How does Roger Montgomery construct his share portfolio?

Matthew R
July 29, 2011 at 2:08 am:

I have found a great way to “turn the market off”

Work the night shift so you sleep all day!

Roger Montgomery
July 29, 2011 at 11:38 pm:

I cannot think of any flaws in your strategy other than the need to hand orders to someone else telepathically.
- Steveo PL
  August 2, 2011 at 5:16 pm:
  
  Ha ha, obviously not a shift worker. I’m trying to build up my portfolio so I don’t have to do night shift!
- Roger Montgomery
  August 4, 2011 at 10:33 pm:
  
  Stay tuned. This is the place to find willing assistants Steveo.

garry
July 28, 2011 at 7:00 pm:

Hi Roger,
I just wanted to mention a stock that seems to be ticking all the boxes, and to hear any comments from the table of knowledge you have here now at your blog..
The stock is Cambell bros CPL…It has 3 divisions in the business.
1.. Is an analytical testing services division which services the mining industry, environmental monitoring, food analysis and equipment maintanance. Research tells me that the global analytical testing business is to be worth $100b annually of which CPL has only a small peice. Management believe they have the potential to grow this division of there business significantly because of there business model and competeive advantage.
2.. A division manufacturing and distributing chemicals and cleaning products for commercial, industrial and retail.
3… A paper goods, tableware and kitchenware supplier to the hospitality industry.
The company has grown continually at a good clip, barring 2010, which underperformed, but seems to be back on track now. If you beleive that the mining environment we are in at present still has some legs, then this is very positive for the analytical division of the business.

EPS… have increased from 28cents in 2003, to $2.02 this year.
ROE… is currently 16%, but i would expect this to improve next year.
DEBT/EQUITY ..is currently 13.5% and has been reduced annually.
REVENUE..increased 2011 by 34%.
PROFIT MARGINS..up 25% on prior year

Although the stock appears to be expensive on my calculations, it looks like a stock the valuable graduates could find interesting. Am i missing something as i havent heard it mentioned here before.
thanks in advance .

Brian
July 29, 2011 at 5:09 pm:

Garry,

Trading at about double its intrinsic value. That explains why it hasn’t been mentioned here.

Matthew D
July 27, 2011 at 11:13 pm:

Any opinions on ORI?

Matthew D
July 27, 2011 at 11:57 pm:

OZL and PAN presenting interesting opportunities.

Ian
July 26, 2011 at 2:27 pm:

(excluding investment in property)
The original question is “If given $100,000 to invest in the stock market,would I spread my money equally across the portfolio or invest a larger percentage in the very best stocks that are trading at prices less than they’re worth”.

Many successful investors have said invest only in what you can understand. To that extent, if available at discount some diversification would make me sleep well. The ones below represent to my mind companies with very different risk exposures to external influences. Following are simple enough … in broadest possible terms of course! Taken as read that they have rational (or in some cases stellar) management and good historical performance.

ARP 15% build shiny bits and tops for cars, some discussion elsewhere if this is discretionary or not
CSL 15% take people’s blood and make useful stuff out of it
ONT 10% fix people’s teeth, again some discretionary
REH 10% plumbing…if people don’t build new they renovate
PMT 10% take peoples money and make more
FWD 10% grey nomads AND housing for mining?
REA/WTF/ 10% leaders in their online fields

20% prudent reserve for the opportunity to up the purchase of any of the above if Mr Market presents opportunity in short term.

Roger Montgomery
July 27, 2011 at 1:58 am:

Not bad at all Ian!
- Ian
  August 5, 2011 at 11:05 pm:
  
  5th August, red letter day. Time to put some of that 20% prudent reserve to use!

Ash Little
July 22, 2011 at 7:53 pm:

Hi Grads

I am a very happy factional owner of DTL.

I note they had a very large rise in SP today and the only thing I can see that would be the reason is an announcement that the chief DTL man has now been named as Chairman of inaugural Australian Rugby League Commission.

What this does to enhancing the DTL business has me scratching my head.

Mr Market being silly again I think.

BTW not selling anytime soon(certainly not buying)

ZORAN
July 25, 2011 at 12:16 pm:

HI ASH

It looks like someone new on friday, about mondays announcement???

Cheers
Zoran
- Matt
  July 26, 2011 at 7:07 pm:
  
  Another case of some investors being more equal than others ;)
- Ash Little
  July 27, 2011 at 7:47 pm:
  
  Hey Guys you may be right but these are really really good numbers.
  
  Much better than forecasts. As far as I can see only one guy was close
  
  Makes future valuations hard though………Can a 50 odd % ROE be maintained forever?????? no…….but will it slow anytime soon?……Not sure about that. Lots of blue sky with only 2% of the market
  
  not sure how to value them…………very difficult but happy to hold a really good business

Alex
July 22, 2011 at 9:20 am:

Roger, one of the things that is not often mentioned in asset allocation is this: If you can’t find something out there with enough margin of safety, then don’t buy anything. Stay 100% cash. (or in my case the equivalent is to pay off debt)

One of WarrenB great strengths and investment mantra’s was this. The benchmark for most investors (like me in particular) is the cost of debt. If you are going to hold a mortgage sitting at 7.5% for 10 years, then there is no point investing in stocks unless you can safely buy a business with an expected rate of return of at least 7.5% over the next 10 years. That is your benchmark right there.

And right now, in the current relative high interest rate climate, not too many companies come out with a deep enough margin of safety to get a consistent predictable rate of return of 7.5%.

And that is the problem with the stock market right now. People need to remember there benchmark needs to be the cost of servicing their current debt. (if they hold any)

I leant this the hard way last time debt cost were high..I just wish I had read WarrenB 20 years back..

Cheers

Alex

Alex
July 22, 2011 at 9:27 am:

Roger that is an ANNUAL Rate of return of 7.5%. There are not to may companies that you can safely predict will have an annual ROR of more than 7.5% year after year after year….

To many things can go wrong..government interference. the wrong CEO appointed etc etc

That is WarrenB genius. Somehow he can find these sort of companies that year after year give high predictable returns greater than the cost of what should be everyones benchmark (the cost of servicing their debts)
Roger Montgomery
July 22, 2011 at 8:21 pm:

I would add that most people have to pay a mortgage off in post-tax dollars so the pre-tax equivalent opportunity cost is even higher than 7.5%
Ash Little
July 22, 2011 at 8:56 pm:

Thanks Alex

Good Post

Ann
July 21, 2011 at 9:16 pm:

I watched this show, very informative thanks

Ray H
July 20, 2011 at 9:11 pm:

ANG 4%
ANZ 5%
AWE 1%
BHP 4%
CFU 5%
CSL 3%
CST 49%
FGE 6%
FWD 2%
MCE 7%
QBE 2%

Cash is low at 10% and I will be building that over reporting/dividend season. Also put my money where the future IV is regarding CST – a fantastic business and I’m very disappointed that it may be sold for a song next month. If that eventuates, cash will be plentiful if other opportunities present themselves.

Scott R
July 20, 2011 at 9:03 am:

Your did amazingly well to keep a straight face Roger with Silver Lake Resources – SLR. I wouldn’t be game to play poker against you. The cats out of the bag!

Phil Crossan
July 22, 2011 at 11:45 am:

Hi Scott,

Yes, they made a pretty good half yearly profit of about $6M, but their “Exploration evaluation and development expenditure” went up about $17M on their balance sheet, and is treated as an asset. It looks to me like a capitalised expense.

I picked this up when doing Roger’s simple operating cash profit method and is also apparent in SLR’s cash flow statement as well.

How we capitalise expenditure to create an asset would be a good discussion to have on this blog.

David V
July 19, 2011 at 6:25 pm:

Hi All,

We are 100% allocated into shares at the moment. The strategy is long term growth, so looking to be patient and ride the bumps.

Break down:

FGE: 22%
MCE: 24%
MIN: 10%
ORL: 12%
QBE: 4%
SWL: 10%
TRG: 9%
ZGL: 9%

Most of the protfolio is well under my IV for 2012, so either the market is chep at the moment or my valuations are well off the mark. Great performers have been FGE, MCE, SWL and ZGL; where as QBE and TRG have been detrimental to overall performance in the short run.

Roger Montgomery
July 20, 2011 at 12:16 am:

Thanks David for sharing your portfolio ideas and for taking the time to write.
domenic
July 20, 2011 at 4:47 pm:

have been following your suggestionsdoing very well thank you dom
Harley
July 20, 2011 at 5:28 pm:

David look at Slater and Gordon (SGH)

Rodger Brook
July 19, 2011 at 4:46 pm:

Does anyone know why Decmil has fallen like a rock? It seems like good value now. Does anyone have a valuation?

