Is Value.able Valuable?

Is Value.able Valuable?

‘Sapporo Steve’ sent me this message in early December. He wrote:

Hi Roger,

I see many comments on the blog congratulating you on your book, but they don’t actually say why it is great. So I have done a book review. You may use any part for promotional purposes.

Regards,

Steve

Here is Steve’s Review. Is Value.able Valuable?

If you are starting out in the stockmarket there is probably no better place than at the feet of the “Oracle of Omaha” – Warren Buffett. The world’s most successful investor has for the past 50 odd years given away his advice on how to make money in the share market. One problem is that 50 years of successful investing can add up to a lot of reading. Thankfully some of Buffett’s disciples have written investment books to assist others with their forays into the sharemarket. Luckily for Australian investors, we have our very own Warren Buffett.

Many investment books often state that there is something in the book for the beginner and the advanced investor – that is….. something for everyone. However, after reading many investment books and many on Buffett, this is rarely true. The reality is that it is a challenge to cover beginner subjects without losing the advanced investor and vice versa.

Value.able is Roger Montgomery’s first book, one which he has adeptly and succinctly taken Buffett’s style and principles and developed them into a very practical framework for investing in the share market. For beginners, the book is a great way to get the “condensed Buffett”. For more experienced investors, the formula for working out the intrinsic value of a company is a piece of gold. So, although it is a cliché, Value.able does actually have something for both the beginner and advanced investor.  Be Patient

“You won’t run out of opportunities. But if you swing too often and miss, you will run out of money”. (Montgomery, p.58)

One of Buffett’s attributes and one extolled by many value investors is the necessity “to wait for the fat pitch” – that is, the opportunity to maximise your chances of succeeding with an investment is intimately tied to your ability to be patient and simply wait for the opportunity to arise. Many investors including those managing managed funds on behalf of others have shown little ability to be patient, a problem that leaves many of their clients poorer.

The structure of Value.able cleverly assists the beginner in taking this patient path (and building patience along the way). Part 1 (Think Like An Investor) and Part 2 (Identifying Extraordinary Businesses) take the beginner through what needs to be considered before actually calculating the share price of any company – just like Buffett does.

Buffett has stated that he first looks for good companies, then calculates what he believes are their intrinsic value and then finally look at the price. Of course this means looking at many companies but with experience a good investor can assess fairly quickly whether a company is worth further research. Part 1 and 2 greatly assists in providing what one needs to look for in identifying a potentially good investment. “If you are not in a hurry then Value.able will be an essential companion” (page XXIII). I wholeheartedly agree.

Instead of just rushing to value a company (using the formula set out in Chapter 11), Montgomery ensures that you first gain a deep and thorough understanding of just what makes a good company and a good investment. Chapter 2 (Buy Businesses, Don’t Trade Stocks) and Chapter 3 (Value, Not Price) are excellent chapters for beginners to understand that the share market is more than just numbers.  But numbers seduce. Let’s face it, money is about numbers and so is much of the share market. Much of the talk revolves around the company’s share

price – is it cheap? Is it good value? What’s the P/E ratio? All numbers. Many “experts” seldom think or discuss whether the company is actually a good company, why it is a good company and other “non-number” issues. Montgomery uses JB Hi-Fi as an example of a company that according to some (via “the numbers”) was overvalued but using his valuation method it was undervalued and just as importantly possessed the attributes of a great company (See p.225).

For experienced investors, mistakes often come from not paying due attention to the intangible aspects of a business or by being too quickly seduced by what looks like very favourable numbers (a big margin of safety). Value.able’s chapter headings offer the experienced investor the opportunity to quickly source and recap on what the intangible aspects are.

Chapters such as Chapter 5 (Pick Extraordinary Prospects) and 7 (Competitive Advantages) in Part 2 offer a quick way to reference and revisit critical qualitative aspects that might need to be confirmed before purchasing shares. I believe the book’s practical application could be enhanced if there was a small section at the end of each chapter to summarise the chapter’s most salient points and act as a checklist.

Valuing a company can be a time consuming process and one that requires a lot of numbers. I have read many value investing books and many recommend using a company’s past 10 year financial records for assisting in determining the company’s valuation. The thought of trudging through a company’s past 10 year’s financial statements does not really thrill me. Others, of course may be different.

But for me, this is where Value.able really delivers. Value.able’s valuation methodology is extremely simple and so simple that one almost feels like there is something missing. It actually makes valuing companies fun.

For beginners, the methodology’s simplicity means that you can start valuing companies immediately and with a high degree of confidence. Of course you may choose to do more research regarding the qualitative (and quantitative) aspects of a company, but after a short time, and thanks to Montgomery’s book, you will be able to very quickly assess whether a company is a potential investment target.

Since reading the book 6 or so months ago, I have valued more companies than I have in the past 3 years. Because the process is so easy with 15 or 20 minutes to spare I have simply gone to my internet broking platform and punched in the numbers required for the valuation.

The valuation tables (you’ll understand when you read Chapter 11) allow you to develop a range of values which experienced value investors will tell you is crucial in developing a ‘margin of safety’.

The aim of the book is to allow individual investors to firstly, find good companies and then calculate their intrinsic value. I found myself tagging many pages that I thought were worthy of documenting to help make me a better investor.

The other wonderful aspect of Value.able is the website (www.rogermontgomery.com) where you can purchase the book and Roger’s Insights Blog (rogermontgomery.com) where you can discuss and share valuations and thoughts on companies with others. Just like Buffett, Montgomery freely dispenses advice and wisdom and at the same time encourages everyone to develop their own investment capabilities. The blog is like having an open line to some great thinkers and provides an additional source of information for you to consider before actually making an investment.

Be greedy when others are fearful and fearful when others are greedy .

Value investing is usually described as buying a dollar for 50 cents. I believe there are two parts to this statement. One, an investor must be able to establish the true or intrinsic value of a company’s share. Secondly, one must have the emotional fortitude to buy when you have discovered a dollar selling for 50 cents.

The most difficult part of value investing is not working out the value of a share and it should be said that Montgomery’s formula is the best I have discovered so far in terms of simplicity and accuracy. But Buffett has stated that when it comes to value investing, most people either “get it” or they don’t. I have found many people who don’t “get it” even when the dollars are reining down and on sale for 50 cents like in 2008.

As Montgomery states (page 194) the best opportunities are usually when the fear is greatest and that is during times like the recent GFC. Using rationality and logic (understanding the dollar is on sale for 50 cents) is easy but actually placing your 50 cents on the table when the sharemarket is going to hell in a hand basket can be hard.  Thus to those who “get it”, it is easy to be greedy when others are fearful, but for many, including beginners to the market, fear and a lack of confidence are difficult emotions to overcome. The battle is to overcome your own emotions and irrationality and plunge in where others fear to tread. Value.able only touches on the emotional side.

Montgomery’s book is truly valuable for both the beginner and experienced investor. With some additional insights on the emotional and behavioural aspects of investing (a 2nd book maybe) Value.able would be truly invaluable.

Posted by Roger Montgomery (with permission from Steve), 2 December 2010

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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.