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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Roger Montgomery answers viewer questions about AWE, Nido Petroleum and Gunns on Your Money Your Call. Unfortunately none make Roger A1 grade. McMillian Shakesphere (MMS), on the other hand is one of Roger’s A1 businesses and its value is expected to rise substantially over the next three years. But is it cheap? Watch the interview.
Roger Montgomery tells viewers of Your Money Your Call he expects the value of MacMahon will rise 15% over the next few years, Monadelphous will rise 18%, Bradken 20% and Campbell Brothers 40%. Some of these businesses are cheap today, but are they one of Roger’s A1s? In his appearance on the Sky Business Channel Roger also shares in thoughts on iSoft, a business that has raised large amounts of capital but been unable to produce rising returns for shareholders. Watch the interview.
Of the 1900 companies listed on the ASX, only 4 of Roger Montgomery’s A1s are trading at prices below their value. In his appearance on Your Money Your Call Roger also discusses the mediocre outlook for Ausenco and reveals his 2012 intrinsic values for Commonwealth Bank (CBA) and Westpac (WBC) -are they cheap? Watch the interview.
On Market Moves with Bridie Barry, Roger Montgomery reveals four of his A1 businesses that are trading at prices less than their value. The value of one particaular A1 is 20% less than the current share price! Roger also shares his insights on Brambles, explaining why he thinks the value of the business hasn’t changed much over the past 12-13 years. Watch the interview.
The market may have fallen, but Roger Montgomery tells viewers of Market Moves it still seems expensive. In this interview Roger also explains why the Australian dollar is tied to the global outlook for our resources, compares BHP to RIO and Wesfarmers to Woolworths, and explains why Westfield doesn’t make his A1 grade. Watch the interview.
There are only four good quality companies on the ASX that are trading at levels worth acquiring right now. Read Roger’s article at www.eurekareport.com.au.
Share market commentator Roger Montgomery welcomed the share register reforms. ”This is a definite win for inexperienced and infrequent share investors who may have previously been duped into selling their shares for less than market value,” Roger said. Read article.
I was in Melbourne last week filming this year’s The Path Ahead DVD with Alan Kohler and Robert Gottliebsen. This is the third time Alan has asked Monique and I to participate, and in addition to enjoying it immensely, I am incredibly humbled by the invitation.
We sit around the breakfast table, enjoy some wonderful pastries, fruit and cheeses (a welcome break from my Dr Ross Walker breakfast regime) and I get to debate and hear a range of views about markets and the big picture issues for investors. The dialogue becomes quite animated at times, and I have to admit to often forgetting the four or five cameras recording our every utterance.
Tony Hunter from the ASX holds court, and directs questions that have been received by Alan to the panel, and almost always without notice. I thought I would write about this year’s experience only because one of the questions got me thinking about the clichés that investors often have at the back of their mind when making investment decisions.
Relying on investing clichés can be dangerous, if not because they are prevarications, but because they are the domain of the lazy who seek to grab the attention of those whose concentration has been diminished by the constant noise of the markets – much of which is useless and information-free (the noise that is).
Here is a few that came to mind immediately (some are useless but perhaps others aren’t); Sell in May and go away. Buy the rumour, sell the fact. Don’t catch a falling knife. Feed the ducks while they’re quacking. Buy dips. Buy low and sell high. Only buy stocks that go up. This time its different. The trend is your friend. You can’t go broke taking a profit. Its time in the market not timing the market that counts.
You may have a few too, and I would love to hear them. Let me know if any have helped or hindered and feel free to add them by clicking ‘Leave a Comment’ at the bottom of this post.
There is no doubt you have heard many, if not all, of them before. They have become part of investing lore and yet they lead more to pain and suffering than they do to enlightenment. So why do they survive? Is it because there is truth in them?
I believe it is because there is a steady stream of new investors entering the market for whom the cliché has not yet become one. They run the risk of seeing the investing cliché as a truth – to be memorized and applied – and in doing so, they are guaranteed to repeat the mistakes made by the many that came before them.
