Quindell - Understanding Accural Accounting.

I'm not an accountant and I'm long Quindell - all disclaimers out of the way!

Today I'm going to have a brief look at the issues people seem to have regarding the accruals in the H1 results that were published last week.


What is accrual accounting?


- Accural accounting is pretty much the standard form of accounting for most reasonably sized businesses (according to a friend of mine who is an accountant) across the whole of Europe.


- It's used because it gives a better current picture of a business than cash accounting does - cash accounting only recognises transactions when there is an exchange of cash.


How does it work?


-  For example, if my imaginary company sells a computer to someone that's paying by credit card, the revenue from that sale will only be recognised by the cash accounting methods when the cash is received.


The accrual method however states that the chance of receiving that money is very high if not certain and as such recognises that revenue from the point of which the sale was made.


- In short, this often method means that sales revenue can be instantly recognised even if the cash hasn't been collected.


The case with Quindell:


- The first point to make is that accrual accounting in the legal services industry in the UK has been (as far as my friend told me) mandatory, so I struggle to understand why people are complaining about so much about something Quindell is obliged to follow.


- In the case of Quindell the accrual accounting method uses figures that would be the equivalent of working on a legal case and billing hours that you're pretty certain you're going to get paid for, even though an invoice hasn't been sent to the other party yet.


- Going into more detail, for a lot of the claims that Quindell takes on it pays out a cash fee. Quindell can't then bill the insurance company until the case is done and dusted (settled). Now, because claims take around six months to settle, at the end of Quindell's financial year, they will have booked a lot of costs (paying to get the work), but no matching revenue to illustrate why these costs are booked, because the bill would be raised in a future year. Consequently, the accrual accounting system gives a much better idea of what's going on.


- One of the reasons why the accrual accounting method is the best to use in the case of Quindell is that if income was not accrued, the tax man would likely accuse the company of understating profit and therefore tax. 


- Secondly, when auditing the 2013 accounts, KPMG would look at the 2012 income accruals and assess the cash conversion rate to satisfy themselves that the basis for calculating the accruals was sound. They would then look at the 2013 income accruals and satisfy themselves that they were calculated on the same basis. 


The importance of this system:


- Basically, this method of accounting means that you can have very large and most importantly more representative revenue and profit growth than you otherwise would under the cash accounting method, but it doesn't impact upon your cash-flow, because you can't update your cash flow until that money has gone from party A to party B.


- The real beauty of this method in my opinion is that because it's so much more representative of the full picture than cash accounting is, you can have a good look at the accrued income and use it to help with personal cash flow projections. Now, not being FCA authorised, it would be unwise for me to make any good guesses on this front, but I would encourage people to have a good look and do some maths - the picture is rosy!


Doubters:


- I really struggle to workout why some people don't like this method of accounting. Yes, it doesn't directly effect cash flow or show an instant cash flow increasing effect, but it does show what's going on in the business as a whole far better than the cash accounting method does. Remember that cash flow is only part of the picture for a company and if the accrued accounting method wasn't used you would have a serious issue in valuing most companies on the AIM.


- Moreover, this is an accounting method that is used by almost every company that's listed in the UK and Europe, so I think that claiming that there's an issue with it is ridiculous.


- Further to my previous point, is a more generic point about Rob Terry, which is that in the UK we seem to be very bad at not forgiving. Yes, The Inovation Group (TIG) was a bit of a pigs ear, but frankly most business men will mess up at some point. Look at Carl Icahn, who blew up in his first career as a stock broker, but came back to be one of the greatest investors of the current time.


In the case of Rob Terry, I think we need to be more American in attitude (not something I often say) and accept that being an entrepreneur is one of the only paths in life where you can have as many chances as you like at being successful.


To conclude, I don't really understand why people have had an issue with the accrued income in the H1 results, but I hope this helps to explain what they actually are.

Quindell - A Look at the H1(2014) Results, Cash Flow and Rumours.

Quindell's 2014 H1 results were (in my humble opinion) excellent! 

Now, that's not a statement I would make hastily about any set of results, but once again Quindell have managed to pull out another great set of results against a backdrop of wide negativity regarding the stock and aggressive shorting tactics from hedge funds. 

For those interested the results can be found here: 

http://www.quindell.com/images/uploads/irdownloads2014/20140821_IR.pdf

I'm going to try and discuss a few things regarding this set of results, including, but not limited to:

1. Cash flow, its common misunderstandings, how we need to look at it in the case of Quindell and any possible solutions that the company may employ in the short term.

2. What this set of results means for common investing metrics (PE ratios, etc). 

3. The allegations of fraud.

As a disclaimer, I do have a long position in the stock and am a strong believer in the prospects of the company; nevertheless, this doesn't mean I wear rose-tinted glasses when it comes to analysing the company, which I think could do with a better investor relations and public image team.