Craig B
July 20, 2011 at 3:03 am:

Not sure why the drop in price Rodger.

I value them at $3.80 for a RR of 12%.

Substantial value at present compared to that.
- Roger Montgomery
  July 27, 2011 at 2:01 am:
  
  A friend made the following observations:
  
  Their share price has been whacked because 2H11 and 1H12 will be soft relative to their cracking 1H11 result. However, I’d expect them to announce significant contract wins by the end of the Sept quarter which will mean their 2H12 will be as full as a state school. At current staffing level DCG has the capacity to do $500m revenue p.a. at 6% NPAT margin or better (i.e. $30m NPAT). They should have >$75m cash on balance sheet at June ’11 and may pay a divvy.
  
  So;
  Current MC =$310m
  Cash =$75m
  EV =$235m
  CY12 EBIT =$42m+
  EV / EBIT =5.6x
  
  NWH is on >8x EBIT (and I think that’s a little bit cheap).
Phil Crossan
July 22, 2011 at 12:26 pm:

Hi Rodger,

They’re possibly being hit harder than others due to not paying out any dividends.

They’ve invested fairly heavily in Property, plant and equipment this half, hopefully that will enjoy the same returns that their earlier investments have.

Definitely well worth a look when their full year results come out next month.
- Roger Montgomery
  July 22, 2011 at 8:23 pm:
  
  Thanks Phil
Nic Arena
July 22, 2011 at 3:04 pm:

I have a valuation of $3.31. Have factored in a slight payout rise in the next year or 2 to be on the conservative side.

I just think that these types of companies (with FGE and MCE) increased their SP so quickly that in a market correction/downturn lots of people take their profits. Should increase again when Mr Market is happy.
- Lloyd Taylor
  July 23, 2011 at 10:48 am:
  
  In the upcoming reporting season I think we need to keep a sharp eye on the considerable cost pressures in these service companies.
  
  Margins and ROE may be under pressure. I think there may be a few unpleasant surprises to come.
  
  I suggest that this may be what Mr Market is concerned about, rather than just a question of general unhappiness of Mr Market in the macro sense.
- Nic Arena
  July 23, 2011 at 5:52 pm:
  
  I’d agree Lloyd if it was just DCG, FGE and MCE dropping but everything has dropped the last few months. Many of these companies IV won’t have changed but the SP certainly has. I believe MR Market is depressed at the moment. I will be interested to see their annual reports but as a holder of DCG I am not worried … not just yet!!!
- Roger Montgomery
  July 24, 2011 at 12:55 pm:
  
  Hi Nic,
  
  My understanding is that mid tier mining contract work has slowed.
- Ash Little
  July 23, 2011 at 7:50 pm:
  
  I agree Lloyd
  
  If you look at the data coming through and make some best guesses about the future then cost preasures are more than very real.
  
  Thanks for this thought

Darren
July 18, 2011 at 1:55 pm:

G’day Roger,
Just wondering what other value investors think of News Corp (NWS) at the moment. Seems to be good value, but do you catch the falling knife? I guess buying on fear is sometime easier said than done.
Cheers.

Roger Montgomery
July 19, 2011 at 12:28 pm:

Rewards to the brave…The question is whether the business is worth more or less under scenario 1) break up, Scenario 2) fewer acquisitions for growth Scenario 3) closed down businesses. News of the world is closed. What was it earning, how much capital/equity did it command, what is the impact on revenue and earnings? Could more businesses close? Then you can determine whether it is cheap. If you believe they will survive this and get through it, then the only question is one of value…
- Nick Mason
  July 19, 2011 at 2:27 pm:
  
  Disagree with you Roger that should they survive then the only question is one of value.
  
  The brand in my opinion had been irrevocably damaged and I believe this to be just the beginning.
  
  Point 15 in Phil Fisher’s excellent book ‘Common Stocks and Uncommon Profits’ asks “Does the Company have a management of unquestionable integrity?….. regardless of how high the rating may be in all other matters, however, if there is a serious question of the lack of a strong management sense of trusteeship for stockholders, the investor should never seriously consider participating in such an enterprise.”
  
  I’d be reluctant to hold News Corp shares even if someone gave them to me.
- Roger Montgomery
  July 20, 2011 at 12:06 am:
  
  Hi Nick,
  
  Happy for you to disagree but I think we may be in agreement. British Parliament wants News to leave Britain or the Murdochs to leave News. Should the company survive – it will in some form – then the remaining question will be one of value.
- Nick Mason
  July 20, 2011 at 2:37 am:
  
  Hey Roger,
  
  For me the question of value is only relevant if the company is investment grade. News Corp is not investment grade (in my view) and so the question of value is of no importance. Perhaps you are happy to own non-investment grade businesses at the right price or perhaps you consider that News Corp is still investment grade, I do not.
- Roger Montgomery
  July 20, 2011 at 9:03 am:
  
  Perhaps surprisingly it is investment grade for us (but it’s no A1)
- MattB
  July 20, 2011 at 10:28 am:
  
  British Newspapers account for only a fraction of News Corps earnings. News Corp remains a powerhouse in the tv and the movie businesses. In my opinion these temporary losses in share holder confidence are just that, temporary.
  
  *I do not own News Corp.
- Mike Punch
  July 22, 2011 at 12:15 pm:
  
  John Templeton said
  “look for a stress of a novel kind, that if solved will not be a permanent impairment to a company’s regular profit”
  Cheers Punchy
- Tony
  July 25, 2011 at 10:45 am:
  
  I read a book last year called, “What They Teach You at Harvard Business School”. The author, who was a journalist, kept a diary during his tenure at Harvard while undertaking an MBA. He reported his take on the lecture that Warren Buffett gave to the class: “When the CEO sleeps with a goat, buy the company”. I think Rupert might be thinking, “Boy, you sleep with one lousy goat…”
- Simon Anthony
  July 19, 2011 at 9:24 pm:
  
  Perhaps what happens in the U.S is the real deal breaker, if the FBI or Justice Dept. turns up anything of substance than the current share price could fall another 18% quite easily. I can’t see News Corp moving on in U.K under its current model. However Rupert’s Newspaper’s aren’t the huge revenue generators many people think they are in fact they contribute <25% of NewsCorp total earnings. What really remains to be seen is whether a NewsCorp board (minus a Murdoch or two!) will ever get its hands on BSB which has an outstanding ROE for a media business I believe they will and therefore I would rate NWS as a speculative BUY, post the FBI findings not finding anything substantial. I would upgrade to BUY.
- Roger Montgomery
  July 20, 2011 at 12:20 am:
  
  Thanks Simon. Appreciate your thoughts. Thanks for taking the time to express them for us.
Andrew
July 19, 2011 at 1:25 pm:

I was thinking about this the other day. It made me think of Warren Buffet and his purchase of American Express was it? They were part of a big scandal which hammered their share price but Warren obserbed that people were still using their cards bought into them and made a bucketload.

it does kind of seem like a perfect storm for a value investor, i percieve it as a short term scandal acting as a catalyst for a big sell down where overall very little of the business has actually changed.

I think Roger has provided some great thoughts to consider. If News comes out unscathed and this whole thing has resulted in little difference long term than it is a great opportunity.
- Steve
  July 20, 2011 at 10:39 pm:
  
  A great opportunity Andrew? I’m not so sure about that. I believe even with the current sell-down it may be more expensive than it is worth. I have a vague recollection that Roger’s IV is quite a bit lower than the current price. Could be wrong though

gjk
July 17, 2011 at 8:29 pm:

Hi Roger,

What do you think of Tassal Group (ASX:TGR)?

Greig

Andrew
July 19, 2011 at 1:00 pm:

Salmon farming and manufacturing isn’t something i am personally interested in. I am yet to see someone go into woolworths and demand for a Tassal branded salmon to cook. Instead they seem to be more like me and just get the woolworths select range. I think it has been discussed on here a long time ago where i said similar thoughts and got into the financials a bit more so you may find it through the goolge tip everyone puts forward.

I just don’t see any competitive advantage in that space, no idea on the financials now.
Craig B
July 19, 2011 at 6:45 pm:

I had a look at Tassal, with mixed feelings.

Mostly average returns, consistently between 8 and 14% since 2005, except for a better result of 19% in 2007. Maybe the GFC hit em hard?

Interesting blend of statistics:

– no revenue growth.
– generally flat returns. no real improvement over the last 6 years.
– a couple of capital raisings and low payout ratio.
BUT
– substantially improved margins.

