So much effort has been made by the authorities over the years to limit gambling and the damage it creates. Although it is an activity as old as the world and intrinsic to human biology, there is no doubt that a correct regulation can keep alive the pleasure of gambling as a leisure activity, limiting the extreme phenomena that can have harmful repercussions for individuals and families. As the Latins used to say, est modus in rebus. However, we cannot fail to notice that such limitations do not exist or at least do not work with financial speculation. A recognized study, the conceptual and empirical relationship between gambling, investing, and speculation by Jennifer Arthur, Robert Williams and Paul Delfabro, researchers at the University of Adelaide, points out that financial speculation shares many elements with gambling:
1) In gambling you do not buy assets, but are an option to earn money. In speculation sometimes you acquire assets other times you do not. However, the objective is not the acquisition of the asset itself, which you do not really know, but to earn money.
2) In gambling, the body emits dopamine. Dopamine is a neurotransmitter that the brain releases during pleasurable activities, such as food, sex and drug taking and is also released in situations where the “prize” is uncertain. And this applies to both gambling and speculation. Being exposed to these situations in a methodical manner is addictive. The online trader, like the bettor, is more attracted to a small short-term gain rather than a large long-term gain because it allows for a greater release of dopamine.
3) In gambling, sounds and lights are produced that tend to amplify the state of euphoria, courage and optimism that dopamine creates in the player. In trading it is even worse. Not only lights and noises, but also an incentive to trade through incessant streams of news and buying recommendations.
Financial speculation in the retail world must be regulated. While it is true that we live in a world full of regulation, sometimes excessive, we also live in a world full of unregulated excess. Apple sells hardware and claims to force the use of its Apple Store platform to download programs on the phone, charging 30% of the amount for this. Google effectively controls the online search of the planet. Amazon, thanks to its position in online commerce, can decide the life and death of companies. Technological changes tend to be abrupt. Regulators are slow. But sooner or later, like death and taxes, they come. And when they come, they often overreact (ask banks and telephone companies…).
Une histoire triste
Illustrious cinematography has made many cars unforgettable, inexorably linked to the emotions that certain films have aroused in us. How can we forget the Mercedes Pagoda in 1980’s American Gigolo? The Ford Thunderbird from the glorious Thelma & Luise (1991). The Volkswagen Transporter from the refined Little Miss Sunshine (2006). And again, Alfa’s Duetto for the iconic The Graduate (1967). The Smart for Ridley Scott’s romantic A Great Year (2006) or the reckless Citroen 2V in the James Bond film For Your Eyes Only, starring the beautiful Carole Bouquet (1981). Finding a movie that left a trail with a Renault is not easy. After a bit of research, I could only find the Renault 5 in the movie, Dude, where’s my car? a crazy movie released in 2000 that has left a “trace” that, however, does not smell of glory, nor of jasmine.
Renault’s story is so sad it would make a mink breeder’s eyes glaze over. Stuff forbidden to children.