1. Cash Flow

- The fist bugbear I have regarding the bearish argument regarding low cash flow, is that many people seem to talk about it in the context that it's a finite amount per half or quarter year:

This may be an incredibly basic point, but just because we know what the cash position for the company is unto June 30th, doesn't mean that the company has not made a huge amount of marginal cash flow since then. So, you see that just because we know about £85 million worth of cash doesn't mean that in reality the company presently has significantly more in percentage and real terms post results.

Now, based on this quote from page four of the results:

"Underpins our 2H operating cash flow expectations of c.£30-40m, and our 1H 2015 expectations of up to £100m"

We can clearly see that the company is expecting between £5-6.6 million pounds per month in the second half of 2014, meaning that in July and August it's likely brought in £10-12 million on top of the £85 million we heard about in the results - roughly an 11% increase since June 30th using those figures.

- Journalists seem to be focussing on the net funds of £18.9 million stated in the results, which is frankly ridiculous, because vast amounts of companies have much higher debt ratios. Look at the results from Nike or Accenture for example. 

My point here is that it's highly likely that the media has been intentionally talking about net cash flow, because it's the smallest cash related number they can see - in the grand scheme of things operating cash flow is much more important.

- My final point regarding cash flow is that Quindell is a rapidly expanding company and that people who purchased shares under the expectation that they would be able to generate huge cash flow figures in tandem with other growth metrics perhaps need to rethink their investment strategy. 

Now, Quindell have said that they're reducing their growth outlook in order to focus on cash flow, but regardless of this, the nature of growth companies is that they're initially very cash intensive. This isn't to say that businesses have to suffer from low cash flow in order to grow, but it does mean that generally if you want to see a fast increase in shareholder value you have to be prepared for a significant lag in cash flow against profit and revenue growth. 

- What might Quindell do to ease this issue in the short term?

Well, this is an idea I actually nicked from a poster called QPP1000 on the LSE Quindell share chat (I highly recommend his posts for investors who haven't seen them), which is that they may consider placing some shares to a major institution (say fifty million), this would have the effect of making them significantly more cash positive, but also increasing investor sentiment by having another large institutional name to add to the current list.

Personally, I think that the current board of directors are more inclined to focus on the business and hope that over time this will drive growth in the share price. Nevertheless, I am very pleased to see that they're pursuing suing Gotham City Reports and other bloggers for defamatory claims, which I think is a very positive sign that the company is fighting back and possibly means that they may be more inclined to view these as viable options in the short term.

2. Investing Metrics

There's a bit of a danger here in going overboard, so I'm going to try and be concise here and keep to the popular investing metrics.

- Using the adjusted earning per share figure featured in the results of 29.60p and a share price as it stands as I look at it (literally as I'm writing this) of 170p, we get a half year PE ratio of 5.74, or a full year PE ratio (if we double the EPS) of 2.87 and realistically we should probably more than double this figure as Quindell always delivers more EPS in the latter half of the year. 

I ask you, is this a sensible PE ratio for a company that has a very strong growth outlook? 

Well, in my opinion the answer is a strong "No". When you usually purchases shares in a rapidly expanding company most investors will take a higher PE ratio than normal in the knowledge that the continuation of high revenue and profit growth levels in that business will allow room for significant growth in the company's share price. 

- Next we have to look at the potential for dividends (after all this is where most holders of Quindell intend to make their money).

With a profit before tax in H1 of 2014 of £153.7 million against an H1 figure in 2013 of 39.2 million, it's clear that there is a lot of potential for releasing a good dividend at some point this year. I have already done a write up which discusses this in reasonable detail, so I would encourage people to read this post:

http://themaskedaimtrader.blogspot.co.uk/2014/07/quindell-plc-frustrating-but-stay-with.html

The fact that Quindell has a current dividend cover of over 25 times suggests to me that there's a lot of scope for significantly increasing this dividend and the fact that the company has pulled back on the growth slightly to allow cash flow to catch up means that there's likely to be much more available cash to release a strong dividend this year compares with last year's dividend.

3. The Allegations of Fraud

- The Ponzi scheme argument is the most ridiculous "de-ramp" of Quindell I have ever seen and I seriously thought that I had seen all of them by now. 

If we approach the idea that Quindell is a massive Ponzi scheme from a logical perspective, it simply doesn't make any sense. For Quindell to be fraudulent in any sense they would have to have fooled not only members of the top ten insurers in the UK (Aviva, etc), but also some of the largest companies in the world (British American Tobacco, BT, EDF Energy, etc).

More than this, they will also have fooled huge fund managers like Fidelity, AXA, M&G and Artemis, which have whole teams dedicated to doing due diligence on high growth stocks like Quindell in portfolios.

