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  1. #4561
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    Default Seeds of Destruction: Part 3.4a - NPAT of 'PGW Rural Rump' going forwards

    Quote Originally Posted by Snoopy View Post
    A big day with the announcement of when and how that capital repayment of $235m will be returned to shareholders, But what has not been revealed until now is the indicative debt level of the PGWRR company that is left.

    From an end of May 2019 post capital repayment balance sheet perspective, the total bank debt on the books is:

    $3.920m + $31.742m = $35.662m.

    This is within the 'core debt' envelope of $25m to $50m forecast for FY2020 (p9 of the proposal). But this is only part of the debt of the company that is forecast to balloon out by way of an additional $70m for 'typical seasonal working capital'. This reality is somewhat different to the 'debt free' situation that I imagined PGW would be in all year round in 'Part 3.2'.

    A greater amount of debt outstanding means our indicative interest bill going forwards needs to be reworked.

    Using past debt balances and interest payments declared over FY2018, the indicative interest rate bill 'before' was $10.235m based on an average debt balance of $179.834m, this implies an indicative interest rate of:

    $10.235m / $179.834m = 5.7% (use in Step 2)

    That means we can calculate the indicative annual interest payments after debt repayment as per the steps below:

    Step 1/ Calculate the incremental peak seasonal debt multiplication factor:

    PGW has various seasonal funding requirements that are met by taking on extra debt. The seasonal funding requirements are outlined in p9 of the 'Special Meeting' explanatory documents for the date of Tuesday 23rd July 2019. Peak working capital (and hence peak debt) is forecast to be between October and January, in line with selling spring seasonal goods to farmers.

    Over FY2020, the minimum net working capital required is estimated to be $35.662m on July 1st 2019 peaking at $105.662m around November 2019.

    $105.662m / $35.662m = 2.9629 (an increment of 196%). Yet averaged over a financial year and using a linear model, the average increase in incremental debt is only half this:

    196% / 2 = 98% => Annual debt incremental factor = 1.98

    Step 2/ Calculate Annual Debt Interest Payment

    Using the liabilities in the balance sheet as presented on p10 of the Special General Meeting notice:

    0.057x [$31.742m+$3.920m-$1.160m] x 1.98
    = $3.894m


    Rural Services ($39.5m EOFY cash balance after debt repayment)
    EBITDA $29.875m
    less DA $6.918m
    less I $3.894m
    equals EBT $19.063m
    x 0.72 equals NPAT {A} $13.725m
    No. shares on issue {B} 754.048m
    eps {A}/{B} 1,82c
    I want to revisit my earnings projection, because the last one did not take into account the reduction in unallocated corporate costs. i am in two minds about doing this. The detail of corporate head office restructuring was meant to come out by the end of June. So far the only announcement has been the departure of former CEO Ian Glasson, to be replaced by Stephen Guerin, an internal appointee. If that is all the restructuring that happens, then my cost reduction assumptions will go to custard. However, if my ongoing corporate head office cost reduction is realistic it won't be a free lunch. There will be a capital cost in redundancy that I have not considered. Nevertheless in the interests of 'looking down the road' I think this is a worthwhile exercise to complete.

    From an end of May 2019 post capital repayment balance sheet perspective, the total bank debt on the books is:

    $3.920m + $31.742m = $35.662m.

    This is within the 'core debt' envelope of $25m to $50m forecast for FY2020 (p9 of the proposal). But this is only part of the debt of the company that is forecast to balloon out by way of an additional $70m for 'typical seasonal working capital'. This reality is somewhat different to the 'debt free' situation that I imagined PGW would be in all year round in 'Part 3.2'.

    A greater amount of debt outstanding means our indicative interest bill going forwards needs to be reworked.

