This week’s best articles and blogs from the web.

There were two excellent articles on The Motley Fool this week, and both consisted of nothing but quotes from the great Charlie Munger.

The 87-year old billionaire and business partner of Warren Buffett is as quotable as Mr B., and also tougher-minded, more acerbic, and invariably correct.

I could quote Munger all day, but here’s just a few of the gems he delivered at what he says will be the last of his annual meetings with investors.

On financial collapse

You don’t ever want to do anything to push an economy to collapse. Terrible things result.

Think about this. During World War II, Japan tortured our soldiers to death. They marched them around. The Germans put people in ovens. Just awful. And what did we do after the war? We gave them money to rebuild. We said, “Let bygones be bygones.” The result was a magnificent global economic system and a win for human rights.

Who deserves the most credit for this? That would be John Maynard Keynes and his book The Economic Consequences of the Peace.

Why capitalism works

Joseph Stalin can achieve division of labour and there would be benefits. That doesn’t mean it’s capitalism.

The major success of capitalism is its ability to drench business owners in feedback and allocate talent efficiently. If you have an area with 20 restaurants, and suddenly 18 are out of business, the remaining two are in good, capable hands. Business owners are constantly being reminded of benefits and punishments. That’s psychology explaining economics.

On the evil of envy

There is nothing more counterproductive than envy. Someone in the world will always be better than you. Of all the sins, envy is easily the worst because you can’t even have any fun with it. It’s a total net loss.

On the dollar depreciating 95% over the past 50 years

If you think the past half-century was bad, you will have serious problems in life. The period you describe as miserable was a tremendous time for the American economy. You’ve described success.

On US unemployment

Part of the problem is that Asians are so damn smart. For years they were in this Malthusian trap, stuck in agriculture. Now they’re unleashed, and human talent is just awesome when unleashed. They’re formidable competitors.

On Charlie Munger

Most of you know exactly what I think about every subject, but you still come anyway. It’s a damn cult.

On financiers and Wall Street

To the extent that all I’ve done is pick stocks that have gone up, and sat on my ass as my family got richer, I haven’t left much contribution to society. I guess it’s a lot like Wall Street. The difference is, I feel ashamed of it. I try to make up for it with philanthropy and meetings like this one today. This meeting is not out of kindness. This is atonement.

Read more Munger!

I could go on quoting until I got sued by The Motley Fool, whose writers must already be feeling pretty miserable given that they write for a living and Munger just spouts these pithy gems as a side hobby!

That goes for me as a blogger, too, by the way: If Munger started a blog I’d be tempted to give up writing!

Just go read part one and part two for yourself, and remember these are unscripted off-the-cuff responses from one four-hour session with an octogenarian – not even a lifetime’s wisdom distilled.

For that you’d have to read Munger’s book.

[continue reading…]

Important: What follows is not a recommendation to buy or sell shares in Caledonia Investments. I am just a private investor, storing and sharing my notes. Read my disclaimer.

Name: Caledonia Investments
Ticker: CLDN
Business: Investment trust
More: Trustnet / Google Finance
Official site: Caledonia Investments

I have a soft spot for family vehicles like Caledonia Investments. I’m reassured to think that crusty old Barons and Earls are keeping a gimlet eye on the same investment that I’m in.

These trusts also appeal to me because:

• I believe wealthy old money knows how to stay wealthy.
• Big investment trusts are a relatively economical way to buy active management, if that’s your wont.
• They are invariably interestingly diversified.
• I’m a sucker for the romance.

Like anything on the stock market, investment trusts can attract their fair share of flighty managers and corporate conquistadors — or sometimes they simply bungle badly. With a wealthy family trust, I’m more confident that I can wait out misadventures knowing that seriously rich people are batting for the same cause as me – but with rather bigger bats!

For all these reasons and one more, I’ve made a substantial investment over the past few months in Caledonia Investments.

The extra kicker is that as I write, this investment trust stands at a discount of nearly 20% to its Net Asset Value (NAV). I consider this discount very likely to narrow over the medium term.

Wiping out the discount so that the shares traded at the estimated value of their underlying assets as of today, I’d see a 31% uplift to my shareholding’s value, even if Caledonia’s own investments did not to rise in value at all!

In reality, however, I expect Caledonia’s assets to at least keep track with the UK stock market; the trust has beaten the FTSE All-Share index in all but one year out of the past ten.

On a total return basis, Caledonia outperformed the same index by 113.5% over ten years, as of 31 March this year — a superb result! No lost decade for investors in Caledonia.

Past performance doesn’t guarantee anything, but I believe the combination of what I consider an unwarranted large discount, the strong family interest, and a track record of good asset allocation is a recipe for decent returns from here.

A potted history of Caledonia

Caledonia arose from the wealth of the Cayzer family, which made a mint or two from steamships in the 19^th Century.

The Cayzers bought the wonderfully named Foreign Railways Investment Trust in 1951 as a holding vehicle for their family wealth, though they showed rather less sentimentality than me when they renamed it Caledonia Investments Ltd.

