This video: https://www.youtube.com/watch?v=d3cRr318ve4, is the annual shareholder meeting of Fundsmith. Apart of presenting the results of the year, they review a set of economic fundamentals and behaviors that are communicated in a very didactic way.
Basic strategy principles
The investment strategy has three pillars that are summed up by the acronym ODD:
- Only invest in good companies.
- Don’t overpay.
- Do nothing.
“We limit it to a few sectors which have the characteristics we seek: consumer staples, some consumer discretionary products, healthcare, and technology being the main sectors.”
About Brexit: Better A Painful Ending, than An Endless Pain.
When there is not the perfect company in a sector, we pick two to look for that perfection.
I found this web that publishes different data related to the oil production and their derivates.
You can download the data and prepare more detailed reports, or you can use the graph chart available to draw simple charts.
This is the Benefit per stock from 2007 till 2017 of the main utilities companies from Spain. This reinforces my bet on Red Electrica and Enagas.
You go through a procurement process and you buy licenses for the whole corporation to enable it to use the services/products linked to it.
After a while you figure out how much of these licenses you are using in reality:
- How many people is really using it?
How many new joiners are accessing to it?
- How many servers are using them?
A good asset management process linked to the original contract signed with the vendor needs to be in place, or just a person reviewing it periodically.
Well, you will not imagine how many organizations are losing money with over estimated license contracts that finally are not used.
It’s not easy to convince to an organization to invest money to analyze the gap between the signed license agreement and the real use of these licenses. To do it sometimes is like to recognize that they did not signed the right contract, so it’s like to recognize an mistake.
- How much we can save if we re-negotiate the license agreement?
- What is the real forecast we have with respect the use of these services?
- Can we move to a “as a service” agreement model?
This is a list of events and potential actions I didn’t take, and that I want to remember:
- Event: Trump won the USA election
- Action not taken: Buy Goldman Sachs stock.
- Result in 3 months: stock from 185$ to 250$.
Chemours splitted from DuPont, Nelson Petz after Kraft split he invested in Mondelez.
- Action not taken: Buy Chemours stocks.
- Result in 1 year: stock from 8$ to 35$.
I learned about the Cyclically Adjusted PE Ratio (CAPERatio) or Shriller ratio, and I found that in September 2016 this was 26,57. Looking into more data, I found this chart
with data since 1880:
This graph is very indicative about the huge efforts to perform earnings on financial services right now.
They seemed to be easy in 1995, but in 2005 the effort and the risk exposure is so huge.
It’s easy to understand why GE sold GE Money, and other major transformations that are happening. How is it possible that NYSE market growth and growth.
I’m working on a set of accounts and solutions for my company, handling a portfolio at country level.
My team is composed by account managers where that handle the day to day relationship with customers, write offers, deliver services with the support of service managers, handle projects directly or with a PM…They do a lot of things, and they understand the importance of the customer touch, and all they need to do to sell.
If you have a team, you will have high potential people and average people. So you can expect that the knowledge differs in general depending of the person behind.
My point today is that I found the knowledge all these guys have about finance is so poor in general. Things like the P&L rules of the company, how the indirect costs are allocated, how are the revenue recognition rules are, how to make accruals… is basic knowledge they need to be able to understand what is happening in their accounts.
The person handling the portfolio before me did a good job organizing finances, having clear figures of pipeline, gap plans, forecast… but s/he never teach or coach the team about all the basic rules that are impacting the account managers.
This lack of understanding has derived into a lack of interest on the results or on understanding why so many of them are delivering poor operating income figures. The second derivative of the impact is the fact that they had not under control the impacts of bad delivery. They know they have problems on the contracts, but they are not able to tell me how much in dollars is the quantity of the impact.
My first step on the portfolio has been to review all the finances with them:
- Account by account,
- review the gap of the contracts with respect the expected gross margin, direct cost margin.
- Understand what are the reasons of our poor operating income (this is outside of the accounts).
- Explain what are the basic rules of the P&L, and how some behaviors affect more than others.
- Enable actions at account level and at country level, reviewing periodically all these actions.
The results are being interesting, once this first whole review of accounts conclude, I will be able to focus on growth and sales.
Other year trying to understand the values with more return into dividends.
AT&T is out due to the fact that is not in Dow Jones anymore, but continuous being the #1.
The world is moving from a product based economy to a service based economy. Some companies born in the subscription model, but others need to transform from their existing model to the subscription based model.
So, well everybody knows already that Zuora is an emerging competitor in the market, creating and end to end solution for subscription models. Take care, they do not only take care of the billing activities (there are thousand of companies dedicated to managing billing activities), they do more.
- Allows any business in any industry to launch or shift products to subscription.
- Implement new pay-as-you-go pricing and packaging models.
- Ways to play:
- Packages model,
- Pay as you go,
- Overall strategy,
- Bundling strategy,
- Segmentation strategy.
- Gain new insights into subscriber behavior.
- Open new revenue streams.
- And disrupt market segments to gain competitive advantage.
- 100% integrated with SalesForce.
I find specially interest on the documentation shared in the Zuora academy, where aspects as the financial metrics for a subscription company are defined, measured and analyzed. I read the Metrics white paper and it’s a worthy read.
The main concepts are:
- Churn rate: % of lost business, 10% churn is a healthy percentage. Small changes in your company’s churn rate can have a dramatic impact on growth over time.
- Recurring Profit Margins: the difference between your recurring revenues and your recurring costs.
Cost of Goods Sold (COGS).
- General & Administrative (G&A).
- Research and Development (R&D)
- Growth Efficiency Index: How much new recurring revenue can you get out of a given investment in sales and marketing? If you spend $1 on sales and marketing, how many new recurring revenue dollars does that buy you?A healthy ratio for a b2b SaaS company with a direct sales force is 1:1. Invest $1 to book $1 in new recurring revenues.
To follow the competition:
- Strong competitors: AMDocs, CGI Group, Oracle, CSC,
- Prominent competitors: Aria Systems, Chargify, AWS, SAP
Things to be improved:
- VAT management,
- Revenue recognition,
- Multi-currency support outside of SalesForce,
- Integration with other vendors: Microsoft Dynamics and Oracle.