    Using past debt balances and interest payments declared over FY2018, the indicative interest rate bill 'before' was $10.235m based on an average debt balance of $179.834m, this implies an indicative interest rate of:

    $10.235m / $179.834m = 5.7% (use in Step 2)

    That means we can calculate the indicative annual interest payments after debt repayment as per the steps below:

    Step 1/ Calculate the incremental peak seasonal debt multiplication factor:

    PGW has various seasonal funding requirements that are met by taking on extra debt. The seasonal funding requirements are outlined in p9 of the 'Special Meeting' explanatory documents for the date of Tuesday 23rd July 2019. Peak working capital (and hence peak debt) is forecast to be between October and January, in line with selling spring seasonal goods to farmers.

    Over FY2020, the minimum net working capital required is estimated to be $35.662m on July 1st 2019 peaking at $105.662m around November 2019.

    $105.662m / $35.662m = 2.9629 (an increment of 196%). Yet averaged over a financial year and using a linear model, the average increase in incremental debt is only half this:

    196% / 2 = 98% => Annual debt incremental factor = 1.98

    Step 2/ Calculate Annual Debt Interest Payment

    Using the liabilities in the balance sheet as presented on p10 of the Special General Meeting notice:

    0.057x [$31.742m+$3.920m-$1.160m] x 1.98
    = $3.894m

    Rural Services ($39.5m EOFY cash balance after debt repayment)
    EBITDA $29.875m
    add Unallocated S&G overhead $1.600m
    less DA $6.918m
    less I $3.894m
    equals EBT $20.663m
    x 0.72 equals NPAT {A} $14.877m
    No. shares on issue {B} 754.048m
    eps {A}/{B} 1.97c

    SNOOPY
    Last edited by Snoopy; Yesterday at 08:04 PM.
    To be free or not to be free. That is the cash-flow question....

  2. #4562
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    Default Seeds of Destruction: Pt 5.3a PE Ratio and Gross Yield calculations: PGW Rural Rump

    Quote Originally Posted by Snoopy View Post
    Scenario $157.5m debt repayment and new FY2020 Investment
    eps {A} 1.82c
    PGW Rural Rump: Market Valuation {B} 54c - 31c = 23c
    PE ratio {B}/{A} 12.6
    Gross Dividend Yield {A}/{B x 0.72} 11.0%

    Notes

    1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.

    2/ The PE ratio is now looking looking high for this type of business, despite the fact I have considered a business cycle average value of earnings.

    3/ The potential dividend yield looks O.K.. The lesser than expected capital repayment has not made PGWRR debt free after all. This is no doubt because PGWRR has elected to keep spending to invest in the business. But, conservatively, I haven't modelled the effect of any of this increased earnings coming through.

    In this low interest rate environment I would be prepared to buy with a gross dividend return of 8.5%. This implies a post capital return share price of:

    25c x 11.0/8.5 = 32.4c

    Post 'capital repayment' and a couple of years down the track into more favourable farming times, I am therefore guessing a capital appreciation of around (32.4c -23c =) 9cps, plus dividends of 2cps per year, are on the table, with the share now trading at 54c. Given we shareholders are currently in a dip in the earnings curve, and that means a rather higher PE than I have calculated above, patience may be required. I see no immediate bargain available for new shareholders buying in at 54c.
    Continuing my rework of the post capital repayment scenario, this time with $1.6m in unallocated head office costs removed.


    Scenario $157.5m debt repayment and new FY2020 Investment
    eps {A} 1.97c
    PGW Rural Rump: Market Valuation {B} 54c - 31c = 23c
    PE ratio {B}/{A} 11.7
    Gross Dividend Yield {A}/{B x 0.72} 11.9%

    Notes

    1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.

    2/ The PE ratio is now looking looking high for this type of business, despite the fact I have considered a business cycle average value of earnings.

    3/ The potential dividend yield looks O.K.. The lesser than expected capital repayment has not made PGWRR debt free after all. This is no doubt because PGWRR has elected to keep spending to invest in the business. But, conservatively, I haven't modelled the effect of any of this increased earnings coming through.

