Despite the marvellous profit record, no cash ever seemed to come out. Gradually the reason became clear. It wasn't just the machinery that was being manufactured.
Robinson was using fair value adjustments to write down acquired stocks and debtors, thus booking greater profits when the stock was sold, or the receivables collected.
Similarly, by writing down fixed assets, the depreciation charge taken against profits was reduced.
In an instant I had learned the distinction between profits and cash.
From 1990 onwards, Robinson faltered with repeated profits warnings and a wholesale change of management.
The component businesses were scattered to the four winds as the group was broken up piecemeal. The lesson learned stood me in good stead to predict the demise of businesses later in my career.
Acquisitions provide a wonderful opportunity for creative accounting and investors should view them warily. Some make great business sense; many don't. As long as you remember ‘Cash is King’, you won't go far wrong.
No business generating plenty of cash goes under, which cannot be said for businesses generating plenty of profit.
Another lesson is that if you are going to invest in a business, you must master the language of business, i.e. accounting.
Beware new paradigms
The most memorable experience I have lived through is the 1990s dot-com phenomenon. As with most manias, there was a seminal event associated - in this case the coming of the internet. The momentum built up by such manias is very powerful and, for many, hard to resist.
You just know something is wrong when investment bankers start devising new ways to value enterprises other than by their ability to generate cash for their owners.
Nearly always, the new valuation metric travels further up the income statement and sometimes clean off it.
As Ben Graham said: "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."
I think there are a number of lessons here. First, I agree with Sir John Templeton that "It's different this time" are the four most dangerous words in the investment lexicon.
Second - history repeats itself, but the manifestation is usually different.
Third - ignore siren voices and trust your own judgement. And lastly, often the darkest hour is just before the dawn.
In investment terms, this means the point where nearly everyone is pessimistic and can see no positive news whatsoever. As the last bull turns to bear, the market inevitably turns up.
