How do your Easter holiday homework results compare?

172 Comments

1. 

   Geoff
   May 12, 2011 at 2:45 pm:

   ‘I would appreciate any views on CMG (Chandler McLeod), who recently took over Ross Human Directions. Late last year Roger rated CMG as a A2 company and Ross Human Directions as a A1 company. To me, the intergration of the two companies appears to be a good mix, however, the big question is whether the cost factor was fair and reasonable’

2. 

   Harry L
   May 12, 2011 at 2:21 pm:

   Hi All:

   This may seem a silly question, but here goes anyway.

   I have read and discovered where most of the Data can be found to find the IV for most Companies. (Comsec, yahoo Finance, ASX etc)

   Where or how do the graduate’s determine the Volume of shares outstanding for Future Valuations of IV ie 1,2 or 3 years into the future?

   Best Regards

   Harry L

   • 

     Matthew R
     May 13, 2011 at 7:46 am:

     You take a guess! :)

     This guess is made easier when you are looking at a company which hasnt issued more shares in previous years. When this is not the case have a think about what recent history tells you about the future. Dividend reinvestment plans, history of capital raisings, outstanding executive options (and exercise dates) are the main sources of new shares on issue but occasionally there will be convertible preference shares (or equivalent) that have a conversion date approaching

3. 

   Harry L
   May 10, 2011 at 2:46 pm:

   Hi Roger & Graduates

   I am looking for some assistance in re-evaluating GUD.

   I already hold the stock, but was looking to increase my exposure.
   I am OK in calculating the IV, however I noticed GUD have conducted a an On Market share buyback in March, which will influence the future IV calculation.
   I am familiar with Rogers formula (BV+EPS-DPS)+(NEW ISSUES per Share- Buyback value per Share)
   What I am unsure of is: how the BB/share value is calculated. & when is it applied.

   I re-read RM’s book PP 81 to 83 first edition and became further confused.
   eg pp81 reads “However, when buy-backs are conducted at prices below the Intrinsic Value, they increase the value of the company for remaining shareholders”

   Yet pp 82 reads in bold “When a company buys back its shares at prices that are lower then the equity value of the company, it can increase the value of the business to its remaining shareholders. During the GFC, however companies were doing the reverse”

   I completely agree with th statement on pp 81 but am struggling with that on pp82.
   I understand the Equity Value per share to be the same as Book Value per share, which is Assets-Liabilities divided by shares on issue. If GUD conduct an on market share buyback, this is surely at a price greater than Book Value. Is this then detrimental to the remaining shareholders?

   In what year would the effects of the Buyback take effect? I calculate my future IV for 2011, 2012 & 2013. The Buyback was in March 2011, the last company report was in H1 2011, but was for half year only up to 31Dec2010. & does not reflect the Buyback. By the time the next report is out and will reflect the buyback 2011 will nearly be over, and we should be looking at 2012. The next Company Report should reflect the reduced Share Numbers and any changes Equity, ROE, EPS and DPS.

   Should we be waiting this long to estimate 2012/13 IV in regard to the Buyback.

   Sorry if this is in the wrong location.

   Happy to be directed elsewhere, or if the topic has aready been discussed, please help with a link.

   Best Regards

   Harry L

   • 

     Roger Montgomery
     May 10, 2011 at 10:45 pm:

     Hi Harry,

     There are some terrific tables I can show you to demonstrate this. But for now, notice that I say on page 82 “can” rather than “will”?

     • 

       Harry L
       May 11, 2011 at 9:38 am:

       Hi Roger
       Many thanks for your time.

       pp 81 refers to buyback prices below IV
       pp82 refers to buyback prices below BV ( equity/share)

       I cannot see how an on market buyback would ever be below BV. Hence my question regarding GUD and whether they are producing a detrimental result for the remaining shareholders? Have I missed something here?

       Again, thanks for your time

       Harry L

     • 

       Roger Montgomery
       May 11, 2011 at 12:43 pm:

       Buy backs below BV are not common, but not impossible.

4. 

   Ash Little
   May 8, 2011 at 10:54 pm:

   You are a Grad in my View David

   Keep up the good work

5. 

   Natalie
   May 6, 2011 at 9:35 pm:

   Hi Guys

   Very new to this so just got a question and a comment.

   Question
   I am having a problem finding ‘no of outstanding shares’ in the annual reports, some are not very user friendly in the online version and I have spent many hours going through the pages. (CWP was great – all the info required on one page). Can someone please guide me to where the ‘outstanding no. of shares’ is usually reported. Is it called something different? I have had to get this data from comsec.

   Comment
   I had done my homework but did not post it as I was not at all confident about what I was doing, and sure enough some of my results where way out. But now that we have Roger’s answers I have spent some time going through my work and trying to get his answers. I have found that where I went wrong most of the time was that I was using a payout ratio that I worked out using dividend per share divided by earnings per share as instructed in valueable. But when I used the last payout ratio that the company paid during the year (which at times was VERY different to the workings, I started getting the right answers. Am I doing this right? I vaguely remember reading this in the book.

   For those who are getting a very different answer to Roger’s you may have to look at your payout ratios and compare them to what the company’s policy is on how much they actually payout.

   • 

     Ron shamgar
     May 6, 2011 at 11:04 pm:

     Hi Natalie, I don’t trust the commsec or etrade data, but, if there hasn’t been any share issues or buybacks it’s usually correct.
     Always look at the annual report-notes to financials- usually towards the end.
     I have found in the past that once u find it the first time, it’s gets easier every time.
     Hope that helps and feel free to ask here regarding specific companies ur having trouble with. Cheers

     • 

       Natalie
       May 7, 2011 at 8:51 am:

       Thanks Ron, very helpful, I have now located a couple, I am sure it will get easier.

   • 

     Andrew
     May 9, 2011 at 8:23 am:

     THe annual report is the best place to look. There will be a note (i think usually around the note 22 or 23 mark) which will have it. The title is a bit different which can be a bit annoying.

     Look in the notes section for a contributed equity, issued capital, share capital. It wil be in there somewhere. Just be careful to use the share number and not the dollar amount.

     The way i go about finding it is to look at the balance sheet as the note is in reference to that.

     The first item in the equity area will either be call share capital, contributed equity or somethng like that. If you look at a balacne sheet you will see what i mean. If the term is contributed equity then it will be under contributed equity in the notes. If it is something capital than you might want to look for issued capital or shares on issue. Next to the item on the balance sheet should be a reference number to a particular note, not sure if this is the case but this could also be the very note your looking for.

     Sorry if i am making it sound confusing but hope it helps

6. 

   Steve B
   May 6, 2011 at 3:07 pm:

   I,m in need of help. My 2010 IV for WAN is way above anyone else’s. Using 2010 annual report & RR=10%

   Inputs:
   Equity=130.5; EqLY=67.8; Shares=214.1; EqPs=0.61; EPS=44.9; DPS=28; POR=62.32%; NPAT=96.2; ROE=97%, using avg. Eq. & 60% ROE selected.
   IV=$8.05

   Do i need to factor in latest capital raising (increased shares & equity) & acquisition? If so, not sure how to reflect the acquisition? Is the price paid for SMG added to the equity of the combined business?

   Any hints appreciated, Thankyou

   • 

     Michael P
     May 6, 2011 at 11:52 pm:

     Steve, You have calculated Equity per share based on ending equity, I used Average equity to get EqPerShare = .463 and IV therefore of $4.49.
     Re, no. of shares on issue : Roger has referred to averaging each month over the reporting year you are basing your IV calculation on – to account for any large jump in shares issued during the period. The ASX announcements website has the Appendix B notices required to be lodged when shares on issue changes. For WAN from Oct 2009 #shares was 213.6m and from April 2010 it was 216m.
     Now WAN has become SWM (Seven West Media) , I am interested in the blogs thoughts on this acquisition, and newly calculated IV. Thanks, Michael.

   • 

     Nic Arena
     May 7, 2011 at 4:48 pm:

     Hi Steve,

     I like how you have listed all the figures that you have used to calculate your IV. It helps when I look at it to see what I have done differently (doesn’t mean what you have done wrong as I may be completely wrong myself). On a side note, it is getting a bit annoying people just asking the blog what their IV for company XYZ is without offering their IVs AND figures.

     I noticed you used the figures from the last annual report, not the recent half yearly results. So after my little grumble my figures and IV are below:
     EQPS= 0.61 (same as yours)
     POR = 97% (I have roughly 170m dividend paid in the last 2 years while NPAT was about 184m (I always use a few percentage higher for the POR) – Although there are a couple of different section in their annual report that makes reading the dividend payment quite hard – so I could be wrong).
     ROE: 43% (I used 42.50% for the equation. The reason I used a much lower figure than the 97% you used is that their ROTC is in the 20% so when I average the last couple of years and looked at forecasts I have used 43%)
     RR: I have used a 14% because of the type of business and the low quality rating my system gives it. It sounds like you might be using a 10 or 11% RR and I would suggest this figure is only given to the COH, WOW, ARBs etc of the world.
     This gives me an IV of about $2. This is much lower than yours and I’m not sure what other people have but I would suggest it is under most peoples as well. I am very conservative and I would suggest this company would approximately be a C2 or C3 in MQR (but again I could be wrong). For me it gets a 12.5 out of 15 which is not nearly investment grade. My IV might be well under what RM or others have but again I am really conservative and would prefer to miss an opportunity rather than make a mistake. I think it was around $6.60 at the annual report and is now down to $4.60 so quite a drop. Not sure of the reason for the drop and I don’t think it will drop to $2 but definitely not a company I would invest in (at the moment – never say never). Hope this helps NIc.

   • 

     Rainsford
     May 8, 2011 at 2:14 pm:

     HI Steve
     I’m close to your numbers with IV $7.86. My forecast 2011 is $3.78 v $5.32 in the answers.

     Look forward to some tips!

   • 

     Graeme
     May 9, 2011 at 9:20 am:

     The one thing that stands out immediatly is your payout ratio, WAN pretty much has a payout ratio of 100%. That will make a significant difference to you IV for WAN

     • 

       Steve B
       May 13, 2011 at 10:48 pm:

       Hi Graeme,

       I used the interim dividend (40,309) & paid final dividend (21,071), not declared. If i use the interim & declared (55,797), then i end up with 100% POR. I think Roger uses dividends paid. Here’s the discussion http://rogermontgomery.com/the-smsf-review-reviews-value-able/#comment-4741
       However, the previous years dividends paid was almost double, so maybe, in this case, it is best to average the 2 yrs (approx 100% POR) as Nic & maybe you have done?

       Hope I’ve interpreted everything correctly?

       Thanks for your help Graeme

     • 

       Steve B
       May 15, 2011 at 12:31 pm:

       Posted this before without success, I’ll try again.

       Hi Graeme,

       I used the interim dividend (40,309) & paid final dividend (21,071), not declared. If i use the interim & declared (55,797), then i end up with 100% POR. I think Roger uses dividends paid. Here’s a discussion http://rogermontgomery.com/the-smsf-review-reviews-value-able/#comment-4741
       However, the previous years dividends paid was almost double, so maybe, in this case, it is best to average the 2 yrs (approx 100% POR) as Nic & maybe you have done?

