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.
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The sharp fall in The Reject Shop’s shares might be an opportunity in disguise. Roger Montgomery thinks it will a stock to watch in 2011. Read Roger’s article at www.eurekareport.com.au.
Roger says good value companies tend to hit you in the face – their value is obvious. This engaging presentation has lots of questions from the floor as Roger lists ways of assessing the value of companies. He lists companies he regards as good value and those that are poor value and gives his reasons. View the presentation.
CONTRIBUTIONS ARE NOW CLOSED.
I have an assignment for you.
Before we start, two things…
1. If you are looking for a gift that keeps on giving in 2011, give your loved ones a copy of Value.able. To guarantee your gift makes it into Santa’s sleigh, you must order before 5pm next Monday, 13 December.
2. Put Thursday 16 December @ 7pm in your diary. Sky Business has invited me to appear on their Summer Money program.
Within Summer Money, Sky is running a series called The Twelve Stocks of Christmas and I have been asked to present one of the twelve stocks. What I would like to do is let everyone on Sky Business know about you – the Value.able Graduate class of 2010!
You have been instrumental in contributing to the knowledge and awareness of value investing and I would like to say thank you by reviewing your suggestions on air.
So, what will it be? You can nominate one of the companies we have already discussed. More points can be earned by contributing a company of which you have industry-level knowledge. Think about your industry or business:
– Who is the strongest [listed] competitor in your industry?
– Who would you like to see out of business because they are an emerging threat?
– What are their competitive advantages, their opportunities for growth and why do you think they will sell more of their product or services in the future or at higher prices?
– Perhaps they are out of favour in the share market, but you believe it’s a case of a temporary set back being treated like a permanent impairment?
I encourage you all to post your contribution. There are just two rules:
1. One stock (your best pick) per Value.able Graduate. The more detailed your information, the better; and
2. Ideas must be submitted by Wednesday 15 December
Before the live show at 7pm next Thursday, 16 December, I will run my valuation eye over every suggestion and give each my Montgomery Quality Rating (MQR). But the list will be yours – a contribution from the Value.able Class of 2010.
Whilst only one stock will make it to the show, EVERY SINGLE STOCK contributed on this post with sufficient supporting detail will be subsequently listed in my final pre-Christmas post for 2010, complete with MQRs, current valuations and prospective valuations (I have decided to called these MVEs – see below).
Embrace this opportunity to practice what you have learned over the past twelve months, and get the official Montgomery Quality Rating (MQR) and Montgomery Value Estimate (MVE) for your favourite stock. You never know, your stock may just be the one I contribute on national television to The Twelve Stocks of Christmas.
Post your suggestion here at the blog by Wednesday 15 December 2010.
I look forward to reviewing your insights and hearing what you think of your classmates’ suggestions. Simply click the Leave a Comment button below.
Posted by Roger Montgomery, 9 December 2010.
Postscript: thank you for your kind words and birthday wishes. I’m thoroughly enjoying my time away and am very much looking forward to reading and replying to your comments when I return to the office next Monday.
Postscript #2: Steven posted his own Value.able 12 Days of Christmas at my Facebook page last Friday – brilliant!
On the twelfth day of Christmas,
My independent analyst’s blog gave to me
12 A1s humming
11 valuations piping
10 C5s a-sleeping
9 forecasts prancing
8 capital raisings milking
7 floats a-sinking
6 CEOs praying
5 golden A1s!!
4 C5 turds
3 emerging bubbles,
2 editions of Value.able
And a market leader with a high ROE!
Here is Steven with his daughter Sophie.
Roger, you were good enough to sign my book…
“To Steven, Your guide to avoiding the dogs you told me you were so worried about, RM”.
Here I am reading Value.able to my little two year old Sophie at bedtime, holding her toy dogs. The moral of the story for Sophie? Roger shows dogs make fun toys and pets but must be avoided at all costs when investing in great businesses!”
Steven
Shareholders must be certain that any business they own has strong competitive advantages. Pfizer’s decision to bypass Australian distributors bites deep into revenues to two pharmaceutical wholesalers is a lesson to investors. Read Roger’s article at www.eurekareport.com.au.
At 7.30am this morning after inspecting a property, I found myself on the street being presented with a sealed envelope and cryptic directions to a taxi suspiciously parked just 10 metres from where I was standing.
Turns out my family thought my upcoming 40th was a pretty good reason to celebrate and surprise me! They have whisked me away for a few days, as one of mates put it, for a ‘birthday soriee’.
I am completely unprepared. My laptop sits idle on my desk and iPhone charger is still in the power point (not turned on). I have been told there is an internet café where we are staying, however I’m not certain how reliable the connection will be.
