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Bubble watch #13 – get ready


Bubble watch #13 – get ready

In recent months, the number of very successful investors doing ‘it’ themselves has surged.

So here’s a question:

Do you think the number of very successful investors will continue to surge when the market falls?

Of course not. Fair-weather success is easily and frequently mistaken for genius, and just as those who have borrowed 80 per cent to purchase a property yielding nothing after maintenance and interest feel vindicated by rising property prices, so too do share market investors believe their need for guidance is reduced when everything is going up.

It was John F. Kennedy who, in 1963, famously borrowed the phrase; “A rising tide lifts all boats”, and Warren Buffett who subsequently observed that; “Only when the tide goes out will we see who was swimming naked”. These observations are no less true today than when they were made. As markets rise and interest rates remain low, those quotes should stand as reminders that confidence in our own abilities might be misplaced.

There are a number of ways to test whether confidence is justified. Of course, the most expensive way is to wait until the next inevitable correction but very few baby boomers can afford to get the next correction wrong. Preserving your wealth through the next correction will make the difference between a comfortable retirement and something quite different. And if you believe owning Telstra for its yield will keep you safe, be warned.

Another safer and far cheaper method of testing your confidence is to digest the techniques and tools of others, shining a light on our own in the process.

For those who didn’t get around to picking up a copy of Value.able, I’m taking the liberty of recommending it to you now. If you already have a copy, now is the time to read it again.

“If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.” – Warren Buffett, 1997.

The gap between price and value is widening in the wrong direction, and the chasm over which the bridge spans is deepening. The current share prices mean many large companies now have to sustainably generate unusually high rates of return on equity to justify very modest returns for shareholders. And those returns don’t seem to justify the risk. They certainly won’t when interest rates rise.

With apologies in advance for the apparent narcissism, on October 5 2010, Adam Schwab reviewed Value.able on Crikey:

“Unlike virtually every share market expert, not only does Montgomery get it right most of the time, but he also has the rare ability to simplify the fundamental principles of investing to the most unsophisticated of investors.”


“There are few more topics as poorly explained (and as a result, misunderstood) as investing. That fact is somewhat ironic given there have been more books written about investing than almost any other subject. But unlike books filled with technical charts or complex formulae, Value.able manages to simplify investing to a few basic principles and explain to readers how buying shares in a company is really like buying a business. Montgomery is careful to distinguish between speculating (which is what most mum and dad investors unfortunately end up doing) and real investing.”

Purchase your copy of Value.able today HERE


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. 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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  1. Using Value.able’s principles, I entered Sirtex and exited when the market rose to far above its intrinsic value. Yet you hold a large position in this company at way over the price I sold for,. I avoided CSL and Ramsay because they were and remain way above intrinsic value and so I have missed phenomenal gains in these 2 excellent companies. Ramsay in particular has a steady growth curve that is possibly second to none other in the market.That’s my comment. May I have yours?

    • Your valuation depends on your inputs. Clearly our inputs, for example for growth etc, have been different. It is also quite likely we have used a much lower required rate of return than you may have adopted.

  2. Maybe my flat graphic ‘The investment clock’ I have on the wall’ is starting to tick again with the hour hand slowly groping up to midnight?

  3. Getting the plug out of the way first. Value.able has been a constant source of reference ever since i first got to open its pages and i wouldn’t hesitate to recommend it.

    I really am starting to think that a bubble is forming. It may not be here yet or it may already be, i have to admit i am never a good market timer which is why i am a value investor.

    Even american sotcks which i have looked at seem to be really expensive at the moment which leads me to believe the source of any bubble is the low interest rates and changes to monetary policy worldwide could be the catalyst for the pop.

    In Australia, we have an irrational property market (at least in sydney) and the cheap debt through low interest rates fuelling what i believe is an illusion of wealth. Theres probably more people going for a skinny dip these days than a lot of people think.

  4. The chapter on ROE is instructive too. When you are paying 2, 3 or 4 times book value for a company, it needs to sustain a very high return on equity merely to generate a rather mediocre return to the shareholder – a return to the shareholder that arguably doesn’t compensate him or her for the risk. I am delighted to hear you are re-reading Value.able.

  5. Interestingly I took out Value.able last week to review Chapter 13, getting out… easily the best book in my library

    The others in my library that I will be re-reading.

    Intelligent Investor – Ben Graham
    Bulls, Bears and a Croupier, Matthew Kidman

    both great books and worth a read, especially at this time.

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