Overall, this makes the chance Quindell being a company based around Ponzi fraud very low in my opinion and the arrogance of certain other bloggers to believe that they can out-analyse the analysts of these huge institutions is laughable. 

- Secondly, we have the allegations of altering results to present a different picture to shareholders. 

This is almost as illogical, because you're then implying that the company's auditors (KPMG) would allow their name to fall into disrepute in the event that they got caught out. Considering that KPMG audit many FTSE 100 companies, I highly doubt that their likely to risk the custom of companies capitalised in the hundreds of billions of pounds to serve companies worth two billion pounds or under. 

- The RAC deal is one that I'm not overly familiar with as I bought into the company post the Gotham City Report, but again this is an issue that can be logically explained. 

We all know that the RAC have an IPO coming up and therefore will be extra-stringent regarding the dispensation of knowledge that could impact upon their performance on the IPO date and as the large company in the deal, Quindell will ultimately have to wait until the RAC give to go-ahead before they can comment on the rumours.

Also, we have to remember that issues with the RAC deal were reported by media outlets like This Is Money and the Financial Times and we all know that media outlets are prepared to spin stories if they think that people are prepared to read them. In this case This is Money said:

 "The deal between the two in its original form is also now considered unworkable, sources said," 

While the FT said:

"talks about restructuring the tie-up have stalled, said people familiar with the project."

Let's be honest, "sources said" and "people familiar with the project" are about as credible sources for information as my labrador is. This looks to me like the continued disgruntlement from the media after they were barred from the AGM and I implore trigger happy investors and traders to ask themselves if they believe a source is credible every time they read it. 

I think that in conclusion, if there are a few things we can take away from the past few weeks, it's that Quindell share holders and traders in general would do well to look at the likely authenticity of news before they trade based upon it. Secondly, current stake-holders in the company should not be disheartened by the languishing share price and remain confident and inline with the excellent results we saw yesterday and thirdly the cash flow argument needs to be seen from the perspective of a young company based on its past and future growth rates.

Stox App (beta) - A Review.

I'm normally not particularly interested in apps, but Stox caught my eye for three reasons:


1. It's aimed at teaching basic investing knowledge - a subject I'm particularly passionate about.

2. It looks pretty unique as far as educational apps on the subject go.

3. It has a beautiful Graphical User Interface (GUI) - something that men in their late teens and early twenties like myself really need to bother using any app.


Now, being in its beta stage, the app is obviously not finished, but of what I was able to play around with I was incredibly impressed!


I ran Stox on my Samsung S2 and I found it to run very smoothly and the "swipe" and "tap" UI effects were a great way to separate the app out into appropriate information sub-sections, which took you through the very basic ideas surrounding the stock market mechanisms. I particularly liked the way in which the app tested you on the completion of each section and then took you back to the relevant information if you made a mistake.


As a professional trader, I knew there was a danger that I would fall into the "this has too little information camp" regarding the app, so I tried to review this app as a novice and on doing so I actually felt that people new to the trading and investing world would really appreciate and benefit from the way in which the app uses very basic examples to relay information that has the potential to become very complicated when you begin to get technical.


I ought to warn readers now that I am both English and went to a grammar school and consequently may have a bias regarding my single criticism of the app, which was that it felt a little slow to give information - I'm a bit impatient and when I ask a question immediately want an answer. I just felt that the app was holding information just out of reach of the speed that I wanted to take it in at as a user, but I feel that this issue probably says more about me than the app itself! This could be improved by just reducing the time it takes for the "tap to continue" icon to appear, but I think that in reality most people aren't likely to see this as a real issue, especially if the users are actually members of the target audience (novice investors).


Overall, I felt that Stox has the potential when it comes fully live to continue to be both a highly informative and fun app for those who are taking their first steps into the world of investing and I look forward to testing the app further as it comes out of its beta stage.


For those interested the beta version of the app can be downloaded free on the Play Store for android devices:


https://play.google.com/store/apps/details?id=io.stox.app


All the best,

The Masked AIM Trader.

How Can Global Companies Avoid Tax - A Starbucks Example.

People asking me about how Starbucks went about avoiding large amounts of tax in the UK is a question I get asked a bizarre amount - I'm not an accountant and I very rarely trade companies that are valued over one billion pounds, so I don't know why people think I'm qualified enough to answer this query.

These methods could actually apply to any reasonably large corporation and in some cases much smaller companies as well, but I'm going to use Starbucks as an example to keep things simple in this case.

Introduction:

1. Tax Avoidance Vs Tax Evasion

Tax avoidance is legal. Tax Evasion is illegal. This is not a point directly linked to Starbucks, but it's essential to understand that Starbucks were not doing anything wrong in a legal sense (they may have been in a moral sense, but that's not my prerogative to discuss). 