Founded by the young Louis Renault in 1898, with the help of his brothers Marcel and Ferdinand, the company immediately made a name for itself with its revolutionary direct drive transmission. Hegemony in the races of the time gave strength to the brand. However, in one of those races Louis’ brother, Marcel Renault, lost his life. However, the business exploded and by 1908 the company was producing over 4000 cars a year, including several high segment cars. The company had registered several patents, many of them in the engines that now produced directly and had developed vertically by acquiring steel mills. Unfortunately, the other brother, Ferdinand, also died early that year of liver cancer. The company contributed to his country during the First World War, designing and producing the FT tank, agile and robust. The post-war period saw the birth of the competitor Citroen, which used the assembly line introduced by Ford a few years earlier and therefore offered a very attractive product for the lower-middle class. However, Renault remained a remarkably successful top-of-the-line brand. As is always the case, brands do not survive when they fall behind technologically. Citroen began to offer more prestigious cars at very competitive prices and Renault saw its sales halved in 1921, to 5500 cars. It was a crisis. In 1922 sales fell by a further 70%, reaching 1700 vehicles. Citroen that year produced over 30 thousand cars. They would become 100 thousand two years later. Just when there seemed to be no more hope for the poor Renault this came out with the model KJ, a small model, but attractive that managed to intercept part of the growing demand. In 1923 Renault’s sales increased tenfold to almost 20 thousand vehicles. The two companies would be discordant until the arrival of the Second World War, but it is worth remembering an episode that has a current flavour. In 1931 André Lefebvre, a manager trained at Voisin, an aircraft manufacturer, joined Renault. This person proved to be extremely capable, although after a few years, when he saw that the overwhelming power of Louis Renault would not give him space, he went to Citroen where he created (together with Flaminio Bertoni) cars such as the DS (the shark) and the 2CV. This is very reminiscent of the story of Carlo Tavares, CEO of Citroen and previously Carlos Ghosn’s right-hand man at Renault. Here understanding that he would never go beyond that role he went to Citroen, in a few years revolutionizing it and making it a success story.
During World War II, Renault had to work for the Germans, trying to protect its factories and employees. However, Louis Renault and the then CEO Francois Lehideux were already working on the post-war 4CV project that would later be a great success. Sadly, when the war ended, Louis Renault, in the anarchy of the early days of liberation, was attacked by French guards who mistakenly saw him as a collaborator. Louis Renault thus died from the beatings of his own countrymen after offering his country one of the most inspiring and generous entrepreneurial stories. Very sad.
Today Renault is a company just back from a big corporate scandal that saw its CEO Carlos Ghosn arrested in Japan (and then escaped hiding in a cello case, pink panther stuff…). Along with the loss of its Deus ex-Machina Renault saw its partnership with Nissan dissolve in one of the worst manifestations of Japanese protectionism. The company doesn’t have a good brand. It doesn’t have cars to talk about with friends at the dinner table, and it has among its shareholders the French government, in recent years a notch below Cuba in terms of its ability to interfere in labour-intensive companies. Next year, let’s remember, there are presidential elections in France. Well, it seems like the ideal situation to buy some put, easy money. Particularly after the stock has doubled from its March 2020 lows, instinctively following a growth sector.
However, as was the case in 1921, just when there is no hope, one can expect more determination and pragmatism from a self-defeating company that for too long has been consumed by internal squabbles, state meddling and mythomaniac management focused on volume and not margins/brand.
Let’s analyse a few points:
1) The Management. Luca De Meo is a good manager. Maybe not a genius like Marchionne or Tavares, but he is certainly at the top when it comes to marketing, the ideal man to improve the perception of a brand and Renault absolutely needs it. As Fiat was fifteen years ago, Renault’s brand is under the mat and its cars ugly. With the difference that Renault makes good quality cars, while Fiat’s quality back then was consistent with the brand and the aesthetic. Today Renault is the car with the gift of making you look ten to fifteen years older when you get behind the wheel. The car with which you never, ever pick up the girl of your dreams. If they manage to make money with ugly cars and a brand like this, one wonders what they could do with a brand that is even only neutral …
2) Nissan. The Renault-Nissan group was one of the largest vehicle manufacturers in the world, behind Toyota and Volkswagen. The merger was expected and disaster happened. Now the disaster (i.e., rigid separation between the two companies) is expected to continue. So, at best it stays that way.
3) Costs. The state doesn’t want domestic layoffs, but it also doesn’t want a behemoth like Renault to go under. Costs will be cut and the state will protect those left at home.
4) Electric. Renault-Nissan is one of the pioneers of electric. Today they have lost leadership, but we believe they will recover soon. As we see in the stock market today, the electric is very much a perception and we are sure that perception will improve quickly. A small note to De Meo that the recent presentation on the electric goals, in our opinion was a bit ‘exaggerated. However, it denotes enthusiasm.