In 1955, Caledonia then gobbled up the Cayzer family’s interest in the British and Commonwealth Shipping Company, and the resultant entity was floated on the London Stock Exchange in 1960.

Caledonia subsequently divested itself of the British and Commonwealth holding in 1987, and became more like the opportunity-seeking investment vehicle it is today.

It was restructured as a formal investment trust in 2003.

Don’t discount the family factor

Now, there are some investors who would say this convoluted history justifies a discount on the trust, especially when added to the ongoing involvement of the Cayzer family, who have their own colourful back stories.

But as I’ve said above I’m in the opposite camp, in that I like the family factor.

I’d also note that the share has sometimes traded at a slight premium to net assets in the past, so clearly the Cayzer family effect alone can’t explain the discount:

It has to be admitted though that Caledonia’s family owners have been a fiery lot over the years: More 1980s Dynasty than 19^th Century dynasty.

The turn of the 20^th century was marked by a big bust-up, which this article from The Telegraph from 2004 captures:

One of the City’s most bitter family feuds moved towards peace yesterday when Caledonia Investments announced a special dividend costing at least £64m to buy out dissident members of the Cayzer shipping dynasty.

The scheme has been devised to end three years of feuding in the family, which owns 37.5pc of Caledonia via the Cayzer Trust Company and 12pc through individual family members.

Rebels led by Sir James Cayzer, the 72-year-old patriarch who gives his address as Kinpurnie Castle, in Angus, and has a fleet of Rolls-Royces but no driving licence, have campaigned for Caledonia to be broken up and its assets distributed.

Rows and power struggles have turned on matters ranging from a controversial investment in a boat by the trust for the millennium celebrations to Dotcom-era underperformance.

And while those fractious days would seem to be behind it, various offshoots of the Cayzer family still own 46% of the trust’s shares. What’s more, last year Will Wyatt, the distant grandson of clan founder Charles Cayzer, took over as CEO, returning the trust to direct family control.

For some this sort of thing – and the potential for another flare-up — is untenable.

For me it’s all part of the fun of investing in family houses. But if it doesn’t float your steamboat, then you should certainly look elsewhere; the Cayzer involvement is surely here to stay.

No big buybacks

The family holding presents a more concrete concern, however, even for us spreadsheet-wielding romantics.

An undertaking to the UK’s Takeover Panel means Caledonia is unable to execute any share buybacks that would take the Cayzer concert party’s holding above 49.5%.

That’s important because — as investors at rival mega-trust Alliance are presently discovering — buying back shares can be an effective way of narrowing a large discount to a trust’s net assets.

Personally, I don’t think it does much good for ongoing shareholders. Yes, your shares are rising in value, but your company is spending your assets to get that result. It’s all rather circular.

The hope of course is that the discount will narrow faster than the rate you’re spending money to narrow it, as other investors should buy the shares if the discount widens too much, anticipating it will be closed again by buybacks.

But it doesn’t always work that way.

Worries about what’s under Caledonia’s kilt

It’s all rather moot, anyway, because Caledonia isn’t buying back substantial amounts of shares.

Instead, we’ll need to see a decent investing performance and a change in sentiment to narrow the discount.

The key to the latter, it seems to me, is that a big slug of Caledonia’s money is in private equity funds or directly invested in unlisted companies (including, rather fittingly, 100% ownership of The Sloane Club in London) and the market seems to lack confidence in these unlisted holdings.

A similar argument was made a couple of years ago to justify the discount at RIT Capital Partners, the family vehicle of the Rothchilds.

Indeed, I discussed RIT Capital Partners on Monevator when it was trading on a double-digit discount in 2009. Since then the discount on Jacob Rothchilds’ warchest has turned into a premium, and anyone who bought the shares when I wrote has seen a return of around 46%, versus less than 29% in the FTSE 1001.

This return is especially impressive when you consider that RCP was holding plenty of cash at times – although equally it was also invested in flightier foreign markets, too, so the comparison with the FTSE is a crude one.

My highland fling with Caledonia

While RIT has an even more stellar ten-year record than Caledonia on most measures, the main reason for that recent outperformance is simply that the discount on its shares disappeared to become a slight premium. This transformed the trajectory of its share price.

I think RIT has a good chance of doing well from here, too – and to retain its value better than a tracker should the market dive — and I still hold some.

What I’d class as the easy justification for investing in those shares has passed, however. If anything, the slight premium bothers me.

But the window has not yet passed for Caledonia. The fund sits at a 20% discount despite the fact that net assets were ahead 6.5% over the past year, versus a 5.4% performance from the All-Share. Consider that it has 6% or more of its money in cash, and the 20% discount looks even more untenable.

Yes, Caledonia has a new manager, who seems to favour resource companies over the financial firms that long dominated Caledonia’s roster (and the CVs of some of his aristocratic forebears).