    In this low interest rate environment I would be prepared to buy with a gross dividend return of 8.5%. This implies a post capital return share price of:

    23c x 11.9/8.5 = 32.2c

    Post 'capital repayment' and a couple of years down the track into more favourable farming times, I am therefore guessing a capital appreciation of around (32.2c -23c =) 9cps, plus dividends of 2cps per year, are on the table, with the share now trading at 54c. Given we shareholders are currently in a dip in the earnings curve, and that means a rather higher PE than I have calculated above, patience may be required. I see still no immediate bargain available for new shareholders buying in at 54c.

    SNOOPY
    Last edited by Snoopy; 08-07-2019 at 03:28 PM.
    To be free or not to be free. That is the cash-flow question....

  3. #4563
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    Default MDRT: FY2012 to FY2019F

    Quote Originally Posted by Snoopy View Post
    FY2012 FY2013 FY2014 FY2015 FY2016
    Short Term Bank Loans $29.709m $47.702m $35.573m $57.195m $36.623m
    add Long Term Bank Loans $111.500m $62.000m $65.000m $66.000m $97.511m
    add Net Defined Benefit Liability (Pension Plan deficit) $26.264m $20.819m $13.528m $14.655m $25.729m
    add Employee Entitlements $17.531m $15.910m $20.837m $20.511m $20.982m
    equals Total Bank and Worriesome Liabiliities {A} $185.004m $146.431m $134.938m $158.361m $180.845m
    NPAT (declared) {B} $24.5m $14.6m (*) $42.3m $32.8m $39.6m
    Minimum Debt Repayment Time {A}/{B} (in years) 7.55 10.02 3.19 4.83 4.57

    (*) Excludes Goodwill Write Down of $321m.

    The above table shows that in absolute terms, 'worriesome debt' returned in FY2016 to a level not seen since just after the Alan Lai headed capital raising in FY2011 (that's bad). However the ability to service that debt, the declared Net Profit After Tax, has improved markedly since that time (that's good). Bring the two together and MDRT has improved from a worst of 10.02 (that's bad) to 4.57 today (that is acceptable, anything between 2 and 5 qualifies as 'medium level debt'). While I would prefer to see PGW pay down some of their debt, this isn't going to happen under the Alan Lai regime. Financial discipline will be required from here and fortunately for we shareholders CEO Mark Dewdney (aka 'the Dewd') has it.

    The turning point was FY2014. So what happened in FY2014 to turn things around?
    A benefit of selling the seed division for well above book value is that it gives PGW a chance to get their debt mountain under control. But going against this is major shareholder Agria who for their own reasons want as large a cash payout as possible. I think it is worth asking the question:

    'What shape will PGW be in debt wise if the capital repayment goes ahead as planned?"

    One way to answer that is to work out the 'minimum debt repayment time' (assuming all profits were directed to paying off debt) for the company.

    FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 (adj F)
    Short Term Bank Loans $29.709m $47.702m $35.573m $57.195m $36.623m $26.719m $30.806m $3.920m
    add Long Term Bank Loans $111.500m $62.000m $65.000m $66.000m $97.511m $110.925m $149.205m $31.742m
    add Net Defined Benefit Liability (Pension Plan deficit) $26.264m $20.819m $13.528m $14.655m $25.729m $15.827m $10.574m $10.761m
    add Employee Entitlements $17.531m $15.910m $20.837m $20.511m $20.982m $22.946m $31.163m $31.163m
    equals Total Bank and Worriesome Liabiliities {A} $185.004m $146.431m $134.938m $158.361m $180.845m $175.967m $221.748m $77.568m
    NPAT (declared) {B} $24.5m $14.6m (*) $42.3m $32.8m $39.6m $46.3m $27.1m $11.4m
    Minimum Debt Repayment Time {A}/{B} (in years) 7.55 10.02 3.19 4.83 4.57 3.80 8.18 6.80

    (*) Excludes Goodwill Write Down of $321m

    I was under the impression that debt at PGW would come down as a result of selling the seed division. However, this analysis shows it will not happen. When the capital return has been washed out of the system, the balance sheet that is left is still highly indebted (an MDRT figure of 6.8). I would consider anything between 2 and 5 qualifies as 'medium level debt'. They say we are in for a period of sustained low interest rates. It looks like PGWRR will need that.