       Interested to know what you did?

       Thanks for your help Graeme

   • 

     Steve B
     May 9, 2011 at 4:57 pm:

     Michael, thanks for the avg. EqPs & no. shares help. I remember the reference to it, I’ll try to find & re read.

     Nic, i used 2010 annual report because i thought that was expected in homework. Taking div., NPAT & ROE over 2 yrs. clearly makes a difference also & thanks for the additional ratio.

     Rainsford, glad to know i,m not the only one, thanks. My 2011 IV is $4.29, but given the above i probably need to re-calculate.

     Your generosity is greatly appreciated grads

7. 

   Ian Bowditch
   May 5, 2011 at 9:23 pm:

   Hi Roger and all,
   You young guys dont know how lucky with Rogers book and this site.I started investing at 21 and first got Rogers book at 69. and think its great.
   By the way I thought LOL was lots of love, and I had serious doubts about some of you.
   Regards Ian Bowditch.

   • 

     John P
     May 5, 2011 at 11:18 pm:

     I found out the hard way what LOL really means. My grandson was in hospital having an operation. I sent a text to my daughter to check how things were going and ended the text with LOL. Daughter not impressed at the time and like Ian, I now know the corrrect meaning!

     • 

       Josh E
       May 6, 2011 at 11:57 am:

       Being 24 myself i’m well aware what lol really means, however I still get texts from my mum sometimes that end with LOL and I have to remind myself that shes not actually laughing.

       I started reading Roger through another newsletter service that he writes for and in turn have developed my own process which to date seems to be working successfully. Without reading his thoughts and processses in that newsletters and the ideas developed by others both on this blog and through other forums I don’t think there is any way I could have the knowledge I now do, and thats even after completing a Bachelor of Commerce and Applied Finance.

       Ian, I also think were pretty lucky now with how easy it is to access data online and the ability to make meaningful distinctions of this data via programs such as Excel and the mathmatical power that it carries. Certainly makes the process a lot easier for myself anyway.

     • 

       Roger Montgomery
       May 6, 2011 at 5:19 pm:

       Its ok for you to mention Eureka Report Josh. Thank you for your encouraging words. Roger

8. 

   Christopher
   May 5, 2011 at 11:29 am:

   Hi Roger,

   In very rare cases, is it possible for a profit downgrade to have no impact on intrinsic value?

   Consider for example a company with a forecast 55% return on equity and a payout ratio of 20%. Suppose then that either the forecast is revised down to 50%, or the when the company reports their NPAT it misses expectations and return on equity is only 50%.

   Given that return on equity would have to be lowered to approximately half this amount to produce a meaningful intrinsic value, is it accurate to say that the profit downgrade or missed target has not affected intrinsic value?

   If this is the case, might it impact on their quality rating instead?

   I realise we are operating at the margins here and this isn’t the usual scenario.

   • 

     Jonesy
     May 5, 2011 at 2:43 pm:

     Not sure I entirely understand the point you’re trying to get across. However, if you think that intrinsic value is an estimate of all present and future earnings of a company, then any profit downgrade or NPAT missing expectations is less money the company earned than it was hoping for so yes, it will reduce intrinsic value.

     • 

       Christopher
       May 5, 2011 at 9:27 pm:

       I meant you could still end up using the same implied growth rate. So you would still be selecting the same return on equity level to use. The only thing that would change is equity per share would be a little lower

   • 

     Andrew
     May 6, 2011 at 10:52 am:

     I may be missing something here, i am not quite sure what you are getting at and can see two possible repsonses.

     The first is the obvious one, if a company reports a lower profit and the equity stays the same or increases, or the profit rises but not as much as the growth in the size of the equity the return on equity will decrease and there for affect the intrinsic value if you are using Rogers method.

     The other, which you may be getting at (and apologies for my confusing response), is what happens if the company announces a downgrade in profit however that profit result is enough to maintain the return on equity due to the size of the equity not growing at a larger rate to decrease the ROE. i.e the profit although downgraded grew at enough of a rate to sustain the ROE result as the size of the equity didn’t increase by a larger amount. I would say that this would be rare and would be a case of all planets needing to allign but is possible i guess.

     Much better to simply invest in great quality companys. This reduces the risk in worrying about profit downgrades as they very seldom come.

9. 

   Peter howe
   May 5, 2011 at 11:17 am:

   Hi Roger, this is my 3rd attempt to contact u! Your website/blog seems to make contact v difficult–I try to “join up” and end up with “buy a copy now” , which I did a couple of months ago. It appears my previous 2 mails (2nd one sent wed 4th april) have not been received by u .I’m not v computer literate
   Nearly finished 1st read of your book (well done Roger) questions to follow, lucky u!
   I appear to be missing something–what are “graduates”? Ihave received no info re this . Homework? Do I join a club or something?
   looking forward to hearing from u
   Peter howe

   • 

     Roger Montgomery
     May 5, 2011 at 1:16 pm:

     Hi Peter,
     Thank you for your encouraging words. I cannot locate your email sent on 4 April? You signed up to the blog when you ordered Value.able. I will be sure to keep you updated of any exciting developments as they happen. If you completed the Holiday homework, you are already a Graduate. Welcome to the class of 2011! Some Graduates have emailed photograph with Value.able, which are published at http://www.facebook.com/montgomeryroger.

   • 

     Graeme
     May 9, 2011 at 9:34 am:

     Hi Peter,

     Don’t be to concerned about the sign up to the blog and emails Roger send out every now and again, you are not missing any information as long as you read the blog. The emails are mostly links back to posts Roger has written on this blog

     Here on the blog is where all the information is posted. So as long as you read the blog and its comments (and of course make comments and ask questions yourself) you will be getting all the same information as everyone else.

     The Graduated are just all us people who have bought and read the book and have started puting the wisdom from Value’able into practice.

     Graeme

10. 

    Ken
    May 5, 2011 at 9:00 am:

    I have been “stirring the possum” on the subject of MCE for a while now and I would like to explain why.

    I think MCE is quite a good company, and for those who invested earlier, it has been a very rewarding investment. Nevertheless, I have detected a level of excitement and enthusiasm that prompts my contrarian nature.

    I doubt that many of you have done your own research as Roger always advocates.

    How many of you can honestly say that you checked what patents MCE have ?

    Have you researched Trelleborg, their biggest competitor ?

    Have you researched the management team at MCE ?

    Have you questioned the cost and time overruns on the Henderson site ?

    These steps all come under the heading of “doing your own research”. I don’t want to know your answers, but answer yourself honestly, and then assess whether you have done your own research.

    From my perspective, MCE is almost a case study in mass hysteria on this site, and although it may well be a profitable exercise for you all, if you haven’t answered ‘yes’ to all of the above, you have profited from dumb luck rather than investing skill.

    Finally, this is not intended to offend, but rather to prompt you into examining your approach to investing your hard earned dollars. As Roger says DO YOUR OWN RESEARCH !

    • 

      Michael
      May 6, 2011 at 6:37 am:

      Ken,

      See this post – this came the day after MCE topped:

      http://rogermontgomery.com/peter-switzer-interviews-matrix-ceo-aaron-begley/#comment-9658

      I own MCE, but I agree that the when the level of enthusiam gets too high, its a concern and make me think we are likely at the top – at least in the short run. The next will be oil, gold and the AUD if recent discussions are anything to go by.

    • 

      Sean
      May 6, 2011 at 8:11 am:

      Ken

      I for one enjoy your contrarian posts; makes me think a bit more deeply about decisions made. I agree that the line between luck and considered thought when we are successful is thin. The key is recognising if we did get lucky or if we were successful due to our own research, considerations and skill.

      Arguably though, MCE could also be a case study in what to look out for in recent ASX-listed companies worthy of investment.

      If you jumped on MCE at the 52 week yearly high of $9.95 and were only concerned with price not performance, you would wonder what all the fuss was about and probably think R. Montgomery and fellow bloggers are nutters and have no clue on what we’re on about.

      I really love this quote; and its not from one of our esteemed investing gurus:

      “Believe nothing merely because you have been told it. Do not believe what your teacher tells you merely out of respect for the teacher. But whatsoever, after due examination and analysis, you find to be kind, conducive to the good, the benefit, the welfare of all beings – that doctrine believe and cling to, and take it as your guide.”

      — Buddha

    • 

      Andrew
      May 6, 2011 at 8:38 am:

      Hi Ken,

      I think we share similar thoughts and it is good to have voioce like yours as it challenges our ideas and that is how you truly learn.

      MCE does seem to be a bit of an idol to be worshipped by most. Happy to say i don’t own it, doesn’t fit my circle of competence, hurdle to invest is too high for me.

      I echo the same points you make and will also like to add a caveat that doing your own research goes beyond just working out current and forecast valuations.

      • 

        Roger Montgomery
        May 6, 2011 at 10:44 am:

        Just make sure, in your stance against any company, you aren’t taking your cue from short term prices.

      • 

        ZORAN
        May 6, 2011 at 2:13 pm:

        MCE

        Granting and grawling is only done when “boat missed”

        Dont miss another boat.
        Jump in in at late 7’s and Bob will be your uncle
        (remember Bob is agood guy)

        Cheers
        Zoran

11. 

    David Martin
    May 4, 2011 at 10:20 pm:

    Reading Seans blog on goodwill and then David’s first paragraph on HECS fees and could not help but think of the similarity, whether accounting or ecomoic goodwill – as in HECS – neither are worth a crumpet if you dont do anything with them.

12. 

    Ash Little
    May 4, 2011 at 10:18 pm:

    Hi Roger,

    I loved your Euraka comments today.

    I thought my seperation was expensive but $3,5B for FGL puts me in a better place.

    Keep up the good work

13. 

    Richie
    May 4, 2011 at 8:44 pm:

    Hi Roger and all

    My IVs are pretty much close to Roger’s apart from a couple of them which appear way out. It makes me wonder if the source data is correct in some cases. I use Commsec and some figures look dubious. Anyway, I hope you are able to help me out with a couple of IVs

    1. FXL 2010 IV. Roger’s IV is $7.79; mine is $5.95. I’m using the following source data, all from Commsec:
    BOY Equity = $119m, EOY Equity = $205m, NPAT = $58m, Shares on issue = 259m, DPS = 7.5c. This gives me the following: EPS = 22.4c, POR = 33.5%, EqPS = 79c, ROE = 35.8%. My 2010 IV = $5.95 using RR of 10%. Not sure why mine differs from Roger’s so much. The good news is my 2011 IV is almost the same as Roger’s 2011 IV.

