearn from in person coursesLose moneyIf you want to learn how to invest, losing money is the best way to do it. Why? Because you don’t forget the lessons and it will limit your future losses. I can’t say you won’t make the same mistake again. I often do. But it’s the most reliable method.
The problem is that it’s also the most expensive. You need to lose meaningful amounts to feel the pain needed to discourage repetition of the mistake. You cannot avoid losing money, but you can mitigate some of the more stupid losses by other, cheaper modes of learning.
Learn from booksBooks are a good way to learn and there are a huge number of great investment books to choose from. I picked a selection of 20 books that are worth starting with and posted that in the Investing Resources section of my website, under Top 20 Books. Of course, I would like everyone to buy my book, The Smart Money Method, but there are lots of great books to choose from.
But simply reading the book is not enough – you need to take notes in order to learn. I may return to this subject as it surprises me how many people expect to read a book and retain the information. I don’t think passive reading is enough, and I have a system to collate my impressions. This gives me material to reference later, as well as boosting the amount of information I retain.
Learn from podcastsThis is in some respects a more difficult method of learning because you often listen to podcasts while you are doing something else – I listen on my walk to work for example and it’s quite easy to get distracted. I used to have an app which allowed me to save an audio clip on the go. I could then have it transcribed, but the app sadly disappeared – if anyone knows of an alternative, please reply to this email! I now simply jot down important takeaways in the notes app on my phone. But it’s a more laborious process and not always possible – for example, in the car.
My favourite podcasts are listed on my website with a top 20 and next 30. See the Top 20 Podcasts page. I value both the interviewer and interviewee. I have just listened to two “top” podcasts interview the same guest and there was a world of difference. It could have been a different guest.
If you are subscribed to my newsletter, you might want to check out my podcast if you haven’t already. But don’t forget: Some of your biggest lightbulb moments will come from non-investing podcasts – for example, I think Shane Parrish of the Knowledge Project is particularly good.
Learn from videosYouTube is an amazing resource. So much so that the sheer volume of content is the biggest problem you have to deal with. I have a spreadsheet of over 100 YouTube videos, some of which we recommend as additional “homework” in the relevant sections of our online courses. We also intend to produce a list of the top 20 and next 30-ish investing video channels. But this takes time and it’s still on the to do list, as you can see from our website:
Learn from blogs/newsletters/magazinesI include here Substack posts and newspapers as well as magazines. The Financial Times and the Wall Street Journal are my two go-to newspapers and the opinion columns are really helpful in understanding issues. Similarly, the Economist magazine is fantastic and in the UK, investor focused magazines like Investors Chronicle and Moneyweek are helpful (I write for both). In the US, I like Value Investor Insight. Bloomberg Business Week is also great, but I cancelled my subscription as the print delivery was random – and I like to read the print editions. I would love to hear other magazine suggestions from readers, particularly in other regions. Please just reply to this mail.
My younger students are often puzzled by my preference for the printed word. I spend enough time on-screen and my retention is better if I consume content in printed form. I am also better able to understand the significance of an article from its position in the print edition (notably the FT). I would encourage readers to try the print editions – it really works.The number of Substack newsletters just keeps growing. Our Top 20 list has a total of over 100 newsletters listed and we have another 20-30 in progress. The list changes so fast that it’s hard to keep pace. I built the page as I thought investors needed a discovery engine. Please take a look and let me know what you think.
The issue here is again one of volume vs quality – it’s really hard to pick out which are the good letters from an ocean of content. Then you have the question of which ones are worth paying for and how much.
The problem in learning this way is that it will take you a huge amount of time to work out what is worth reading, and I am not sure if it’s worth the effort. Interestingly, it’s a problem which will be resolved as demand is growing, albeit not nearly at the rate of supply. I had lunch with a friend who has a start-up fund and whose commission budget is 1% of his former $10m+ pa. So he was asking which newsletters to consider. This need will grow and a better intermediary than our limited efforts will emerge. I would like to build a newsletter discovery website but I don’t have the time; if a graduate reading this wants to have a go, please get in touch.
