AI and Stock Picking

There have been a few articles recently written about AI and the attack on hedge funds / funds management. Computers have been making in-roads for sometime, particularly in quantitative and algorithmic trading. My interest is in whether AI will start infiltrating classic, bottom-up fundamental analysis. 

One argument against the invasion of AI is the breadth of experience and information sources required: meeting company management, suppliers, competitors, ASX announcements, store visits - the list goes on. This argument seems reasonable. However, the opposite side of the coin is just how much any of this actually matters. It is an increasingly well-known fact that most fund managers fail to beat the index over time (particularly post fees). If you think about it, the index itself is a fairly basic algorithm (selects stocks based on metrics such as size and free float) that fends off most fund managers - most humans have already lost to machines. 

There are chunks of fundamental analysis that are manual and repetitive and therefore susceptible to AI performing the task. For example, a common hunting ground for the fundamental investor is to go through the ASX announcements, looking at company updates, insider buying/selling etc. I imagine a robot could trawl through these announcements and compile a shortlist and dossier of stocks meeting a checklist of investment criteria. A robot could identify a company buying back stock in decent volume, go back through years of announcements to compile annual and half-year data to identify the trend in financials. The robot could then probably search the web for products sales, compare with competitors and even check out the CEO's personal background. Google is the big obvious beneficiary of this. Just imagine the power of how much Google can understand about a company. Google can identify key word flow and website traffic and probably deduce the impact on companies. And all this can be delivered with zero emotion or bias. 

So not only do fund managers struggle at the best of times, it is hard to imagine how AI won't deliver a decent kick in the ribs in the coming years to mainstream managers. If there is an edge in fundamental analysis, AI could probably deliver it cheaper than humans. 

That being said, I think human managers will have roles in speciality areas. Start-up or young  turn-around companies are hard to quantitatively analyse (there isn't much data) and the quality of the management team are of higher importance - whether fund managers or a machine are best place to determine whether managers or winners or losers or not is another issue. Very illiquid, small companies may just be too small for AI to bother with. And there will be cases of joining the dots where AI may never catch up. 

If AI skims the cream from a lot of traditional finance professionals, they may be forced into the remaining niche areas such as venture capital and small-caps thereby overcrowding those trades and invalidating them anyway. 

Some individuals are particularly adept at buying in panic and selling in boom, however if AI increasingly displaces humans from markets, then irrational behaviour may also decrease reducing the ability to arbitrage fear and greed. 

It's really hard not to see how the landscape won't continue to change and get harder for humans. 

Kristian 

Disclosure: own Alphabet / Google (via 401k)

EGP Capital Launch Party

As part of the launch of 'EGP Capital', Tony Hansen is putting on some drinks and nibbles Friday 31 March at the Radisson Blu Hotel, Sydney. EGP is exceptionally managed and this provides you with an opportunity to meet the manager in person. And the best part is it's free - a probably once only event knowing the frugality at EGP. 

If you are interested in attending, please contact EGP Capital directly at www.egpcapital.com.au. 

Kristian 

PIE Conference

The PIE conference is being held Tuesday 21 March in Auckland. The company line-up looks to be high quality and will be worth seeing the CEO's present. 

I'm going to attend, and will be in Auckland Monday 20 - Wednesday 22 March. Please let me know (via the profile page) if you would like to catch up and talk stock ideas.  

Kristian 

Calling Out For Queensland Body Corporate Managers

I'm doing some research on a company that primarily distributes through QLD Body Corporate Managers. Given I, and some colleagues, are in the process of buying shares in this company, I can't disclose the name of this company at this stage. 

This company is very rapidly growing, offering customers big savings. I'd like to speak to some QLD Body Corporate Managers to get some industry feedback. Industry feedback is a great way of verifying management and stockbroker claims.

If you are or know a BCM then I'd be appreciative if you could get in contact or pass on someone's contact details. 

Thank you, 

Kristian Dibble

Kangaroo Island Property

After touring Kangaroo Island (KI) early December last year looking at Kangaroo Island Plantations (KPT) timber plantations and proposed wharf at Smith Bay, it also appeared there may be an opportunity in property investment on the island - there are several catalysts to improve the economy and therefore house prices. 

Firstly, KPT is planning on exporting timber off the island. If this goes ahead it will create jobs. Not everyone agrees on where the timber should get off the island, but everyone agrees it needs to happen. Secondly, the airport is getting upgraded and lengthened so commercial jets can land/takeoff. This means that jets could fly direct from Sydney and Melbourne. This doesn't just mean more tourism, but people could work in Sydney for example during the week and fly to KI on the weekends. The house price differential is enormous. And recently a new resort application has been approved.

There is minimal permanent rental property on the island. We visited the Century21 office at Kingscote and there were only four properties for rent! 

So the upside case here is a jab-in-the-arm for the economy from the infrastructure projects and a 10%+ escalation in population along with minimal rental property could lead to higher rents and higher prices. 

