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Is The TV Your Investment Strategy?

Companies, Insightful Insights | Comments (41)

Is The TV Your Investment Strategy?

Mark Twain (1835 – 1910) said; “I Am Not So Concerned With The Return On My Money As The Return Of My Money.” It may surprise you to know he was quite the investor and liked to make comment about his observations.  His quips always revealed a deep understanding of the nonsense that goes on in the stock market.  What fascinates me is that the mistakes Twain observed during his lifetime are being repeated today.

I am occasionally asked why I spend so much time offering my insights when many observe that there is neither an obligation nor financial need.  The reason is quite simple, I enjoy the process and of course, the proceeds of investing this way.  I find it reasonably undemanding and so I have a little time to share my findings.  And there’s the ancillary benefit of seeing hundreds of light-bulb moments when people ‘get it’.  I note Buffett’s obligations and financials are even less necessitous and yet he has devoted decades to educating investors and students.  I really enjoy my work.  It is fun and thank you for making it so.

Investing badly in stocks is both simple and easy.  But while investing well is equally simple – it requires 1) an understanding of how the market works, 2) how to identify good companies and finally, 3) how to value them – investing well is not easy.

This is because investing successfully requires the right temperament.  You see you can be really bright – smartest kid in the class – and still produce poor or inconsistent returns, invest in lousy businesses, be easily influenced by tips or gamble. I know a few who fit the “intelligent but dumb” category.  Because you are bombarded, second-by-second, by hundreds of opinions and because stocks are rising and falling all around you, all the time, investing may be simple but its not easy.

Buffett once said; “If you are in the investment business and have an IQ of 150, sell 30 points to someone else”.

Everyone reading this blog is capable of being terrific investors.  But it is important to know what you are doing and to do the right things.

To this end I have asked a couple of investors with whom I have corresponded for permission to discuss their correspondence because it provides a more complete understanding of the research that’s required before buying a share.

I regularly warn investors that what I can do well is value a company.  What I cannot do well is predict its short-term share price direction.  Long-term valuations (what I do) are not predictions of short term share prices (what I don’t do).

Generally the scorecard over the last 8 months is pretty good.  The invested Valueline Portfolio, which I write about in Alan Kohler’s Eureka Report, is up 30% against the market’s 20% rise.  I have avoided Telstra and Myer, bought JBH, REH, CSL and COH.  Replaced WBC with CBA last year and enjoyed its outperformance.  Bought MMS and sold it at close to the highs – right after a sell down by the founding shareholder – avoiding a sharp subsequent decline.

But this year, there have been a couple of reminders of the inability I admit to frequently, that of not being able to accurately predict short term prices.  And it is understanding the implications of this that may simultaneously serve to warn and help.

Even though I bought JB Hi-Fi below $9.00 last year, its value earlier this year was significantly higher than its circa $20 price.  And the price was falling.  It appeared that a Margin of Safety was being presented.  And then…the CEO resigned and the company raised its dividend payout ratio.  The latter reduces the intrinsic value and the former could too, depending on the capability of Terry Smart.

The point is 1) You need a large margin of safety and 2) DO NOT bet the farm on any one investment – diversify.

You can see my correspondence about this with “Paul” at http://rogermontgomery.com/what-does-jb-hi-fis-result-and-resignation-mean/

The second example is perhaps more predictable.  Last year, Peter Switzer asked me for five stocks that were high on the quality scale; not necessarily value, but quality.  We didn’t then have time to reveal the list, so I was asked back, in the second half of October 09.  By that time, the market had rallied strongly, as had some of the picks.  The three main stocks were MMS, JBH and WOW.

But because I didn’t have five at that time, I was asked for a couple more.  I offered two more and warned they were “speculative”.  “Speculative” is a warning to tread very, very carefully – think of it as meaning a very hot cup of tea balanced on your head.  You just don’t need to put yourself in that position!  But I was aware that viewers do like to investigate the odd speculative issue. A company earns the ‘speculative’ moniker because its size or exposure (to commodities, for example) or capital intensity render its performance less predictable or reliable, earning it the ‘speculative’ moniker.  Nevertheless, based on consensus analyst estimates they were companies whose values were rising and whose prices were at discounts to the intrinsic values at the time – a reasonable starting point for investigative analysis.  ERA was one and SXE was the other.  Both speculative and neither a company that I would buy personally because their low predictability means valuations can change rapidly and in either direction.