    2. MMS 2010 IV. Roger’s IV is $6.27; mine is $9.15. I’m using the following source data, all from Commsec:
    BOY Equity = $57m, EOY Equity = $89m, NPAT = $29m, Shares on issue = 67m, DPS = 24c. This gives me the following: EPS = 43.3c, POR = 55.4%, EqPS = 133c, ROE = 39.7%. My 2010 IV = $9.15 using RR of 10%. Not sure why mine differs from Roger’s so much. Interestingly, I also looked at the annual report and NPAT differs from the Commsec figure. The annual report shows NPAT = $44.96m whereas Commsec = $29m. If I use $44.96 as NPAT, it pushes out my IV to around $24!

    If anyone can point out where I’ve gone wrong, I’d appreciate it.

    • 

      Ken G
      May 5, 2011 at 10:20 am:

      Hi Richie
      I can not help you on how Roger got such a low current IV for MMS but mine is simular in 2011
      As for infomation. Morningstar has a 2009 book value at .85 and 2010 at 1.32 with earnings at .439 cents per share which gives a ROE of 51.65% (.439/.85 %)
      As for the different figures in the financials one is quoting Net Profit before Abnormals of 29.7 million and the other is a Net Profit after Abnormals of 45 million

    • 

      Matthew R
      May 5, 2011 at 1:39 pm:

      The most reliable source of info is the annual report – CommSec and others can be quite a long way off

      • 

        Nic Arena
        May 7, 2011 at 5:37 pm:

        Don’t know how Roger got such a high IV for FXL at $7.79. Mine was around $2.70.

14. 

    Tim
    May 4, 2011 at 7:29 pm:

    Hi Roger,

    More help needed please! Want to work out future IV for TSM however on Etrade under it’s profile there is not any figures for 2011 and 2012 forecast EPS and DPS. I assume somewhere it has been discussed on this blog so could you please point me in the right direction as to what to do in this scenario!

    Thanks,

    Tim.

    • 

      Roger Montgomery
      May 5, 2011 at 7:57 am:

      Forecasts are not available for all companies. It may be that eTrade does not cover ThinkSmart. Can one of the Graduates point Tim in the right direction please? Thank you.

      • 

        Jonesy
        May 5, 2011 at 9:23 am:

        Try Yahoo finance – couple of analyst estimates there
        http://finance.yahoo.com/q/ae?s=TSM.AX+Analyst+Estimates

        Also Bloomberg and Reuters have analyst forecasts for Thinksmart on their sites

      • 

        ron shamgar
        May 5, 2011 at 11:44 am:

        i can tell you one thing:

        if these forecasts are correct than this company is getting very cheap!

        (its unfortunate they don’t report their profit in $ rather than eps, as you never know what number of shares figure they are using).

      • 

        Jonesy
        May 5, 2011 at 2:48 pm:

        You’re bang on Ron, I would much prefer them forecasting Net Profit rather than earnings per share for that very reason. And as far as Thinksmart goes, really like the company and acquired some around 6 months back (I think Pat first mentioned it). NAB recently lightened their holding which may account for the falling share price. Hoping to top up my holding should the price drop a bit more.

      • 

        Tim
        May 5, 2011 at 10:41 pm:

        Thanks for the replies!

        More research to be done!

    • 

      Robert
      May 5, 2011 at 10:06 am:

      Hi Tim,

      TSM doen’t appear to be well covered. Commsec (Morningstar) has no estimates either. I did find some information here: http://finance.yahoo.com/q/ae?s=TSM.AX+Analyst+Estimates & here: http://www.reuters.com/finance/stocks/analyst?symbol=TSM.AX … By no means comprehensive – but a start.

      RobF

      • 

        Tim
        May 5, 2011 at 10:43 pm:

        Thanks Rob, will check them out!

15. 

    ron shamgar
    May 4, 2011 at 7:00 pm:

    and this:

    http://www.youtube.com/watch?v=eu6Y2VtiV3g

    • 

      David
      May 5, 2011 at 11:00 am:

      If the forecast is correct and construction in china slows dramatically, commodity demand and prices would fall and so would the $AUS. Would the oil price remain high independant of this? If so, a lower $AUS and steady oil price would probably be good for MCE.

      • 

        ron shamgar
        May 5, 2011 at 11:39 am:

        in the short term, if china suffers a property collapse than all commodity prices including oil will fall. but, oil may reach a higher low than previously. (for more on that read GMO report). matrix wont be affected in the longer term but its share price may be affected in the short term. this will create opportunities as long as you have the cash to capitalise on it.

      • 

        Brad J
        May 7, 2011 at 10:53 pm:

        Hi Ron,

        I would be very interested to find out Rogers view on this.

        If there was a property bubble in China it would have massive implications for Australia and any commodity based company. In fact I would think the share market would plummet as well as the A$ and Govt revenue. There would also be a steep fall in property prices in the resource based states like WA and QLD. Unemployment would rise and interest rates cut.

        The property market dropped in the UK due to banks not lending so we really can’t compare the two. Also the falls there have not been nearly as steep as in the US.

        With regard to the US compared to China the commonality there would be an oversupply. However, I don’t think you can buy a property in China without a large deposit and I would think that you need to be able to prove that you can afford it. This wasn’t the case in the US where home buyers could hand back there keys to the bank and basically had no choice as they couldn’t afford the property in the first place. This might mean that prices fall but it is manageable as they are less likely to plunge. But it could still have major ramifications for Australia as building would slow down and our raw materials would not be needed.

        Having said this, I really don’t understand the property market in China but would like to know a lot more. The question is was there another property market slump that would be a good comparison. The best comparison would be the Japan property bubblehttp://en.wikipedia.org/wiki/Japanese_asset_price_bubble however prices were much more inflated but they probably didn’t have the oversupply issues Jim Chanos is referring to in China.

      • 

        Roger Montgomery
        May 8, 2011 at 10:05 pm:

        Hi Brad,

        There has already been a post or two about this issue a year ago.

16. 

    ron shamgar
    May 4, 2011 at 6:53 pm:

    http://video.ft.com/v/772837551001/Why-Jim-Chanos-is-short-China

    interview with Jim Chanos if you haven’t watched before.

17. 

    fred
    May 4, 2011 at 2:49 pm:

    ok it is now sorry

18. 

    fred
    May 4, 2011 at 2:49 pm:

    This blog does seem to be updating?

19. 

    Kevin
    May 4, 2011 at 2:30 pm:

    I agree with everyone’s sentiments on MCE. My concern for MCE and indeed most Australian companies is the strengthening of the Australian dollar.

    My question to the room is do we really understand what impact a rising Aussie dollar (perhaps to $1.30 or $1.40 USD) will have on Australian business?

    A long term bullish view of commodities equates to a long term bullish view on the Aussie which inturn makes countries like Africa or South America more attractive as counterparties. The second part (Australia’s competitiveness with others) will take longer to play out, but a stronger Aussie I believe is a structural change that is here to stay.

    There is the obvious significant impacts on exporters, however, strong quick movement (like the recently movements) will also hurt importers in the short term. The importers new stock purchases will be cheaper, but stock on hand may have to be sold at a loss to compete.

    Basically I have a dim view all round and can see there being some significant fallout as everyone comes to grips with a stronger Aussie dollar and we establish new levels.

    Having expenses as well as revenues in USD is preferable (to just revenues) but at the end of the day the net profit is still lower in Aussie dollars and this is all I care about.
    Perhaps I should plan a US holiday and cheer up….

    • 

      Ash Little
      May 5, 2011 at 6:16 pm:

      Hi Kevin,

      I think the $a is something we all should be thinking about.

20. 

    Ron shamgar
    May 4, 2011 at 12:50 pm:

    Pg56 today’s AFR “tycoon sees no property bubble in china”.

    Now I am 100% certain there’s a property bubble! ;-)

21. 

    Terry Quirke
    May 4, 2011 at 12:35 pm:

    Agree with David,

    I’ve just started investing now and I’m 42. With kids, mortgage, wife and everything else I can only put away a little each month and slowly build a portfolio (I think they call investors like me coffee table investors) as I’m abiding by WB’s mantra to not borrow to invest. The hardest thing I have is finding the time to sit down and study the elements that go into value investing (such as forecasting, cash flow, etc) that help you to make that buy decision. As such, I find this blog to be an invaluable (pun intended) educational guide (just look at the forecasting breakdown, above, exactly what I need to help me button down that element).

    A big thank you to Roger, Ash, Yavuz and all the other contributors who help to make this journey easier to understand get to grips with.

    As an aside Roger, what do you think on having a post where contributors can list books to read on associated topics? I have managed to broaden my knowledge by reading books people have mentioned in posts (such as Jim Rogers Hot Commodities for example), which I otherwise would have been ignorant of? For example, I recently read a book on the GFC and Bear Sterns collapse, which whilst it had no bearing on value investing, provided excellent background reading on the world of investing in general and the GFC in particular.

    • 

      Roger Montgomery
      May 5, 2011 at 7:47 am:

      Great idea Terry, thank you. I’ll pass your idea onto my team. Each time I gshare another idea I get the look “more Roger? But we’ve already briefed the developers!”.

      • 

        Matt
        May 5, 2011 at 8:14 am:

        Agility is key!

      • 

        Robert
        May 5, 2011 at 10:11 am:

        Hi Roger,

        I hope we get to see more of those beautiful charts from your post the other day.. They look fantastic – and too good not to share :)

        RobF

      • 

        Roger Montgomery
        May 5, 2011 at 11:11 am:

        Patience Robert… your discipline will be rewarded.

22. 

    jerry
    May 4, 2011 at 10:25 am:

    FSA:ASX Looks cheap at these prices any thoughts fellow Value investors?

    • 

      ron shamgar
      May 5, 2011 at 9:00 am:

      trading at least 40% below its IV. the problem is the balance sheet, it is not great. seems to be going nowhere at the moment. if cash flows improve this year and maybe pay small div things might improve. the business seems to be doing well and is in the right economic environment but roger has mentioned that in the past management had interests elsewhere so might not be focused. i think its a B4. hope that helps.

    • 

      Craig B
      May 5, 2011 at 9:08 am:

      Hi Jerry,

      I think there are a few of us on this blog who are already owners of FSA.

      You should probably be aware, however, that Roger’s rating for it is B5, which basically means he sees some cat risk there relative to other companies. That doesn’t necessarily mean the sky will fall in on them. It could mean he thinks there’s a higher probability they’ll dilute you with a capital raising sooner or later.

      Not sure I agree with him, but he’s an experienced analyst, whereas I’ve got a Grad Cert from Finsia and have read a few books. (Only my mates ring me for an opinion.)

      I must admit, I bought them some time ago because they were cheap and had achieved good returns 2 out of the last 4 years. The other 2 years weren’t bad, and I attributed the 2010 result to the GFC.

      One thing I’m learning though, is that a cheap price isn’t enough. You need to be able to assess the prospects of the business well too. I was somewhat disappointed with the half year results given the guidance that was issued in October last year. I’m not sure I can assess the situation that well, and I’m sure there are better prospects out there. In fact I know there are.

      Having said that, I’m not selling just yet. I’d like to see how things unfold at the end of this financial year.

      Patience is one of the chief virtues in this game.

23. 