Does that mean its their sales and marketing that’s letting them down?
- Roger Montgomery
  July 20, 2011 at 12:19 am:
  
  Perhaps the sales team is making the best they can of a supermarket duopoly…

Brad
July 17, 2011 at 9:49 am:

Thanks Roger, will do.

FYI, our returns for the year were c.20%- about double the benchmark. We’re pretty happy with the result although we were up > 40% in April!

Major drivers for the result were SWL, MCE, MMS and FGE which doubled and DTL, ORL CCV, and CCP which were up c.25%.

Stocks bought and sold include JBH (break-even) and SFH (loss). SFH was a mistake. We thought the existing business would remain steady and growth would come from the rollout of the lingerie business.

On our model, most stocks in the portfolios are significantly undervalued including VOC, ZGL and stocks mentioned above.

Further, running portfolios of fractional ownership interests in businesses with strong competitive advantages, run by able and honest managers, with high return on equity utilizing little or no debt and trading at bargain prices allows me to get on a plane, chill out with the family for a week and sleep and night – now thats value.able !

Roger Montgomery
July 19, 2011 at 11:57 am:

You’re welcome and I delighted to hear it Brad. Enjoy!

Brad
July 16, 2011 at 8:59 pm:

Of course Roger, the reality is investing is more akin to the “Fairstar Principle” which goes something like you’re on a cruise ship and in the casino: you bet say, red and keep doubling your bet until the wheel comes up black – or you run out of money. (hopefully towards the end of the cruise!)

All my portfolios are fully invested – I’m off to Bali until reporting season kicks off …….

Roger Montgomery
July 16, 2011 at 11:54 pm:

Enjoy your bonus!

Geoff Cruickshank
July 16, 2011 at 12:46 pm:

Interesting exercise. Our portfolio looks something like this.
Business 39%
Business premises 24%
Cash 15%
Shares 22% (9 companies roughly equal amounts with 2 woofers yet to be cleansed)

Some of this is within SMSF, so the interesting part was aggregating it and seeing what it looked like overall. Could take it a step further and add in a house and some farmland, but you have to live somewhere.

Roger Montgomery
July 16, 2011 at 11:46 pm:

Thanks Geoff.
Ian Bowditch
July 17, 2011 at 12:46 pm:

Geoff and Roger bloggers
Interesting as my allocations are property and businesses 50% Shares 33.5% and cash16.5%.
The shares are held in individual and share portfolios and are AGK 4% BHP 8% CBA 29% ANZ3% FGE 8% JBH 8% MCE 9% MIN 1% ORL 5% PTM 2% QBE 18% WOW 5%
AGK and BHP are held in individual Name and will not be sold until the capital gains can be offset.

Regards Ian B
- Roger Montgomery
  July 19, 2011 at 12:02 pm:
  
  Good to hear from you Ian. I hope you are well and thanks for contributing.

Matthew D
July 15, 2011 at 1:55 pm:

My valuation for FMG keeps coming back $0. What the?

Chris
July 17, 2011 at 1:27 pm:

What are your inputs?
Greg Mc
July 17, 2011 at 6:09 pm:

Some inputs might be useful here, Matthew…

Adam W
July 15, 2011 at 1:09 pm:

Hi Roger
Before reading value.able my share portfolio was predominately ARG, AFI and MLT as I was not confident that I could outperform these LICs over the longer term. As I have become more confident in implementing the value.able techniques I have added smaller parcels of MCE, FGE, WOW and JBH when the price has dropped well below my estimation of IV.
It will be interesting to look back in 3-5 yrs and see if the parcels of MCE, FGE, WOW and JBH have outperformed the LICs.
Best regards
Adam

Roger Montgomery
July 16, 2011 at 11:29 pm:

Indeed Adam. Many are indexes so you just have to build and refine your own index.

Andrew
July 15, 2011 at 11:08 am:

Thinking about this topic a bit more, i think i have come up with my construction strategy strategy.

-Only use money which i can afford to invest. Any money that is needed for my own capital expenditure needs is off limits. i.e if i have a surplus of more cash than i will need for a while than i can go in and invest it otherwise i keep it as cash. I work this out by thinking, if i invest with this money and i don’t sell this or any other company in 5 years, will i still be able to meet my financial needs?

-Limit my investing activities to those companys which fulfill my own quality benchmarks. Ignore the rest regardless of sentiment, price, perceived value, industry or anything else. This step includes my rule of not investing in miners, airlines, car manufacturers, pyramid schemes, dervitives/futures, short selling and Bernie Madoff.

-Do not worry particularly about being exposed to much in a specific industry as this is a very general group to put companys in and as i am solely focused on value it does not make sense to ignore a really quality company at a very attractive price because you already own another quality company in that industry which were bought at an extremeley attractive price.

-Strictly adhere to the concept of Margin Of Safety.

-Sell only if the quality has changed, price offered is an offer i cannot refuse.

-If a truly large amount of surplus cash exists and a speculative* investment opportunity exists than that is fine but can only use 5% of available funds for that investment and have to follow my strict rules.

*Firstly i know some will see the words speculative and investment next to each other and will want to start chasing me around with holy water, a preist and a rabbi exorcist style but please hear me out.

When i say speculative investment i mean investing in a company which has met my quality criteria and trading at a discount but for one reason or another still has an element of speculation in it. For example, investing in a small-cap (i have found a couple which are interesting but want to see future results befor i realyl judge them) A1 company which is trading at a significant discount to IV but has extremley low to no liquidity and there for the price will not necessarily rise unless something happens to get people interested in it like it growing to become part of an index etc. So i am still value investing but i am acknowledging that there is an element of speculation as i need to see a catalyst for the demand for shares to rise and there for taking the price up to the IV calculated.

My thoughts are that the market all about supply and demand generally and we can buy a really small company that is quality and trading at a big MOS, price will link up to value in the long term but it still needs an element of liquidity to help it get there.

If i buy a company at 50%MOS but after my purchase no-one wants to buy or sell for 5-10years than the price will not be going anywhere. I will still own a quality company but until the market does take notice than i need to feel comfortable to play the patient and waiting game. If the company stays quality and grows than eventually something will happen but it could take an extremley long time.

I hope i haven’t confused anyone there.

Basically, i want to be as i said earlier, over-sxposed to quality companys which were bout at a large MOS and does not adversley impact on my financial state.

Roger Montgomery
July 16, 2011 at 11:24 pm:

Thanks for taking the time Andrew. Sincerely.
Phil Crossan
July 17, 2011 at 1:31 pm:

It’s theoretically possible for the price of a share to rise without a single trade being executed. The buyers place higher bids whilst the lowest offers get withdrawn. IDE of which I own a few may behave like that. (Of course the price can go down exactly the same way, and if bad news is released, there may not be not a single buy order).
- Roger Montgomery
  July 19, 2011 at 12:06 pm:
  
  the gain or loss is however unrealised.

Frank
July 15, 2011 at 11:01 am:

I have two portfolios that I keep. A selection of stocks from Valueable methods and a Westpac bluechip 20 portfolio running as an SMA. They are currently approx 65 % self select and 35% bluechip 20.

My basis for this is to be more growth oriented with my self selection. I believe in the Australian economy in the long term and my regular gearing bluechip 20 fund provides ensures that I am in for the long term. Further, I am convinced after reading John Bogles book that index funds can be a good way of investing!

Hope my strategy works! Only time will tell….

Roger Montgomery
July 16, 2011 at 11:16 pm:

Do keep us all up to date and you can join Scott with your own blog post!

Steve
July 15, 2011 at 10:24 am:

Hi Roger,

Would it be possible to get some more lists and IV’s up while we are waiting for the A1 service? Especially now that the market is falling. If you can find the time.

Thanks in advance

Roger Montgomery
July 16, 2011 at 11:12 pm:

On the way Steve. This week I expect.

Adam
July 15, 2011 at 8:28 am:

HI Guys,

If you haven’t had a look its worth viewing WB MBA talk (part 8) on you tube where he talks about different diversification strategies for different investment styles. In this clip Buffet believes in only having 6 stocks if you invest seriously, with about half in the stock you like the most.

I wouldn’t say that I have a set strategy. I only invest in sectors that i full understand and I stick to Rogers principals regarding ROE, debt, etc….Basically i go looking for cash pumps that require little capital expenditure, strong CA, with bright prospects in sectors that I understand. This dictates the way I distribute my capital.