My suggestions on TV or radio should be seen as an additional opinion to the research you have already conducted and should motivate investors to begin the essential requirement to conduct their own research.  Unfortunately, I have discovered to my great disappointment, that some people just buy whatever stocks are mentioned by the invited guests on TV.  Putting aside the fact that I have said innumerable times that I cannot predict short-term movements of share prices, it seems some investors aren’t even doing the most basic research.

As I have warned here on the blog and my Facebook page on several occasions:

1)   I am under no obligation to revisit any previous valuations.

2) I may not be on TV or radio for some weeks and in that time my view may have changed in light of new information.  Again, I am not obligated to revisit the previous comments and often not asked.  Only a daily show could facilitate that.  An example may be, the suggestion to go and investigate ERA because of a very long term view that nuclear power is going be an important source of energy for a growing China followed by a more recent view (see the previous post) that short term risks from a Chinese property bubble could prove to be a significant short-term obstacle to Chinese growth.

3)   I don’t know what your particular needs and circumstances are.

4)   I assume you are diversified appropriately and never risk the farm in any single investment

5)   The stocks that I mention should be viewed, in the context of other research and your adviser’s recommendations, as another opinion to weigh up – to go and research not rush out and trade…rarely is impatience rewarded.

There are further warnings that are relevant and described in the correspondence related to the post you will find at http://rogermontgomery.com/what-does-jb-hi-fis-result-and-resignation-mean/

One investor wrote to me noting he had bought ERA and it had dropped in price.  This should not be surprising – in the short run prices can move up and down with no regard or relationship to the value of the business. But like JBH before it, ERA had of course made a surprise announcement that would affect not only the price but the intrinsic value.  In this case, it was a downgrade and a rather bleak outlook statement relating to cash flows.  Analysts – whose estimates are the basis for forecast valuations here – would be downgrading their forecasts and as a result the valuations would decline just as they did when JB Hi-Fi increased its payout ratio.  Over the long-term the valuations in ERA’s case, continue to rise (these valuations are also based on earnings estimates – new ones but which it should be noted are themselves based on commodity prices that are impossibly hard to forecast), but all valuations are lower than they were previously.

Our correspondence reminded me to regularly serve you with NOTICE that there is serious work to be done by you in this business of investing.  In a rising market you can pretty much close your eyes and buy anything but you should never conduct yourself this way.  If you work appropriately during a bull market, you will be rewarded in weaker markets too.  And while many may complain when I say on air “I can’t find anything of value at the moment”, I would rather you complain about the return ON your money than the return OF your money.

Posted by Roger Montgomery, 5 March 2010.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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41 Comments

  1. Omar
    :

    Hi Roger,

    I was recommended by a person to speak to you in regards to value investing, and how to get started in funds management. Just wondering whether you have any seminars ? Or whether you would be kind enough to meet with me and perhaps give me insight into the world of funds management. i currently do work in the industry but in the broking area.

  2. Martin
    :

    Hi Roger,

    Having read all the Berkshire Hathaway annual reports from 1977 to 2009, I now want to study the annual reports of Australian companies, but can’t find a website with a history of annual reports that goes back more than a handful of years. Can you help and let us know what website would provide us with old annual reports?

    Thank you,

    Martin

  3. Sara
    :

    Hi, Roger,

    Really appreciate your work in sharing your thoughts on investing and educating investors.

    Reading your posting on 3 March, I feel that some people are not taking their share of responsibilities in investing and are too quick in seeking someone else to blame. Your attempt of giving people the methods and tools of analysing a business is really worth applauding.

    Thanks for all your work and effort!

    Sara

    • admin
      :

      Hi Sara,

      Thank you for your kind support. There isn’t anyone who is explaining the business-like approach to share investing and I know this because every time I present it, whether its to an investment club investing $20,000 or to the CEO of a major Australian company on a sunny Autumn afternoon on the back deck, I get the same response; ‘how come no-one else is doing this?”

