SPX Discussion for the Grown-Ups, page-4

Firstly, thanks for your considered responses.

We felt sure there were other grown-ups around and you've proved us right. If anyone else wants to add to the discourse, please do.

As we said in another thread, engaging in personal attacks against each other or against the CEO achieves nothing and will not help move this company forward.

If a commentator calls the CEO of a listed company a bendy goat it makes the commentator look like a child, and they will be thought of as such.

If a commentator asks the SPX board why it appears to have failed in its most basic duty to hold the CEO and executive accountable for apparent repeated misrepresentations to shareholders and for an abject failure to deliver initiatives on time, on budget and to an acceptable return on investment (and the commentator has structured evidence to back up the claims), heads turn to the company looking for an answer. It may take a few goes, but that's using a professional, business-like approach to influence.

None of the four non-exec board members wants to read the business press headline, "Spenda shareholders accuse directors of dereliction of duty". Ouch. That's enough to make any director (SPX or otherwise) choke on their gin and cranberry juice.. or whatever the Perth tech bros / brosettes are drinking these days.

No harm in a bit of professional activism here and there if it's your thang. It's not ours.

Anyway, back to the matter in hand. For full disclosure we have a large shareholding in SPX amassed over recent times. We're probably one of the mysterious accumulators the Copperati so regularly bang on about. Our shareholding is not large enough to prompt a form 603, nor is clearly enough to mop up much of the free float, but it's large enough to make a difference if our thesis holds, yet small enough not to lose the ranch and horses if it doesn't. Our thanks goes out to the hard working individuals who offer liquidity to the SPX order book on a daily basis and are rewarded across the spread for doing so.

We're deep value investors (Buffet cigar butt and worse) and our macro thesis with SPX and similar poor performing businesses is simple. It's based on Graham and Dodd, with subsequent work by de Bont and Thaler and others, including more recent work at Columbia. Put simply, at a macro level, after a period of non-performance which the research indicates is 2-3 years, if the problem facing a company or industry ISN'T TERMINAL (and we don't think it is at this stage for SPX), there is a stunningly high probability (almost statistical certainty) that mean reversion will kick in at some point.

Even if SPX shareholders understood this (and we doubt many do), the issue is 'when' and that appears to be causing unbearable stress and anger that most cannot handle, especially those that are sitting on big losses. This has depressed the SP to the point where you don't need to invest much to get a decent return when mean reversion inevitably kicks in... if you can stand the wait.

At a portfolio level, even if you (and we) are wrong, if you make a few SPX-style bets and have the staying power, our experience is that the winners way, way outperform the losers. It's just a bit bumpy along the way.

Our experience (supported by the research) is that if the situation isn't terminal, the mean reversion seems to be independent of all micro factors in the business itself, such as the board and CEO competency, the financial position, company history, etc. In fact, if you speak to the executives at poorly performing or distressed businesses, often they have no idea how they are going to turn things around. They are blinded by (and constantly reminded of) their own failings and lurch from one internal crisis to another, often inefficiently switching resource priorities as they go. Irrespective of this, the business with or without the current board and executives almost always finds a way through and then goes on to a subseqent period of outperformance.

As we have already said, the key point and the focus for all deep value investors is whether the company or industry are in terminal decline or not. If you can ascertain this, then it becomes a question of when to invest and the simple answer is: before mean reversion kicks in. Even better if you can foresee a catalyst signal through all the noise, but this is hard.

Our view is that there are some emerging catalysts which may (or may not) kick off mean reversion after this three year period of stagnation. Top of the list is the Limepay (LP) acquisition, which we think by accident or design, is a wonderful addition to SPX and has the potential (for the reasons in the previous posting, including pipeline and tranching of the purchase consideration) to add significantly to the SPX bottom line and help grow the business. We think signs of this will appear in the upcoming 4C.

If LP has the pipeline we think it does based on disclosures, watch out for more announcements of new, large LP customers coming online in future quarters. If these don't materialise, there is a big problem and you can quote us on that.