5) Valuations. The Renault company today is practically worth its stake in Nissan and the net cash in its belly. The company produces profits. Valuing 0.1x Renault’s sales and its bank to tangible equity, still modest multiples, the stock could almost double.
To conclude, a sad company with a sad past, a sad brand and sad expectations. Disappointing so far and from here on. it will not be easy for Renault. Let’s see.
Renault is held in the Pharus Electric Mobility Niches fund (3%), in the Niche Satellite Areas.
Value investing refers to an absolutely diverse approach. However, there is a common denominator at the root of it, which is to try to benefit from the way the investor’s head works. The investor is attracted by what goes up and produces good news flow. This creates a bottleneck on some issues. That is, more buyers than sellers. Similarly, what doesn’t go up or doesn’t have good news flow will be sold, and again this creates a bottleneck, with more sellers than buyers, pushing the stock down further. A growth/momentum investor will always have to look for positive themes. A value investor, on the other hand, will have the luxury of analysing what has been thrown away to, gradually, accumulate companies and themes where growth is seen a bit further down the road, or severely undervalued assets. Or both. The value investor buys with a large margin of valuation safety. The growth/momentum investor is not so much interested in valuations as he is in momentum, whether that be on the chart or in profits. It is easy to understand that operating in areas with little competition is easier than operating in super-competitive areas. Sir John Templeton said that it is impossible to perform well in the long run unless the investor does not detach himself from the majority. And John Maynard Keynes affirmed that if the majority agrees on something this is already shown in the prices. Of course, being value requires patience, and having clients with this gift. Given this, the possibility of losing capital in the long run with a diversified value portfolio is very low.
As we were saying, there are many value investors and all of them have their characteristics, more or less distinguishable. Wanting to create a range, with on the one hand the softer value investor, who identifies within a reference index the companies with the most value characteristics, while respecting diversification by geographic area and sector, and on the other hand the value investor who does not look at geographic diversification, nor sector, nor the concentration of securities, Peter Cundill is certainly positioned at the end of the latter category. Armed only with a pen and balance sheets Cundill looked for forgotten companies that he valued according to the strategy of NET-NET STOCKS, theorized by Ben Graham, i.e. companies that traded below the value of its current assets net of its current liabilities and financial debt. To this, Cundill added other characteristics such as: 1) they had to trade below the tangible net worth; 2) the stock had to be at least half of the previous high; 3) the price-earnings ratio had to be the lower than 10 and the inverse of the long IC rate; 4) the company had to pay a dividend; 5) the debt had to be sustainable with the cash generated and there had to be room to increase it. It must be said that only in the 1970s were similar companies found in the United States. Today such companies exist only in Japan. It must be said, however, that Cundill also invested heavily abroad. Peter Cundill from 75 to 85 generated an annual return of 26% to a negative US index at that time. He wrote a book “There’s Always Something to Do” that is enjoyable even for the non-specialized reader.
We live in a world that has been favouring growth for 15 years now, but we believe that a prolonged phase of rediscovery of value may lie ahead of us. We thought it might be interesting every now and then to propose some great past investors who belong to this category, while we wait for this approach to start again. To paraphrase Peter Cundill’s mantra, “… in investing you need patience, patience and more patience”.
XL Axiata, Indonesia’s third largest mobile operator, reported during the week. The company reported solid data and the stock rebounded nicely. We hold the company in the NEF SDG fund, in the trend SDG 5G (0.6%) and in the Pharus Asian Niches fund, in the Small Caps Indonesia Niche (1%). In addition, IT integrator DXC, held by the NEF SDG fund, also reported good data in the trend SDG 5G (1.2%) and in the Asian Niches fund in the 5G, sub-Niche Apps (0.5%). While the company has doubled from its lows, it trades at 10x earnings and just above 4x EV/EBITDA.
This week among the stocks we carry, there is only Hewlett Packard Enterprise, held by the NEF SDG fund, in the 5G trend SDG (1%) and the Asian Niches fund in the 5G Niche, sub-Niche Apps (0.4%).