  4. MattB
    :

    Roger,

    While it is not ideal that people buy whatever you mention on tv, print or radio without due diligence, I think as a brand you have built up credibility as a ‘value investor’. In your situation, you can’t actually give any further recommendation than a valuation. As I understand it, that valuation can be determined by anyone once we know what the criteria are (read your upcoming book). People can of course see what you hold in your Valueline portfolio and get an idea from that. The question is, what will you do once the book is out? Once your followers can make their own Montgomery-esc valuations and your cooling off period expires, will you again start making recommendations?

    Cheers

    Matt

    • admin
      :

      Hi Matt,

      Great questions. Everyone knows that having resigned from the financial services and funds management businesses I founded, listed on the ASX and sold, I am presently not in a position to be able to assist with the innumerable requests I receive to value companies, provide my private list of ‘A1’ stocks, manage funds, provide share market advice, review and establish share portfolios and the like. I am however prepared to let you know when I am in a position to assist. 

      I hope the book does answer everyone’s questions. Its deliberately going to be a limited release and it will not available in book stores. I figure it won’t hurt to have a handful of people using the models.

  5. Tony Carson
    :

    Gday Roger
    Could you help us all out like you obviously like to do and publish that list of 41 A+ stocks you had last time you apperad on market moves please. Thanks for your valuable blogs
    regards Tony

    • admin
      :

      Hi Tony,

      Not quite sure it was as many as 41 but I will get around to it. You will have to be patient – one of the key attributes of good value investors!

  6. Kevin Rouse
    :

    I enjoy your frank approach and encouragement that investors develop a sytematic and strategic approach to their investments.
    I have a varied property and equities portfolio and often questioned my conservative and researched approach was the best way to manage my equities, thinking I might be better served aligning with an advisor / broker and let them manage /advise my investments. That was until i visited my retired Dad at Christmas. His broker (I wont name them) recommended strongly in Nov / Dec that he invest in Telstra which he did (large amount) with it all looking pretty sad at the moment ($65,000 down. Interestingly a regular on the business channel ( Not you Roger) who had been highly critical of the stock changed his recomendation and was highly positive of the stock ( almost too positive which Peter Switzer commented about at the time). Maybe my researched conservative approach is not so bad.

    • admin
      :

      Hi Kevin,

      Value investing can make you very wealthy….provided you are not in too much of a hurry. Thank you for sharing your story with us Kevin.

  7. Adam
    :

    Gday Roger,

    I was wondering if you still think Fleetwood is a good business? I note their payout ratio is quite high now, which probably isn’t a great thing given their circa 25% ROE.

    • admin
      :

      Hi Adam,

      Its really really important that you get my book. A company with a high ROE and a high Payout is still a good business to own, its just that its value is not as high as a company that can generate a high ROE and retain more of its profits. Its explained in some detail in the book.

  8. Duncan
    :

    Hi Roger,

    I’m sad to say your tv strategist is most deffinity me. I watch Your Money Your Call, Switzer and Market Moves as often as I can (wife and her soap opera’s willing). Although I listen to all brokers I feel really comfortable with only four – Roger Montgomery, Dale Gilliam, Lincoln Indicators and Tim Morris. I also buy papers, Smart Investor and trade through CommSec so use their free info. You all trade on fundamentals but all the slightly different methods (the way you value companies, the use of stop loses). My difficultly has been creating a plan for trading and most of all finding the reliable sources of the information needed from the thousands of sites on the net. To my cost that’s why I listen to the t.v. advice (that’s not to say it’s anybodies fault other than mine i’ve lost the gains i had made). MMS is a prime example. I bought them and started making a bit of profit. I didn’t worry about the odd up and down as the fundamentals were and still are good. Then they slumped and it wasn’t until after a few days that I found out, i think from you on the T.V last year, that the owner had started selling a load of his shares ahead of this year’s release of the Henry Report. I kept the shares until very recently when I woke, turned on the t.v., to find US shares were down another 1.25%. I panicked, put all my shares up for sale so as not to get a margin call. Subsequently the U.S ended the day only down 0.5% and that was the day the AU market started it’s up turn. I had sold all my shares at the lowest price (you’ve got to laugh!!) . I’ve now learnt I should use stop loses but my question is, where do I go or subscribe, to get good, solid, reliable company information and so I know that a boss of a company I own is selling his shares?

    thanks for your time

    i’m getting your book for my birthday!