Tax avoidance is the process of reducing one's tax bill by utilising multiple tax jurisdictions, holding companies within these jurisdictions and multiple other inter-company transaction based techniques. Generally speaking, avoiding tax is the process of looking at the rulebook and asking "What can we get away with looking at these rules?" and "What loopholes may exist within these rules that we can utilise?". 

Tax evasion on the other hand is the illegal process by which a company or individual reduces their tax bill by utilising illegal methods. These methods could involve having a cash-in-hand business (if you're an individual), where you don't declare your real income to your tax authority, or by utilising foreign bank accounts (if you're a company) for investments based in other countries, so you can avoid paying high capital gains tax rates on the disposal of assets, etc.

2. Holding Companies:

A holding company is a company that's only purpose is to own stock in other companies and by this form a corporate group. Under normal circumstances they will not create goods or services itself and are usually formed in various tax haven authorities in order to utilise varying rules and legislation which help to reduce a company's tax exposure.

3. Profit and Loss: 

For tax purposes profits must be low. For shareholders profits must be high.

Profit = Sales Revenue - Costs.

This is a very important point to understand, because when all of this kicked off about Starbucks there were a few journalists at the time who were mistakenly saying that tax was paid on sales, when it is intact paid on profits.

This is a pretty obvious idea to many, but just in case some of you have missed this idea, tax is paid on the profits that a company makes. In order to reduce your tax bill you want your profit to be made (in technical accounting terms) in jurisdictions that have the lowest levels of tax, but as investors we are looking for good strong profits. Although this initially sounds counterintuitive, a company isn't going to become unprofitable just to avoid paying tax. Instead, they move their profits into low tax regions and their losses into the higher tax regions. This way shareholder value is retained with high profits after tax (which dividends are paid from) and the company also benefits by paying overall less tax.

4. Types of Tax: 

The first point to make here is that we are discussing the ways in which Starbucks may avoid paying corporation tax - a tax on companies. We're not discussing how it may avoid paying tax in all senses. So, for example, in the UK Starbucks employs around five-thousand people and will pay national instance contributions for those employees and business rates, etc. 

5. Where Tax is paid:

This is another very simple point, but UK corporation tax (the tax that Starbucks were paying very little of) is obviously paid in the UK. Therefore, Inland Revenue don't care about tax they may be avoiding elsewhere in the Starbucks global empire, but just tax that should be paid in the UK. Now, because I live in the UK I am going to discuss how the UK corporation tax bill was reduced by tax avoidance techniques and not about how Starbuck may be avoiding tax elsewhere in the world.

6. Tax Negotiations:

It's worth noting that any tax for companies is more of a negotiation than a checklist filled out between Inland Revenue and the company in question. Often there will be teams of expensive tax lawyers negotiating between the two parties and the governing tax authorities reserve the right to call the company on certain points of their tax strategy.

The Methods:

There are three main methods that you could use (they're not necessarily methods that all large corporations will use).

1. Increasing Costs:

As we know from point three of the introduction, Profit = Sales Revenue - Costs. Now, lying about how much sales revenue you're making would be tax evasion and it would also be very easy to check, making it not a great idea for companies who want to legally avoid tax. 

On the other hand, bringing up your costs so that they effectively wipe out profits within the jurisdictions with the highest tax rates is a way forwards - Inland Revenue won't make you pay loads of tax in the UK if you don't make loads of profits in the UK.

Now, really we need a diagram here, but instead you need to imagine the following set up:

                                Debt

USA----------------------------------------------->UK

        <----------------------------------------------                     

                                Interest 

This method works on the basis that  head office of Starbucks (which we'll put in the USA for this example) funds the UK operation. So debt is effectively transferred to the UK from the Starbucks head quarters in the USA and then the UK branch of Starbucks pays interest to the head quarters in the USA.

Now, what's great about this method is that interest paid within a company group is set by the company group's worldwide finance director, who probably lives in the USA near the Starbucks head quarters. This means that the interest rate can be set at a level that begins to absorb some of the profits that the UK operation maybe making and thus reducing their corporation tax bill in the UK.

There are issues with this method however:

One issue is that you can't say set and interest rate within the company group of fifty or one-hundred percent. In other words, Inland Revue are not daft enough to believe and accept that you would have an utterly uncommercial business and reserve the right to call you up on it (in the open market no one pays fifty percent on a loan).

Also, the interest income would still have to be paid in the USA, where the Starbucks head quarters reside (in this example), so while you can use this method to decrease your tax bill in one jurisdiction (the UK) you still have to pay the tax elsewhere, even if it may possibly be at a lower rate.