    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 07:29 PM.
    To be free or not to be free. That is the cash-flow question....

  4. #4564
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    **** 1 ****

    My you have been a busy dog Snoopy, I can not keep up with your rate of production.

    **** 2 ****
    Quote Originally Posted by Beagle View Post
    One wonders what happens to the problematic under funded pension scheme if the crown jewel's are sold ?
    Quote Originally Posted by Snoopy View Post
    I would have thought a sudden influx of millions of Danish dollars would be the ideal time to properly fund the outstanding pension liability. However the proforma post capital repayment balance sheet just published, dated 19th May 2019, shows a net pension liability of $10.761m, up from $10.574m at the last balance date of 30-06-2018. This means the golden opportunity to 'square up' the pension scheme has been lost.

    Such a small increase in 'net pension liability' ordinarily might not raise eyebrows. Except that...
    The pension plan seems to be much understood by most posters, some of whom should know better.

    The liabilities of the plan are calculated year to year on a set of assumptions about the future, and these assumptions do change each year.

    Probably the biggest contribution to the increase in liabilities over the years is the change in interest rates.

    How much additional funding will be required in the future is however uncertain
    om mani peme hum

  5. #4565
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    Quote Originally Posted by Snow Leopard View Post
    **** 1 ****

    My you have been a busy dog Snoopy, I can not keep up with your rate of production.

    **** 2 ****




    The pension plan seems to be much understood by most posters, some of whom should know better.

    The liabilities of the plan are calculated year to year on a set of assumptions about the future, and these assumptions do change each year.

    Probably the biggest contribution to the increase in liabilities over the years is the change in interest rates.

    How much additional funding will be required in the future is however uncertain
    And as expected returns and discount rates get lower that how much more might be quiet large.

    And those oldies who might have once worked for Wrightsons Bloodstock years ago and even recently retired Seeds people will still get their pension......and in some cases when they pass on their spouses continue with a pension.

    Should have bitten the bullet and done a commutation offer to pensioners to get rid of all or most of the problem for good.

    Maybe they did consider a commutation offer but the amount the Actuary came up with was just too horrendous

    I note that overall Scheme liabilities fell a bit in 2018 ....maybe more than expected died.
    Last edited by winner69; 07-07-2019 at 07:52 AM.
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  6. #4566
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    Quote Originally Posted by Snow Leopard View Post
    **** 1 ****

    My you have been a busy dog Snoopy, I can not keep up with your rate of production.

    **** 2 ****




    The pension plan seems to be much understood by most posters, some of whom should know better.

    The liabilities of the plan are calculated year to year on a set of assumptions about the future, and these assumptions do change each year.

    Probably the biggest contribution to the increase in liabilities over the years is the change in interest rates.

    How much additional funding will be required in the future is however uncertain
    Similar to what happened with Coats PLC? As interest rates dropped, its pension liability kept blowing up until it effectively sunk GPG due to the need by GPG to keep pumping in money.

    History also records that once Coats PLC was properly recapitalized, its shares have put on 300% return in 3 years.

  7. #4567
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    Quote Originally Posted by Snow Leopard View Post

    The pension plan seems to be much understood by most posters, some of whom should know better.

    The liabilities of the plan are calculated year to year on a set of assumptions about the future, and these assumptions do change each year.

