Ian Rushbrook - Ten Rules for Investment

You probably do not know who is Ian Rushbook. Well he is an investor with a great track record. You can look him up if you want to, but here is one of his most important lessons:


1. Only invest in companies with growth in revenues per share and avoid companies that grow by acquisition.
Mere grows in size is of no benefit to shareholders.  The value of the shares is determined not by the size of the company as a whole but by the revenues, earnings and dividends per share, and their rate of growth.

2. Avoid highly geared companies like the plague - debt is crippling to management flexibility and corporate growth.
Even though this may sound counterintuitive as equity investors are always inclined to think that gearing is good.  Yet the financial graveyard is littered with companies which borrowed too much and came unstuck.

Running a highly geared company also means that the interests of the shareholders is not first in the minds of management but that creditors are.  That is never a good situation.

3. Only invest in companies with an attractive return on total capital employed as opposed to simple and high ROE achieved through debt.
Calculating the return on equity while ignoring the rest of capital employed is a grave mistake. Equity, because of write-offs can also be negative. This would mean that even a small profit will give an infinite ROE.

A better measure of measuring returns is to calculate the return on total capital employed which includes debt, and if you like, deferred tax liabilities which is really an interest free loan from the government.

Return on capital employed is calculated by dividing net profit (before or after tax whatever you prefer) by total equity plus total debt (plus deferred tax liabilities)


4. The market does 95% of the work for you - your problem is not to duplicate research but to identify errors of logic in company evaluations.
Ian gives an example of banks being the dogs of the stock market in the 1970s and 1980s.  Periods of high inflation.

Yet over the five-year period until 2001 banks make shareholders millions.  Not because major broking analysts were not analysing them properly.  It was because most investors had failed to spot how attractive banks had become in the new low inflation environment.

Ian mentions that he was never in favour of and always sceptical of the idea of new macroeconomic paradigms.  He however mentioned that new paradigms for individual companies and sectors really can emerge.  Helping to spot them is an important part of a fund manager's job.


5. Against the market at any point in time, that which looks statistically cheap is probably dear and visa versa. 
What Ian is saying is that there is usually a good reason for apparent valuation anomalies.

This can be summed up as generally speaking the market knows more than you do and there is usually a good reason for apparent anomalies, one market sector being remarkably inexpensive for example.

Be very careful before investing in such anomalies without doing thorough research.


6. Only invest in companies where you would be willing to work for the chief executive.
This can usually be determined to the answering of a few simple questions.

From the coverage in the media would you as a young person gladly follow such a person?
Can he articulate a sound strategy?
Does he have the charisma to give the company a sense of purpose and excitement?


7. If you don’t understand the product or service don’t invest in the company.
The most striking example of this rule took place in the time of the South Sea bubble in 1720 when a company was successfully promoted as "for an undertaking which shall in due time be revealed".

Compare that to the “clicks not profits” idea from the internet bubble and it just goes to show human nature does not change.


8. Working full-time in investment you will probably only see two or three outstanding investment opportunities in a year - be prepared to wait for them.
Investing can sometimes be a lonely and boring pursuit as Warren Buffett has said many times.

Not being able to sit on their hands is probably the biggest problems fund managers have as they think they must show activity to justify their fees.


9. Minimise portfolio turnover.
That is best summarised by the quote “if there's nothing worth doing it's worth doing nothing”.

Portfolio turnover can be a substantial drag on your investment returns. Even with internet dealing decreasing transaction costs it still costs about 1% to get in and out of a position.

And with government looking to tax anything and everything this may go up even more.


10. Entertain your broker at your expense rather than his - this will improve his advice dramatically.
If you are entertained by your broker you often feel duty bound to pay for it by placing an order.  But if you can afford your own lunches it's better to keep your investment objectivity by entertaining your broker.

This way he will feel obligated to give you a few good ideas. Always a good position to be in and probably the best meal you ever paid for.