The biggest risk to a investor is not in the amount of stocks you own but not to full understand the businesses you invest in! I would rahter have all my capital in two businesses I have spent hours and hours researching than ten I haven’t got a clue about. At the moment I have most of my capital in cash, but I do like the mining services and IT based businesses and I own a couple of stocks in each.

My advise for what it is worth, stick to A1 businesses in sectors that you understand and you will do very well.

All the best….Adam.

Andrew
July 18, 2011 at 10:29 am:

Very true Adam, understanding the business is my biggest filtering point. Even if the price is very attractive i wouldn’t invest until i have understood what it is they do and how, what their future prospects are like. I don’t care how attractive, popular, trendy or growing a gold company is. I will never invest in it as i being a metrosexual guy from sydney who works at a desk, can only put together IKEA furniture and only sees gold when watching New Jersy based reality TV shows with his fiance, I have no idea as to how they are performing, how efficiently they are operating, where the gold price is heading, how much gold is left in the ground, how much gold will people want in the future.

I can however with great confidence come to an opinion on the demand for JB Hi-Fi products, upcoming fashion retailing related trends and how much food people will want to eat and which products they ar emore likely to buy and where they will keep their money when they aren’t spending it. There for i will stick to these companys and let the gold bugs put their prospecting helmets on and go digging.

Sticking to what you know is such a simple but powerful and profitable rule to have. Not saying that you ignore everything else, learn about other industrys, humans need to keep learning, but only invest in them when you reaslly understand them.
Nick Mason
July 18, 2011 at 2:23 pm:

I watched this talk a couple of years ago and it had a big influence on me.

Warren says that there are plenty of people who have gotten rich of their best idea and significantly less who have gotten rich of their 7th best idea (re. diversification.) Although he would only recommend this type of concentrated portfolio for people who are really going to bring a lot of energy and hard work to the game.

Fantastic talk and I’d recommend it to everyone.
Brad J
July 18, 2011 at 5:14 pm:

Hi Adam,

I believe this is the best advice an investor can get and have listened to WB MBA talk numerous times. You must understand the companies though as you pointed out. If you listen to this advice, no more really has to be said on portfolio construction in my opinion.

Rod
July 15, 2011 at 6:20 am:

It’s not so much my strategy, but my pre- and post-Value.able strategy. Pre, I owned various shares at various times, without a lot of principle behind it. I ended up with an almost exclusively blue-chip portfolio once I started getting advice. Still chuffed however by once making money on BPT! I’m not greatly concerned about distribution within the portfolio, but sometimes worry that BHP has been 25% plus for many years. I’ve been slowly working to change this imbalance a bit. I was also very heavy on banks pre-GFC – the ONLY way to make money out of a bank! I had also dimly glimpsed the idea that the market itself was an over-emotional fool, but needed Roger’s book to articulate this for me. I don’t think I’ve ever had more than 12 stocks, and my cash is usually low since I’m inclined not to leave it in the bank if something else looks better. This is sometimes embarrassing, and I’m aiming in future to increase the cash-in-hand somewhat as opportunities arise.

I won’t confess to all my indiscretions, but on reading Value.able, out went TPI(ouch! blush!) and AMP. After all how could a company full of supposed financial experts not make a decent profit and then propose to join another company whose record was hardly better? TLS had already gone. In came some familiars to this blog so that now I have ACR BHP CBA CSL FMG IDL MCE NAB ORL PYC WBC and WOW. I’ve done best over the years on BHP CBA IDL and WOW. And yes, I know PYC is an aberration.

Now I feel I understand the market and strategies so much better despite being strictly an amateur. I now have a personal watchlist (about 70) and feel I can ignore all the stuff out there about stocks which are not on it unless they become potential additions. I will never own more than a fraction of this list, but it gives me a sense of direction and purpose I have not had before.

Roger Montgomery
July 16, 2011 at 11:01 pm:

Fantastically encouraging Rod. Thank you for contributing.

Peter M (Mully)
July 15, 2011 at 1:41 am:

With regards to the number of stocks one should hold in a portfolio, I’ve tended to adopt an appoach which Brian suggests be used as as a guide.

He suggests that the maximum number of stocks to be held in a portfolio is the lesser of 15 or the square root (to the nearest whole number) of the collective market prices of the portfolio divided by 1,000.

So a portfolio priced between $7,000 and $12,000 would contain 3 stocks: 3 x 3 = 9 x 1,000 = $9,000.

A $100,000 portfolio might contain 10 stocks: $100,000/1,000 = 100 of which the square root = 10.

The maximum of 15 stocks is reached at 15 x 15 = 225 x 1,000 =$225,000.

On average, my portfolio comprises around 11 stocks at any one time with little regard to sector weightings.

I’m quite happy to maintain a concentrated portfolio in one or two sectors as long as I’m comfortable with those sectors and the quality and financial performance of the businesses in which I’ve invested.

An old habit of mine to take a decent profit and leave something in it for the next guy, has served me well over the years but means that my portfolio can, on occasions, be quite active for a value investor.

That said, I’m refining my selling strategy along the lines outlined in Value-able but old habits die hard. After all, I’m yet to meet someone who went broke taking a profits :)

Roger Montgomery
July 16, 2011 at 11:07 pm:

Traders go broke taking profits by making the common mistake of letting a few losses run and cutting their many small profits short. Thanks for taking the the time to contribute Peter.
- Peter M (Mully)
  July 17, 2011 at 3:39 pm:
  
  Point noted but a trader (which I’m not) who takes small profits, doesn’t apply tight stops to their portfolio and let’s a few losses run deserves what they get in that scenario.
- Roger Montgomery
  July 19, 2011 at 12:22 pm:
  
  no disagreement from me on that one…

John R
July 14, 2011 at 5:17 pm:

Hi Roger,
It certainly is an interesting subject. I am surprised by how many people seem to have what I would regard as adventurous portfolios with a small number of small caps. Maybe this is because these are largely trading type portfolios.
The main portfolio I have is our self managed super fund where we have a strategic asset allocation between growth (shares) and non growth (cash,fixed interest) assets set and managed to manage risk.
Growth assets include over 50 shares with a mix of large and small caps. I believe for a super fund it is necessary to manage exposure to individual shares by wide diversification . It is also important to have mainly shares providing consistent dividends preferably fully franked (we live on these!).
regards John R

Roger Montgomery
July 14, 2011 at 10:02 pm:

Really appreciate your contribution John. Thank you.
Adam
July 15, 2011 at 3:38 pm:

Small-cap does not necessarily mean higher risk, indeed sometimes it may be quite the opposite. Higher volatility yes, but volatility is not the same as risk.

Also, if you own over 50 shares, you’re portfolio is basically going to match the market index forever, therefore you may as well just have an index fund or listed investment company where there is only admin required for 1 investment.

(Just my opinion, seek and take professional advice!)
- Roger Montgomery
  July 16, 2011 at 11:30 pm:
  
  Agree entirely.
- John R
  July 17, 2011 at 12:55 pm:
  
  Interesting views – however I don’t agree. I have tilted the portfolio towards well priced companies (per my valuation model) that pay good franked dividends (my running yield is therefore very substantially above that for an ETF like STW for example. I do buy some LIC’s but only where they show they can outperform the relevant index and I can buy in at a reasonable discount to NTA.

Matthew D
July 14, 2011 at 4:50 pm:

Just looked at AUN. Not surprised Foxtel swooped.

Roger Montgomery
July 14, 2011 at 10:01 pm:

Fascinating isn’t it? How did you treat the negative equity?
- Matthew D
  July 15, 2011 at 2:00 pm:
  
  Well I had no clue. I couldn’t even figure out how that happened haha! They owe 19c a share?
- Andrew
  July 18, 2011 at 10:32 am:
  
  More liabilities than assets= negative equity. No idea how to treat it but i can see from a strategic point of view the benefit for Foxtel (who i would think would be a very profitable company).

Calvin
July 14, 2011 at 3:24 pm:

I thought that was an interesting show as Portfolio balance was something I never thought of when I first purchased shares pre-valuable.
My first purchases (speculaters) were advised to me by a friend and consisted of MQC, NAB and WDC.
Of these MQG had 45% of the portfolio but by pure luck these were purchased at the bottom of the GFC and before long MQG had gone from my $16.99 to $58.00.
When I look at my graph my portfolio mirrored MQG being mostly geared to them and of course as I watched MQG tumble so did my portfolio but once I read valuable I took what profits I had left and now have a more balanced portfolio with better quality companies.

Roger Montgomery
July 14, 2011 at 10:00 pm:

Thanks for contributing Calvin and for adding to the body of knowledge and experience.