Learn from online coursesI built my online investing school as I realised that a book can only take you so far. There is no way to question the author and very few books include exercises, which are the most effective way of learning a complex topic like investing.
My Analyst Academy course was designed in conjunction with some highly experienced fund managers and analysts. In the three years (and hundreds of students) since, we have fine-tuned the content repeatedly.
Despite this, there is a big problem with online courses – and it isn’t the quality of the content. The issue, of course, is finding the motivation to complete them. Especially a course as intensive as the Analyst Academy. My plan at first was to allocate people to a cohort, getting them to start together and move at the same pace. That proved quite difficult as each student naturally moved through the syllabus at their own pace.
I am not sure there is a real solution to the completion issue. At the moment, I ask students to make a written commitment at the start. This has worked pretty well for us, but our completion rate is not 100% and I sometimes worry about taking people’s money without them reaping the full benefit. Perhaps I am too idealistic.
Our content is really practical and high quality, but it also benefits from:
The facility to ask questions in a community. Students are encouraged to ask questions whether directly course related, indirectly or more general. And students are encouraged to offer responses because the best way to test your understanding of a concept is to attempt to explain it. The answers are of course checked for accuracy and I always add an explanation.A regular webinar programme where students can interact with me and each other over Zoom. In the first part of the webinar I explain concepts. In the second part, there is time for Q&A. This allows students to ask more detailed or broader questions where some discussion is needed. It also lets me answer questions that might be difficult or take too long to answer in written form.All the content is presented in a variety of formats. The main medium is video, be it through the core video lectures or the webinars, which are recorded to allow a second pass at more difficult concepts. Then you have the printed word with lots of PDFS to download and further written notes on the course pages, as well as spreadsheets (especially for exercises), audio content and third party video content.
I accept there is a motivational issue – you must want to complete the course – but we have had great success with both private and professional investors. One multi trillion firm is trialing it as an alternative to the CFA (spoiler, it’s much better at preparing you for an analyst’s role). Plus we’ve had several funds taking it as their main method of training staff. For example, we recently had both a large UK pension fund and the #1 asset manager in a European country sign up their entire research departments.
Competitors’ online courses tend to look fancier but provide more academic solutions which are of limited help in the real world. But in saying that, they also tend to be cheaper and may well be worth considering.
Learn from in person coursesPersonally, I think this is the best solution. Courses like Russell’s are invaluable, not only because of the learning they provide and the ability to ask questions as you go, but also in the ability to interact with other students. This even works over Zoom – I have several Zoom friends I have met on courses and some of these are even translating into real life friendships. I have met two people in real life from this source in the last few months.
I used to run physical courses in my office in the City of London for smaller funds and serious private investors. I stopped during Covid but have launched some Zoom based courses since. Email me at info@behindthebalancesheet.com if you would like to be put on the mailing list for our Forensic Analysis Bootcamp. I can recommend Russell’s course, but I haven’t been on any others so it’s difficult to suggest others.
ConclusionLearning is a useful and enjoyable endeavour. It’s also one that is essential for investors, but they don’t pay enough attention to it. In my view, training in most institutional environments is often limited. There is the CFA of course, but it has serious shortcomings. Besides that, training is often associated with the annual Money Laundering Course and similar boring compliance routines rather than a desire to improve performance. This is shocking when the benefits are so obvious – learning can be enormous fun and gives individuals the opportunity to grow. It should surely be a priority for most investing institutions, but in my experience, it is given too low a priority.
For the retail investor, a learning programme is essential. You will improve your skills so much more quickly if you study what works and what investing style suits your temperament. A programme dedicated to building your understanding is an essential step towards beating the market. And it’s great fun.
The post What I learned from a £2000 investing course appeared first on Behind The Balance Sheet.
June 9, 2023
May 24, 2023
May 23, 2023
May 17, 2023
#23A/B -The Best-Selling Author
William Green is the author of Richer Wiser Happier, an outlier in investing books as a best-seller. He is a craftsman and a perfectionist and having interviewed 40 of the world’s top investors for the book, has some fascinating perspectives on investing and on life.