    Brian
    May 4, 2011 at 1:53 am:

    I was wondering where I could obtain the relevant numbers (earnings yield, div yield, book value, etc) for the entire stock market so that I could come up with a Valueable-based value for the entire ASX. Has anyone done this?
    Cheers,
    Brian.
    (Yes, I know. 1.30 am. Crazy.)

    • 

      Andrew
      May 5, 2011 at 2:13 pm:

      Had a look into the same service you are using Darren, although i kind of got turned off it when they seemed to be saying at the time that one of their top picks was Myer. Well they said it required a low RR which they seemed to be using in my opinion as a quality socre similar to rogers MQRs.

      Any service that is saying Myer is a good company does not fit with me, i could have misinterpreted it but even if i did the fact that i could misinterpret it means i will stick clear.

      As to what is mentioned above, calculating the IV’s for al companys on the ASX. I would just like to ask. Do you really need to?

      Do you understand every company enough on the stock exchange that you would be able to confidently calculate a vlaue and make investment decisions on their outlook?

      I would like to see people put in the effor they use in calculating IV’s instead into working out the quality of a company.

      • 

        Darren
        May 5, 2011 at 8:46 pm:

        Hi Andrew,

        Thanks for the feedback, and i like your posts as I certainly started out just worrying about IV’s only but have learnt plenty in the past 10 months or so (and hope to continue learning).

        You make some very good points and I pretty much agree with what you said. Roger has also mentioned that most of the stocks on the ASX don’t make a profit and you wouldn’t want to invest in them so do you need to worry about all of them ??? And as you rightly point out calculating a company IV is not really the most important part to wit; “There is much to consider when valuing a stock, but don’t let the arithmetic obscure the underlying fundamentals of the business. Although stock valuation is essential, it should not be considered the sole and definitive means of stock selection.”. I use [third party product name and promotion removed].

        And, yeah you are right about Myer – i wouldn’t shop there let alone buy there stock (definate value trap!)

      • 

        Darren
        May 5, 2011 at 8:48 pm:

        about Myer that was meant to say I wouldn’t shop there let alone buy there stock!

      • 

        Darren
        May 5, 2011 at 10:29 pm:

        Hi Roger
        My last couple of posts were edited/removed and I gather that was cos you thought I was kinda spruiking the service I recently subscribed to and I didn’t mean it to be like that. I don’t work for them or anything like that but just meant to share my experience as I’m new to this investment caper and the more info the higher the chance one can make the best choice for themseleves……….most people on this site offer up their knowledge and/or experiences which help us new grads increase our knowledge of the investment journey we are taking. I’m sorry if i crossed a line and I assume we shouldn’t mention specific services by name or sound like we are promoting them – and I certainly can agree to that so will be careful in the future.

        Darren

      • 

        Roger Montgomery
        May 5, 2011 at 11:07 pm:

        Hi Darren,

        Its important to have a consistent policy and treat everyone equally. Without the time, for example, to check everyone’s links for quality or software suggestions for quality, effectiveness, after sales service, product support etc, its better to keep the blog third-party-product free. If those third party products wish to promote themselves or have their subscribers do it for them, there are many other avenues. Further I am not an advocate of any product or service nor do I use any third party product or service and therefore don’t want people thinking I am or that I do.

      • 

        Andrew
        May 6, 2011 at 8:32 am:

        Hi Darren,

        I just think, there are so many companys that you already know in advance, regardless of what their iv and market price might be that you wouldn’t invest in so why bother worrying about them. Just stamp them as i do “NN2V” (no need to value) and use the time you would spend looking at them doing somehting with a higher intrinsic value like spending time with a loved one.

        I see elements on here (not aimed at you by the way) which reminds me of a book i once read. I won’t mention the book as i don’t want to plug somethign especially as it doesn’t have anything to do with investing. BUt it follows a similar theme, people need help with a specific area, they find something that works and helps them in that area and then they become a bit obsessed with it and stay up all night focussed on this one area.

        I have done it myself at one stage with a certain task and learnt my lesson for that. To turn it into a financial view the money i spent researching and teaching myself about this area if compunded over 5 years at 20% could be worth now anywhere from $890 to $1500.

        I will just state again for and then i will leave it alone, if you don’t analyse and understand the company how can you know if it is investment grade, if you don’t know it is investment grade how can you assign an appropriate required return to come up with the calculation, if you can’t assign a required return then you can’t value, so save yourself time and money and don’t bother.

        Also, calculating every company means you are forced to assign a required return to the company regardless of quality. However that ignores the fact that a bad company at 10% RR will still be a bad company at 100% RR. Assigning a higher RR does not reduce risk in investing in a poor quality company.

        This is not aimed at you Darren but want to get my feelings out there as i sometimes think this gets missed.

      • 

        Andrew
        May 6, 2011 at 8:44 am:

        My point to my first paragraph is not aimed at everyone, probably more towards the younger people, don’t get too obsessed with investing, it is porfitable but not the be all and end all.

        As a fellow Gen Y i know it can be easy to get carried away with making money but instead of wasting time calculating IV’s for bad companys (which 80-90% of the ASX is) we can use that time to progress in other areas.

        For me it is spending time with my fiance and developing ideas for my own business which with a bit of luck i can one day force Roger to follow my companys progress and assign an MQR and no doubt discuss the pros and cons of any development on Sky Business.

        I think this will help also with the psychological element of turning the stock market off and actually make you better investors as you won’t feel like you have to be glued to the market to find the next company at a discount and you just wait for those home run balls and hit them out the park.

    • 

      Paul Rehill
      May 5, 2011 at 7:51 pm:

      Hi Brian

      Roger does that so maybe you could ask him from time to time to post it. But it seems like a waste of time to me. Charlie Munger said it is enough to find only 1 or 2 good buying opportunities each year that you have thoroughly researched and to load up on those. This is only a good idea for the average investor if they have some reasonable level of diversification. Trying to analyse a market’s IV takes away your research time from finding the 1 to 2 good opportunities.

      You’re better off developing some fundamental analysis filters to quickly rule out securities to focus on those few good investments each year. Most common stocks on the ASX are either too speculative or aren’t very profitable and so it’s better to focus on finding the high return-low risk opportunities instead.

    • 

      Dan S
      May 6, 2011 at 12:09 pm:

      Brian,

      I have tried a similar approach, but simply with the top 10-20 companies by market cap as the ASX is dominated by large caps.

      EG – BHP, Rio, BIg 4, Woodies, TLS, WOW, WES etc. This will still take some time.

      I think there’s a big bow to draw re: MOS in the ASX vs. future short term movements in the ASX.

      Cheers,

      Dan

      • 

        Michael P
        May 7, 2011 at 1:02 pm:

        I think this suggestion may have been made before, but what would be good to see is a new Index – the ASXMQR50A1 index, that has the top 50 A1 MQR rated businesses in it (selected by MQR Capitalisation = # shares on issue x Roger’s IV as at the last annual results). Rebalancing could be done annually, or when a company is delisted.

      • 

        Roger Montgomery
        May 8, 2011 at 10:36 am:

        that is an excellent idea.

24. 

    Peter P
    May 4, 2011 at 12:36 am:

    Hi Roger,

    I note that you have a 2011 intrinsic value of $23.32 for Fortescue metals. To have IV that high I am assuming you are using an ROE of 60% – this would imply a growth rate of 54%.

    Just wondering if you or anyone else can comment on that.

    It just seems incredibly generous to a apply such a high ROE to a company that with such high debt.

    should we be adjusting the implied growth rate down ?

    thanks

    • 

      Frank
      May 4, 2011 at 3:46 pm:

      Hi Roger,

      Would definitely like to know how you came up with the value of $23.32 for Fortescue and also $7.79 for FXL for the year 2010. Based on this results, notwithstanding the fairly low RR of 10% they would be screaming buys. FMG intrinsic value at almost 4 times current price, surely thats a big enough MOS.

      I have heard you mention before that in general, the value of a business rise and falls at a fairly slow pace, compared to price. I dont think a year is a long time in business, however, just comparing the intrinsic values calculated for 2010 and 2011, shows a big difference in value in just a year implying that it had??

      • 

        Andrew
        May 5, 2011 at 2:27 pm:

        Hi Frank,

        Just wanted to add some thoughts. I think you are concentrating on one element and not the whole picture.

        Lets start with FXL, Rogers homework says that 2010 IV is $7.79, however in 2011 the IV is $2.76. The current price is $2.27. Does it still scream out buy, especially after such a drop in IV.

        FMG is ranked by Roger as a B2, the increase in IV is significant. However the lowish MQR score means Roger has some apprehensions about whether it is investment quality. You need to have a further look into this company to see whether you believe it is investment quality. There are some issues with this company that could mean that despite the forecasted rise as to whether the company is still worth investing in.

        Remember the most important part is to buy quality businesses, we then buy them under IV. If you believe after looking into the above two companys that they are investment quality than go for it but there is more that needs to be looked at then just the calculation.

        Also, some of these companys would probably, at least in my book, require a higher required return (most i would not bother with investing in or clacluating the IV for). This would bring the IV down as well.

        Lets not get too focused on the calculation part, the quality of the company is the important part and is not indicated by the IV.

    • 

      Dino
      May 4, 2011 at 9:07 pm:

      Hi all,

      Long time reader first time poster.

      I would like to thank roger for his efforts & sharing his immense knowledge.

      Like most I have MCE, FGE, VOC.

      Hopefully these shares continue to shine. I am after some opinions (not advice!!) in regards to a couple of shares;

      Zicom – only trading 2 * NTA – my opinion is that it has a fair way to go and still i.e undervalued???

      Northern star resources (small gold producer) – excellent roe, resource base building up from a small base – main asset is paulsens mine. Not quite sure of the mine life of paulsens. Would like some opinions re this one.

      Cheers

      • 

        ron shamgar
        May 5, 2011 at 9:05 am:

        zicom – check out roger’s eureka report column. good business just not as cheap as before. you want to buy this around 40cents.
        northern star – its cheap! and has huge prospects and is in my top 4 goldies to hold.

        maybe Mal or Steve I can comment here. thanks.

25. 

    Ken
    May 3, 2011 at 9:34 pm:

    I continue to read much written about MCE on this blog. For example, I have read a number of people saying that MCE’s intellectual property (patents) are a competitive advantage. Some even put it in the same category as COH & CSL !

    I have looked at what MCE have patented, but not sure if there really is a competitive advantage ?

    Here’s a news flash for you……MCE have no Australian patents granted.

    They have 5 patents filed, and they are for the following;

    Buoyancy clamp
    Stop collar
    Downhole centraliser
    Packing material
    Removeable impact cover for a buoyancy riser module.

    None of these sound like a competitive advantage to me.

    • 

      Andrew
      May 4, 2011 at 8:23 am:

      It can definitley be a source. Look at the biotech and pharmaceutical industry.

      I guess it will also depends on where MCE will get their patents. Whether it just be Australia ro go worldwide.I would assume they would go worldwide as my understanding is that there are about only 4 companys in this industry and MCE are the only Aussie one.