2. Franchising Costs:

This is the idea that the Starbucks brand has value and that in order to set up a Starbucks franchise I need to sign a licensing agreement. I can't turn my house into Morley's Micro Starbucks for example. 

Again for this we will need a little diagram:

                          6% of Sales 

UK-------------------------------------------------->Holland 

      <----------------------------------------- Licensing Office                                                                                                                                                     

                           Brand

This works on the basis that you charge the UK operations to be able to make and use the Starbucks brand and it works by having your licensing office in a very low tax jurisdiction (Holland for example). This means in the example above the six percent of the total UK sales for Starbucks would be sent to Holland and paid as tax there (where the tax rates are a lot lower than in the UK), but more than this, it also incurs a cost to the UK operation and can reduce the UK profits of Starbucks, thus reducing their UK corporation tax bill. 

This has become a very popular method for companies that have very highly valued, unique intangible assets, as it allows a lot of potential for very high rate licensing payments to reduce taxable profits substantially.

Again, as with method number one this can't be set at an astronomical rate. Starbucks would have to negotiate with the UK authorities for a number they could get away with and in order to do this they would discuss brand value, unique value they may have, etc.

3. Past Losses:

This is the idea that you can net past costs against current profits. This simply works on the exact same basis that capital gains tax does in the UK. 

So, for example, I have a business and it makes a fifty million pound loss in the first year, but then it makes a fifty million pound profit in the second year. Those two figures can be netted against each other so that for the second year in which I made that fifty million pound profit I don't have to pay any tax. 

50 million - 50 million = 0 

This method is handy to begin with for many companies, but it begins to become redundant once the business beings to become substantially profitable. In order for it to be of use, the business has to incur a huge operating loss to fully offset income. 

To sum things up, we can see a few methods that companies may chose to use to avoid corporation tax in the UK. The methods can often be used to avoid tax in other jurisdictions as well and often companies will employ a wide variety of these techniques in order to reduce their total tax bill across their global empire.

Quindell - New Technical Analysis

Quindell is a stock that I have a bit of an obsession with. The main reason behind this is that (regardless of having a long position in the stock) Quindell is in a war zone currently between bulls and bears. This stock is so exciting at the moment that I'm seriously considering writing some "cliterature" on the subject.


Now, the subject for today is technical analysis on the stock and how I've had to change my tune in regards to how I look at Quindell. I was the individual who used to post weekly technical analysis updates for Quindell on LSE and anyone who ever saw one of these would know that I used to look at the following indicators: MACD, KDJ, CCI, RSI and volume based candlestick movements.


Many people are now under the impression that technical analysis on the stock is useless, but actually it can still yield useful results, but you have to change how you assess the underlying ground on which the company has been shunted onto:


1. Standard indicators (MACD, CCI, KDJ, etc):

These indicators still seem to be useful if you're trading intra-daily, but otherwise they don't provide the same level of insight that they once used to. There are two reason for this, the first one is that they require a decent level of daily volume in order to be accurate and in the summer volume tends to fall across the board, reducing the accuracy of these indicators on all time frames. The second point is that these indicators have a tendency to become useless when the bid and ask become loaded by shorting influence.


2. Charting:


This is where I believe we can still usefully use technical analysis. Resistance and support levels combined with volume based analysis (my next point) are excellent ways in which we can still try to predict the future using technical analysis.


Let's take Quindell at the moment as an example:


200p throughout the latter half of July was the old support line, with 220p being the main resistance at that point. Currently, we have a major support line at 140p and a minor support line at 160p with the next line of resistance to break being at 180p and from there it will be a pretty quick run up again towards 200p, due to very low volume resistance lines between 180p and 200p


3. Volume:


Volume is a particularly useful thing to watch, because it helps to guide us towards what impact  events have on the underlying sentiment of Quindell. Also, without it we end up in a sticky situation whereby trading slows on tightening spreads (primary traders tighten things up to create volume) and if (like I do) you believe that the short interest in the company is systematically loading up the sell side of the book on occasion, this can cause very fast movements towards to downside.


Further to discussing the merits of looking at the volume, over very positive indicator that can be seen is by analysing the price movements of the following dates: April 22nd, June 11th and August 6th.


When you do this you'll notice that these three days are high volume days but more than this were all days on which a major price fall was seen. Now, obviously high volume doesn't always correlate with a price fall and vice versa, however we can use these three dates as a technical example of changing sentiment:


The important date to look at is August 6th, which was the day Quindell told us that July was a cash positive month. People at their screens on that day will know that the range was huge and that the share price hit 138p prior to closing for the day at 168p. This is known as a positive technical movement and illustrates a "technical change" in volume traded sentiment.