Cliché 1: You can’t go broke taking a profit
Think about the statement, You can’t go broke taking a profit; A new investor is almost certain to go broke doing just that. Why? Because a new investor will inevitably purchase a share only to see the price decline. Buying a low quality company (not one of my A1’s for example) or paying too a high a price (not estimating the intrinsic value of a company) will inevitably lead to a permanent loss of capital. The share price goes down and the investor, not wanting to accept a loss, holds on in the hope that one day the shares will recover. Then suppose the next investment decision leads to a gain; do you think the investor will hold this share for very long? The short answer is no. The fear of repeating the first mistake, resulting in another loss, is just too great. Better to take a small profit now than to see the shares fall again and have another loss. The end result of repeating this numerous times is that the investor has several large losses and several small profits. The net result, of course, is a loss. You can go broke taking a profit just as surely as you can go broke saving money buying excessively-priced items that are on sale.
A further example refers to inflation, and its effect on the purchasing power of your money. Trading frequently involves substantial frictional costs. Brokerage, slippage and spreads seriously impinge on the returns otherwise available from a buy and hold strategy. Earning 15 per cent from buying and holding is always preferable to 15 per cent from trading, and that’s even before tax is factored into the equation. Suppose however, you don’t even achieve 15 per cent from trading frequently; after 20 years, you merely match the rate of inflation. Arguably, you have not lost purchasing power, but you have not gained any either. You have been taking profits but have not made any.
Similarly, if you sell a stock (using rising or trailing stops, for example) and make a 100 per cent return, but the shares rise 400 per cent, I would argue you have left a great deal of money on the table. You have certainly lost money taking a profit.
Cliché 2: Its ‘Time in the market’ not ‘Timing the market’ that leads to success.
Another cliché that comes to mind is the idea that time in the market is the key to success rather than timing. At the outset, let me state that I don’t believe that timing the market or share prices works. Nor do I believe that time in the market works always, and if it sometimes does, the time can be so long that the returns are meaningless. Take for example the investor who purchased shares in Macquarie Bank at $90 some years ago; they are still waiting for a positive return. Or what about the investor who bought shares in Great Southern Plantation when the company listed? No chance of a positive return at all. If you purchased shares in Qantas or Telstra ten years ago, you would now have an investment with less value than you what commenced with.
Time in the market is no good if you buy poorly performing businesses or pay prices that are far above the intrinsic value of a company. For the seventeen years bound by 1964 and 1981 the Dow Jones rose just 1/10th of one percent. Time, it seems, was not the friend of the merely patient investor. I can show you equally long periods of low returns on the Australian market too.
The point however is that time is only the friend of the investor who buys wonderful businesses at large discounts to intrinsic value. Otherwise, time is an enemy that steals returns just as surely as it steals a great day.
Don’t use time then as a band-aid to heal your investing mistakes. Stick to A1 businesses bought at discounts to intrinsic value and time will be your friend. So what are the businesses that time has befriended the most? What businesses have been increasing in intrinsic value the most over the last three, five or ten years?
The following Table should offer the answers.
Remember, these companies may be higher quality (Some are my A1’s), but they might not currently be cheap and I have not discussed the path of their intrinsic values in the future, which arguably is more important for the investor. Be sure to seek personal professional advice before transacting in any security.
| Company ASX Code | Annual Gain in Intrinsic Value | Company ASX Code | Annual Gain in Intrinsic Value |
| MND (Monadelphous) | 30% | CAB (Cabcharge) | 25% |
| WOR (Worley Parsons) | 61% | ANG (Austin Eng) | 98% |
| BTA (Biota) | 38% | WEB (Webjet) | 24% |
| COH (Cochlear) | 18% | SUL (Supercheap Auto) | 17% |
| RKN (Reckon) | 29% | REX (Regional Express Airlines) | 47% |
| CRZ (Car Sales) | 124% | CPU (Computershare) | 36% |
| REA (Realestate.com) | 78% | TRS (The Reject Shop) | 28% |
| CSL (CSL) | 39% | REH (Reece) | 21% |
| NMS (Neptune) | 25% | IRE (Iress market tech) | 19% |
| ORL (Oroton) | 27% | ARP (ARB) | 19% |
| JBH (JB Hi-Fi) | 85% |
The table reveals the companies that have demonstrated the highest growth in intrinsic values over the years and perhaps unsurprisingly, if my method for calculating intrinsic value is any good, you will find a very strong correlation between the increases in values and the increases in share prices.
