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Investing Education

  • Guest Post: The Happiest Company on Earth?

    Roger Montgomery
    April 18, 2012

    Many of us grew up with a diet of the brilliant work of Walt Disney. As children we laughed and cried along with the characters of Donald Duck and Mickey Mouse, Cinderella and Bambi.  More recently, boosted by the purchase of Steve’s Job’s Pixar business, Disney continues to build its library and draw many more generations into the fold with the characters of Finding Nemo, Toy Story, Monsters Inc and Cars.  The company dominates with its ‘share-of-mind’ competitive advantage. In this Guest Post Andrew takes the scalpel to the company and dissects its major components.

    What does your company REALLY do?
    A nuts and bolts look inside the happiest company on earth

    The ability to make assumptions about the future prospects of a business is fundamentally linked to how we understand that business. Without a good understanding you will be more than likely flying blind and your perceptions and reality could be in very different places and therefore throwing a great deal of uncertainty into any estimate of intrinsic value (which is linked more to the future prospects than anything).

    A company that I am very fond of and one that I am sure almost everyone here has heard of is the Walt Disney Company (NYSE:DIS). I thought this would make a great case study in understanding the business.

    So what does Walt Disney do? The first thing that comes to mind is the feature cartoons that it made its name on and its theme parks. These are the most iconic images that are attached to this famous company and more than likely where we were first knowingly exposed to the brand whether it be entering Disneyland for the first time and looking up Main Street towards the castle or watching movies like Snow White, Dumbo, Pinocchio.

    What may surprise some people however is that most of the revenue and net income for the company comes from television.

    Take a look at the below table:

    Figure 1-Yearly breakdown of DIS segment revenue and net income (net income is before non-controlling interests taken out and are reported in US$ Millions)
    As you can see in Fig.1, every year from 2001 to 2011, the largest contributor to revenue and profit (except 2002) was the Media Networks segment of the business. Over this period the company has on average brought in around 41.5% of the groups revenue and 55% of the net income as shown by fig 2.

    Figure 2- Average % of total group figures
    This technique of looking at the individual segment results and comparing them to the overall group is a technique I like to use to really understand the nuts and bolts of the business. Looking at these figures I can see that even though DIS made its name by animating feature cartoons and opening gigantic theme parks, it is the TV channels they own that make up the most crucial element of the business as it is today. There for if you were interested in investing in DIS you would be very wise to focus particular attention on understanding how the media Networks business derives its revenue and what risks are associated with this segment. Luckily the DIS annual report defines this in quite good detail but back to this later. One thing to realise though is that this type of analysis is greatly influenced by scale of operations. The biggest divisions will or at least should, bring in the bulk of the revenue and profits. It may be helpful to see on a relative basis at where the magic happens.

    To do this, you might like to use profit margins of each segment. It is not uncommon for a diversified businesses smallest division to have the highest profit margin as in Qantas with their frequent flyer division. Disney is no different. It can change from year to year as shown in figure 3 however. Once again as you can see, lately it has been about the media networks. Looking at this however, you can gain a clearer picture of the profitability of each division in a relative manner. Despite being one of the smallest divisions, the consumer products segment is right up there in regards to profitability.

    Figure 3- Net margins by division and overall group
    So now, simply by looking at the financials we can get a clearer picture as to what DIS is really all about. We can see that the media networks business is arguably the most important. I can also see that the parks and resorts division is a pretty predictable segment with revenue and profit growth pretty consistent throughout the years and whose margins remain quite stable.

    So where to next? Well you want to understand the risks associated with each segment so that you can be better placed to understand them and be able to make informed decisions and assumptions on the future. As mentioned earlier, the DIS annual Report actually goes into detail about the specific risks of each segment as well as detail as to how they derive their revenue. All annual reports will have a description of what the principal activities of the business are as well and if the management is shareholder orientated than it may include some very handy bits of information about the companies past, present and future. This is the next step, read all the information you can about that company whether it be through annual reports or newspaper articles, also read about the industry and read industry specific media to see what the insiders are doing and saying about the future. Knowledge is indeed power.

    These are the simple steps to understanding a business and is aimed at the beginning investor although I think everyone can benefit from thinking more about how to understand a business they want to invest in.

    Have you got any examples of businesses where the core operation may differ from what people may perceive? What gems can be found in the nuts and bolts of existing businesses? What techniques do you use to understand a new business? Feel free to post any thoughts below.

    What do I think of Disney? Their return on equity has been increasing but is still below my required return so my valuation would still be at around or lower than their reported book value but I would love to own them personally. They are one of the biggest brands in the world and when they get it right, they create products that will last generations.

    Guest Author: Andrew Leggett. Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 18 April 2012.

    by Roger Montgomery Posted in Companies, Investing Education.
  • Guest Post: Do Something!

