The Current Market Conundrum (20/11/2012)

13 Comments

1. 

   Simon Stewart
   December 4, 2012 at 1:24 am:

   Hi Roger,

   Just following on from Stephen Pattricks comments, I just checked out your Warren Buffett style top 15 must have Australian companies and they range in saftey margin from -14% to -54%, 8 of the 15 are already higher than the 3 year intrinsic value prediction. Perhaps you have created your own bubble in top quality companies? What do they, you say should be heading in the opposite direction to the stampede?

   Simon

   • 

     Roger Montgomery
     December 6, 2012 at 1:07 am:

     You’ll note Simon, I did not make mention of their current value. Only referenced their quality.

2. 

   PeteAbela
   November 24, 2012 at 10:43 am:

   Hi Roger, it’s an interesting question you raise. Ultimately the bull market did prove to be expensive given the 50% drop that occurred at the time of the GFC. However, sitting on one’s hands from 2003-2007 would have led to missing out on great profits.

   I agree with your overall conclusion: Buy good quality companies, especially when the inevitable dips in the market occur, and don’t spend too much time trying to predict where it’s going next.

3. 

   STEPHEN PATTRICK
   November 23, 2012 at 11:01 pm:

   Hi Roger, the Market or “the companies that make up the All Ords index” appears inexpensive at first glance, by virtue of the fact that the index trades in the mid 4000’s these days yet 5 yrs ago it was 2000 pts higher, but as you know all the real quality companies – DMP, CTD, CSL, REA, BKL, TRS, MMS & CRZ, just to name a few, are indeed EXPENSIVE, trading 20 to 50% above IV. Even if you lower somewhat the demanding criteria you used the list of available quality companies at a discount doesn’t grow all that much.

   Obviously a lot of money is sitting on the sidelines but the money that DOES make it’s way into the market is seeking perceived Safety or Quality, people want quality and they will pay ANYTHING to get it, you’ve done too good a job Roger educating people about buying quality. I think, like the economy, we’re seeing a “two speed” Market, money is coming out of Mining and Mining Services (the traditional “cyclicals”) and pouring into stocks like those above, so some stocks are expensive whilst others are oversold and probably are actually value in the medium to long term. I don’t see the Market as a whole declining, barring any black swan events, but at some point Risk will be “back ON” and money will start chasing the cyclicals once again and some of this money will come out of stocks like those above, when this will happen of course is the $64000 question, personally I am waiting for this or another black swan event to take positions in stocks like those above

   In this video Roger you mention the Fund holds some Decmil, I heard on Your Money Your Call that you exited this holding in April or have you taken advantage of recent price weakness and bought back in. I’d like to mention how much I enjoy your appearances on YMYC and your expanded coverage with the appearances of Tim, David & Russell, I see you have spent some time surrounding yourself with likeminded individuals, these guys are all pretty knowledgable and seem like good blokes as well, you guys must have some fun there in the office, I’d love to be a fly on the wall sometime or meet you all around the BBQ one day

   • 

     Roger Montgomery
     November 26, 2012 at 4:20 pm:

     You would have to be a very patient fly and I don’t think flies live very long….

4. 

   vic ciscato
   November 21, 2012 at 10:34 pm:

   Hi Roger,
   I agree that its difficult to find value in the market at present. I have developed a system to determine the direction the share market is moving on a weekly basis. On 9th April the direction turned bearish so existing share holdings were disposed off as the share price met stops. This phase continued till 29th June 2012 when it turned bullish. The bearish phase lasted 16 weeks and all my stock holdings were sold during that time. From the 29th June I searched for stocks that met my buy criteria and purchased 21 stocks over a period of 6 weeks. Recently we went into a bear phase on 27th October 2012. I have reduced my holding to 5 stocks. I do not use the All Ords to determine market direction, my studies are based on ASX200. Regards Vic

   • 

     Roger Montgomery
     November 22, 2012 at 8:25 am:

     Hi Vic,

     WOuld be delighted to hear and see more. Get in touch with me directly if you believe there could be merit in chatting.

