Forget the circle of competence, and the cheapest bank in Europe?
Investing in 123 #6/2024
1 question to reflect on
The result of last week's question: I could have added more options. There’s no right answer. The only right one is a positive return 😉
This week’s question:
Which sector would you NEVER touch, because you know nothing about it or for other reasons?
You can add other sectors in the comments ⬇️
2 quotes, do you agree?
“Live as if you were to die tomorrow. Learn as if you were to live forever.”
Mahatma Gandhi
This is a powerful quote for life and investing. Famous investors often tout, to stay within your circle of competence. But they speak less about actively expanding it. When he was young, Warren Buffett learned everything he could about insurance. He read about it, he spoke to people in the industry, and then he placed his bets. (In 1955, he bought Western Insurance at a trailing P/E of 1).
Could he have learned about technology? Of course. The man has sufficient brainpower to learn anything he wants. But he chose not to. In his view, it is too difficult to forecast the future of tech. He wants inevitables. Or to phrase it differently:
"In the long run, everything is a toaster."
Bruce Greenwald, finance professor and value investor
So, one can go wide, and learn about many sectors, or one could go deep, and study a few sectors in detail. What do you want to do? Go deep or wide?
I prefer to go wide. Why? I prefer to know a little bit about many things than being a specialist on one single topic. Stick with what resonates with your personality.
3 ideas of the week
These are 3 ideas I never acted on because they are outside my circle. My goal is to expand that circle into financials in 2025 (the companies are just too profitable)
Hingham Institution for Savings (Ticker: HIFS)
Category: Well-run small-cap bank
What does it do?
Hingham is a small bank in the US. If I had to write down one word for Hingham: Focus. It excels in what it does not do. Consumer lending, commercial lending, investments and wealth management, insurance, etc. But wait a minute, how does it make money?
Real estate lending services. Instead of expanding its services, it chose to stay within its circle of competence and spread out geographically.
Why should you care?
The stock suffered from the ‘banking crisis’ when Silicon Valley Bank exploded and traded at 80% of book value. It has recovered since. It had a terrific ROE in the past decade (>15%) until the end of 2022 when it began to suffer. With 15% inside ownership, there is still skin in the game. I keep it on my watchlist.
Check out the best article I could find written by
Kinsale Capital (Ticker: KNSL)
Category: Mid-cap fast-growing insurance group
What does it do?
It’s a specialty insurance group that focuses on the excess and surplus lines (E&S) market in the U.S. These are risks that are too complex for traditional companies to insure.
Why should you care?
A 10-year revenue and EPS growth rate of more than 30%. A 20-bagger up until now. It does not seem Kinsale is stopping. It has a unified enterprise system which allows them to make an offer faster and more precise. This advantage reminds me of a company like Adyen, built from the ground up without polluting the business model with acquisitions.
A superb write-up by
Secure Trust Bank (Ticker: STB)
Category: UK Microcap bank in a downturn
What does it do?
Secure Trust Bank (STB) is a specialist lender in retail finance, vehicle finance, real estate finance, and commercial finance.
Why should you care?
This bank finds itself in a pickle. It trades at a P/E of 3 or 20% of book value. A court ruling on vehicle finance sparked uncertainty across the industry, prompting some banks including STB to suspend lending. As a result, annual underlying profit before tax would be 10-15 million pounds ($13-19 million) below market expectations. The market reacted:
Proceed with caution. The most extensive write-up can be found here.
That’s it for this week.
May the markets be with you, always!
Kevin
At some point, I followed someone into investing into Kinsale capital. Now, insurance is not something I understand. It works different from “normal” companies. I sold it shortly after, because I couldn’t figure it out like I’m able to figure out a normal company. Owning the stock felt like gambling to me personally. It taught me to stay within my circle of competence. Learning every day.
the cheapest bank is not this one, its monte dei paschi in italy, p/E of 2 after a lot of events