    Roger Montgomery
    April 18, 2012

    I spent Easter at the beach, getting away with my family and we enjoyed the company of a bunch of friends. The smallest children all like to build sand castles at the very edge of the dry sand where it becomes moist and pliable. Of course as the tide comes in they are constantly being forced back lest they find their monuments suffer from each mini-tsunami. Investors build their portfolios well back from the high tide mark and the relatively safety gives them the ability to gain perspective and see the tides for what the are.

    In this Guest Post, Scott Green explores the merit of sitting further back and doing nothing.

    Doing nothing whilst doing something

    A value investing strategy requires discipline and patience over a long period of time to work succesfully. You can’t just be a value investor one week then jump to speculative investments the next and expect that the preservation and growth of capital over the long term will be adequate. Patience and discipline are linked inexorably and will take work to develop.

    If you are anything like me you struggle with the urge to do ‘something’ in the market even when there is no real value to be found. As the days stretch in to weeks, the itch can become very tough to control and sometimes you just have to do something to alleviate the pressure. This is especially prevalent in markets that seem to be continually rising. You can think you are missing out even though your investment rules and/or Skaffold tell you that nothing is value. You can eventually ‘snap’ and relax your rules and trade, justifying your decision to yourself in any number of ways. Conquering this itch is an important step to becoming a succesful long term investor.

    Doing Nothing

    One of the key aspects of value investing that Roger has mentioned many times is switching off the stockmarket and focusing on businesses and investigating promising businesses for potential investment. However, in todays 24hr news cycle with information flying at you from every different angle it can be hard to completely switch off. Below I have detailed some steps that I have taken in my personal investment journey to reduce my exposure to the news cycle and also modify the way I do view items when I interact with them. Maybe they can assist you in your in you investment journey.

    1) Keep your ‘value goggles’ on – When you do read a business article or watch an investment show, view it all through the prism of what you have learned in Value.able or elsewhere. You will be amazed at how simple it can become to quickly identify whether or not the relevant piece is helpful to you or of no value. You can save a lot of time reading the financial news if you avoid all the articles that involve speculation rather than investing. A healthy dose of skepticism probably goes hand in hand with the ‘value goggles’.

    2) Avoid living on the business channels, websites and newspapers – Reading or viewing articles on the many available sources of business news is not itself unhealthy but, like fast food, living on it probably is. The popular image of the ‘investor’ is the man (or woman) in their office, big screen showing stockmarket prices and a fast paced business channel, a copy of some financial paper and a website screening the market for the latest breaking news and trends. As investors, we should use the media as a source of information but not allow it to dictate to us what we should or should not be doing. Of course, if Roger or a trusted value investor (Buffet, Klarman, Whitman etc.) is appearing on a show or writing an article that should be required viewing/reading.

    3) Do not constantly check the stockmarket – Some people (I used to be one of them) know where the stockmarket is sitting at any given time throughout the day. They also know where their own portfolio sits in relation to this. They live and die every hour of the day depending on whether they are ‘up’ or ‘down’. As longer term focused investors, day to day fluctuations should be of no concern to us. You will find yourself a much more relaxed person if you track your portfolio once a month instead of once a day. To aid in this, avoid using the many free portfolio tracking services available on the web. Perhaps the biggest step is deleting the apps off your smart phone that will happily tell you how much you are worth every second of every day from anywhere on the planet. I found this the best thing I ever did in regards to switching off the stockmarket and controlling the ‘itch’.

    Doing Something

    This does not mean that we sit around in a vacuum waiting for ideas to just come to us, trade and then return to the void of nothingness. Instead, we replace the actions that hinder us with the actions that will assist us in our investment journey. These are some of the things that I do which progress my investment journey without inducing the urge to act.

    1) Read good books on value investing – Many of us got our start in value investing through Value.able but there is a world of other great value investment books out there that can enhance your knowledge. The grand daddy of them all is, of course, Security Analysis by Benjamin Graham along with its easier to read brother The Intelligent Investor. Others I would recommend are Margin of Safety by Seth Klarman (if you can find it or afford it!), The Agressive Conservative Investor by Marty Whitman and You Can Be a Stockmarket Genius by Joel Greenblatt (Terrible title but the last word on special situations value investing). You should also read some of the books that detail specific situations, usually ‘investments’ that went wrong! Examples include When Genius Failed by Roger Lowenstein about the rise and fall of Long-Term Capital Managment, a hedge fund that collapsed spectacularly in 1998, and Liars Poker by Michael Lewis about the authors experience as a bond salesman at Salomon Brothers in the late 1980’s.

    2) Read investor letters by trusted value investors – The annual shareholder letters of Warren Buffet are considered required reading by all in the invesment community but there are many others that are valueable sources of learning and, sometimes, ideas to pirate away and research some more. These can commonly be found on the websites of the respective investment funds, though there are other websites that collate the information. Also, they can sometimes get there hands on the more hard to find letters from the more private funds. The ones I like are Marty Whitman from Third Avenue Management, Seth Klarman of the Baupost Group and David Einhorn from Greenlight Capital.