    Probably the biggest contribution to the increase in liabilities over the years is the change in interest rates.
    Yes and there is another factor connected with interest rates. More and more of the fund is going into fixed interest investments as the years go by:

    Plan Asset Contributions

    EOFY2016 EOFY2017 EOFY2018
    Equities 79% 64% 59%
    Fixed Interest 19% 28% 31%
    Cash 2% 8% 10%

    I wonder what the returns for fixed interest and cash were over FY2018? Not very good I would think, and those returns would be lower again over FY2019. Is the growth of this fund being knobbled by poor asset allocation?

    How much additional funding will be required in the future is however uncertain
    The issue is the scheme has been in persistent deficit for many years. Through some quirk of accounting I don't understand, PGW have a plan to put in shareholders actual cash via a method that bypasses the profit and loss statement into the scheme to help close the deficit. The problem is the cash - our cash- keeps going in yet the deficit remains stubbornly extant.

    on p61 of AR2016 we learn:

    "The group made a commitment to provide certain contributions to the plan over a five year period."

    We are three years into that commitment now.

    EOFY2016 EOFY2017 EOFY2018 EOFY2019 (est)
    Total Defined Benefit Liability ($25.729m) ($15.827m) ($10.574m) ($10.761m)
    Lump Sum Cash Contribution to Defined Benefit Plan during year (ESCT inclusive) $0m $7.551m $2.842m $3m

    The problem is that over the current year the contributions have gone in ($1.481m at the December 2018 reporting date) yet the liability has gone up. Furthermore due to the seed division sale, the size of the profit engine to service this deficit has halved. In 'relative size of the problem terms', as far as shareholders are concerned, we are now almost back to where we were in 2016. And that means all of the cash poured in to shore up the pension plan since 2016 (real cash not put through profit and loss) has had no effect on the potential bail out debt burden of PGW going forwards. How much cash going forwards will be needed to fix this?

    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 07:26 PM.
    To be free or not to be free. That is the cash-flow question....

  8. #4568
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    Quote Originally Posted by Snoopy View Post
    The issue is the scheme has been in persistent deficit for many years. Through some quirk of accounting I don't understand, PGW have a plan to put in shareholders actual cash via a method that bypasses the profit and loss statement into the scheme to help close the deficit. The problem is the cash - our cash- keeps going in yet the deficit remains stubbornly extant.

    ]
    As a shareholder you should be proud of giving the oldies who made the company what it is today a regular income to keep them happy.

    Don’t worry ...one day there won’t be any left.
    “In a roaring bull market, knowledge is superfluous and experience is a handicap.”

    –Benjamin Graham”

  9. #4569
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    Quote Originally Posted by winner69 View Post
    As a shareholder you should be proud of giving the oldies who made the company what it is today a regular income to keep them happy.

    Don’t worry ...one day there won’t be any left.
    Oh I am proud to do that Winner. I have great respect for the oldies and those not so oldies who still work in the company and are in the scheme who built PGW up. The reason I am bringing this 'superannuation issue' up is that I want PGW to be there in the future so that it can meet these pension obligations, both present and future. If the pensions aren't funded properly over a short period then small cash injections can be made along the way. But this pension funding problem is very long standing and it would appear that PGWs efforts to fix it are insufficient to date. The capital injection from the seed sale is the perfect opportunity to fix things both for the sake of the pensioners and for the certainty that would bring for shareholders in the business going forwards. A one off $10m cash injection into the scheme would calm my nerves and the nerves of many PGW pensioners who will get nothing if the scheme (and PGW) collapses.

    More likely that PGW collapsing though is that its growth will be constrained by constantly having to top up the pension scheme to the tune of $3m or so for twenty years.

    SNOOPY
    Last edited by Snoopy; 07-07-2019 at 10:42 AM.
    To be free or not to be free. That is the cash-flow question....