Kent Bermingham
July 14, 2011 at 10:19 am:

Patience, do your homework, ROE on the rise, Low Debt, Low Capital Intensive Businesses, Great Management, Buy at a huge discount for growth companies ( eg FGE, MCE,FMG,,BHP,ORL )and a more moderate one for mature companies with good discounts and great yields ANZ,ARB,CBA WBC)..
Once you have committed turn Mr Market off and wait till the businesses reach their IV’s and check each financial update to ensure that they are still on track.
I have a mixture of both and have 12 businesses that I own including the ones mentioned above.
As I am retired I am weighted heavier in the banks and have enough cash set aside 25% to take care of not having to have any capital drawdowns in the future and at the same time giving me flexibility to take up further opportunities.
As we are all investing for different reasons our strategies will be different, but mine is to make money and good luck to all.

Roger Montgomery
July 14, 2011 at 9:43 pm:

Thanks for sharing that Kent. Appreciate your contribution. We are watching ARB because we think its a great company and the carbon tax will increase their input (steel) costs which could trigger short term negative swing in sentiment.
- Ray H
  July 15, 2011 at 11:08 am:
  
  Interesting thought Roger – I have also been watching ARP for some time, hoping for a good offer price at which to enter (so far without success I should add). I’m not sure that steel input prices will be the catalyst though. The projections that I have seen are for steel prices to rise by 3% to 8% under the carbon tax. I’m not sure that sentiment will be overly affected by such a small rise in input costs.
  
  Of more significance I believe is consumer sentiment. ARB’s products are without doubt discretionary in nature, so have the potential for lower demand if consumer confidence continues to deteriorate (likely in my view if house prices continue to decline). This may provide the hit to sentiment for the company (temporary viewed as permanent) which provides us the opportunity we seek.
- Roger Montgomery
  July 16, 2011 at 11:22 pm:
  
  Hi Ray,
  
  I don’t disagree with you on the second point. On the first it’s not the 3-8% that is the issue (although concluding an 8% increase on an input that is, for example, more than 50% of the total, is small, might be optimistic. I fear steel companies may use the carbon tax to seek a higher or quicker recoupement of recent low prices.
- Matthew R
  July 17, 2011 at 10:16 am:
  
  Protecting a $50k plus vehicle with a $1k bull bar is not really discretionary in my book… And if you look at who is buying the vehicles, it isn’t a discretionary expense for many of them either (baby boomers, 4wd enthusiasts, farmers and mining companies)
  
  The toorak tractor buyers are what i would call the discretionary end of the market & they don’t buy many ARB products! (the occasional Jeep excepted)
  
  Just my opinion
- Lloyd
  July 18, 2011 at 5:57 pm:
  
  How much of ARB’s product line is sourced offshore and thus immune from Carbon Tax impact?
- Brad J
  July 15, 2011 at 8:07 pm:
  
  This is one I am watching too Roger. Always wanted to own ARB as it has extremely consistent earnings growth. Would need to be around $6 though to give me a decent MOS.
Ken D
July 19, 2011 at 10:33 pm:

Hi Kent,

I like your philosopy and can identify with it! However I am interested as to why you classify ARB Corp a mature company. To me ARB Corp is still very much in a growth phase driven by increasing sales. Their latest market update states: “ARB is continuing to invest in long term growth initiatives, including new products and production and distribution capacity”. They have decided to establish a second plant in Thailand to meet demand for manufactured product and continue to report strong sales growth. Granted they may be reaching their quota of retail outlets in Australia although they note that there are still a number of locations around Australia where their product is ‘under represented’. Certainly they have grown to be the largest bullbar manufacturer in the world but they continue to add to their product range and build on their brand (rather brands). They are certainly no Sirtex Medical, for example, with 1% global market penetration but they continue to benefit from the growth in 4wd sales and the production of new models. ANZ too is exploiting avenues for growth by expanding into the Asian market. From my way of thinking there are a few ultra-high quality growth companies like ARB, COH, CSL which are difficult to pick up at discounts to IV, let alone large ones, so one might settle for a more moderate margin of safety in such cases. I think we probably see things the same way, perhaps just with different interpretations of the term ‘maturity’ (some people even think I’m mature but I go by the adage that you can only be young once, but you can be immature forever!!). All the best to you Kent. Ken D.
- Ken D
  July 19, 2011 at 10:39 pm:
  
  When I think about it – “young once but immature forever” could be a good trait to look for in a company!

Mark
July 14, 2011 at 9:18 am:

My portfolio is set up as follows:

FGE 40 %
MCE 40 %
VOC 10%
Cash 10%

I am happy with the weighting and not concerned with any downturn as I bought FGE at 2 and 3 dollars and MCE at 4 and 5 dollars.

Roger Montgomery
July 14, 2011 at 9:41 pm:

Thats concentrated Mark!
- Mark
  July 14, 2011 at 10:34 pm:
  
  It is very concentrated but at the time it was all i really liked and I do have two properties fully paid off so I have at least spread the risks through asset classes somewhat!
  
  I am considering buying CCP and MTU at the moment but I want to wait til after FGE and MCE report in August.
  
  Additionally for the MCE holdings I haven’t held them for a year yet. I think the year is up in the next few weeks some time so that is also a consideration.
- Roger Montgomery
  July 15, 2011 at 12:14 am:
  
  thanks Mark, on behalf of everyone here at the blog, for the clarification.
- Brad J
  July 18, 2011 at 5:36 pm:
  
  Hi Mark and Roger,
  
  RE – MCE (HOW WILL THEY REPORT)
  
  MCE is now trading at a large MOS. It is a good buy if you believe they have enough orders going forward, which seems to be the concern the market has at the moment. Considering they have orders of 18 to 20 million per month to the end of December and considering they are still quoting on over $400 million of work and have consistently won 35-40% of business they quote on, the prospects look extremely bright. They are also streets ahead technically from their nearest competitor and really operate in a duopoly, so these percentages could be on the conservative side. I expect from extensive research that MCE will report on the upside and will also provide confidence with orders going forward. Also with orders that they have on hand currently and assuming they win the % of work they normally do, they are likely to also surprise the market on the upside next year as well as this year. This is assuming no upside from new products. Watch this space as it is going to be a very interesting reporting season. I own MCE and have recently added to my position. These are my opinions, so please do your own research.

Matty
July 14, 2011 at 5:22 am:

Hi All,

I have in the past been a bit of what you may call a speculator and haphazard investor with a “value” bent, without really knowing how to properly evaluate and value a company (Yes I almost used that P/E word). I would tend to go for out of favour companies/sectors and sometimes fall into the value trap. Now I have been trying to trim my portfolio to something more concentrated (I have now 23 companies and trying to get under 20)

Lucky enough to buy CBA 20 years ago (without greedy conviction) as my first stock and have had a weak spot for the banks since, particularly during the GFC. Didn’t really have faith in the debt-loaded consumer and have only recently added retail stocks after knowing what to look for in businesses with thanks to the Value.a.bible. So gradually starting to diversify more.

Being an engineer I also liked the energy scene and felt somewhat comfortable with the future thematic of the sector.

On a sector basis I have following exposure

Financials 48%
Energy 17%
Information Technology 10%
Materials 8%
Health Care 6%
Consumer (Dis/Stap) 5%
Industrials 3%
Telecoms 1%

Top 7 make up 60% of the portfolio ANZ, CCP, WPL, QBE, BHP, MCE, FGE

Also have Contango in there as a small cap LIC to keep me from being tempted from investing in any small cap materials hopefuls. (Also FGE and DCG in this LIC and currently trading at under NTA) Leave it to the experts and hopefully they perform, while preventing me from getting out of my depth again.

Re: recent market action…
COH under $70 seemed like a nice little diversifying morsel and looking forward to Mr Market sales to offer more Health care/consumer/Telcom sector diversification.

Cash allocation is now scraping the bottom of the barrel. Went into the GFC with 40% cash and now waiting for some market recovery to lift this again. Not too confident in the outlook with all the clouds on the horizon, but as they say there is no free lunch. Now more than luck in the foundation with the little silver tomb. Thanks Roger.

Matt

Matty
July 14, 2011 at 5:34 am:

Sorry Roger that should be tome. It is early in the morning!
Roger Montgomery
July 14, 2011 at 9:37 pm:

Nice approach choosing Contango to take away the need to research the small end. Very efficient. Good rationale.

Chris
July 14, 2011 at 12:51 am:

My strategy has changed (I’d like to say evolved) over time.

