Update No. 275 – 15/07/16

In Leviathan, Thomas Hobbes set out much of the fundament of what the construction of our modern social and political lives has been based.

Interestingly, what the book describes will, to the modern reader, sound very much like ‘Game Theory’, which didn’t really commence development as an academic idea for about 200 years or so after Leviathan was published.

The ‘war of all against all’, was the state in which man existed until we started to form more civil societies. In the best known passage in the book, Hobbes describes the natural life of man as ‘solitary, poor, nasty, brutish, and short’. The most humorous part of this description to me is that Hobbes lived to be 91 years of age, which was an exceptionally long life for one born in the 1500’s. His life may have been nasty and brutish, but by any measure of the period, it was not short…

There is much that could be improved in our modern societies to be sure, but if one were to bring Thomas Hobbes forward in a time-machine to the present day, he could scarcely conceive of the global utopia in which we live in 2016.

It does bear remembering that to someone of that era, our modern life would absolutely be nothing if not a utopia. In this text for example, William Savernak, a householder in Dorset calculated over 7 years of meticulous record keeping around the time of Hobbes that 80% of his household budget was consumed providing food and drink (and you can be sure the food and drink was not as pleasing as we enjoy today either). From the same piece, by the late 1800’s, expenditure on food and drink had plummeted to only 62% of income. In the US today, the median citizen spends less than 10% of their income on food and drink. The bounty we share today would be truly breathtaking to someone from the 15 or 1600’s.

This fact can tend to get lost on us as we go about our daily struggles.

I’ve mentioned before that I tend to be a little ‘Panglossian’ in my worldview, but only because life is so unrelentingly awesome…

I was thinking about Hobbes this week because the tendency for people to see the world through a very negative and short-term lense (nasty, brutish and short…) has allowed us to generate some good gains so far this month. The panic surrounding ‘Brexit’ caused one of our positions (Clydesdale Bank – CYB.AX) to fall dramatically, bottoming on July 6^th at $3.59. We were buying strongly on both the 5^th and the 6^th, basically doubling our holding. As a consequence, with the rebound to prices as high as $4.22 over the last few days, the position has become our 4^th largest. CYB was never really intended to become quite this large a holding for the fund. The position is potentially one that could be prone to further volatility as the markets figure out exactly what consequences Brexit holds. We are likely to trim somewhat if the recent sharp rise continues much further, but long-term, we think the business will perform extremely well for all the reasons we originally purchased it and we shall hold a meaningful exposure, our view is that Brexit will be much more of a non-event than most expect. Short-term behaviour is occasionally necessary to maximise outperformance and for portfolio and risk-management reasons.

As promised in the FY2016 letter, we have recently cleaned up some small positions. We eliminated our previously discussed positions in Traffic Technologies (TTI.AX) and NRW Holdings (NWH.AX). Both of these sales realised profits on the final parcels sold, but both positions realised small losses overall. Mistakes were made, particularly with TTI, we could have made quite good profits had we sold more aggressively when we first offered our holding for sale, but we stubbornly tried to entice someone up to offer instead of taking the bid. We should have been more aggressive when the decision to sell was made. NWH has been discussed at length; in the end the damage was not nearly as bad as it might have been as the remaining rump of the holding grew more than four-fold from its low prices.

The other sale was CML Group (CGR.AX), which was an attempt to profit from an arbitrage of sorts. It was a more complicated transaction than it should have been and didn’t work as expected, but we made about $1,000 and I never want to see the day when it’s not worth a little time and effort to make $1,000, even though you have to get to the 4^th digit of our share price to see the difference it made…

These three sold positions only amounted to only 1.4% of our non-cash assets, and leave us with a leaner and more focused 24 holdings remaining.

Despite solid gains for the fund in the first half of the month, we still trail our benchmark. As mentioned in Update 274, the benchmark we use adjusts for Franking Credits; as a consequence, we basically start FY2017 1.58% behind. We tend naturally to trail when markets rise as sharply as they have in the first half of July in any case. That has been no different this last couple of weeks – Tony Hansen 15/07/2016

P.S. Don’t forget we’re running monthly subscriptions now, if you wish to add to your holding and are not sure what to do, let me know.

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit}

^{*2 calculated based on dividends reinvested}