If you have any questions of course, or would like to contribute a cliche you once thought of as a lore to live and invest by but now see it for what it is, feel free to share by clicking the ‘Leave a Comment’ link below.
Posted by Roger Montgomery, 22 May 2010
There is little evidence that Healthscope is worth anything near the private equity bid of $5.50 a share. Read Roger’s article at www.eurekareport.com.au.
It was as a young boy that I became enamoured with the outdoors and the unique landscape of Australia. I discovered the easiest way for me to experience it was by participating in cubs and scouts. I will never forget the motto “be prepared”. It has served me well in many ways, and while nothing is ever failsafe, it is sound advice when it comes to investing.
The market and its associated commentary is on tenterhooks. You can attribute that to the supertax’s contribution to a foreign investing exodus, nerves surrounding the property bubble in China, rising interest rates, or whatever else seems to be fashionable on the day with which to attribute the market’s conniptions to. I believe however, quite simply, that prices are generally expensive compared to my estimates of intrinsic value. That means that the performances of the underlying businesses do not justify current prices.
Of course if you are a trader of stocks valuations don’t matter. You will sell on the emergence of the Greek storm-in-a-teacup and buy the day after, when another bail-out package is revealed. Alternatively, you will buy when one newsletter says the coast is clear and sell when yet another contradicts it. The people pointing out worries about China today are those that said the banks would rise to $100 before the GFC hit. One of the easiest things to observe in the markets is that predictions of a change in direction are far more frequent than they are accurate. And anyone can explain what has happened, but few seem to be able to look far enough ahead to be positioned well.
With arguably the exception of my warnings earlier this year about the impact of a decline in infrastructure spending in China (thanks to an unsustainable commercial property and capital investment scenario) on the demand for Australian resources, I don’t try to predict the direction of markets or the macro economic determinants. I simply look at whether there are many or any good quality businesses available to purchase below intrinsic value. If there aren’t many or any great businesses to buy cheaply, the only conclusion must be that the market is not cheap.
I cannot predict what the market will do next, but its worth being prepared. When the market is expensive compared to my valuations, one of two things can happen. On the one hand, share prices can drop. That is more likeley to be the case if values don’t rise – which of course is the second scenario. Valuations could rise and make current prices represent fair values (or even cheap if values rise substantially).
In the event that prices fall (remember I am NOT making any predictions), I thought its worth looking at some of the big cap stocks (not necessarily A1’s) and how much their current intrinsic values are expected to rise over the next two years. These estimates of course can change, and its worth noting that none of the companies are trading at a discount to their current intrinsic value.
| Company Name | Current Margin of Safety | Estimated change in intrinsic value 2010-2012 |
| RIO Tinto | No | 8% p.a. |
| Commonwealth Bank | No | 16% p.a. |
| National Aust. Bank | No | 22% p.a. |
| Telstra | No | 2% p.a. |
| Woolworths | No | 7% p.a. |
| QBE | No | 10% p.a. |
| AMP | No | 9% p.a. |
| Computershare | No | 5% p.a. |
| GPT | No | 3% p.a. |
| Leightons | No | 13% p.a. |
My estimates of intrinsic value don’t change anywhere nearly as frequently as share prices, but they do change. I expect some adjustments to start flowing through as companies begin what is called ‘confession season’ – that period just ahead of the end of year and the release of full year results, when companies either upgrade or downgrade their guidance to analysts for revenues, market shares and profits. These adjustments could, in aggregate, make the market look cheap, but that will require 2011 valuations to rise significantly.
If prices fall (I am not predicting anything), and one is not overly concerned about quality, then one strategy (not mine) may be to buy the large cap companies expected to lead any subsequent recovery. Many investors and their advisers still subscribe to the idea that ‘blue chips’ exist and are safe. They tend to think of the largest companies as blue chips (I don’t) and if they are going to buy any after a correction, we might expect they will buy those whose values are going to rise the most. Of course, they may not know nor care about my valuations, nor do they know which companies are going to rise the most (in intrinsic value terms), but over the long term, the market is a weighing machine and prices tend to follow values. It follows on this basis then that Telstra’s value increase of just a couple of percent per year over the next two years may not put it in an as attractive a light as, say NAB.
I think you get the idea. To share your thoughts click “Leave a Comment”.
Posted by Roger Montgomery, 15 May 2010