Back in the early 90’s I bought shares in a company called Ramtron on the basis that a friend I greatly respected recommended it (and it was high tech). That didn’t end well :)

In the mid-90’s whilst studying at Uni and broke I spent several years running multiple pretend portfolios each using a different strategies including ‘finger in the air’, random, ‘technical analysis’ (what a lot of superstitious mumbo-jumbo that is!) and stocks picked from ‘Top Stocks’ by Martin Roth. The Tops Stocks and ‘finger in the air’ portfolios did best, so when I finally had some disposable cash (1999) I chose 3 stocks I liked from Top Stocks and invested a third in each, call the allocation size ‘Y ‘for future use – it seemed ‘better’ to be ‘scientific’ about it, though in hind-sight the magic finger may well have worked as well :) – shares bought AGL, Leighton and Austrim. Well, two out of those three have done OK (up 92% and 175%) but Austrim -> Austrim-Nylex -> Nylex went broke, unfortunately after I sent more good money after bad …

in 2004 when I had some more spare cash I bought some AV Jenning shares (still based on Top Stocks, though by this time I’d been reading a lot about Buffett and was starting to try to think that way), I sort of doubled up here and bought twice as large a parcel, ie 2Y, as I had in my first round of purchases (ie to reduce the impact of transaction costs). I also bought some Hardman Resources (0.25Y) as a ‘finger in tthe air’ speculative, energy punt.

In 2005 I bought another 2.5Y AVJ, 2Y SDI (also in Top Stocks and I figured dental aesthetics would be a growing industry), and (oh dear …) 4.5 Y Timbercorp. OK, it was in Top Stocks and it’s demise is ‘allegedly’ due to shonkiness, but I should have known better on three counts – if something seems too good to be true, it probably is; I’m a Geographer and should have remembered that no-one makes money from agro-forestry; and, forgetting dear old Warren, I bought something when I clearly knew I didn’t understand their business model (I rationalised it away). I also bought another ‘Top Stock’ Pacific Hydro (1.5Y), but it got compulsorily acquired shortly afterwards, which was a great pity as it was a lovely little company.

2006 saw me top up on Hardman (another 2Y shares) in expectation that it would be acquired, which it duly was in

2007 giving me over 18% per annum return over the two and a bit years I held it, PLUS 1.4Y shares in the acquirer, Tullow Oil (listed in England) which has averaged 14.& % growth over the last 3 years and is up 250%. I then stupidly bought another 5.5Y Timbercorp… Since my employment was providing me with plenty of spare cash by this stage I finally bought a company I’d been admiring for years, Westfield, at what I thought was a good price (and was …. based on the previous years IV, not that I was able to calculate IV at that point) anyway, 11Y shares, which promptly dropped in price as the effects of their restructuring took place. Not that this worried me … cheaper steak = eat more steak, right? With the spare cash form the Hardman acquisition I bought 1.4Y Zinifex (ie same theme, speculative punt in a resource company with a small portion of my capital).

Sadly, I inherited some shares from my grandfather at the end of 2007. I kept these rather than liquidating them for two reasons: sentimentality and respect for his insights.

2008 saw the inherited shares, as well as Australian shares, plummet, so I bought some more (3.8Y) Nylex … hmmm (obviously cheaper is not always better! although it was shining on my evaluation measures at the time), and another 3Y Zinifex. Unfortunately, Zinifex and Oxiana merged shortly afterwards … to everyone’s great loss, except probably the directors.

2009 I bought a final 1Y of Timbercorp, and snapped up another delicious 10Y of the even cheaper Westfield, which then dropped some more … hmmm.

2010 my last purchase was a super cheap 1.8 Y of SDI at the end of last year.

Basically, I’ve tried to invest increasingly larger amounts to make the transaction costs have as small an effect on return as possible.

I’ve gradually shifted from a value perspective based on Martin Roth’s ‘Top Stocks’ to my own interpretation of Buffett’s basic rules (based o the guidelines in ‘Buffettology’), and now added on trying to estimate IV as per our dear mentor.

(I’d like to add another measure for how owner-centric the company is, I’m thinking of some ratio of director’s packages, especially options, to profit – I’d appreciate thoughts on this.)

I’ve also done a couple of non-value investory things in my strategy – speculating on resource/energy shares (I figure we aren’t going to need less of these things anytime soon) and using Dividend Reinvestment schemes to buy more of the companies i;ve seen fit to buy into – I know the arguments about allocating the money more efficiently – but for these small amounts I think the savings on transaction costs make it worthwhile.

Changing topics slightly, from Portfolio Strategy to Business Law Reform – I’ve had 5 of my buys acquired and/or merged at some point (Austrim -> Austrim-Nylex -> Nylex, AGL -> AGL + Alinta -> ‘New AGL’, Pacific Hydro, Hardman Resources and Zinifex -> Zinifex+Oxiana->OZ Minerals only one of those was a good deal for me (Hardman) the rest (And I should include Westfield, though the big merger occurred before I bought, there was a recent ‘de-merger’ of assets; who knows how that will go…) DESTROYED value!

SO… when ‘elected’ Supreme Ruler will be changing the rules and:
* getting rid of compulsory acquisitions of shares (that’s just making life easier for the acquirer);
* reintroducing Capital Punishment for those directors who vote for an acquisition or merger that then goes, as most of them do, badly for the small investors. I think Hanging, Drawing and Quartering is only appropriate in such circumstances, and should encourage better behaviour on the part of the others…
* getting rid of the various ‘incentive packages’ for directors that fudge what they are really paid. I think an adequate incentive is ‘you work, you get paid; you do a crap job; you get fired/don’t get renewed’. Seems to work for 90% of the work force, I can’t see why Directors etc are any different :) (Notice I’m NOT saying don’t pay well).

Roger Montgomery
July 14, 2011 at 9:31 pm:

Lovely Chris!

To take your theme further: Putting more money into bad companies because it lowers relative transaction costs…hmmmmm. Keep an eye out for Westfield’s Quality Ratings – coming soon!
- Chris
  July 14, 2011 at 11:48 pm:
  
  Ah Roger, good point, and one of the few crimes I haven’t committed – all my additional investment in bad companies has been done in the sincere misbelief that they were good companies about to come good :)
  
  I’d say this largely comes about (came about, I hope) because of overreliance on past history rather than any ability to produce any sort of future valuation – now I can at least make some sort of stab at a future valuation (Thanks!)
  
  As an example of this take Westfield. Westfield Holdings was one of the stars of the ASX. I have no real idea what inspired them to staple the American business on to it, producing WDC, but I believe that was responsible for a lot of the subsequent decline. Even so, when I invested in WDC in 2007 it had had 21, 23 and 26 % ROE the previous 3 years and scored well on a lot of other historical measures. Anyway, I’m still optimistic about WDC …
Chris B
September 1, 2011 at 5:20 am:

My rule about transaction costs is that they should be less than 1%, buy and sell. So I won’t spend less than $5k in a transaction. And thats the only rule you should have about transaction costs. No more than that.
It seems you have spent some time on shares but I think you are spending the time in the wrong areas. You should analyse companies and business sectors and go from there.
Its worked for me. I’ve read about 20 value investing books and studied some industries. I’ve spent years studying the sharemarket and I have so much more to learn. I’ve made 1 really good investment and some I’ve lost a little on and some doing good, some doing just ok.
Some of those companies you mentioned, many value investors wouldn’t touch and it is an easy decision.

Simon Anthony
July 13, 2011 at 8:21 pm:

Happy New Year !

My portfolio works on the basis of keeping a 60/40 – 40/60 ratio of cash to stocks, depending of whether the market is expensive or not. The cash is placed in 90 term deposits and at the end of each term I rebalanced my portfolio accordingly, rolling over the cash into another 90 day term. This approach prevents me from spure-of-the-moment buying/selling of stocks! I have my largest % holdings in BHP with 8% and my smallest at 3% in CMC.

My stocks are currentely BHP, CBA, CMC, CDA, DCG, DWS, FGE, LYC, MCE, MIN, MNF, ORL, QBE, VOC, WOW.

Also whenever possible dividends are always paid out, never reinvested by way of DRP. My return on this portfolio last year was a respectable 22.14%

Roger Montgomery
July 14, 2011 at 7:56 pm:

Excellent return Simon and well done.

Ray
July 13, 2011 at 7:34 pm:

Hi Roger et al

When one constructs their portfolio there are a number of individual circumstance that come into play that can have an impact on the companies purchased, their weighting and the rational behind the purchase. Looking at the many contributions to the various blogs over the last 9 months or so the individual circumstances of the many bloogers would vary dramatically from those that are looking for the high growth story to high dividend outcomes, younger investors just starting out to those with SMSF in accumulation or pension phase. It would be interesting to have an idea of the profile of the respective graduates. Like a number of previous contributors I am quite happy to own a couple of mature business that are throwing off cash via dividends or buy backs.