I'm going to conclude this post early rather than let it run on into my personal diatribe on all of the reasons to be bullish on Quindell, but I think that what we can see is that although the ground on which we can apply technical analysis has changed regarding Quindell, we can still find value within it.

Quindell PLC - Understanding Institutional Investor Analysts.

Recently, I was fortunate enough that a good friend of mine arranged for me to visit a major investment bank in London. While I talked with the director of corporate finance, the subject of Quindell came up and we had an exhilarating, in depth discussion on the company.


What made this discussion particularly interesting was that we both came from opposite ends of the Bull-Bear Spectrum, with me sitting firmly with the bulls and him with the bears.


We discussed all of the major points: cash-flow, business model, Gotham City Reports, etc.


The point when we came together however was when I discussed the validity of his point about the implications of their cash-flow conversion rate (he was saying that this was the main reason why their in-house analyst was bearish on the stock), by discussing how institutional investors had significantly increased their positions in the company since the Gotham City Attack (Fidelity, Milton Asset Management, Artemis, etc).


The reason we came together on this point was because we both agreed that Fidelity (situated on the floor below us at the time I believe) are an excellent team of asset managers, but more than this have much more advanced research methods than investment banks.


Let's take a brief look at why:


1. Analyst Teams vs Analyst Lone-Wolves:

This is possibly the most important point that needs to be raised, which is that large asset management firms like Fidelity will have teams of analysts one one stock rather than just one analyst. The bank that I was visiting had one analyst on Quindell and my host said it was highly likely that Fidelity would have at least three analysts highly familiar with the stock for each sub-fund that had a position in the company.


2. Public Image:


My host at the investment bank I saw made a highly amusing point, that their in-house analyst was banned from meetings (AGMs, analyst meetings, etc) with Quindell.


This may only be a small point in the grand scheme of things, but being close to the company is essential in order to both truly understand how the company works, but also to get further ideas from the upper-management as to the onward progress their likely to make over various timeframes.


According to another friend of mine in the industry, hedge funds and asset management firms in particular are very good at not alienating themselves to firms, regardless of wether they're long or short and tend to be more tactful generally than the large investment banks are.


3. Management Stakes:


Personal stakes in the funds that they manage doesn't necessarily increase the actual level of their stock picking ability, but instead it makes certain that when these fund managers open a position in a stock that they have done their full due diligence and have covered all research bases fully.


Most investment banks will now actually trade or have any sizeable stake in the companies that they rate, as ninety percent of trades at these banks are primary trades, not proprietary trades. Even then, compared to the size of these large asset managers, the proprietary trading desks of these major investment banks are still not vast.


This means that the analysts for these major banks and brokerage firms only risk their jobs if their clients lose substantial percentages, as opposed to their jobs and a significant proportion of their net worth. Therefore, this is another prong in favour of following the asset managers rather than the investment banks and brokerage houses.


To sum up this very brief writeup, I think we can take away an albeit generalised, but pretty accurate view of the key differences between these two sides of banking world. Further to this, I personally believe that following the movements of these large asset managers is a sure fire way to successful stock picks - after all, they get paid such large amounts because they exceptionally good at their jobs and in asset management circles personal management stakes also play a strong incentive in ensuring good decisions are made. I am not saying that the rating from brokerage firms and investment banks should be ignored at all, but that I personally place the movements of respected asset managers higher than them in my personal rankings.


All the best,

The Masked AIM Trader.

Bacanora Minerals - A Small Sector Comparison

Bacanora Minerals has performed well since my purchase of stock at 67p and in my opinion, looks set to continue on a path gently upwards.


I'm not going to run a huge comparison of the company's lithium assets to those of other major producers, but instead try to illustrate the extent to which I think Bacanora Minerals is undervalued with this small spreadsheet (this is tip for a good way to understand Bacanora Minerals' potential, rather than an article explaining why I think it's great):

Company Name	Total LCE Across Concessions	LCE Production/Year	Opperating Expendature per tonne	Projected/Actual price per tonne	Revenue/Year (expected or actual)	Current Market Cap (USD)	Current Market Cap (GBP)
Bacanora Minerals	5,360,000	52,587	$1,968	$6,000	$212,556,654	$105.49m	£63.19m
Sociedad Quimica y Minera	-	40000 (2010)	-	-	-	$7750m	£4640m
Western Lithium	11,000,000	26,000	$3011 (excluding 2SO4 & NA2SO4 by-product credits)	$6,000	$124,000,000	$72.65m	£43.52m
RB Energy Inc	17,100,000	13724	$3194 (excluding 2SO4 & NA2SO4 by-product credits)	$6,000	$38,509,544	$89.52m	£53.62m

In the case of Bacanora Minerals in particular, the total tonnage of LCE was taken from the conservative figures in their admission to trading on AIM presentation:

http://www.bacanoraminerals.com/reports/pdf/investorpresentation.pdf

I also had to make an assumption about the the life of the mine of the El Suaz and Fleur Lithium Projects, which I took (arguably mistakenly) to be twenty years, thereby allowing me to summon a very low estimate of an LCE production figure per year of 17587 tonnes.

