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Is your stockmarket on or off?

Media Room, On the Internet | Comments (21)

Is your stockmarket on or off?

The New Year is typically a time for resolutions and when it comes to the task of increasing one’s wealth, good intentions are often met with sore disappointment. In this feature article for the Australian Shareholder’s Association, Roger Montgomery gives investors the tools he uses to beat the stock market over the long term. Read Roger’s article.

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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21 Comments

  1. john
    :

    Hi All,

    On my second attempt on a stock i have fge at $8.84 … would appreciate feedback if my number is ok…

    Thanks in advance.

    • Jonesy
      :

      John, best to include all the inputs you use because you can often get the same result for intrinsic value with different input values. At the least, include what you use for Equity per share, ROE, required return rate and payout ratio.

      For what it’s worth, I’ve got the following valuation;
      Equity per share: $1.19
      ROE: 30% (if you use average equity over the past 2 years, you will get a ROE of 41.49%, but equity has almost doubled in the last year, therefore I am using NPAT/Ending Equity and get a ROE of 31.58% and rounded this down to 30%)
      Required return rate: 13%
      Payout ratio: 12%
      Intrinsic value: $5.04

      I would say that this is a conservative valuation, changing the RRR to 12% would give you an IV of $5.80, either way I don’t think there’s a significant discount to intrinsic value at present. Hope this helps.

      • Henry
        :

        John,
        Is your FGE ‘s IV for this year 2011? If it is, then where do get the forecast EPS from, since the end of financial year is not end till July ?

        Ashley,
        Could you revisit my question about Forge? Your reply to my post asking about FGE IV & forecast EPS exactly the same as with John, eg “not too far off”. However, my IV and John IV are far apart.

      • Tom Charles
        :

        Ashley,

        This is written assuming that your IV above is for 2011.

        I don’t know why your using EQPS of $1.19. It should be more in the vicinity of $1.1855 + $0.403 – $0.07 = $1.52 and perhaps a little extra for the shares that have already been issued since the 2010 annual report.

        Using this EQPS figure, ROE of 30.16%, POR of 17.36% and RR of 12% my 2011 IV is $7.26.

        (To be safe with 13% RR, IV = $6.33)

        What do you think?

  2. Matty
    :

    Hi Roger and Readers,

    I read a very interesting article today which is related to turning the market off. I would be interested to hear some views on the article in the link below because it touches on some criticisms of Graham and Doddites (which I guess would include Montgomery Disciples). The analogy is something along the lines of waiting on the tracks with our value portfolios and then being hit by the bubble express.

    It brings up the issue of asset allocation and how much cash can you have really sitting on the sideline? How can you possibly have RR% of 20% on a company to avoid being smashed when inflation begins to bite? You would only get your money into the market during depressive episodes of the market 3 times per century. When it goes manic again, how can you have that cash on the sidelines when it will be eaten away when inflation takes off and by the inevitable bond bubble burst.

    Don’t companies at least offer some inflation protection if they can protect their margins by increasing the price of their products? (This reeks of competitve advantage.)

    When sentiment turns, conditions can change quickly (up and down) as we experienced in 2008/9. We can all sit here smugly with our 20%+ ROE companies but at the end of the day the earnings are also dependent on the macro level economy (some companies more than others) and as Ashley and Lloyd discussed in the previous post, on the prevailing no risk return rate of the day.

    The way I see it, we are in a lose-lose situation here. Globally, interest rates can only go up. (with a few notable national exceptions)

    What active role does the macro economy play in your portfolio?

    http://www.gmo.com/websitecontent/JGLetter_PavlovsBulls_4Q10.pdf

    • Ashley Little
      :

      Hi Matty,

      I don’t disagree with much of this stuff

      We are taking a different view as we are looking for great businesses dispite what happens to the world.

      Grantham is taking a big overall picture.

      I like our way best but we can learn from him about what will be the great businesses

  3. Henry
    :

    Hi Roger,

    Thank a millions for your valuable book and your recommendation on fge, mce and mld. My profit is well over 100k since bought your book on august last year. Now, whoever ask me about share market, the 1st word of my mouth is “go to Roger Montgomery web site, order his book, and read his blogs”.

    Apart from Fge, Mce & Mld are not attractive any more since their share prices are too close to their IV. Have you got more good one like those 3 and don’t mind to share with us in this 2011 year?