There are some potential downsides, of course. Projects may not go ahead. Commercial jets may not fly into KI. There appears to be quite a number of unused houses on the island - there are a lot of weekenders and short term holiday letting property on the island. How much of this would convert to full time rental property if the population increases is a question I don't know the answer to. And KI will always be more expensive and isolated than the mainland: it won't appeal to everyone. 

I didn't draw any specific conclusion as to how or if property prices will move, so if you're thinking of that strategy you would want to look into this in detail yourself. The agent I spoke to was extremely helpful - contact me if you would like his details. 

Kristian 

Disclosure: own KPT

The mavericks disrupting funds management titans

The AFR has run a good article on the disruption of the funds management industry which included two close colleagues and friends - Tony Hansen (EGP Capital) and Peter Phan (Castlereagh Equity). After having known them for some years now, I can say they are both exceptionally smart and ethical individuals.

Both gentleman typically invest in smaller Australian companies and given they have a lot of their own personal wealth invested in their respective funds they have a sharpened eye for risk that many other investors simply do not.

Investors could certainly do worse than investing with them - but this of course is not to be construed as financial advice(!) 

Click the link below to read the full article:

The mavericks disrupting funds management titans

Kristian 

Kangaroo Island Plantations (KPT)

KPT has been a phenomenal investment, a great investing lesson and if plans materialise will be a positive economic boost for Kangaroo Island and South Australia. 

Kangaroo Island (KI) is located in South Australia (130km south of Adelaide) and is famous for its ecotourism including Seal Bay, marine life and a quiet get-away retreat. The tourism hot spots are located on the far western, southern and eastern sides of the island with the central and northern side typically used for agriculture. KI is quite big: 155km wide and 55km long and at times it actually feels quite remote driving through the centre. The population of over 4,000 (2006) is located mostly on the eastern side around the towns of Penneshaw and Kingscote. Sealink provides the ferry from Penneshaw to the mainland at Fleurieu Peninsula.  

It also turns out that KI has exceptional growing conditions for timber. A high, consistent rainfall combined with mild summers and low salinity allow timber to grow quickly. The faster you can grow timber, the cheaper it is to produce and KI finds itself among the lower costs timber producers in the country.

During the timber Managed Investment Scheme (MIS) heyday, various timber companies bought lots of land on KI and around the country and planted timber. These were tax and commission motivated structures that ultimately failed and the likes of Great Southern Plantations and Gunns went bankrupt. 

The main problem unique to KI is that it's an island and there has been no economical way to get the timber off the island and as the ferry service is located on the eastern side at Penneshaw, it is right smack bang in the middle of the tourist area - not exactly ideal for a logging route. 

The combination of these factors caused the prices of timber plantation on KI to crater, which in turn have created serious opportunity.

Out of the rubble, KPT emerged with 30% of the planted timber on KI, along with New Forests with 60% and individuals collectively hold the remaining 10%. I had the good opportunity to uncover this opportunity back in June 2014 when I discussed the situation at length with the great Fred Woollard from Samuel Terry Asset Management, who is the major shareholder in KPT. KPT was then $3 (a fraction of land value alone) and given it is now $27.20, it's fair to say I owe him one (I thought MNY was a good return tip, but a double is not quite as good as an 8 bagger). 

KPT has now positioned itself as the leading timber producer on KI with the recent agreement to purchase New Forests’ KI assets. This deal is phenomenal for KPT shareholders as the purchase price for the land and timber is cheap and crucially ensures KPT owns both potential sites for a second wharf.  

Getting control of both potential wharf sites is key: the government, recognising the need for a solution to export the timber to reinvigorate the economy, indicated only one approval will be given for a second site. KPT owns both Smith Bay and now Ballast Head (owned by New Forest). Smith Bay even contains a house which you can rent on Stayz.com.au. A picture of the site is shown below (note the buoy which is being used to test currents to determine wharf requirements):

So, KPT has now lodged a DA for the second wharf and if the approvals are given, the potential value accretion is enormous - despite the stock having already moved up so much. Slide 24 of the recent presentation (26/10/16) gives you some idea of what the business might be worth once the second wharf is built. As the owner of 58,000 acres of land (which ought to increase in value), a sustainable timber business generating in the order of $20m EBIT p.a. and a wharf owner, the potential upside is multiples from here. 

However, there will be another time for discussing the upside - I wanted to write this post to commend the major shareholders and management. Up until now, the board has not received much  cash remuneration but has been paid mostly in  shares (which they stand to become rich from). We've seen too many companies run by the wrong people: it's easy to get seduced (I have) by cheap stocks, but you also need the right managers with the right incentives to unlock and create value. KPT has  been exemplary in working with all stakeholders: residents, environmentalists, government and shareholders and have set the benchmark to judge other companies. 

Kristian

Disclosure - own KPT and MNY