    Dunc

    • admin
      :

      Hi Duncan,

      Your experience has been repeated by many of the thousands of people who now regularly view my blog. The key is to set your strategy, your information sources and yourself BEFORE you start trading or investing. You need to initiate daily procedures that become daily habits. One of my team has a message on his pc that reads; “if you do what you’ve always done, you’ll get what you’ve always got” Perhaps more succinctly; “if you don’t change, nothing changes”. In regards to your question about finding out if a director has sold shares, what I think you can do as a private investor is set up alerts in commsec for example to be notified of the companies in your portfolio make any announcements. When a company director sells shares, the company has to lodge an Appendix 3Y, ‘Change of Directors Interest’ notice with the ASX. If you have your alerts set up you will be notified of the lodgement.

  9. Damian
    :

    Some great points in your article Roger. I think each person really has to take ownership of their investments and their decisions, regardless of what any advisor says. I do look carefully at company announcements and each profit result to see if things have changed.

    Careful asset allocation and diversity are so important to ensure you are not putting yourself at too much risk.

    I was also looking at SXE quite a while ago. What surprises me is how wrong some of the analysts forecasts were. I’m not familiar with how analysts come to their conclusions, but I would think they would at least be checking regularly with the company to see how they were tracking and adjust their forecasts accordingly.

    I think it also emphasizes to me how important a proven 5 to 10 year track record is. SXE has only had two years listed on the ASX, whereas a company like ARP has a long history, and have proven they can manage the business through good times and bad times, keeping a consistent ROE.

    I think you also have to accept that you will make mistakes and try to learn from them. Even Warren Buffett, with all his experience, admitted recently that he made mistakes in buying two Irish banks. If he can still make mistakes in investing, then we are in good company.

    • admin
      :

      Hi Damian,

      Your comments about a proven track record are right on the money. When Warren Buffett wrote his Berkshire Chairman’s letters he used to advertise for businesses to buy. One of the listed criteria was: “Demonstrated consistent earning power (future projections are of little interest to us, nor are “turnaround” situations)”. I like to see a great historical track record and bright prospects. Be mindful that many businesses existed before they were listed and so could have a long history that doesn’t correspond to its listed life.

      • JC
        :

        Perhaps further to this, I think you would find James Montier’s work on the predictive power of analysts very very interesting.

        Long story short: predicting 1 year in advance is exceptionally difficult, predictions for results at 24 months are almost useless.

        In addition, you will typically find that forecasters are exceptional at predicting what just happened! Bizarre behaviour, but perhaps explained by their attachment to their career.

      • admin
        :

        Hi JC,

        Love it! Thanks for sending that in. My own observations is that it is very hard to predict change. Change in direction of interest rates from up to down. Chang in earnings momentum from growing to declining, all very hard to predict. Thats why you need to really know the businesses. There are a few methods available to help determine the probabilities of continuation and it is important to seek these out. I will write something about this at some stage.

  10. Rici Rici
    :

    Mr Montgomery,

    I don’t know how to phrase this, except to say that at the end of the day it is ‘buyer beware’.

    You might have mentioned it, Cramer definately has, and other long term investors who try to ‘inform’ people, definately has and its this:
    *there is a significant pool of ‘investors (speculators)’, who don’t want to think. They just want to be told what to buy and how quickly the profit will come.

    This is human nature, actually this point was also pointed out in Reminiscence Of A Stock Operator which points to a maket 100 years ago, but things change and yet stay the same.

    You should also reflect on Buffett and why he is traditionally happy to talk to children and teenagers but not grown adults about investing (closed mind sydrome).

    You will never be everything to everybody.

    To a few you really will present ideas that as you said ‘make the lightbulb’ go off. And its to these few that in my opinion hopefully you will gain your comfort for the time spent in teaching us.

    I am really looking forward to your book.

    Don’t get me wrong, I will ‘question’ it as I question everything, but its people like you who have taught me to question and think independently.