A Talk With the Co-Founder of Skype: Lessons For Entrepreneurs

This is an older text but still very useful to read. Sorry for not crediting the original author, but I can't remember who had written this as I just had this sitting in a text file :)

“I worked hard, and I worked all the time. But then, you are not ‘working’… you are building something – and it’s fun.”

Paraphrasing a bit, this was how Niklas Zennström started his talk in Copenhagen. He’s the co-founder of Skype, as well as Kazaa, the mythical P2P file-sharing powerhouse of the early 2000s.

I had the chance to hear Niklas live for more than hour. He spoke about his own ventures, how he invests and gave general advice and ideas for want-to-be entrepreneurs. Here I’ll share a few of his key points with you.

To start, Niklas talked about investments. He explained how his investment group, Atomico, invests in companies  - to sum up, he mentioned the following characteristics as the keys:

a) They have a superstar team – which, in his words, means people who are: ambitious, leaders, highly intelligent, with a lot of stamina and with a diverse academic or work background.

It impressed me that he named stamina among the five main points – but then, as the quote I started with implies, when building something great you need to work A LOT. Keep that always in mind – no big success will come easy.

b) They have a game-changing technology. Not copycats – teams working on something original which, he pointed out several times, can be scaled fast. Category winners, and international-oriented by default.

Think about these as the keys to success – straight from a very successful guy who has done it twice.

Then, he made some good points about location, especially for European entrepreneurs. He said that companies starting in places like Denmark (a smaller economy than the US state of Washington), have the advantage of being internationally-focused by default, given that the local market is very small and, if going for the big bucks, the entrepreneurs have to think for a global market from the start. That’s an advantage to, say, German, French or even American entrepreneurs.

But then, he also threw a rock at Europeans in general – in the EU, he said, people try to protect the past (via social security, welfare state, etc), while in Latin America and other emerging markets people just go forward and push for the future, making innovation more likely.

The Success of Skype

Skype was a huge success – Niklas had already started Kazaa, which in the early 2000s was the most downloaded software in the world. A huge precedent, this made him and his associates no strangers in the start up world.

Kazaa, via its immense platform, and the buzz around its founders made the funding and spread of Skype easier – but then, what’s remarkable is that Skype, with 600+ million registered users, completely eclipsed Kazaa. And, for the record, it made (and keeps making) big money – something which Kazaa, given it’s nature, found very hard to do.

Other keys for Skype’s success, he said, were:

They had the right timing. Skype hit just when broadband connections were spreading big time – was it before, it would have flopped. Was it later, it would have been too late.

They were very fast. They rapidly integrated Kazaa’s technology to the product. Skype was nothing about file-sharing, but the technology behind Kazaa’s direct-user connections was what ended up powering Skype’s own connections.

Skype passed the Mom’s test. It was a super advanced software, but it needed to be easy to use. Niklas made his mom and sister try it – and they learned to use it effortlessly and very fast.

Skype kept innovating and constantly listened to its customers. That’s how it outpaced its competition.

The rest, you know, is history – Skype not only has become the world’s lead chat service, but it has also survived the attacks of Google, Microsoft and Yahoo while also taking a big chunk of the multi-billion dollar international phone calls service.

To close off, here’s a bit of random points of the talk I also found very interesting:

1- Now it’s very cheap to start in the tech-entrepreneur world. Cloud computing, he said, changed the game. You don’t need your own servers anymore, and there are cheap, web-based tools that will do most of the work that took time and costed a lot of money before.

2- Mobile is key – it’s more intimate. People carry their mobiles everywhere. The smartphones are everyone’s alarm  clock – and they are never more than a meter away. You NEED to play mobile if you want to win.

3- When he started Kazaa, he turned the living room of his house into his office – while married and all. We’ll always hear about garage entrepreneurs, but having him telling the story in front of me made it sound much more real.

And last, there’s just one more point I have to make myself. Niklas didn’t start with Skype alone – nor did Larry Page start Google alone, or Bill Gates in Microsoft or even Mark Zuckerberg in Facebook. Instead of keep looking for the ‘next big idea’, start looking for WHO is the right person to help you pursue that said idea.