I was sadly unable to find figures for Sociedad Quimica y Minera online, who are apparently the largest world producer of LCE and who would have been an excellent comparison for us to make.

Comparing market capitalisations has the potential to be very misleading with these companies as obviously large resource companies like SQM produce more than just LCE and Bacanora Minerals likewise has large borate assets. Consequently, I'm not going to write anymore (I'm a tech trader by heart), but allow the numbers for Bacanora Minerals' lithium projects to speak for themselves. The numbers in the table above for Bacanora Minerals refer to the stake owned by the company itself (excluding Rare Earth Minerals' stake) and I still believe that there is a huge amount more upside available here for the company to become sensibly valued. 

To help you make up your mind on the company, I would highly recommend looking in depth at the other companies in this table and at some of the other lithium miners in the world to get an idea for the huge potential that Bacanora Minerals has as a company.

Trade well,

The Masked AIM Trader.

Extra Alternative Investments

It's funny how people who trade the AIM (like me) tend to view ourselves as the white knights of the investment world, surrounded by nothing but risk and turmoil in search of those huge rewards that go with the sector.

Well, I hate to break it to fellow traders on the AIM, but in my opinion the real white knights of the investing world are those that go a step further down the "alternative investment" route and pick the truly bizarre assets. These normally take more time, skill to pick profitably and specialist information on the subject, but nevertheless they can yield very large returns if done well: 

1. Whisky Casks: 

I was first introduced to this as an investment when I heard that good friend of mine had bought a whisky cask. In my friend's case he did intend on actually drinking it, but he also told me that it wasn't uncommon for people to sell the cask back to the distillery after it had matured - picking up a decent return on the way. 

Like buying stocks and shares, when you purchase a whisky cask you're not buying just whisky, but instead paying for a lot of extra costs (what we could describe as the whisky spread): VAT, insurance, storage at the distillery and bottling costs (assuming you choose to have the distillery bottle it). This does mean that in order to get a decent yield from your newly casked whisky you often have to let it sit for a minimum period of ten years.

In the USA it's much more common to hear people buying whisky in the bottled form and there are a few advantages to this: you have a more liquid investment (please excuse the pun) because it's much easier to auction just a bottle than a whole cask and it's easier to diversify on a lower budget - you can have many different bottles for the same price as a cask.

If we have a look at the return on the whisky indices from Q4 of 2012 to December of 2013, there are some clearly very impressive gains to be had in that market.


Before running out and buying a load of whisky to keep in your garage, it's worth noting that (ironically) it's not always a liquid asset (it can be difficult to find buyers and sellers) and it often requires a genuine interest in the subject in order to make good picks and thus substantial profits. The advice given to me when I was considering it was to start out with well known brands, as they're easier to value and you'll get much better liquidity on them.

2. Cheese Flipping:


This is one of the stranger investments I had ever heard of and it's certainly not a long term investment, but cheese flipping (a bit like property flipping) can yield very high returns. It's a more intensive investment than some of the others on this list and you could argue that it's really more of a full time business than an investment.


A traditionally made two year matured Parmesan wheel is worth about $2500 and the investment required per cheese wheel (excluding labour) is the equivalent cost of five hundred litres of milk, some natural rennet and a sea salt solution - about $600.


This has meant that (in Italy in particular) certain banks will allow producers to flip their cheeses; so in short, they can get 80% of the future value of the cheese as a loan, with which they can then buy more raw materials to make more cheese.

Factoring in labour costs (although a lot can be fully or partially mechanised now), there's still the potential for over 100% profit per wheel and for smaller outlets possibly more.

3. Wine:

It used to be standard practice for the gentleman wine investor to buy five casks of a wine he considered worthy of his collection: one to drink, one to drink with friends and three to sell when they were aged for a profit.

By using this investment strategy, if they managed to make the right picks, the gentleman could make enough of a profit from each batch to buy another five casks, take a profit and fuel their own drinking habits.

The market for fine wine as an investment has changed dramatically over the past decades. The prices of the most commonly traded investment wines rose sharply over the first decade of this century and this had it noticed by the big investors who, rather than having a genuine interest in the substance, simply saw it as a means to make money. More recently another thing has changed; a growing number of Asian buyers are appearing, who are changing it back to the practice of gentleman. Combining the investment side of fine wines, with an interest in the status they think having a large collection of wines gives them, they are bringing it back to the five casks approach.

