Another busy week here at Risk and Reward towers.
Last Tuesday I mentioned Glenn Fisher’s new report, masterpiece, magnum opus and Holy Scripture – The Case for Penny Shares.
He’s been working hard on it for the last few months, cloistered in his new home in Cleethorpes for the last few months like a medieval monk.
Well, it’s finally ready. It drops on Thursday. And as part of the report, I sat with Glenn recently for a long chat about my investment philosophy, how I ended up specialising in penny shares, and fantasy Premier League football.
What follows is a short excerpt from the interview. You can read the whole thing when the report lands on Thursday.
GF = Glenn Fisher, SK = Sean Keyes
GF Yes. On that, I’m always thinking in metaphors and analogies for commercial purposes. But in that sense where you’re looking for a company which you say has got a long runway, got a chance of doing good, I kind of, for some reason I want to go into a football analogy.
But would you be looking for that kind of outside player who has not scored a lot of goals before but can suddenly become the new superstar or are you looking for a Wayne Rooney? Good, and is likely to score. Does that make sense?
SK Haha. If you want me to put it in fantasy football terms, I’ll put it in fantasy football terms.
GF Are you taking a chance or are you going with someone that’s well known, or are you looking for a new star?
SK No, you’re looking for, what you’re looking to sign is Jamie Vardy. You want to sign Jamie Vardy in August.
GF Ok. So, every year we do a fantasy football league in the office and we do it in August and for some reason we start every year, or I used to, I go, right, I’m going to pick all the new players that have never done anything before because they’ll come good. And you start the season and you realise that the last season finished a month ago and that the guys who were great at the end of last season are just going to carry on being great. It’s not like everything’s reset and you kind of start again.
But I think that is what penny share investing is kind of about, really. It’s about trying to get that little gem that no one knows quite about, but looking for different factors that you should have probably seen it coming. You should have known that Jamie Vardy was going to go mad…
SK I haven’t played fantasy football for many years because I took it too seriously and I stopped having fun! I remember I had the analysis down to a fine art. There was no number which mattered more to a fantasy football player than that points per million per minute, which is like…
GF You did take it too seriously.
SK Ha. So we’ll come back to investing now. But you’re looking for a player who generates you lots of points in the fantasy football tables, per million budget costs to buy them, per minute they play.
So armed with that simple statistic you could find undervalued opportunities!
GF It’s moneyball theory!
SK Yes! So sometimes that might apply to, I remember Nicklas Bendtner, great buy that year, sometimes it might apply to a highly valued player, sometimes a cheap player. But at some point it’s you’ve got to come up with a system for finding value. And that’s what I tried to do.
GF A trite way of running the conversation back, but you’ve got to find a system that you’re looking for. I always think of your approach as being twofold: you’ve got that first report influence, which is that top down kind of thing, and then you’ve got these four factors. So, getting back to them, you’ve got the profit runways as one of your main…
SK Right so you’re looking at like what is the opportunity, what is going to change, which will allow for growth of the company.
Because ultimately you’re looking for a thing that can go for a small price or a big price, you’re looking for something that can do something great. Obviously that’s the first thing you need to find, what’s it about to do that’s great.
Second thing is price. Lots of companies are about to do something great but that doesn’t mean as an investor you can necessarily profit from it. Because maybe every other investor in the world is already on top of that and it’s going to charge you a massive, massive price to buy the company in the first place.
Third thing is the company has a moat and that’s very important. It’s sometimes underrated but it’s extremely important and worth paying attention to.
GF What do you mean by moat?
SK A moat is whatever the firm does that can’t be easily copied. Because it doesn’t matter if the company is cheap and it’s about to grow right quickly – if it’s doing something that everyone else can do, then as soon as it succeeds everyone else will spot it, and do what it’s doing. And the firm’s profit margins will disappear.
What has made the likes of Warren Buffett rich and which have make a lot of money for the investors in the longer term, are companies with some sort of moat and sort of advantage which prevents other companies from coming in and taking their advantage.
GF Examples of that, is it as simple as patents… for many years they were protected by various things but nowadays there’s various imitators of that. But it’s something that, is it a legal thing or it might be, to your knowledge…
SK It’s lots of things. I’ll start with big companies. I’ve just finished a new report yesterday and the company I wrote about is a perfect example of what we’re talking about. It could be something as simple as a brand, Coca Cola makes great profits year on year on year, just because Coke’s brand is a value. Everyone knows it, people want it, people are aware of it. If I created Penny Share Cola it might taste as good, it might be cheaper but customers won’t care, it hasn’t got a brand.
GF Well McDonald’s to this day, the amount of negativity there is about McDonald’s in the world yet no one’s getting in that, it doesn’t matter if you’ve got five guys or whatever you do – they will still be there.
SK Their name is in their brand. Or like another example might be Facebook. Facebook is a phenomenal company now – it’s one of the biggest companies in the world.
GF An aside. Do you think, Facebook, do you think there will be a new Facebook in ten years’ time? Or a different platform where you’ve got obviously the kind of B platforms like I’d say Instagram is currently widely up there. But ten years ago I would say we were on My Space and obviously we were a bit younger, we’ve gone through that, already I’m feeling older than the generation below me and thinking will they be using a newer platform or has Facebook reached its peak, in the same way McDonald’s has. I don’t think we will have a new McDonald’s, there will always be McDonald’s.
SK It’s a very, very interesting question and I love thinking about it. If you look at the way Facebook makes money, right, Facebook’s thing is that they’ve got all this data about you and they know more about you than any other company in the world. And that’s very valuable. Once you know somebody really well and you can sell them ads. You can sell them really, really effective ads. And for that reason more or less alone they’re worth 300 billion.
That’s their moat by the way, to come back to moats, but they’ve got a moat. They’ve got all this data, no one can get it, so they’re worth 300 billion. So then if you’re asking what would be the next platform I think that whatever the platform is their business model has probably ultimately going to be to know you well, and then monetise that. So they’ll have a similar business model to Facebook, and I think for that reason it will always be in Facebook’s interest to just gobble them up.
To bring them into the Facebook family so they can know even more about you and sell even better ads. And that’s what Facebook have done, they’ve bought Instagram for a billion. After that they paid I think 19 billion for WhatsApp, dollars, that’s a very, very hefty price but I think it’s something for which they pay like $10 per user.
GF My mum uses it, which is always a sign it’s made it mainstream. I was sat there the other night, watching my mum watch Strictly Come Dancing. And to my amazement my mum and her friends… they’re on WhatsApp discussing Strictly. I’m just watching my mum, she’s not terribly old but of an older generation, and all using WhatsApp, look at that. That’s terribly interesting to me.
SK They paid 19 million for WhatsApp, right, maybe it was two years ago, and at the time WhatsApp I think had like, I can’t remember the numbers there, they basically paid $10 per user. And at the time WhatsApp was making no money, it was charging a small bit for the app but there were no ads. And it was considered a slightly crazy move and very risky by Zuckerberg and Facebook. But I don’t think anyone is saying that now, WhatsApp has continued to grow and it just makes perfect sense for Facebook to have them in their family along with Instagram, along with their messenger app.
… I think I’ll end it there, that’s enough rambling conversation for one day! Tomorrow I’ll send you another short excerpt from our interview, in the run-up to the big launch on Thursday. I can’t wait to see how it does.