SUMMARYWilliam Green spent five years painstakingly crafting Richer Wiser Happier and distilling his learnings from interviewing 40 of the world’s top investors. This was a labour of love for him – he didn’t take a vacation in that time – and he went to extraordinary lengths, for example one chapter contains 11,111 words, because he liked the number. The love and careful craftmanship shines through and is what made the book a best-seller.
GETTING INTO INTERVIEWING INVESTORSGreen always wanted to be a writer and studied English Literature at Oxford. He fell in love with markets, partly as he saw it as “a smart alec short cut way of making a living without doing too much work”. He had his first article published almost by accident and ended up as a journalist. Interviews with great investors followed. He persuaded John Templeton to see him for a Forbes article with an element of cunning and guile.
As he interviewed more successful investors, he became more interested in the personality types, and it became a moral and intellectual pursuit – how do you build a sustainable and successful life?
“The great investors are playing this game they can’t get enough of” – very true of Mario Gabelli, for example, our last guest.
The money is a good scorecard but the game itself is intoxicating. And Green suggests we ask ourselves “am I playing some game that I am really suited to play?” and “am I really passionate about it?”
RICHER, WISER, HAPPIER
Green spent five years writing the book, which unusually for an investing book, has become a best seller. It was an all consuming passion, he didn’t take a vacation in that period. He says he wanted to create something “true, beautiful and good”. He interviewed 40 investors for the book, and the people he went big on were the good thinkers, people to learn from, people he admired.
Green mirrors some of the qualities of some of these great investors – the obsessiveness, committing to quality in an uncompromising way in the same way some of the investors seek out quality investments.
Some of the most popular highlights of the book include:
Sixth, said Templeton, “One of the most important things as an investor is not to chase fads.”
“There are four things that we know improve brain health and brain function,” says Shubin Stein. “Meditation, exercise, sleep, and nutrition.”
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
Source: Amazon
ABOUT WILLIAM GREENWilliam Green is the author of RICHER, WISER, HAPPIER: How the World’s Greatest Investors Win in Markets and Life.
Green has interviewed the world’s most successful investors, exploring in depth how they have achieved such success in a highly competitive field. And how we can benefit by copying their winning strategies.
Green has written for The New Yorker, Time, Fortune, Forbes, Barron’s, Fast Company, Bloomberg Markets, and The Economist. He has collaborated on several books and worked closely with renowned his friend Guy Spier on his book, The Education of a Value Investor. Green also wrote and edited The Great Minds of Investing, which briefly profiles 33 renowned investors.
Green was born in London, went to school at Eton (our 3rd Old Etonian on the podcast), studied English literature at Oxford University, and received a Master’s degree from Columbia University’s Graduate School of Journalism. He lives in New York with his wife and family.
BOOK RECOMMENDATIONSGreen recommended two books:
Why We Meditate: 7 Simple Practices for a Calmer Mind by Daniel Goleman and Tsoknyi Rinpoche.
A new book which teaches you how to overcome negative thoughts
Buy on amazon.co.uk
Buy on amazon.com
Letting Go by David Hawkins.
This book describes a method of using an inner mechanism of surrender – this is a practical way of releasing inner blockages to happiness.
Buy on amazon.co.UK
Buy on amazon.com
William didnt suggest his own book, but I shall. It’s a book which will indeed make you wiser and happier. It may not make you financially richer but you will be richer as a person.
Buy on amazon.co.uk
Buy on amazon.com
HOW STEVE KNOWS THE GUESTSSteve asked William if he would come on the podcast and he kindly said yes. THey almost met up in Omaha, maybe next yearh
TranscriptThis is an AI generated transcript – let us know if it’s good enough and useful.
The post #23A/B -The Best-Selling Author appeared first on Behind The Balance Sheet.
#23 -The Best-Selling Author
/*! elementor - v3.13.2 - 11-05-2023 */.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#69727d;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#69727d;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block} William Green is the author of Richer Wiser Happier, an outlier in investing books as a best-seller. He is a craftsman and a perfectionist and having interviewed 40 of the world’s top investors for the book, has some fascinating perspectives on investing and on life.