Though this doesn't mean it’s been brought back as a gentleman's sport. As with any market, fraudsters have appeared offering the common investor fake deals. It is estimated that by 2012 more than £100m of private investors money had been stolen in fine wine scams. The Metropolitan Police after getting involved in a number of incidences have issued two pieces of advice to the amateur investors:

1) If you want a guaranteed deal, go to a large public merchant such as Berry Bros & Rud or Corney & Barrow. They’re expensive, but you know what you’re getting.

2) If you will use a less known supplier, check out their details carefully. Put their premises address through Google street view, if it is an actually warehouse or store-front, you’ve struck a winner. If it’s a field somewhere is Suffolk…

Handling the investment, is much like whiskey. Generally you’d buy the casks from the dealer, and then one would pay them a management fee, storage costs, perhaps bottling, etc. Though interestingly, wine happens to be a far more liquid investment than whiskey. It standardly proves more volatile, and it has many more market maker equivalents.

4. Stamps:


In my humble opinion, stamps are the world's most boring alternative investment, however I still felt that I ought to mention them.


Characteristics to look for in stamps are non-perforated edges, as perforations didn't become a mark of the manufacturing process until 1854 (before which stamps were cut from the sheet with scissors) and thematic stamps, which often have a lower supply level. The real issue here is that actually collecting anything remotely valuable is very hard.



The issue is that if you haven't inherited a stamp collection from a period when the stamps collected were not valuable, your ability to collect anything that with ease that has large growth potential within your own life time is vey low. 


However, the large amount of stamp brokers and dealers does make this a pretty liquid investment in comparison with the others in this list and if you strike gold, you could make as much as £5,000,000 for the 1855 Swedish Treskilling Yellow, which is so prized because it should have been printed in green. 

5. Classic Cars:

For car enthusiasts this is a great investment, as you get to have all the fun of playing with your new toy for a few years before you sell it. As with the other investments here there are other costs to factor in (insurance, storage and potential restoration), but this is certainly an easier job than flipping cheese or dressage horses.

The key with investing in classic cars is purchasing well-known names like Jaguar, Bentley and Aston Martin. In particular, limited edition versions of high-end brands do very well with many vehicles yielding over 400% over ten or more years.


This isn't to say that similar yields can not be gained from more common cars. Citroen 2CVs can be bought in pretty tired conditions for a few thousand pounds and be sold on restored for tens-of-thousands. Often for a decent profit to be made here you have to be prepared to work on these vehicles yourself and dedicate a lot of time and frustration to them.

6. Dressage Horses:


This requires a real equestrian to help you out and you may also need to fill out a lot of paperwork if your importing and exporting these animals to foreign buyers, but the margin available on dressage horses that are flipped between countries can range from 20-50% and be as high as 80%.


The real disadvantage with dressage horses however is that unless a deal is done shortly after purchase of the horse, you end up with a very expensive asset to keep, as you need extended veterinary insurance, food, stable housing, etc. This combined with the fact that the market for dressage horses is pretty illiquid means that you could be sat on the asset for a long time before you can find a buyer.


I think this is a real case where you need a love for horses in order to be able to successfully profit out of this investment type and it's probably the hardest of all of these investments to make.

7. Christmas Trees:


Christmas trees are better suited to the American investors as in the US 72% of the thirty-nine million families that buys real Christmas tree purchase those trees from retail lots.


Now, the cost of a five to seven foot sized Christmas tree is about $12-18 for wholesalers and traditionally people will pay anywhere between $50-80 for these trees and $100-200 for larger trees.


This gives the potential for a pretty hefty profit margin and it's not uncommon for one family to own multiple outlets. With the average lot making profits of over $10,000 each Christmas, this quickly becomes a seasonal investment that can reap in very high yields.

8. Art:


Purchasing fine art is probably one of the more normal investments on this list and for many art flippers it's an easy way to make substantial profits by trawling jumble sales and charity shops for supply. For example, recently four porcelain plaques, were picked up at a Marlborough jumble sale and then re-sold again at a Swindon auction for £8500.


Investing in art however is a different matter and the easiest way to go down this route is to pick up and coming local talent. The most important factor here is simply to choose art that you enjoy looking at, be it modern or antique and ensure that what you buy has a signature on it - signature-less art is like a Ferrari without the Horse badge.


Landscape paintings will be the most liquid form of art for auction based selling, with large sculptures taking the last place on the liquidity tree.

To sum up the extra-alternative investment market, we can clearly see that as with stocks and shares, if you're prepared to do your work and if you have a passion for a niche subject it can be really worthwhile to have a dabble in this market. Personally, I wouldn't go out and start flipping Parmesan cheeses with my local bank, but for many wine or whisky is a great initial step to take down this road.