    • Henry
      :

      I do not sit still on a stock, because I think that it is inefficient way of making big money. Sit still on a good stock or business may give 100% return in a year. However, if you ride the wave of a good business and make a few hundred dollars a day, you earn a lot more. Sit still on a good business only make profit when the price make another high, while riding the wave, one can make money on the consolidation phase as well. One may argue that what if after you sell, and the sp goes up north, you ‘ll miss the boat. It has happened to me many times. As long as the SP is still way less than it’s IV, I’ll always buy it back higher than I sold it for, since buying below it’s IV is low risk. That is a beauty of combining IV with wave riding, since it gives me the confidence of buying the stock at a particular price without fear. And fear and greed is the cause of losing money for stock traders and investors.

      • Andrew
        :

        Hi Henry,

        I hope that method continues to do well for you.

        That said, i always found surfing to be a bit difficult, even in Hawaii with little waves on a big board i found myself falling off the board most times i hopped on a wave. Although i did find this one really good wave and managed to ride it all the way to the shore.

      • Henry
        :

        Thanks Andrew,
        I fell off the wave zillion off times too prior I accidentally fell into Roger video in YouTube. The 3 heaviest fall are EXT sold at $1.2, AND sold at $0.48 and JML sold at 0.17. The fall is because I do not know the actual price of them, want to buy but scare buying at peak.

  4. fred
    :

    Roger may be going thru a metaphoric change moving in a new direction. Will you be keeping this blog going or are you still deciding???????

  5. Ashley Little
    :

    Hi Roger,

    Great stuff yet again,

    More of the same stuff for the Value.able disciples but the more you read it the more you will practise it

    Thanks again

  6. Andrew Grey
    :

    Roger,
    Thanks for that excellent example of a dud. please keep them coming. I have been looking at the annual report for MWR as a quick look at the numbers on one website shows a ROE of 789%! i thought this could be good! a quick look at the annual report however shows that they lost 6 million bucks last year and this year they had this down as tax asset and used that as there so called profit! not to mention that they issued more shares of around 12 million dollars and now (just a few months later) they report a total equity of 11 million! i suspect that the reason the ceo is paid 300 thousand bucks a year is that he specializes in capital raising, and is very good at his job indeed.

  7. Nick Mason
    :

    Hello Roger,

    welcome back, I hope you enjoyed your holidays.

    Whilst we agree on most things (re. investing) I was surprised by your statement ‘The market is more volatile than desired.’ Really?? Market volatility is an endless source of opportunity, the more volatile the greater often the opportunity. I once saw a quite reputable fund manager being interviewed on Bloomberg who said that ‘volatility is the value investor’s best friend’ and I agreed absolutely with him. It was the cleverest thing he said all interview and it was a good interview overall.

    Did you ever get to see that Charlie Munger speech I told you about or read Michael Lewis’ new book??

    Best Wishes,
    Nick

    • Matthew R
      :

      Roger has made a number of comments previously about how volatility is a value investor’s friend

      In the context of the article I interpreted it along the lines of ‘share market participants take too much notice of price action and find the market much more volatile than they would like. Instead they should ignore all reference to price’

      I join you in wishing the market was much more bipolar than it is!

    • Greg Mc
      :

      G’day Nick,
      I think perhaps that Roger was referring to volatility for the uninformed/beginner/mum+dad type investor that is emotionally influenced by the yo-yo nature of the market. I agree with you that this same volatility is most useful for some of us!
      All the best,
      Greg

  8. fred
    :

    Kresta Holdings Limited ( krs ) take over offer of .325 cents, do you think it fair Roger???????????

  10. Andrew
    :

    Mine is definitley off, haven’t even visited the website in about 4 months.

    Don’t need to mention it here as it is what we all preach but if you are investing for the long term than the only sensible way to make your investment decisions is to base it around the facts of the business and its prospects. You cannot make long term investment decisions based around short term variables and short term favour from the market.

    This means unfortunatley doing the hard work and learning about the businesses operations and processes, story, finances and working out if any sustainable competitive advantage exists but as always the hard work will pay off.

    Personally, the stockmarket is nothing more than a facilitator that enables me to buy companies when a particular company makes it over the “Look at me Andrew” investment barricade. It is an extremley high and long barricade so only the strongest jumpers get there, but when they do i will be ready for them.

    Or to slightly change a warren buffet ditty:

    “I like to step over one-foot hurdles when investing but i want the companies i invest in to jump the 10 foot hurdles in order to get to me.”

    We’ll meet somewhere in the middle and decide whether we should begin a relationship or say goodbye to meet another day.

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