And yes, he’s also reshaping the trust’s strategy to concentrate on fewer holdings, where Caledonia’s investment can result in a more meaningful influence at board level, as well as looking to boost the trust’s market-lagging 2.2% dividend yield.

Even on this last point, Caledonia already has a 44-year history of raising its dividend – another super achievement.

Yet the market seemingly prefers to fret that this £1 billion company has lost nearly £200 million of its value down the back of an antique sofa than to look at its medium-term history of wealth preservation, market-beating returns, and a growing income.

I think the market is wrong. It’s true that buying trusts on a discount can be a hit-and-miss affair; the market isn’t entirely dumb, and often the discount correctly anticipates dawdling performance or worse.

But I think the old money factor tilts the odds in Caledonia’s favour. In my worst case scenario, the discount doesn’t narrow much and I buy into a secure and rising dividend with one-fifth knocked off the price.

If you too are tempted to invest in Caledonia, then you’ll want to read the latest annual report to see where it is putting its money and how recent changes will affect its portfolio going forward. As ever, do your own research – I am not responsible for your actions.

My own money is where my mouth is. I’ve put roughly 6.5% of my net worth into Caledonia Investments, and writing this post I’m thinking to myself that this sum could rise still higher!

Note: I take no responsibility for the accuracy of this post. Read my disclaimer.

1. excluding dividends [↩]

The second update of the Slow and Steady passive portfolio takes place against a backdrop of global doom and gloom. Eurozone ministers fiddle while Athens burns and the talking heads ponder every scenario – from default to default plus meltdown of the financial system (part two).

Where does all this brouhaha leave our battered lazy portfolio? Roughly where it started!

The portfolio was set up at the start of the year with £3,000 and an extra £750 is invested every quarter into a diversified set of index funds, heavily tilted towards equities.

Missed an update? Catch up on all the previous passive portfolio posts.

The results are in

The portfolio has ticked up 0.85% since launch for a whopping cash gain of £31.96. That’s £14.12 earned in the last three months. Sweet dreams are made of this.

Since last time:

• The US fund remains in the black but has lost nearly half of its initial gains1 as America’s recovery runs out of puff and growth figures are revised down.

• Meanwhile, Europe continues to motor ahead, despite everything – maybe the doom-mongers have been exaggerating?

• The FTSE is bumping along going nowhere fast, which feels about right. Still, we’ve had the VAT rise, the onset of George Osborne’s austerity measures and carnage on the High Street since the last update, so we’re getting off lightly.

• Japan was the big laggard last time, post-Tsunami. It’s still down but slowly recovering.

• The Pacific continues to edge down. This fund is dominated by Australia so could be feeling the slowdown in commodities and the rises in interest rates.

• UK Gilts gain as fear stalks the land. Our bond holding registered the portfolio’s second biggest loss last time, but has swung around to notch the highest gain this quarter. Its performance this quarter is a shining example of bonds as buoyancy aid, shielding the portfolio from equity volatility.

• Emerging markets are now the biggest drag on the portfolio as overheating takes the steam out of Chinese growth.

Whatever the causes, we’re talking about dips and gains that amount to a few pounds. Despite the red-hot newswires, the market remains flat.

Still, it’s a long-term game for passive investors – we’re relying on low costs, diversification and the risk premium to reward us in the future. Perhaps the far-distant future of foil suits the way we’re going.

New purchases

Time to throw in another £750 of our carefully husbanded cash and rebalance the portfolio as follows:

UK equity

HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233

New purchase: £153.02
Buy 43.0690 units @ 355.3p

Target allocation: 20%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan.

Target allocation (across the following four funds): 50%

North American equities

HSBC American Index – TER 0.28%
Fund identifier: GB0000470418

New purchase: £218.76
Buy 113.8771 units @ 192.1p

Target allocation: 27.5%

European equities excluding UK

HSBC European Index – TER 0.37%
Fund identifier: GB0000469071

New purchase: £87.35
Buy 16.6858 units @ 523.5p

Target allocation: 12.5%

Japanese equities

HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374

New purchase: £33.47
Buy 53.2813 units @ 62.81p

Target allocation: 5%

Pacific equities excluding Japan

HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713

New purchase: £38.63
Buy 15.708 units @ 245.9p

Target allocation: 5%

Emerging market equities

Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60

New purchase: £84.25
Buy 162.9317 units @ 51.71p

Target allocation: 10%

UK Gilts

L&G All Stocks Gilt Index Trust: TER 0.25%
Fund identifier: GB0002051406

New purchase: £134.51
Buy 83.9663 units @ 160.2p

Target allocation: 20%

Total cost = £749.99

Cash = 1p

Total cash = 5p

Trading cost = £0

We rebalance to target allocations every quarter using new contributions. It’s a no-brainer as our plain ol’ index funds don’t incur trading costs.

Take it steady,

The Accumulator

1. Note, I’m talking cash returns since the last update. I’m not referring to the gain/loss percentage since purchase. Same goes for all the other funds. [↩]