  10. #4570
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    Quote Originally Posted by winner69 View Post
    And as expected returns and discount rates get lower that how much more might be quiet large.
    The assumptions used including discount rates are shown below:

    EOFY2016 EOFY2017 EOFY2018
    Discount Rate (10yr govt bond rate) 2.34% 2.97% 2.85%
    Inflation 2.0% 2.0% 2.0%
    Future Salary Increases 3.0% 3.0% 3.0%
    Future Pension Increases 2.0% 2.0% 2.0%

    It looks like only the discount rate is moving. The lower the discount rate, that means the more money is required 'now' to fund future obligations. So if the government ten year bond rate halves (from 2.85%), that means the present day obligations of the pension scheme could double? That would be another $10m of 'hidden debt' on the books or more poignantly another $10m of 'shareholder cash' to remove that hidden debt needed?

    I note that overall Scheme liabilities fell a bit in 2018 ....maybe more than expected died.
    Perhaps they changed the assumptions to assume more people will die sooner, and so relieve the pension scheme of its future cashflow problem? (of course if the people don't die sooner as assumed, that might be a problem in itself!)

    SNOOPY
    Last edited by Snoopy; 13-08-2019 at 07:43 PM.
    To be free or not to be free. That is the cash-flow question....

  11. #4571
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    Snoopy ...what’s that 10 year Govt bond rate now ...ouch
    “In a roaring bull market, knowledge is superfluous and experience is a handicap.”

    –Benjamin Graham”

  12. #4572
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    Quote Originally Posted by winner69 View Post
    Snoopy ...what’s that 10 year Govt bond rate now ...ouch
    1.543%. So it has almost halved since EOFY2018 (was 2.85%) and more to come!

    At 19th May, the date of the pro-forma balance date, the rate was 1.77%. So it has come down a lot more, even in just six weeks.

    If it gets down to 1% then PGW might need a $20m (not $10m) capital injection into the pension scheme, assuming the earnings of the scheme remain flat. But if interest rates fall, then those fixed interest returns will fall as well. So even more money will have to be pumped in just to keep the future earnings stream steady.....ouch....ouch

    SNOOPY
    Last edited by Snoopy; 07-07-2019 at 11:27 AM.
    To be free or not to be free. That is the cash-flow question....

  13. #4573
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    Quote Originally Posted by Snoopy View Post
    1.543%. So it has almost halved since EOFY2018 (was 2.85%) and more to come!

    At 19th May, the date of the pro-forma balance date, the rate was 1.77%. So it has come down a lot more, even in just six weeks.

    If it gets down to 1% then PGW might need a $20m (not $10m) capital injection into the pension scheme, assuming the earnings of the scheme remain flat. But if interest rates fall, then those fixed interest returns will fall as well. So even more money will have to be pumped in just to keep the future earnings stream steady.....ouch....ouch

    SNOOPY
    Actually - quite stupid method to determine the required capital for a pension schema. I am wondering what they are doing at the point in time the interest rate turns negative (as it already is in some parts of the world - i.e. this is a when, not an if)?

    Wouldn't they need in this case an infinite amount of money to fund their funny schema?
    ----
    "Prediction is very difficult, especially about the future" (Niels Bohr)

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    The most underfunded super fund in the country is the Government Superannuation Fund - the funds for government employees
    Last edited by winner69; 07-07-2019 at 01:19 PM.
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  15. #4575
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    Quote Originally Posted by BlackPeter View Post
    Actually - quite stupid method to determine the required capital for a pension schema. I am wondering what they are doing at the point in time the interest rate turns negative (as it already is in some parts of the world - i.e. this is a when, not an if)?

    Wouldn't they need in this case an infinite amount of money to fund their funny schema?
    Is a dilemma BP butthey will find a ways around it

    https://www.ipe.com/pensions/pension...016338.article

    “This is for a pure economic reason,” he adds. “If a pension fund makes a promise to stakeholders, it cannot pretend that the promise is as strong as government guarantee. Pension funds cannot print money. A promise a pension fund makes to stakeholders is no different from a promise made by a corporate to repay an investor. Pension funds’ strategies should reflect that dynamic when they think about discounting and matching.”
    “In a roaring bull market, knowledge is superfluous and experience is a handicap.”

    –Benjamin Graham”

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