/*! elementor - v3.13.2 - 11-05-2023 */.elementor-column .elementor-spacer-inner{height:var(--spacer-size)}.e-con{--container-widget-width:100%}.e-con-inner>.elementor-widget-spacer,.e-con>.elementor-widget-spacer{width:var(--container-widget-width,var(--spacer-size));--align-self:var(--container-widget-align-self,initial);--flex-shrink:0}.e-con-inner>.elementor-widget-spacer>.elementor-widget-container,.e-con-inner>.elementor-widget-spacer>.elementor-widget-container>.elementor-spacer,.e-con>.elementor-widget-spacer>.elementor-widget-container,.e-con>.elementor-widget-spacer>.elementor-widget-container>.elementor-spacer{height:100%}.e-con-inner>.elementor-widget-spacer>.elementor-widget-container>.elementor-spacer>.elementor-spacer-inner,.e-con>.elementor-widget-spacer>.elementor-widget-container>.elementor-spacer>.elementor-spacer-inner{height:var(--container-widget-height,var(--spacer-size))} SUMMARYWilliam Green spent five years painstakingly crafting Richer Wiser Happier and distilling his learnings from interviewing 40 of the world’s top investors. This was a labour of love for him – he didn’t take a vacation in that time – and he went to extraordinary lengths, for example one chapter contains 11,111 words, because he liked the number. The love and careful craftmanship shines through and is what made the book a best-seller.
/*! elementor - v3.13.2 - 11-05-2023 */.elementor-widget-image-box .elementor-image-box-content{width:100%}@media (min-width:768px){.elementor-widget-image-box.elementor-position-left .elementor-image-box-wrapper,.elementor-widget-image-box.elementor-position-right .elementor-image-box-wrapper{display:flex}.elementor-widget-image-box.elementor-position-right .elementor-image-box-wrapper{text-align:right;flex-direction:row-reverse}.elementor-widget-image-box.elementor-position-left .elementor-image-box-wrapper{text-align:left;flex-direction:row}.elementor-widget-image-box.elementor-position-top .elementor-image-box-img{margin:auto}.elementor-widget-image-box.elementor-vertical-align-top .elementor-image-box-wrapper{align-items:flex-start}.elementor-widget-image-box.elementor-vertical-align-middle .elementor-image-box-wrapper{align-items:center}.elementor-widget-image-box.elementor-vertical-align-bottom .elementor-image-box-wrapper{align-items:flex-end}}@media (max-width:767px){.elementor-widget-image-box .elementor-image-box-img{margin-left:auto!important;margin-right:auto!important;margin-bottom:15px}}.elementor-widget-image-box .elementor-image-box-img{display:inline-block}.elementor-widget-image-box .elementor-image-box-title a{color:inherit}.elementor-widget-image-box .elementor-image-box-wrapper{text-align:center}.elementor-widget-image-box .elementor-image-box-description{margin:0}GETTING INTO INTERVIEWING INVESTORSGreen always wanted to be a writer and studied English Literature at Oxford. He fell in love with markets, partly as he saw it as “a smart alec short cut way of making a living without doing too much work”. He had his first article published almost by accident and ended up as a journalist. Interviews with great investors followed. He persuaded John Templeton to see him for a Forbes article with an element of cunning and guile.As he interviewed more successful investors, he became more interested in the personality types, and it became a moral and intellectual pursuit – how do you build a sustainable and successful life?“The great investors are playing this game they can’t get enough of” – very true of Mario Gabelli, for example, our last guest. The money is a good scorecard but the game itself is intoxicating. And Green suggests we ask ourselves “am I playing some game that I am really suited to play?” and “am I really passionate about it?”
RICHER, WISER, HAPPIER
Green spent five years writing the book, which unusually for an investing book, has become a best seller. It was an all consuming passion, he didn’t take a vacation in that period. He says he wanted to create something “true, beautiful and good”. He interviewed 40 investors for the book, and the people he went big on were the good thinkers, people to learn from, people he admired.