      An example of how it can be a competitive advantage is that if MCE have found a way to make the above products in a cheaper, stronger, better or any other type of way that differentiates it as being better from the competitors than they will have sole right to exploit that invention.

      It kind of puts them one step ahead of their competitors in the R&D area and can there for offer them a competitive advantage by being able to offer customers more value through these products.

      If you can make a bouyancy clamp through materials or processes which make them more attractive to customers than your competitors products whether it be through quality or price than this is a source of competitive advantage.

      • 

        Ken
        May 5, 2011 at 8:46 am:

        Andrew,

        Making a product cheaper or better than existing is not a basis for claiming a patent. Before stating that it puts them ahead of their competitors, do you know what patents their competitors already have ?
        Certainly price or quality can be a competitive advantage, and I am not saying MCE might not have that, but do any of us know ?

      • 

        Andrew
        May 5, 2011 at 6:20 pm:

        Your right Ken, but the process and way of building the said products that might make them cheaper or better may be enough for a patent to be registered.

        I don’t know if this is the case either, the fact that i am not sure means that i stay away from the company.

      • 

        Brad J
        May 6, 2011 at 5:35 pm:

        How good are patents anyway. You can quite often just change a couple of small elements to a product and the patents are not worth anything. Moat comes in many forms and one of these is perception. WB refers to this with Coke, Kodak, Disney etc. MCE are perceived to be one of the highest quality producers. How many companies are going to risk going with a new player without a proven reputation for quality in this area. There is a lot at stake with huge amounts of money invested and reputation accounts for an awful lot. In this context we need to ask ourselves how important patents are?

      • 

        Andrew
        May 9, 2011 at 1:30 pm:

        Your right, it can be easy to get around patents,trademarks etc but my view is that it is better to have them than not.

        Every business should protect its IP howver they can regardless of how insignificant they tink it might be.

    • 

      Sean
      May 4, 2011 at 9:52 am:

      Ken

      I think we all get the point from this post and previous others that you are not a fan of MCE!

      However, wouldn’t you consider that a business that provides specialty equipment to other very large businesses in an industry that is searching for a very finite, dimishing resource, and is only one of a handfull in the world to be doing what they’re doing, as well as growing at a rapid rate, to be in a very unique position? And have some form of protective moat/ competitive advantage?

      Intellectual property doesn’t necesarily have to be under patent to be of value to a business. In engineering; a patent is usually the end result of ingenuity, creativity and in some cases pure genius that sprung forth from some very clever minds. I’m not an engineer but I do know some of the clever buggers.

      It’s your learned opinion that MCE doens’t have a competitive advantage; but I know a few people who might disagree with you on that one. ;)

      Cheers

    • 

      Steve I
      May 4, 2011 at 8:50 pm:

      Ken,
      Given the BP spill, one big advantage that MCE has is their reputation.

26. 

    ken fraser
    May 3, 2011 at 9:23 pm:

    Could someone tell me what LOL stands for. Thanks.

    • 

      Andrew
      May 4, 2011 at 8:51 am:

      Hi Ken,

      Is internet babble language that means “Laugh Out Loud”.

    • 

      John M
      May 4, 2011 at 3:11 pm:

      lol = laughing out loud

27. 

    David
    May 3, 2011 at 8:14 pm:

    How do you guys calculate forward intrinsic values for companies that do not have Morningstar earnings estimates for FY11 and FY12 earnings stored on Etrade, Commsec etc? I believe I heard Roger mention something recently about liking Credit Corp at current levels on Your Money Your Call (please correct me if I am wrong), but I have nothing to work with to value this company other than the fact it has grown 30+%p.a. for 10 years, debt levels, current intrinsic value, and the fact that it now appears to be in a good position despite being in a lot of trouble during the GFC. As most of the value seems to be in the small caps at the moment, this is a problem I have for a lot of companies with bright prospects.

    • 

      jerry
      May 4, 2011 at 12:44 am:

      LOL = laughing out loud

    • 

      John Wilson
      May 4, 2011 at 10:09 am:

      Credit Corp: my recollection is that their problems started prior to the GFC. Their problems related to management issues at the time which are often difficult to gauge by looking at the published figures.
      Roger mentioned this problem during a couple of recent interviews. He might comment on this question in general as he’s aware of the specific example.

    • 

      Michael S
      May 4, 2011 at 11:23 am:

      Hi David,

      Sometimes companies will provide forecasts themselves. In the case of CCP the half year results have the forecasts clearly laid out. Info available from the ASX website.

      http://www.asx.com.au/asxpdf/20110215/pdf/41ws8pymp26ynh.pdf

      Things like payout ratios etc are things that require some educated guesses. I look at track record and with CCP I look at management’s estimates of ledger purchases and the needs for capital.

      I have held CCP for some time and I have read a lot about their business. This helps with the guesses. CCP have a lot more people on payment plans compared to a few years ago so I think it gives them a lot more confidence with forecasting collections. Their offshore operations in the Phillipines seems like a smart move with the high A$ too.

      I have their ROE rising and the IV above the current price for FY2011. I have the IV for 2012 rising at a good rate too.

      Hope that helps. Does anyone else have any insights about CCP?

      Regards,
      Michael S

      • 

        Michael W
        May 5, 2011 at 3:03 pm:

        For a debt management company like Credit Corp (also applies to CLH and possibly FSA), I believe a fundamentals based investor really needs to have an opinion on the amortisation rate for the debt ledgers. This is very much a black box and has huge impacts on the bottom line profits. In certain cases, it can be easily manipulated by management to hide losses so it’s unwise to take the profit numbers as fact, turn them into ROE numbers and apply IV calculations over the top.

        In CCP’s case, it is now easier to have an opinion post-GFC that their ledger purchasing and cashflows have stablised. A good exercise would be to compare the latest accounts for CCP and CLH with particular focus on revenues (note: CCP revenue figures are post-amortisation these days – conventional revenue figures are on pages near the back), cashflow, amortisation, ledger assets and profits. The debt on the balance sheet is also good to look at over the last few years.

        My personal conclusion is that Credit Corp may be over-amortising and therefore under-reporting profits. And that they are 3-4x better at doing debt ledgers than Collection House. Whether it’s because they’re better at valuing and buying ledgers, are better at collecting, have a lower cost base, or a combination of all 3 I’m not sure. These are my conclusions, please do you own research!

        Disclosure: I own CCP shares, but not FSA or CLH

28. 

    Andrew
    May 3, 2011 at 7:59 pm:

    What are your thoughts on ERA? I believe this is now a company that is under value

    • 

      Ron shamgar
      May 4, 2011 at 12:24 am:

      It is trading slightly under NTA but they have serious issues with mine life. Also the weather is flooding their mines so they need to buy on the spot market to cover their contracts. This company’s future lies in the hands of the indigenous people in their area. If these people allow them to expand mining then they will do well longer term. I do have a feeling that RIO will take them out soon as they already own 70%. Too much out of our hands to make an investment decision.

29. 

    Graeme
    May 3, 2011 at 7:44 pm:

    Thanks for the homework, I did do it, I just did not get around to sending it in. Although my calculations did not match, I was happy with my valuations, They were consistantly lower in all the shares, and I am sure when I take a closer look I would not be surprised if it was by the same % on all. Which means probably a miscalc in the spreadsheet. But not concerned better to be under valuing companies then over valuing. Will only give me a larger MOS :)

30. 

    Henk
    May 3, 2011 at 2:48 pm:

    Hi Roger, I have enjoyed reading your book over the past week and also tried to do the Easter Homework over the past two days. I don’t seem to be able to match your figures. Is there any chance of you showing one or two of the companies as a worked example. TRS and perhaps FXL. It would help me understand the logic of the calculations and the data you are using.

    Regards Henk

31. 

    Simon Anthony
    May 3, 2011 at 2:42 pm:

    A fall from Grace or an opportunity to purchase something wonderful ? Perhaps it’s time for all Value.able graduates to review the A1 business MCE and remind themselves why are they holding, or should they consider holding this wonderful (falling angel) stock.

    Fact 1. MCE has fallen 23% over the last eight weeks, offering a greater MOS for Value investors

    Fact 2. MCE IV current valuation is north of $11 for 2011.

    Fact 3. MCE new facility once completed provides a huge boost to production and allows for greater organic growth. I would expect valuations to rise as the new plant allows for increased capacity and contracts. I feel comfortable with $14 by end of 2012.

    Fact 4. MCE maintains its competitive advantage by lowering production cost with newer equipment and more efficient mass production

    Fact 5. MCE is better placed than its closet rival(s) in meeting the worlds increasing demand for offshore deeper & deeper deep sea oil drilling. They offer the finest quality product of buoyancy devices.

    Fact 6. Not withstanding the rising $A ($1.10US) and the fact that 80% of sales are in $US the new margins in production are able to ameliorate this rise in the short term and may prove fair value once the oil price exceeds $150 a barrel.

    • 

      Ash Little
      May 3, 2011 at 6:00 pm:

      Hi Simon,

      Thanks for this

    • 

      Ken
      May 3, 2011 at 9:19 pm:

      Simon,

      What evidence do you have that “fact 4” and “fact 5” are actually facts ? How do you know that their production is “more efficient” than that employed by Trelleborg ? All of their competitors use syntactic foam, and they all look remarkably similar, so what makes MCE’s product “the finest quality” ?

      • 

        Simon Anthony
        May 4, 2011 at 12:50 pm:

        Materials Technology
        Matrix syntactic foam technologies are designed to allow users to optimise buoyancy related
        solutions according to performance (depth vs density), economy & production volume.

        Design & Analysis
        >> Matrix utilizes state of the art 3D modeling & FEA software to design & analyse product
        solutions.
        >> Tools such as solidworks, inventor & analysis enables engineers to conduct detailed design and
        stress analysis of complete geometers which are issued as 3D drawings to customers or can
        be reproduced as a scale model using the latest 3D printing technology.

        Manufacturing
        Manufacturing of syntactic components is performed in one of two ways:
        Design → Tooling → Moulding process
        Design → Lamination and Machining
        Each process has different technical and commercial benefits – talk to Matrix

        Skin Systems
        Several skin systems are available as follows:
        Composite – this system provides a structural integrity layer to the outer block surface as well as
        impact protection. This can be applied in the moulding process or directly onto the finished core.
        Polyurethane – high build polyurethane provides excellent impact protection and can be applied
        in thickness of 0.5mm to 30mm. These systems are usually top coated with a gloss marine grade
        paint. Polyurethane skins can be applied directly onto the foam core or onto a composite skin.

        Inserts & Attachments Points
        Attachment points, inserts, mount and through holes can be integrally moulded or post fitted to
        the part depending on the manufacturing process. A variety of metallic, polymeric and composite
        materials can be used such as 316SS, carbon fibre and titanium.

      • 

        Ken
        May 5, 2011 at 6:46 pm:

        Simon,

        Here’s one from Trelleborg – sounds like a competitive advantage to me.