    Again I cant emphasise strongly enough, what you are doing musn’t be subject to a ‘voting machine’, just like intelligent investing should not be subject to short term thought or popularity.

    There are not many people like you and Mr Buffett in this world.

    Again to use Mr Buffett’s words in one of his letters, remember the quacking duck sydrome, it still alive and well, and with increased effectiveness in the transmition of communications, the quacking is increasing.

    I really need that isolated intelligent duck.

    • admin
      :

      Hi Rici,

      Couldn’t have said it better myself. When it comes to ducks; only when you aren’t in the pond, can you tell if it is the duck or the pond that is rising. So turn the stock market and its quacking off. Study businesses not the stock market.

  11. Tessie Vibat
    :

    Hi Roger,
    I bought AGS (Alliance Resources), which was highly recommended by a guest at Market Moves. He said it will have a good drilling result by 2010. I got out of it before the shares plunged and I lost some of my money. Learned my lesson to have my research first and I only invest now in blue chips than speculative stocks. I am one of your fans on Facebook.

    • admin
      :

      Yes Tessie, you were one of the first people to discover me on Facebook. Thank you for your contributions to my page! I am pleased to read that you have learnt a valuable lesson (and fortunately didn’t lose money in the process).
      Roger

  12. Nick Mason
    :

    Hello Roger, thank you for another very enjoyable column. When it comes to investing money I’ve found the majority of investors love to be told how and where, regardless of the quality and past success of the person giving the tip. This is I believe for three reasons. 1st, they believe the person giving the tip has some secret knowledge or insight they do not posses, 2nd, they are lazy and 3rd because if anything goes wrong they have someone else to blame.

    For these above reasons I very rarely give anyone tips even when asked although you may remember I gave you the unsolicited tip of Forge when they were trading at $1.90. I hope you took it.

    Thank you again for your excellent blog, it really is a pleasure to read.

    • admin
      :

      Hi Nick,

      I did value Forge and discovered it was well below intrinsic value at the time. Thanks..and for the encouraging words too.

  13. Tim
    :

    Hi Roger,
    I don’t think I’ve ever seen you talk/write when you haven’t warned of the pitfalls of risky investment! I’m enjoying learning about good investing, but didn’t realise how much work is involved. Looking forward to your book to help answer some questions.
    Thanks

  14. JohnC
    :

    I thought it was Will Rogers who said “I’m more concerned about the return ‘of’ my money than the return ‘on’ my money”. However, Mark Twain did come up with his goldies too: “October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”

    Also, it is ironic that Mark Twain was such a good judge of human nature but was a terrible judge of himself and his financial abilities. He was bankrupted by his failed investments but subsequently made good on his debts.

    Finally, it is good that you are reminding everyone to be diligent in their investments. After all, it’s clear to me at least that one of your roles is that of a teacher, not a carer. I respect the effort and time you’ve put into educating a wider audience in how to invest wisely. Thank you.

    • admin
      :

      Hi JohnC,

      I will check it again. Thought I read it in my copy of The Wit and Wisdom of Mark Twain. His publishing company went bankrupt in 1894 and as you say he paid everyone back 100 cents in the dollar just four years later. And he did say “To succeed in business, avoid my example.” I echo your observations and was careful to say that he liked to comment on other’s folly, not that he was immune to it himself

  15. David C.
    :

    Hi Roger

    Could you please provide some comments on using your methods for investing in LICs? Do you need to value each investment they are holding or use another approach? Is the discount to NTA comparable to the margin of safety concept?

    Regards

    • admin
      :

      Hi David,

      A very simple strategy employed by some people I know and have plenty of respect for is simply to buy decent managers when very large discounts to NTA are available and sell when those discounts close or (if you are patient and have enough faith), when the discount turns into a premium.

  17. Shuo Yang
    :

    Hi Roger,

    I am currently studying finance at UNSW and has been investing since I was in Year 10. Could you please offer some thoughts on QBE and what your valuations of the business is over the medium term/long term period.

    Kind Regards

  18. scott
    :

    i was silly enough to buy clean seas tuna (CSS) at 30 cents cause it was reccommended by an anlayst on tv – a week later it fell to 7 cents!!! Never again

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