Livewire reached out Ben Rundle from NAOS Asset Management to ask him about how he got started in investing. We asked Ben about his best and worst investments, recent opportunities he has identified and his views on short selling in the market.
How did you get into investing?
I started out in investing at a stock broking firm called Taylor Collison. It is run by a group of directors who I admired and followed whilst I was in university, which was a great opportunity. I had a mentor when going through university called Geoff Day who ran Macquarie’s equities business in Adelaide. He was very hands on in terms of teaching me about the stock market and how to invest in companies and it all started from there.
Rule #1 learn from more experienced investors
What has been your best investment?
Out of the recent ones since being a fund manager is Smart Group which is a business that I invested in when the price was around $2.80 and we accumulated it over time. The price is now at around $6.60 so a good investment as we doubled our money on it.
What has been your worst investment?
Another recent investment was The Shaver Shop which listed at about $1.05 and then sold off to around 65c where I started to buy it. In my view nothing fundamentally had changed in the business so we bought the stock. Unfortunately, our estimate of the changes were wrong and the business actually hit a stumble and the share price fell quite quickly back to 50c. So that was a decent error.
Rule #2 Retail conditions can change quickly, making it hard to truly estimate earnings
Do you have a particular investing skill that you think you are good at? What is it and why is it valuable?
I think that we are quite good at extrapolating what the actual earnings of the businesses would look like if we owned the business as a whole. Each half year the companies report their earnings and I think that we are reasonably good at estimating what the future cash flows of the business will look like and how much reinvestment into the business is required to maintain their competitive position which I think is the key when your looking at an investment. The accountants job is to record the earnings and the managers job to analyze those earnings. So I think that is our competitive advantage.
Rule #3 Understanding earnings is critical to successful investing
What rules do you have when investing in a company?
We follow a quite a few rules and we are quite strict on them. So the business has to have a strong balance sheet. We also have to be able to understand what the business does. We have to be able to see a path to earnings growth and we have to be in a business where we think management is capable.
Rule #4 Have a process and stick to it
What types of business do you avoid whilst investing?
We avoid businesses which are highly geared. We avoid businesses we don’t understand and we typically avoid commodities because you can be right on your numbers but the situation changes when the commodity price moves
Rule #5 Avoid companies with high levels of debt
Your mandate allows you to move and focus on undervalued sectors. So where are you looking today?
At the moment we are not putting emphasis on a particular sector compared to any others. We are really fundamental stock pickers, for example one that we have invested in recently is called Elders which is in the Ag sector that is a business that we think is undervalued. But we didn’t come across that from looking at the Ag sector we came across it from looking at cheap stocks.
Rule #6 Be open minded about where new opportunities might come from
Short selling has been in the spotlight recently, why do you use short selling?
We use short selling to improve on the returns we can get over and above what we can get on our long books. So over the course of the year we catch up with hundreds of companies and not all of them are good. Over time you get to understand the drivers of the companies and often you can see the catalyst for the earnings or the share price of the company de rate significantly. For us shorting is just another tool in the tool box to generate returns for investors.
Rule #7 Be open to using a range of techniques that can help to improve your returns
What do you look for when trying to find short selling opportunities?
Short selling opportunities come in various forms but probably the greatest ones tend to show up in the accounts. It can also be the case of management selling out the stock, which is often a catalyst. If a significant holder within the business sells out of a decent amount of stock for no reason - that can obviously provide a catalyst.
The best shorts come about from companies that have a huge amount of debt that they wont be able to refinance in the future. So they heavily rely on capital markets and the capital markets won’t be there to support them.
Rule #8 Watch what company insiders are doing
Is there anything as a local fund manger that you think the local funds could learn from the approach that the offshore funds have taken to promote their short positions?
That happens a lot less in Australia because our culture differs a lot here. I think potentially we will see a bit more but I think it will be driven more by the offshore guys finding the opportunities rather than the Australian fund managers doing it themselves. The Australian market is quite small and can be a little bit parochial. I think it is risky for people here to outwardly attack companies on the short side. Although we are starting to see more of that I don’t think we will match the levels of the US.
Interview prepared and conducted by Will Kidman.
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Appreciate the transparency and insight in this interview. Great read.