        Drill Riser Buoyancy is used offshore and operates in a hostile environment. From receipt by the client to installation offshore, many operations are performed that can have a detrimental effect on Drill Riser Buoyancy. These operations could result in cracked or broken buoyancy elements which could cause damage to surrounding equipment and more importantly harm to personnel.

        Health & Safety underpins all that we do and to this end, we have developed the ‘Ultra MIS’ range of Drill Riser Buoyancy. Ultra MIS (Module Integrity System) is the inclusion of a special discrete layer beneath the surface of the external skin of the buoyancy elements. This provides the ultimate in structural integrity.

        Ultra MIS elements have been tested in parallel against elements without the Module Integrity System and have consistently demonstrated a dramatic advance in structural properties. The Ultra MIS system provides nearly a two-fold increase in mechanical strength and buoyancy elements have the ability to accommodate nearly twice the deflection before sustaining damage when compared with a standard buoyancy element.

        Ken

    • 

      Derek
      May 3, 2011 at 10:50 pm:

      Agree with the sentiment Simon, but I think your valuation of MCE is on the high side. I have calculated that the ROE of the company is moderating down in FY12, FY13 and FY14 to closer to 35% and I have also assumed some level of increase in dividend payout ratio from FY12 onwards. My calcs get me an IV FY11 of $10.11, FY12 of $11.82 and FY13 of $15.00. Even on my calcs current prices look like reasonable value.

      • 

        John Watson
        May 4, 2011 at 10:19 am:

        I also assume MCE’s ROE declines to 35% in 2013 and dividend payout ratio increases, giving me a 2013 IV of $15.84. I revise my valuations with the release of company half yearly reports and any company revisions to earnings, sales guidance etc.

32. 

    Andrew
    May 3, 2011 at 2:41 pm:

    Thanks for the exercise Roger, happy to know that i was close to the mark for the cashflow analysis. Even though i was part of the first edition class it has taken me a while to get the cashflow analysis area working for me, still learning more each day in regards to that.

    I echo what was mentioned in this blog, to truly know what a great company is, you need to know what a bad one or a questionable one looks like. This homework provided a good snap shot of different types of companys.

    I think Chris B summed it up perfectly with his quote and i think it is something every person on this blog should reflect on as i think it sometimes gets missed in the noise of looking for the next company at a discount to IV.

    If you don’t understand the company, then how can you with any confidence analyse the value of it.

    • 

      Mark Ab
      May 3, 2011 at 5:47 pm:

      As the great Warren Buffett has stated many times in the past, he doesn’t touch any business he cannot fully understand, no matter how good it’s prospects seem on the surface.

33. 

    Craig
    May 3, 2011 at 1:44 pm:

    Wondering if someone could assist with the Easter homework please. In respect of 2011 forecast IV. Let’s take TRS.

    My 2010 actuals inputs:
    Equity=51.543; shares=26.034; gives EqPS=$1.98
    EPS=90; DPS=67; gives payout ratio=74.44%
    NPAT=23.351; Ave equity=45.986; gives ROE=50.78%
    Giving me 2010 IV of $16.54 (in line with Roger’s)

    Now to my 2011 forecast inputs:
    EqPS=1.98+0.68-0.41=$2.25; shares=26.034; gives forecast equity=58.577
    EPS=68; DPS=41; gives payout ratio=60.29%
    NPAT=??.???; Ave equity=55.060; gives ROE=??.??%

    Elsewhere in the blog I saw someone use 2011 NPAT of 17.68, which when paired with forecast ave equity of 55.060 gives forecast ROE=32.11% and 2011 forecast IV of $11.86 (in line with Roger’s).

    Questions:
    1) Am I on the right track here with my calculation of the forecast equity and forecast average equity figures?
    2) Was that forecast NPAT figure of 17.68 calculated somehow using the figures? If so, how? Or was it obtained by analyst or company estimates? If so, where?

    Apologies for the detail here, but I’m just trying to bed down my forecasting IV method. Any assistance much appreciated. Thanks.

    Craig

    • 

      ken fraser
      May 3, 2011 at 4:17 pm:

      Craig, 1. Yes. 2. Rogers EPS of 68 cents multiplyed by the number of shares on issue gives you the NPAT for 2011.

    • 

      Andrew
      May 3, 2011 at 4:27 pm:

      Your EQPS figures match mine, which might not be of any help as i got 2010 IV of $17.95. Looking at your figures i think it might be due to pay out ratio, i got a payout ratio for 2010 of 69%. Would like to know someone elses thoughts on this as all my other figures apart from this one seem to match up. I got a figure of 16,103 from the statement of changes in equity in the annual report. Have i missed something here and more dividends were paid out?

      EQPS for 2010 was $1.98, add the eps of 0.68 and minus the DPS of 0.41 you get ending 2011 EQPS of 2.25 so you are indeed correct there.
      POR of 60.29% looks correct.
      0.68/average(1.98,2.25) equals a ROE of 32.15%.
      With this i get a IV of $11.67 which is within .20 of roger so i am happy with it. Rounding can quite usually be the cause of this.

      Your forecasting appears to be pretty good.

    • 

      Dave P
      May 3, 2011 at 10:31 pm:

      Using your figures above (which are pretty much the same as mine):

      NPAT 2011 = (EPS 2011) * (Number of Shares) = 0.68 * 26.034 = 17.703
      ROE 2011 = (NPAT 2011) / (Average Equity 2011) = 17.703 / 55.060 = .3215 = 32.15%
      Plug those numbers in, and you should be on your way :-)

    • 

      Peter P
      May 3, 2011 at 10:54 pm:

      Hi Craig,

      Yes you are correct with question 1 – I also got the same figures

      Regarding Question 2. –

      NPAT is simply EPS ( earnings per share ) x by the number of shares
      NPAT = EPS ( 0.68) x 26 034 Shares = $17 703

      Note – One thing to watch is if a company does a capital raising you will have to manually add this to contributed equity and also take into account additional shares issued. Analysts will revise the EPS to take into account the new shares and weather earnings will improve ( ie – they purchase an asset that will improve earnings )

      Regards

      • 

        Craig
        May 4, 2011 at 10:35 am:

        Thanks Ken, Andrew, Dave and Peter.

    • 

      Roger Gibson
      May 4, 2011 at 11:25 am:

      I rarely get exactly the same figures as others though usually close and the answer seems to invariably lie in small differences in data input and the number of decimal places used. The IV value is very sensitive to some of the inputs. For TRS I get:

      Year/NPAT/EqPS/ROE/PR/IVreinvested/IVnonreinvested/IV
      2010/23.4/1.98/50.8/74.7/$7.51/$9.33/$16.84
      2011/17.7/2.25/32.2/60.3/$4.36/$7.31/$11.67
      2012/24.7/2.51/39.9/73.0/$7.30/$8.16/$15.47

      • 

        Andrew
        May 6, 2011 at 12:55 pm:

        Can i just confirm with someone what NPAT and Dividend figures they are using for TRS 2010. I don’t seem to be getting a similar POR to everyone else. Mine is around the 69% mark where as everyone else is getting high 70% figures.

        I must have missed something in the annual report so if anyone can help me out with a figure i can look for it will be great.

        Thanks in advance

34. 

    Sean
    May 3, 2011 at 12:29 pm:

    Wondering Roger’s and the blog community’s thoughts on something I’ve pondered on recently…. GOODWILL.
    As an accountant to SME’s the goodwill shown in their accounts is usually just a product of the double entry accounting system whereby debits must equal credits and means that they’ve generally paid too much for something. This phenomenon however is not limited to SME’s; think Fosters recent and continual write down of wine assets acquired from Southcorp.
    For eg, you acquire a business for $10000 (it’s a cheap business that sells fixed line phones…D’oh!), you must credit your bank account or heavens forbid a loan account if you borrow to fund the purchase. Say you only receive $8000 in tangible assets (some equipment and stock – the copper in the phone lines might be worth something though). That’s $8000 to be debited in your balance sheet. To ensure your balance sheet …. er balances; us accountants will debit the left over $2000 to a goodwill account.
    It’s easy to value the goodwill component of these businesses; it’s nil. As an intangible you receive nothing for your purchase; and arguably could cost you interest and opportunity if you elect to fund the purchase with debt!
    Bearing in mind something tangible is anything you can touch or grab.
    My mind drifts to the goodwill shown in the accounts of investment grade, ASX listed companies. I look carefully at the goodwill component of these businesses and assess if it as actually adding any value to the business. I’m talking about separating genuine intellectual property from what I call ‘paid too much for something’ goodwill. The ‘other’ type. I just think it’s another aspect of due diligence to consider when researching companies worthy of investment.
    Think trademarks or secret recipes (Coca Cola and KFC) or patents (Cochlear, CSL and Matrix C&E). Don’t get me wrong; goodwill can be extremely valuable, even invaluable. Do you think you could make an impact in the world of beveridges or takeaway food if you stumbled upon the secret recipe for Coke and KFC and had some deep pockets or backers? I wouldn’t mind a crack at it!
    We look at other things that add value to the businesses we invest in that are intangible (can’t be grabbed) like the network effect, various competitive advantages or exceptional staff and management. We can’ quite quantify the value of these things but we know our company would be less successful or profitable without them. You could argue that these types of things could even make up goodwill when making an acquisition.
    I personally like to investigate the proportion of goodwill to total assets in the accounts and assess if it is real goodwill that adds to the business or the ‘other’ type. If I find it is the ‘other’ type I will remove some or all of it to arrive at a more conservative ROE. I’m not saying this applies to any businesses mentioned here nor any I’ve invested in; I just think it warrants further thought and discussion.
    Arguably we should steer well clear of businesses that form a habit of paying too much for what they’re getting anyway; I love beer so once again my mind drifts to Fosters!
    Amortisation/ Impairment of goodwill is a whole other discussion; it is a business expense shown in the accounts but generally not tax deductible; says it all really.
    I’m not looking for advice but I suppose my question (rhetorical or answered) is does the blog community and Roger look at goodwill and its’ value adding prospects when researching whether a company is investment worthy ?
    Next time your trawling through financials and balance sheets (we’re a weird mob aren’t we?) just have a gander at the goodwill component in the assets section. Is it unreasonably high? Can you easily recognise anything they received for it? Should it be removed/ lowered from equity in our valuation calculations?
    Ask yourself; should I remove some or all of the goodwill from the equity to arrive at my calculations? At if not; why not? Just some thoughts.

    Cheers

    • 

      Andrew
      May 3, 2011 at 4:16 pm:

      Not sure if you have bought Value.able (and if you haven’t i thoroughly recommend it) but their is a whole chapter dedicated to Goodwill in there.

      I like the way Roger looks at it but can’t remember the details of the chapter at the top of my head. Roger likes to , and i agree and think it is the same as what you are discussing, differentiate good will into too categories. These are accounting goodwill (which you are of course aware of) and economic goodwill which is what you are referring to towards the end i think. I suggest reading the chapter in value.able plus some of the other learned accounting folk who frequent here might be able to offer a better discussion than myself.