In my circumstance the portfoilio has been constructed inside a SMSF in pension phase which provides considerable tax advantages re off market buy backs such as BHP and JBH. In fact I sold my holding of RIO prior to the cutoff date and added to my BHP holding for just such a purpose.

Like many of the contributors to the blog I started out with a portfolio based on the so called “blue chips”, fortunately I saw the light and have since parted ways with the majority of them.

The another important element to consider is your risk appetite and whether you are a conservative or aggressive investor.

Having said all that my portfolio now looks like this

ANZ 7%
CBA 9%
BHP 16% (reduced after buyback)
WOW 7%
JBH 6% (reduced after buyback)
ORL 9%
MND 4.7%
FGE 8.3%
MTU 7%
NXT 7% (unproven at this stage but work in progress)
MCE 14%
SPL 3.7% (a bit high risk but I like the story)
Cash

12 Stocks that I am very comfortable with, can sleep at night and I am not concerned about the high volatility that can occur. I have even leant to turn off the market and whilst I used to track how my portfolio was performing against the AS200 I have now taken the view “who cares” it really does not mean a thing in the long run as I have set my own benchmark effectively.

The only thing I look for each day are the various announcements to the asx just to make sure that nothing stupid is happening with the companies I have part share in.

There is still a lot to learn not least of all being patience.

Roger Montgomery
July 14, 2011 at 7:52 pm:

Great contribution Ray. Thanks so much for taking the time to contribute to the Insights blog.
Craig B
July 14, 2011 at 10:40 pm:

Ray,

Very interesting.

My profile may appear high risk given the highest number of shares I’ve owned (we’ve owned…..sorry darling) at one time is 7, however, when I first read (in The Intelligent Investor or an article that referenced it) that you could estimate the value of a share AND occasionally these shares were on sale for prices way under that estimated value, well I was blown away. I still feel like the character in The Greatest American Hero – but I haven’t lost the instruction book(s)!

Point is, I don’t feel like I’m taking big risks chasing larger returns with fewer stocks. If the fundamentals are there, the lower that price gets, the better I feel. The returns have been great and I sleep well, a brief period in March 2009 notwithstanding.

The reason I sleep well is, like you, I keep a close watch on the announcements – minimum 6 times a day I log onto comsec. That and scanning the companies list on the back page of the Fin Review I do daily. I also re-read the reports and redo my calculations on a regular basis, although this occurs not because of ritual, just that I’m usually ruminating on the companies I own, and doing the calcs – again and again – seems to put me at ease.

I treat this very seriously. Its a 2nd job. My lovely wife accepts that reading time is part of the job.

And patience……..essential!
- Craig B
  July 15, 2011 at 11:08 am:
  
  Ray,
  
  Just to flesh that out, my wife and I discuss our situation before any major moves – as you do – but with all our investing activities there has always been one golden rule:
  
  The family home is sacrosanct.
  
  I never do anything that puts it at risk. Outside of that we’re happy to chase higher returns. (We’re early 40’s/late 30’s/young kids).
- Matthew R
  July 16, 2011 at 7:59 am:
  
  Hi Craig B – I recommend taking a look at wotnews, you get an email every time the company makes an ASX announcement. It has other useful features as well, but that one might save you a lot of time logging into CommSec + you can switch the market off that little bit more!
- Craig B
  July 17, 2011 at 7:59 am:
  
  Thanks Matthew. Someone else mentioned that a few months ago here on the blog so I signed up then. It is sometimes handy.

sapporosteve
July 13, 2011 at 6:20 pm:

Hi All,

I have never really taken the balance of my portfolio that seriously. Historically, I have always thought that a great buying opportunity should be weighted accordingly – I endeavour to use Buffett’s “when its raining opportunities reach for a bucket not a thimble”. So a big opportunity needs a big bucket so to speak. Recently I have sold some smaller allocations and bought more of my other holdings, but generally I am moving closer to larger investments in a smaller number of companies just as Mohnish Pabrai does – “Few bets, big bets, infrequent bets”.

Nor have I ever considered the balance between industries. When the market for one industry is in the doldrums (like retail currently) I really dont see an increased risk in placing more of my funds in that specific industry. Indeed, if there are good bargains in one sector then I believe you should allocate accordingly. Bruce Berkowitz has been very successful with this approach and he is currently 80% in financials. You may see that with my allocation to rare earths stocks which I have held for some time.

ALK – 3%
ARU -6%
ATR – 3%
CFE – 5%
LYC – 3%
ANZ – 3%
CBA – 3%
FGE -10%
MCE – 15%
MMS – 5%
VOC – 3%

Overseas shares (US and Canada)

BP -3%
GWG -3%
AIG – 3%
C – 3%

Regards
Steve

Sean Saul
July 14, 2011 at 9:05 am:

Portfolio construction and weighting is a very interesting beast. The ideal of diversifying is sound but you can over-diversify also.

The law of diminishing returns applies to diversification once you get to a certain number of shares in a portfolio.

I’m not a mathematician so I’ll leave the algorithims and calculations to other brilliant minds and just apply common sense. I believe in choosing 8-12 A1 investment grade companies that you:
a.Understand the business model of;
b.Have researched and consider worthy of your investment dollars at the right price,
c.Can keep up to date with the progress of (financial, managerial, industry, legislatively etc);

If you spread your eggs around too many baskets, you will be very busy (or negligent) keeping an eye on all those baskets.

Mark Twain once said: “put all your eggs in one basket – and watch that basket!”
A bit extreme but I like the sentiment.

Weighting is another thing altogether; I suppose a lot depends on your comfort levels to being exposed to certain industries. The triggering of potential capital gains events and subsequent tax to be paid with it also need to be considered.

Cheers.
- Roger Montgomery
  July 14, 2011 at 9:40 pm:
  
  ANother terrific quote is from Fisher; It is a mistake to believe one reduces one’s risk by spreading his investments across a broad range of enterprises he knows nothing about.
Edward
July 15, 2011 at 1:11 pm:

Steve,

I am very much leaning to “Few bets, big bets, infrequent bets”. I have been only investing for the last year but I really do not see there ever being more than 2 or 3 opportunities a year where I am confident enough that the odds are enough in my favour to make a bet.

Cheers

Edward.

Richie
July 13, 2011 at 6:08 pm:

In an environment like this I only like good companies who pay most of their earnings out as fully franked dividends. Risk with yield, just incase the fat lady sits on the pointy bit on the chart!

Ash Little
July 13, 2011 at 7:21 pm:

That’s great Richie,

But if a company pays out all it’s earnings how will it grow?

Debt?

Divy yield can get smashed if the fat lady sits on the pointy bit.

TLS had a good yield at $5. It’s an even better one now. Like to see the yield when it gets to $1

Good companies at discounts is the key in my view.
- Tyler
  July 17, 2011 at 11:54 pm:
  
  Some of the best companies can grow while paying out all their earnings.
  See’s Candy springs to my mind
- Roger Montgomery
  July 19, 2011 at 12:24 pm:
  
  Unitab was another…
- Ash Little
  July 21, 2011 at 7:53 pm:
  
  Very few see’s Candy businesses lying around at disounts. If you find one guys make sure you let me know about it

John Palmer
July 13, 2011 at 5:52 pm:

Hello Roger,

My portfolio is currently 85% cash and 15% equities spread across 12 companies with major holdings in MCE, TLS, CCV, DTL and FGE accounting for 70% of my exposure to the Aussie Market. I am happy to maintain the 85% cash but will rebalance the remainder of the portfolio as the reporting season progresses.
I have established my own quality ratings (based on cash flow, earnings per share growth, revenue growth, Debt/Equity ratio, ROE and equity per share growth). To my pleasant surprise, many of my highly rated companies happen to also be amongst your A1s and A2s, although some apparent abberations pop up occasionally (eg SFH).
Had I adopted my planned approach at the start of the 2010 financial year, the portfolio would have been MCE, TTY, SWL, MIN, NCK, ACR, NFK, EQN and TGA.
Would have been a great year, but very biased towards the mining and engineering sectors – in hind sight, that was the place to be, but I think I will aim for greater diversity in 2011/12 if I can find 10-12 quality businesses at significant discounts to IV.

Regards
John

Ash Little
July 13, 2011 at 7:13 pm:

Nice John,

But TLS is not for me. I can only see things getting worse but that is just my view

Allan
July 13, 2011 at 5:40 pm:

A very interesting topic and interview Roger….