5. 

   Andrew Legget
   November 21, 2012 at 11:55 am:

   Interesting thoughts as usual Roger.

   It is a conundrum, i think the answer lies in the fact that the search included increasing EPS and intrinsic value. Looking at the current make up of the ASX, to me it is more the fact that in the short term at least it is hard to see where a lot of the companies will make more money out of, and how they can do it at profitable levels that sustain or increase ROE rather than a structural decrease in quality. So i would say that even though it doesn’t look as expensive as previously it is still more about expensive prices due to short term macro effected decreases in intrinsic value rather than a kind of reduction in quality although this still definitley exists (especially in retail in my opinion).

   My view, either try to look further forward (however this starts getting into the speculation zone) or find a way to better use cash whilst we wait for prices ro values to change that make it attractive (easier said then done due to low rates on term deposits, savings etc especially if you are in the business of investing for others and being judged on your success and this will become less attractive if inflation starts rising which could definitley happen), other option is trying new markets.

   This is why i have started thinking more international than local, i can still see some quality companies in Australia but i see more overseas. I haven’t done much valuing lately due to university commitments but if there was significant value showing on my overseas watchlist (and i am unsure if there is) then coupled with a high aussie dollar which at some point i think needs to drop then that would be the attractive option for me.

6. 

   William Winvest
   November 20, 2012 at 6:32 pm:

   Hi Roger! I know that you would like to invest in good quality companies that have bright future prospect and cheap. However, in the expensive scenario, why don’t you take a short position on all of the C-class companies associated with poor performance, the high probability of future decline and expensive to their intrinsic value? I thought about this question when I listen and visit your blog weekly. What do you think about it, Roger?

   • 

     Roger Montgomery
     November 21, 2012 at 10:57 am:

     We will be running a little long-short portfolio, to see whether we can replicate the >70% returns, in a unit trust structure.

7. 

   nicholas.christian1
   November 20, 2012 at 4:04 pm:

   In a macro view, last time we nearly ‘fell off the cliff’ in July 2011 the squabilling in congress sent the S & P back to 1,100 points (i.e. more than 20% lower than today). The debt is higher today and the republicans are still in control and thier platform is unchanged – stop spending!

   If there is one thing the Mr Market doesn’t like its uncertainty – regardless of what ‘might’ happen there’ll be bucket loads of it with last minute negotiations going on.

   Short term – volitility, long term – fantastic!

8. 

   Andrew McLaren
   November 20, 2012 at 9:57 am:

   This is a more general question that the overall value in the market, but since this is derived from the individual companies, I hope its appropriate!

   One of the issues (probably more a challenge) I have in valuing companies is putting a risk profile on them, and from there to a required return and an intrinsic value. Skaffold might do a lot of the heavy lifting here, but its IV’s are necessarily still derived from a required return, and hence a risk profile. Tweaking this required return can dramatically alter any IV assigned to a company.

   I often work backwards from Skaffold’s IV to derive the required return that generated this. Often we are close, but sometimes Skaffold will be using a required return that differs from mine. In this case I’ll try and understand why – I’m happy to be different, but I like to have a clue why!

   My typical numbers run between 10% and 14%. Even with the risk free rates as low as they are, I’m loathe to go under 10%, and even at 14% I’m telling myself that I don’t trust these projections a lot, which is a huge red flag. But the required returns I use are still largely subjective.

   Can you give any insights into how the required returns are derived in Skaffold? Is it as simple as using the same parameters that generate the quality scores – it’s a fair bet that the parameters that define an A1 or A2 company, are exactly the same parameters that would indicate that its risk of surprise is low. Or is there something more subjective at play here?

   Andrew

   • 

     Roger Montgomery
     November 21, 2012 at 10:58 am:

     Hi ANdrew,

     Consistency is vital. Give Skaffold a call and ask for Chris.