I was planning to publish a new post today: What are the twelve stocks of Christmas? Thankfully all the post requires is one final proof read and then a click on ‘Publish’. I’ll venture down to the internet café this evening.
Please keep posting your comments here at the blog and on Facebook over the next few days and I will reply upon my return. I will be back in the office on Monday 13 December
Thank you in advance for your understanding and patience.
Posted by Roger Montgomery, 8 December 2010.
Christmas is about sharing and joyful memories. With just 18 days to go, I thought it would be educational, if not insightful, to share the performance of some of the securities Value.able Graduates have discussed here at my blog.
Does the Value.able approach to investing, as advocated some of the world’s leading investors, have merit?
First Edition Graduates may not be surprised by the results posted below. The higher quality businesses, those scoring A1 and A2 Montgomery Quality Ratings (MQRs), and those at larger discounts to intrinsic value have, in aggregate, beaten the index. Some have trounced it. And with the exception of QR National, the companies that were labeled as poor quality (C4 and C5 MQRs) and overpriced, have under-performed. Some of the maturing higher quality companies (think JB Hi-Fi) have indeed performed.
The following tables present some of the blog posts and the stocks that I have listed, mentioned or discussed in them. I have consistently suggested investigating an approach that seeks the highest quality businesses and prices that offer the biggest discounts to value.
Whilst the results are short-term (therefore nothing should be taken from them), they are nevertheless encouraging. The approach advocated in Value.able is worth investigating.
Many Value.able Graduates have suggested I start a newsletter or a stock market advice service. Thank you for the encouragement. I do enjoy the cross pollination of ideas and look forward to 2011 attracting even more investors to the patient and rational approach shared here at my blog.
Here are the tables (DO YOUR HOMEWORK AND RESEARCH. ENSURE YOU ARE COMPREHENSIVELY INFORMED. SEEK AND TAKE PERSONAL PROFESSIONAL ADVICE).
Do these three companies represent the last of good value? Oroton, JB Hi-Fi, DWS, Cogstate, Cash Converters, Slater & Gordon, ITX, Forge, Decmil and United Overseas
Which 15 companies receive my A1 status? CSL, Worley Parsons, Cochlear, Energy Resources, JB Hi-Fi, Navitas, REA Group, Carsales, Mondaelphous, Iress, Fleetwood, ARB, McMillian Shakesphere, Sirtex, Oroton.
Is Apple an A1? What A1 companies does Roger Montgomery think are the best value right now? Apple, Forge and Decmil.
Where are my valuations Roger? Cabcharge.
JBH’s years of fast growth has slowed.
What do you think of the QAN, JBH and ITX results Roger? Qantas and ITX
Telstra profits will continue to drop
Who is in front of the reporting season avalanche? Navitas, JB Hi-Fi, Cochlear and Matrix.
Part II: What else has the reporting season avalanche uncovered? Ross Human Directions, Monadelphous, Forge, Carsales, DWS, Finbar, SMS Management, CSL, Consolidated Media, Integrated Research, McMillian Shakesphere, Count Financial, Domino’s Pizza, The Reject Shop, Credit Corp, Chandler Macleod, Primary Healthcare, Slater & Gordon, Noni B, Embelton and Tamawood.
Retailing Maturity – Roger Montgomery now has reservations about JB Hi-Fi.
Part III: The avalanche is over – where should you be digging for A1s? Lycopodium, REA Group, Fleetwood, K2 Asset Management, Acrux, Hunterhall, Macquarie Radio, Blackmores, ISS Group, Thorn Group, GUD Holdings, Webjet, Kresta Holdings, Kingsgate, Fiducian and Euroz.
How does cash flow through Decmil?
Part IV: Where should you focus your digging?
Will Roger Montgomery invest in QR National?
I thought the performance of Fosters after the wine bid was knocked back was interesting, but only another year or two will confirm whether the opportunity to add value was passed up. Some higher quality businesses also underperformed the market, thanks in part to deteriorating short-term prospects rather than deteriorating quality.
Remember to look for bright long-term prospects. Of course, in the short-term prospects will swing around – that is business, but longer-term prospects of businesses with true sustainable competitive advantages tend to win out.
Keep an eye on the blog before Christmas as I will be posting a couple of very handy lists (and possibly some homework) before the annual Montgomery Family Christmas break.
Posted by Roger Montgomery, 7 December 2010.
Choosing your shares is a big step, but it’s not unmanageable if you ask the right questions. Gayle Bryant of the Medical Observer asked Roger Montgomery for his insights. Read article.
‘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
Ross Greenwood is joined in the 2GB Money News studio by Roger Montgomery to talk about his top stock picks. Listen to Podcast.
With all the noise about the QR National float, investors may have missed MACA Limited, a relatively straight forward mining services business that meets Roger Montgomery’s value investment criteria. Read Roger’s article.