      To me economic goodwill is the existence of some type of asset whether tangible or intangible that is not reflected on the balance sheet but helps the company generate the above average returns, this would be some type of competitive advantage.

      Accounting goodwill, as you say, usually just means someone has paid too much for something and it makes them feel better. Once i get some other things sorted i plan on re-reading value.able to refresh myself with the content and this is one of the chapters i want to pay more attention too.

    • 

      Sean
      May 3, 2011 at 4:16 pm:

      Postscript: removing goodwill and lowering equity will increase ROE; however have a vast impact on equity per share which will affect your valuations. I’m not saying it should be transposed into Roger’s valuation model, merely another thing to consider when looking at a company’s financial position. Sometimes us accountants know what we want to say but have trouble saying it!

      Cheers.

      • 

        Roger Montgomery
        May 3, 2011 at 11:49 pm:

        Ahhh. When we have the feature that allows you to search comments, you will find I have chatted about this in some detail.

    • 

      Ash Little
      May 3, 2011 at 6:33 pm:

      Nice Post Sean,

      I am an Accountant as well and most of our clients are SBE but we do have some NON SBE.

      This is just my view but it has been developed with the help of Roger and reading Buffets letters to shareholders.

      Being a total nerd and really looking at this for a few years now I have come to the conclusion that some goodwill is vastly overstated and some goodwill is vastly understated. It all comes down the the cash that can be generated from the entity.

      I would recommend that you read the appendix to warren buffets 1983 letter to shareholders.

      Hope this helps

      • 

        Ash Little
        May 3, 2011 at 7:16 pm:

        BTW Here is the link.

        http://www.berkshirehathaway.com/letters/1983.html

        I decided to reread it as a refresher.

        Thanks Sean

      • 

        Sean
        May 4, 2011 at 8:36 am:

        Thanks for the links all. WB’s letters are very manner of fact and educational indeed.

        Have also re-read the chapter on cash flow and goodwill in Roger’s book.
        Identifying accounting vs economic goodwill is at the core of what I was trying to say I suppose. The main issue that concerns me is leaving in goodwill if it is a high proportion of assets in the calcuation of equity per share.

        Accounting goodwill is fairy tale stuff really. That’s one thing about balance sheets; the value of assets can be rubbery at best, however you can be more certain that liabilties are correct!

        Cheers.

      • 

        Jonesy
        May 4, 2011 at 10:02 pm:

        Thanks for that reminder Ash, it’s an excellent discussion on goodwill. Not being an accountant, it does raise a question however. Using WB’s example of the acquisition of See’s, the reported NPAT of See’s following Berkshires acquisition will give an underestimate of the true earning power of the company (because if I’m right the amortization charges will come out prior to final NPAT on the income statement?)
        So bearing this in mind for valuing companies that have made sensibly priced acquisitions at intrinsic value (and thus have significant economic as well as accounting goodwill on the balance sheet) is it reasonable to add back the amortization charges back onto the NPAT to get a better idea of true earnings?
        Hope I’ve explained myself well enough!

      • 

        Ash Little
        May 5, 2011 at 6:12 pm:

        Hi Jonesy,

        Joab is probably better placed to answer this but they changed the rules regarding amortizing goodwill awhile ago. Most of the amortization now is for a finite intangigle

      • 

        Jonesy
        May 5, 2011 at 7:23 pm:

        Cheers Ash, now you mention it, it does stir some memories, I’ll have a dig around.

      • 

        Joab Soh
        May 6, 2011 at 12:00 am:

        Hi Jonesy,

        Ash is right.

        Before: Goodwill used is amortised over a defined period based on management’s assessments.

        Now (since 2005): Goodwill is no longer amortised, but is now subjected to annual impairment test (think accountant’s idea of estimating value).

        It took awhile but accountants have acknowledged that Goodwill can be an infinite asset as long as you can support its value. What I don’t like about the current accounting rules is that impairment assessment on Goodwill is very subjective and is more dependent on whether managements are aggressive or conservative.

        In terms of your application Jonesy, my view (for what it’s worth) is that it make sense as long as you are comfortable that price paid for the acquisition approximates its value.

        Hope this helps

      • 

        Jonesy
        May 6, 2011 at 3:09 pm:

        Thanks Joab, much better understanding about this now

      • 

        Matt R
        May 4, 2011 at 11:44 am:

        Hi Ash

        What is a SBE?

      • 

        Sean
        May 5, 2011 at 10:32 am:

        Probably:

        SBE – Small Business Entity
        SME – Small / Medium Enterprises

      • 

        Ash Little
        May 5, 2011 at 5:53 pm:

        Yes Correct Sean

      • 

        Matt R
        May 5, 2011 at 7:51 pm:

        Thanks

        I didn’t think it stood for “subacute bacterial endocarditis…”

      • 

        Matthew R
        May 5, 2011 at 10:31 pm:

        Mixed up your textbooks? :)

    • 

      Joab Soh
      May 3, 2011 at 8:28 pm:

      Hi Sean,

      Interestingly, there has been some discussion around goodwill (Accounting vs Economic) awhile ago.

      I had previously raised similar concerns over accounting goodwill as a function of management paying too much rather than anything else.

      However, Roger pointed out that a more elegant measure is to examine ROE alot more closely. High ROE & return on net tangible asset suggest that economic goodwill exist in the business which is not reflected on balance sheet. Conversely, businesses with high asset value (due to goodwill) with low ROE should raise concerns.

      Hope this helps.

      See below for link the Roger’s comments
      http://rogermontgomery.com/when-to-sell-matrix-and-other-adventures-in-value-able-investing/#comment-10599

    • 

      Robert
      May 3, 2011 at 8:34 pm:

      Hi Sean,

      Yes, investigating goodwill is important. WB had a bit to say about it in his 1983 letter to shareholders: http://www.berkshirehathaway.com/letters/1983.html read the appendix at the bottom of the page.

      Rob F

    • 

      Peter P
      May 3, 2011 at 11:09 pm:

      Hi Sean

      Good post and very relevant to value investing.
      Roger talks about Goodwill in his book on chapter 9 and I am sure you will find your answer there.

      I also take note of the intangibles to total assets.
      I am no accountant but a question for my benefit.
      If you are removing Goodwill from the assets, are you also writing it down as an expense on the profit and loss accounts thereby reducing profit ( and making an adjustment for tax)

      If you just remove it from equity then this has the effect of increasing ROE not reducing ROE.
      It will also increase the debt to equity ratio.

      One reason companies write down goodwill is because the ROE is Too low and they want to improve it. However in doing so they are destroying shareholders equity.

      So I guess if you think a company has High goodwill that may be written down, you may want to write down the goodwill in the forecasts and see what impact it has on profit, equity and debt. Them make a decision if it is worth investing in.

      Hope that helps

      • 

        Sean
        May 4, 2011 at 8:40 am:

        Yes many apologies for that. Reducing goodwill and in effect equity will leave you with an inflated ROE (got my ROE’s and EQP’s mixed up!); but of more concern to me is leaving it in when calcuating equity per share which is a key ingredient for a valuation model. How much you reduce profit by will depend on how much goodwill is being written down/ amortised.

        Cheers

35. 

    garry
    May 3, 2011 at 10:34 am:

    JUST WHEN YOU THINK YOU HAVE HEARD IT ALL???
    Until yesterday I thought i had heard it all, market falls, market rises, cost of money goes up, interest rates fall, floods, tsunamis, earthquakes, cyclones, management departing, takeover offer etc etc etc.
    then I turn on bloomberg yesterday and news headline reads,
    MAN KILLED IN PAKISTAN, GLOBAL MARKETS SURGE..
    Now I am confused???????? As is the girl in Rogers article!!

36. 

    Adam B
    May 3, 2011 at 9:53 am:

    HI Rodger,

    This is my first post so I would like to take the opportunity to thank you for your book and what it has taught me about investing.

    In relation to easter homework, would it be possible to post the results in your stepped out form (pages 188,189 in your book) like you have done in the past. Most of my results are close but some differ enough for me to want to find out why?

    I did not use Etrade in my calculations. I went to the annual reports for 2010. What was surprising is that some of the results in the annual reports were different from Etrade. I could not understand why this would be?

    Many thanks again

    Adam.

37. 

    Leon
    May 3, 2011 at 9:26 am:

    I may be one of the youngest Valuable graduates yet at 17 years old! Will send pic through.

    • 

      Roger Montgomery
      May 3, 2011 at 11:19 am:

      Well done Leon. We look forward to adding your picture to the Graduate album.

    • 

      Andrew
      May 3, 2011 at 2:32 pm:

      I wish i had this book at 17 years of age. Instead i started investing when i was 21 or 22 and was trying to teach myself until i got Rogers book at 27 years of age. Some hits, more misses.

      Good luck with the journey Leon, you have a great opportunity to really do well and you would be happy to know that despite you being 17 years old you will already probably have more knowledge than some people who have been “investing” in the share market almost 4 times your age.

      Looking forward to hearing more from you and the rest of the new graduates in the future.

      • 

        Ash Little
        May 3, 2011 at 6:08 pm:

        Hi Andrew,

        Well said,

        I wish you the best of luck Leon but I know you want need it

      • 

        David
        May 3, 2011 at 7:59 pm:

        Good work guys. I’m 29 and am following Roger’s methods too. Just remember that HECS, car loans and the demands of your mortgage, wife and kids will probably curb your investment hopes and aspirations for a while unless you are on quite a high salary or if you can build your portfolio before you get to this stage (possibly foregoing a decent deposit unless you live with mum and dad). Your partner might even try to block you from investing, so agree the ground rules early in the piece. I’m going against one of Buffett’s principles and borrowing to invest, made feasible through Australian tax advantages, but know its a double-edged sword. I do however control 80% of my super, so that is another avenue to advance my interest. I would recommend going self-managed ASAP if you know what you are doing and can get a good, affordable service. I heard Roger talking about super funds’ failure to deliver on the Ross Greenwood podcast, which just affirmed my views. My aim is to have 100% control within a year. So far I have enjoyed decent above average returns.

        I really believe in this method but I am also enjoying exploring other approaches to valuation/ investing that have been successful in the past such as those used by Peter Lynch, Templeton etc. Even Roger has more complex 30-plus measures to determine his MQRs – would love to know the whole story if he’s planning on writing another book, although he may be deterred as Stephen Hawking’s publishers did say that they would lose 50% of their readers every time they put an equation in a book! While I have just started out with this research, I do see a lot of similarities in terms of philosophy, even though the methods can be quite different. The one thing I have learned in my tumultuous few years in investing is that 75% of highly paid fund managers underperform the market in any year and a lot of highly paid brokers and respected hacks who love to get exposure all over the media promote horrible companies with high risk and poor fundamentals, using thematics and other flawed hunches as their basis. Roger is one of the few I would trust to manage my money if I had a million in spare change to meet his fund’s entry requirements!