    3) Research companies – Probably the most important something you should be doing. Using Skaffold or other sources to generate ideas leads in to researching thses ideas to see if they are worth investing in. Indeed, most of my own ‘investment time’ is taken up reading company reports and balance sheets. some can be quickly dismissed as unsuitable whilst others will, after suitable research be deemed acceptable and join our portfolio. The research of companies is the heart of value investing and the only way to ensure that investments are made below intrinsic value and with a margin of safety.

    Hopefully, the above ideas will assist you in your investment journey as the have assisted me. THey have helped me become a better, more disciplined, more patient and much more relaxed, investor. A soothing balm over the itch if you like.

    Guest Post Author: Scott Green.  Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 18 April 2012.

    by Roger Montgomery Posted in Investing Education.
  • MEDIA

    How can you beat the market?

    Roger Montgomery
    April 14, 2012

    For many, beating the market indices is the hold grail of share market investing.  In this Australian article published 14 April 2012 Roger Montgomery discusses how you too can beat the market using his Value.able investing strategy.  Read here.

    by Roger Montgomery Posted in Companies, In the Press, Investing Education, Value.able.
  • MEDIA

    What are Roger Montgomery’s Value.able insights into Mining Services?

    Roger Montgomery
    April 14, 2012

    Do New Hope Corporation (NHC), Northern Star Resources (NST), Mt Gibson Iron (MGX), Navarre Minerals (NMC), Allmine Group (AZG), Credit Corp Group (CCP), Matrix composites (MCE), Coffey International (COF), Data #3 (DTL), Breville Group (BRG), UGL (UGL), QR National (QRN) and Seymour Whyte (SWL) make Roger’s coveted A1 grade?  Watch this edition of  Sky Business’ Your Money Your Call broadcast 14 April 2012 to find out, and also learn Roger’s current insights into the Mining Services sector. Watch here.

    by Roger Montgomery Posted in Companies, Energy / Resources, Intrinsic Value, Investing Education, TV Appearances, Value.able.
  • MEDIA

    In April 2012 where does Russell Muldoon see good Value.able investments? (Part 2)

    Roger Montgomery
    April 10, 2012

    Do Lonrho Mining (LOM), Integrated Research (IRI), Hawkley Oil and Gas (HOG), Boart Longyear (BLY), Forge (FGE) and Environmental CleanTechnologies (ESI) achieve Roger and coveted A1 grade? Watch Part 2 of Sky Business’ Your Money Your Call 10 April 2012 program now to find out. Watch here.

    by Roger Montgomery Posted in Companies, Investing Education, TV Appearances, Value.able.
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  • MEDIA

    In April 2012 where does Russell Muldoon see good Value.able investments? (Part 1)

    Roger Montgomery
    April 10, 2012

    Do Thorn Group (TGA), Maverick Drilling (MAD), Campbell Brothers (CPB) and Galaxy Resources (GXY) achieve Roger’s coveted A1 grade? Watch Part 1 of Sky Business’ Your Money Your Call 10 April 2012 program now to find.  Watch here.

    by Roger Montgomery Posted in Companies, Investing Education, TV Appearances.
  • MEDIA

    Can Apple’s share price continue to climb?

    Roger Montgomery
    April 3, 2012

    Roger Montgomery discusses with Ticky Fullerton on ABC1’s ‘The Business’ how the ever-increasing climb of Apple’s share price is likely to come under pressure.  Watch here.

    This edition of The Business was broadcast 4 April 2012.

    by Roger Montgomery Posted in Consumer discretionary, Energy / Resources, Intrinsic Value, Investing Education, TV Appearances.
  • MEDIA

    Is there gold in ‘them-there hills’ for investors in Red5

    Roger Montgomery
    April 1, 2012

    Roger Montgomery discusses the prospects for Gold-Miner Red5 (RED) in this Money Magazine article published in April 2012.  Read here.

    by Roger Montgomery Posted in Energy / Resources, Investing Education, On the Internet, Value.able.
  • MEDIA

    Why is the Value of a Property not necessarily what someone is prepared to pay?

    Roger Montgomery
    April 1, 2012

    In the April 2012 issue of BrokerNews.com.au‘s EMag, Greg Campbell of ARAP discusses property valuation issues, and how Roger Montgomery’s Value.able approach to assessing asset values highlights that what someone is prepared to pay can bear very little relation to the true worth of an asset.  Read here.

    by Roger Montgomery Posted in In the Press, Investing Education, Property.
  • MEDIA

    How can the Biggest not be the Best?

    Roger Montgomery
    March 31, 2012

    Roger Montgomery expounds upon his Value.able investing approach to illustrate how Big does not mean Best when choosing companies in this Australian article published on 31 March 2012. Read here.

    by Roger Montgomery Posted in Airlines, Companies, In the Press, Investing Education.