Green mirrors some of the qualities of some of these great investors – the obsessiveness, committing to quality in an uncompromising way in the same way some of the investors seek out quality investments.
Some of the most popular highlights of the book include:
Sixth, said Templeton, “One of the most important things as an investor is not to chase fads.”
“There are four things that we know improve brain health and brain function,” says Shubin Stein. “Meditation, exercise, sleep, and nutrition.”
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
Source: Amazon
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Green has interviewed the world’s most successful investors, exploring in depth how they have achieved such success in a highly competitive field. And how we can benefit by copying their winning strategies.
Green has written for The New Yorker, Time, Fortune, Forbes, Barron’s, Fast Company, Bloomberg Markets, and The Economist. He has collaborated on several books and worked closely with renowned his friend Guy Spier on his book, The Education of a Value Investor. Green also wrote and edited The Great Minds of Investing, which briefly profiles 33 renowned investors.
Green was born in London, went to school at Eton (our 3rd Old Etonian on the podcast), studied English literature at Oxford University, and received a Master’s degree from Columbia University’s Graduate School of Journalism. He lives in New York with his wife and family.
BOOK RECOMMENDATIONSGreen recommended two books:
Why We Meditate: 7 Simple Practices for a Calmer Mind by Daniel Goleman and Tsoknyi Rinpoche. A new book which teaches you how to overcome negative thoughts
Buy on amazon.co.uk Buy on amazon.comLetting Go by David Hawkins.This book describes a method of using an inner mechanism of surrender – this is a practical way of releasing inner blockages to happiness.
Buy on amazon.co.UK Buy on amazon.com RICHER, WISER, HAPPIERWilliam didnt suggest his own book, but I shall. It’s a book which will indeed make you wiser and happier. It may not make you financially richer but you will be richer as a person.
Buy on amazon.co.uk Buy on amazon.com
HOW STEVE KNOWS THE GUESTSSteve asked William if he would come on the podcast and he kindly said yes. THey almost met up in Omaha, maybe next yearh
Prev#22 -The OctogenarianThe post #23 -The Best-Selling Author appeared first on Behind The Balance Sheet.
May 16, 2023
Aston Martin’s £142 million hangover
In my previous look at Aston Martin, I covered the latest fundraising and looked at the treatment of capitalised R&D. This time I want to cover the other intangible assets. These are often overlooked by analysts, but I believe the treatment of such assets often gives a clue as to the psychology of the chief financial officer or finance director.
I like my finance chiefs to be old, grey-haired and conservative – they usually don’t like to have too much in the way of intangibles, perhaps some goodwill and similar acquisition-related assets, but not much else. Aston apparently employs a racier type of finance specialist, judging from its Intangible Assets note.
Aston Martin Intangibles
Source: Aston Martin 2021 AccountsAs I pointed out last time, the company is carrying £1.4bn of intangibles on its balance sheet with a gross cost of £2.2bn and an amortisation last year of just £135m. We looked at the capitalised development costs then, so let’s now take a closer look at the other intangible assets.
Starting at the right with software, the company has £67m of capitalised software, only added £4m last year and wrote off £3.5m – the net book value is just £10m. The accounting policy is a life of three to 10 years, which sounds rather long. Software is mentioned only three times in the annual report – first is “the business has renewed its focus on in-house intellectual property development, including software and skills relating to electric vehicles, thereby fostering engineering excellence within our corporate DNA”. The other two are accounting policies and this note.
Aston Martin Amortisation Policy
Source: Aston Martin 2021 AccountsPerhaps the company is making immense investments in software and writing it all off through the P&L. In which case, why capitalise anything? I cannot conclude anything from reading this part of the note, but if I were still at a hedge fund, I would be asking Investor Relations what the £4m represents, what is the total spend and is the company investing enough?
Working from right to left, the second asset is the dealer network, £15m gross and £5m net. Formerly this was lumped together with software, which was quite confusing. Depreciation is £0.7m, consistent with the 20-year life in the accounting policies note. The network has a further 6.5 years of amortisation and it’s possible that Aston could still be around in 2030. But it seems an unusual asset to be carrying on your balance sheet and I wonder how they derived its value.