        My biggest investment on margin during the GFC was in ASX 50 (“blue chip”) Babcock & Brown – earnings estimates were still sky high and 11/11 brokers had a conviction buy on it as the share price was plummeting. My financially educated friends believed in it and were in it. I even got asked about stocks at a dinner party and said not much more than the fact I liked it. I found out later that this young couple went out and poured thousands into it just because I am a qualified accountant (working in a fairly different field mind you). Suffice to say, I get a few of dirty looks these days and some people don’t really talk to me anymore! I should have listened to my dad (inheritor and a long-time buy and hold GPT shareholder) who wisely called a shareholder representative organisation to complain about what BNB were doing and the fact that they were going to go broke. The person he spoke to actually spent about an hour on the phone telling him what a wonderful company it was and that his concerns were misplaced! Many are now eating their words and re-evaluating their investment criteria. I’ve learned that you need to be very careful with who you trust to provide you with general investment advice and do your own homework. Speaking of which, my results seem on track but were a little out, so expect me to probably be back asking for help. Absolutely stoked on the valuation of CWP though – its one of the few stocks I like that I found on my own a little while ago. LYL is another from my auditing days in WA but its not that cheap anymore.

        Its great that young people are getting into investing in the market rather than speculating. Most people wait until the kids are grown up and they have a little cash in their 40s and 50s to blow on poor investments without any financial education. Learning from losing a little money in the GFC in my 20s may be one of the best things that happened to me – my dad let me do it because learning from your real-life mistakes is a very powerful thing.

      • 

        Andrew
        May 4, 2011 at 8:50 am:

        Hi David,

        Nice story, i am sure most of us can relate to at least parts of it. Personally, i guess i am lucky that as someone who was not an accountant i never got asked about which stocks i like when the topic came up, instead i got the opposite with people trying to talk me into buying some. Luckily, my opinion of the poeple offering me these tips led me to ignoring them. Although an accountant that i have used actually asks me for advice on stocks and ever since then i realised that just because accountants can understand accounting they don’t necessarily know about investing.

        We have some good examples of yourself and Ash amongst others here that buck that trend.

        Needless to say,as i mentioned, i wish i got hold of Rogers book when i was 17. I think i would have been able to take advantage of a number of opportunities and i would have been in a significantly better financial position than i am now. The GFC was a great opportunity, i did take advantage of it too an extent and made some good money but i also put more money into the wrong companys that i had a preconceived idea about how good they were. I didn’t lose on those purchases and no longer in them but i could have made better gains elsewhere.

        I have been lucky enough to not have found myself investing in a company that went bust. Flirted with some (ABC), but somethign stopped me from pulling the trigger and downloading a Roger Montgomery podcast where he made a joke about ABC then made the decision concreted and i stayed away. I knew of Roger well before that from a sharemarket education thing that the ASX used to do and he was one of the 4 presenters. I followed and respected him after that.

      • 

        Ash Little
        May 5, 2011 at 6:29 pm:

        Hi Andrew,

        I can guarantee that most accountants DO NOT understand ROE investing

      • 

        Joab Soh
        May 6, 2011 at 12:09 am:

        Ash,

        You make me laugh. Bean counters count beans and do not think about what they are worth.

      • 

        Ilya
        May 4, 2011 at 4:36 pm:

        I am 35 and had a few years of picking bad horses. I read Lynch, Graham and even some early Montgomery a while ago. Back then I was sold on the concept of value investing but didn’t really know how to apply it. I didn’t understand the importance of ROE, MOS and how to establish the IV of the business until I read Value-Able. Roger has opened my eyes and I am now much more confident in making informed investment decisions.

        Obviously the earlier you start in life the better. This is true in any field. But don’t get hung up on your age too much. I always watch the night vision goggles scene from the Stepbrothers to cheer me up: “…imagine if we had these when we were 12! Even better we got them when we are 40!” Enjoy:

        http://www.youtube.com/watch?v=xyjn8aybPBs

      • 

        Roger Montgomery
        May 5, 2011 at 7:55 am:

        Hilarous Ilya. May I suggest whilst everyone is at YouTube you then spend transition to http://www.youtube.com/rogerjmontgomery… ?

      • 

        David Martin
        May 4, 2011 at 11:35 pm:

        Good post Sean.
        Could not agree with you more about fund managers and having been involved in the profession for many, many years it is one of my biggest frustrations followed closely behind modern portfolio theory and asset allocation both of which i think is bunkem.
        The problem with fund managers (generally) is that they all benchmark themselves against an index – all ords, S&P 200, smalls, etc.
        The second problem is they mis-align the concept of risk.
        For most people the concept of risk is that they will lose their money but for a fund manager (generally) their notion of risk is that they will underperform their peers.
        The problem therefore is obvious – most fund managers have a very low tracking error which means that you could put a blanket over them. They will all hold the same stocks and if you look at their top 20 holdings, they are all remarkably similar. They are only marginally different to index managers and most people in this environment would probably be better of using an index – lower fees, lower turn over, lower tax…
        If the market fell by 15%, most fund managers would be pleased that they lost only 12% – but to an average Joe – their benchmark is cash which of course is the risk free return.
        I’ve enjoyed being able to invest my own funds and deploying assets as i see fit – if there is a good opportunity i buy it – if not – happy to sit and wait in cash until one appears.
        I don’t blindly see myself as a “high growth” or balanced investor – i am an “investor” and like most of us here i think we are opportunistic by nature.
        The concept of a fund manager being bottom up, top down, high conviction, value, growth, thematic etc is a nonsense . Most fund managers have automatic inclusions by virtue of a company’s size on its respective index.
        As an investor, if i don’t see value i don’t want it. Unfortunately we have a funds management industry that is predicated on mediocrity . Benchmarking against an index of the top 200 includes some really ordinary business’s – many are MQR C 3 – C5 .
        With the insightfulness of the group here and Roger i would be amazed if most of us would not exceed these mediocre benchmarks.
        I note even recently Roger was suggesting his fund had out-performed the index – if my memory serves me correctly it was 88% cash or equivalent so a comparison against the ASX 200 is hardly relevant! Fortunately your mandate roger must not be to be fully invested at all times and given you also hold GOLD and oil futures your fund, I assume would be different to the majority of pure equity funds we have here. I hope it goes well and becomes available in the retail space.
        Personally I have a fairly concentrated portfolio , I think I heard someone say diversification is for people who don’t know what they are doing or better still, diversification is “worseification” !I don’t currently hold BHP – most fund manageres hold 15% or thereabouts because it is index weight – i don’t hold any banks but am happy to do so when i see value. There is nothing yelling to buy me in that space at the minute.
        My portfolio is fairly concentrated, i do own some direct commercial property and have cash and cash is the key. It allows us to keep our stocks when they fall (if you still see value) such as MCE when it falls from 9.90 – $7,70 and provides the opportunity to top up our holdings if we see value.
        I have enjoyed reading so many views and have been amazed at the depth of knowledge by so many of you. Thanks for sharing.
        And ron shamgar – did you buy any more of your mystery stock recently?

      • 

        ron shamgar
        May 5, 2011 at 9:18 am:

        hi David, nice post.
        i need it to drop another 10%-20%, so i can complete my buying. when i finish ill let everyone know. but i think i gave it away with some of the information…. :-)
        cheers

      • 

        ben
        May 5, 2011 at 11:36 am:

        The problem with fund managers are their mandates. For many years during University I always thought that the little guy was constantly on the backfoot and were at the mercy of institutions. Truth is, its the nimbleness and flexibility of the little guy who has no mandates, who doesn’t have restrictions on holding cash and isn’t bound by ‘risk’ (volatility).

        With that being said, it really magnifies the achievements of warren, klarman and berkowitz most achieving average returns of 13-20%. These guys have billion dollar portfolios!

      • 

        David Martin
        May 5, 2011 at 5:44 pm:

        I’ll have to do some further research ron – when did you make your post – i find it hard to back track and pick up threads of conversations on this blog.

      • 

        Roger Montgomery
        May 5, 2011 at 7:02 pm:

        Searching comments is a feature we plan to add shortly David. Any other ideas to improve the blog?

      • 

        Rob
        May 6, 2011 at 12:32 am:

        Hi David,
        If you use a good RSS reader you will get a list of all new posts. For those with Macs it’s built into Safari just click on the “reader” or RSS button.
        I have a Mac and use NetNewsWire as my reader and it works pretty well.
        I read the posts and if I need to know more, I double click and it displays the the page and comments.
        I hope this helps.
        Cheers
        Rob

      • 

        DAvid Martin
        May 6, 2011 at 7:41 pm:

        Hi Rob – thanks for your help – now talk to me as if i am 3.
        What is an RSS reader? When i find it, how will i know if it any good and what is an RSS button.

        I dont use a Mac – but i do have safari by virtue of a few iphones we have at home – if i set Safari to be my default browser will this help.

        I appreciate your help, David

      • 

        Rob
        May 8, 2011 at 8:29 am:

        Sorry David,
        If I talk to you like you are a modern 3 year old, you may still not understand.
        BTW when I was much younger LOLs were Little Old Ladies.
        Here is a link with some instructions from Microsoft themselves explaining RSS.
        http://www.microsoft.com/windows/rss/default.mspx
        Cheers
        Rob

      • 

        Ash Little
        May 5, 2011 at 6:08 pm:

        Nice David,

        I agree with the info on the blog.

        We have a group of like minded people here with diverse and interesting background all trying to buy great businesses at big discounts. I continue to be amazed.

        Even if some of us can’t spell or type (especially me)

      • 

        Craig B
        May 5, 2011 at 11:30 am:

        David,

        I started reading “The Intelligent Investor” 4 or 5 years ago, some 2 years before I discovered Roger. I have emails I sent to friends in that early period of my investing career musing on the value in the prices of Babcock & Brown and RAMS. I still cop a decent ribbing occasionally for that folly so I can sympahise with your story somewhat. Classic case of a little information can be dangerous.

        Luckily I learnt the required lessons with no money down personally (and my friends rated my stock tips like they would my racing tips and gave them a miss.)

        But I’ve had some success with this “Value Investing” thing since I actually starting to participate so my “tips” have improved dramatically, in no small way with thanks to the work of Graham and Montgomery. (I kept reading.)

        I commend this school of thought to the house!

    • 

      Mike Hall
      May 3, 2011 at 5:46 pm:

      If you’d like your “mug shot” posted with each comment, load it up here……

      http://en.gravatar.com/site/login

      • 

        Roger Montgomery
        May 5, 2011 at 7:32 am:

        Great idea MIke. And if you’d like to join the Value.able Gradate Class of 2011 photo album, post your photos here http://www.facebook.com/montgomeryroger

      • 

        David Martin
        May 7, 2011 at 10:55 am:

        Roger – how does one become a gratuate – i have assumed there are some prerequisites or is reading the book, applyings it principles and being a contributor on the blog the pre rqeuisite.

        Not a big issue – just curious.

      • 

        Roger Montgomery
        May 8, 2011 at 10:03 pm:

        You will know when you have graduated…and so will everyone else here. They’ll tell – perhaps they might think you already have!

    • 

      Tyler
      May 5, 2011 at 5:21 pm:

      I read intelligent investor at 15 which is also a good read