Aston today has more than 160 dealerships in 53 countries. It presumably had fewer when the asset was initiated, but it puts a value of about £100,000 on a dealer – or less than the value of the average demonstrator. To be clear, I am not advocating that they should increase the value of the asset, just wondering what a dealership might be worth to the company. I would have thought that there were candidates queueing up to sell Aston Martin cars.
We covered the capitalised development costs last time. I will come back to the technology. Goodwill is straightforward and not a large number. The brand is on the balance sheet at £300m, which doesn’t sound a lot for a global luxury brand – the #100 brand (Colgate) is valued at $19bn – but is significant in the context of £1bn annual revenue and not much in the way of profit in the past few years (and probably in the entire brand’s history).
Development costs are an interesting element. Here is the note which explains the transaction leading to the appearance of this asset on the balance sheet, with the key text in italics:
“On 7 December 2020, the Company issued 224,657,287 shares to Mercedes-Benz AG (“MBAG”) as consideration for access to the first tranche of powertrain and electronic architecture via a Strategic Cooperation Agreement. The Group was required to undertake a valuation exercise to measure the fair value of the access to the MBAG technology upon its initial capitalisation. The Group selected the “With and Without” income approach which compares the net present value of cash flows from the Group’s business plan prior to (“without”) and after (“with”) the access to the technology. This methodology estimates the present value of the net benefit associated with acquiring the access to the technology. In the Group’s assessment, the fair value of access to this technology is £142.3m. The £142.3m represents the assumed cost at acquisition after which the cost model will be adopted. Amortisation is aligned to the expected pattern of consumption of the economic benefits.”
So the group valued an agreement with Mercedes to supply it with powertrains and electronics at £142m. They issued shares to Mercedes in return, so they had to do something with the cost – either capitalise a notional asset or charge it as an expense. Given that there is a life to the agreement, spreading the cost over several years seems logical. But over how many years?
Rebadged Mercedes Engine
Source: Car ThrottleNote that there was an existing balance in technology, prior to this agreement, valued at £21.2m gross. The related amortisation has been £1.9m a year for the past few years, implying a life of about 11 years. We don’t know what technology this is, but it has an unusually long life – a car model usually lasts seven years and technology usually has an even shorter life.
The co-operation agreement is, I believe, a controversial issue – there is no amortisation being charged. Consider this from the perspective of Mercedes. They could have sold Aston Martin engines at say £10,000/unit, but instead Aston gave them some shares and they agreed a lower price for the engines, let’s call it £9,000. Unless you charge the cost of these shares somewhere, Aston ends up making a magical £1,000 extra profit per car.
The notes continue: “In October 2020 the Group entered into an expanded and enhanced technology agreement with Mercedes-Benz AG contingent on shareholder approval, anti-trust and underwriting conditions. This Strategic Cooperation Agreement gives the Group access to powertrain architecture (for conventional, hybrid and electric vehicles) and future oriented electric/electronic architecture for all product launches through to 2027.”
Perhaps Aston Martin is not yet using any of the Mercedes powertrain architecture covered by the agreement – I believe they have used Mercedes engines for some time, predating the agreement. So it’s possible that they are not required to amortise yet. Let’s say they start in 2023 – then they will have an amortisation charge based on the life of the models launched in 2023-27. If the model life is say seven years, then the amortisation charge should average about £12m a year (£142m over a 12-year (7+5) period), but will start lower and end higher.
And here’s the thing – previously, I pointed out that investors failed to appreciate the impending cliff for earnings when the R&D amortisation kicked in – this co-operation agreement is similar. In both cases, there is no impact on cash flow, only on the optic of earnings and the P/E metric. The popular EV/EBITDA measure ignores this parameter. But in my view, the treatment indicates a company where accounting conservatism may not be top of the agenda; they rarely make good investments.
I also wonder about the cachet of a £150,000 sports car which has an engine from an S-class Mercedes, but I am a bit of a purist when it comes to cars.
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