There is no right or wrong answer but there are a few points I try to adhere to. First of all, let’s assume that we have completed our research and we are dealing with investment grade companies.

– I will never have more than 15 companies in my portfolio but in reality this never exceeds 8-12

– Always have at least 10% sitting in cash or fixed interest

– Be prepared to go to 100% cash. A rarity but if all your candidates were a Macquarie @ $90, RIO @ $120 and Cochlear @ $80 then be comfortable with this. Mind you, this is the time that euphoria is at its peak

– An absolute maximum of 7% as an initial allocation in any one company which I am happy to let run up. For this to occur I consider a) the right sector? b) if I hold a competitor, c) MOS of 30%+ c) not on the verge of results unless there is clear guidance, and d) some normality in markets i.e. not weekly swings of 10% and fear of the sky falling (doesn’t worry me but I want
cash to pounce at these times)

To explain:
I have JB Hi-Fi at a 20% discount to 2012 IV. Now we are on the verge of 2011 results, everyone is scared because the Greeks have been having 14 weeks holiday a year, and the sector is in the doldrums as apparently no-one other than myself goes to the shops anymore other than to check things out they want to buy online (on that note check out JB’s website, prices and free freight to see if they are falling behind). Anyhow, I digress.
I don’t hold a competitor so would be happy with a 2-3% allocation JB.

Now take Matrix. I have MCE at 25-30% discount to 2012 IV, there has been little in the way of guidance or information in the last couple of months, we are awaiting 2011 results and the sector it operates in is exciting. I don’t hold a direct competitor so would be happy with a 4% allocation to MCE.

So 7% is rare as all the boxes need to be ticked but it does happen.

Required return I factor in the maturity of the company and growth potential. For single commodity mining companies I ask a greater return and want to buy when prices are low and I am buying the lowest cost producer. But most importantly return should be tied to one’s personal situation. Are you a retiree? Using borrowed funds? Have alternative returns in other investment areas to compare to, etc.

My thoughts nonetheless

Cheers
Allan

Roger Montgomery
July 13, 2011 at 6:32 pm:

Thank you Allan. A solid and disciplined approach.
ZORAN
July 13, 2011 at 8:39 pm:

Some good insights Allan,thanks.

Cheers
Zoran

Grant Rogers
July 13, 2011 at 3:46 pm:

Kind of an off topic post but a value.able one to many out there that should be doing more research rather than valuing (myself included!)

How do you (bloggers and Roger) go about conducting research on equities (which also includes industry research)?

Obviously the first point of call is the reports and other statements released to the ASX…but other than that…are there any other resources which we can be tapping in to?
I know there are broker reports – but I struggle to find any apart from the ones suggested by reuters which are quite costly for an individual investor!

Industry research is also something I would like to be doing more of, but really just don’t know where to start!!!

Roger Montgomery
July 13, 2011 at 6:30 pm:

Have you spoken to the economics/commerce faculty deans?

Jason R
July 13, 2011 at 2:34 pm:

I started share investing in 2009 and with the help of Rogers site and book, along with Sky Business I have built a base portfolio that i am currently happy with. My goals are: Increasing Dividend return and Capital Gain. As such a diversified portfolio (20 stocks) over many sectors was how i started out. After gaining knowledge and confidence and appreciating that i am “owning part of a business”, I am now willing to hold less stocks – currently 7 and have 15% cash available for large market corrections. For interest sake my current stocks and allocations are:
ANZ JBH TSM – 15% each. MCE NVT ORL QBE -10% each.
This is a portfolio i am confident with and happy to hold throughout market ups and downs. Dividends are very important to me – the div payout ratio at my buying prices is approx 7%.

Roger Montgomery
July 13, 2011 at 6:28 pm:

Thanks Jason.

Andrew
July 13, 2011 at 1:41 pm:

Not related to this post Roger, so feel free to do with this as you wish.

With the carbon tax looking as though it is coming in i have had a thought about how it will affect some companys on my watchlist. Below are a couple of thoughts.

Firstly, this is not the place to debate the merits of the tax so lets not get into that here. Its the last thing we need and i have had a thought about even whether i should post these thoughts/insights as i don’t want to throw a grenade into this forum and sending it back to the non A1 days of this forum.

ARB Corp> Last time i checked a major input of ARB’s products are steel. Steel manufacturing is carbon intensive so there for will be affected by this tax. There is a compensation plan in place for the steel industry but it is reasonable to assume that in the short term higher costs will be associated with steel. This means that ARB will have to pay more for these products to make their products. They can either absorb it or raise prices for customers. ARB has a significant competitive advantage in this market and i would expect that they will be able to get away with charging more to cover these costs so should probably not be impacted that much apart from maybe a small drop in sales as people decide whether to buy it now or put the purchase off for a while.

WTF, FLT & WEB> Airlines will have an extra cost to worry about in the perpetual cycle of overall unprofitableness (made up word). This means ticket prices will need to be increased to cover this cost which may result in less people travelling, if less people travel than i think it is reasonable to assume a drop in demand for flights and hotels. If however companys like WTF can get accross the message that they are cheap then this means that those who do fly might go over to this company to book their hotel under the belief that they are offsetting the increase in hotel price and the lower demand for hotels may result in lower accomodation prices.

I have no mining/resources, or heavy industry manufacturing companys on my watchlist, probably not surprising, so a lot of my watchlist can possibly be considered low carbon intensive (unless the banks and online service providers like WTF,SEK, REA have a coal mine somewhere). The retailers i guess will be hit due to the logistical operations.

One project i have this year is to have a look at the renewable or clean technology sector as even before the tax came in i saw this as a logical growth industry as we can only keep doing what we have done for so long, i know AIR and Solco have been mentioned but haven’t had a chance to look at them yet. Any profitable ethenol companys that i can have a look at or construction firms that specialise in green buildings?

Roger Montgomery
July 13, 2011 at 6:21 pm:

good insights Andrew. Thanks for sharing.

Edward
July 13, 2011 at 10:33 am:

It will come as no surprise from my previous posts but my portfolio strategy is simply to maximise the expected value of my investments. I am quite comfortable putting 50% of my fund in only one business and did exactly that this year. I also like to keep some cash on hand in case an opportunity shows itself and I need to act quickly.

I think the biggest risk in portfolio construction is the ability of the investor to correctly assess the range of outcomes for a business and assign probabilities to these outcomes. I personally have found this a very useful part of the investment selection process as it really gets me to think and makes me dismiss many investment opportunities as I do not have the ability to correctly assess the range of outcomes and assign probabilities – I have had to eat a lot of humble pie over the last year! And no doubt will have to eat plenty more in the coming years……….

Roger Montgomery
July 13, 2011 at 5:51 pm:

Hi Edward,

Thanks for that. If you come back and see this response, we’d love to see an actual example of how you do this…
- Edward
  July 14, 2011 at 2:15 pm:
  
  Here is a quick example using Woolworths to illustrate my approach.
  
  I have $10,000 to invest and have been following Woolworths for some time and keen to own shares in the business as I believe it has a bright future. Firstly I need a comparison. So how about if I put the $10,000 of my money in a 12 month term deposit with a bank? The bank is offering me a return of 5%. Now I am not 100% confident that I will get my money as there is a remote chance that the banking system could collapse, the government does not intervene and I lose all my capital. The likelihood of this is low so I assign it a probability of 1 in a 100 or 1%. I am therefore 99% confident I will get my $10,000 back plus a 5% return. The expected value of the term deposit is therefore (0.99 * 10000 * 1.05) + (0.01 * 10000 * 0) = $10394 which is a return of 2.95% on my initial capital
  
  So how does Woolworths compare? My confidence in a business can be roughly quantified by assessing the profitability of a business, the long term industry economics and the management ability. Put simply, I see no reason why a well managed profitable business in a sustainable industry is not going to be earning decent money in a few years time – this is very important because I want to be able hold my shares in that business through a stockmarket crash/wobble. Using data from Morningstar and the 2010 annual report, I make the following assessment.
  
  PROFITABILITY (Maximum score 30%) -A quick glance over the ROE for recent years shows a profitable business. No major concerns here so I will give this 30%.
  LONG TERM INDUSTRY ECONOMICS (Maximum score 30%) – Woolworths is in the supermarket business and I am confident that in 10 years time that people will be going to the supermarket to buy food. I am confident that Woolworths the business still be around in 10 years time. I feel this area needs a lot more study but for this example I have no major concerns here so I will give this 30%.
  MANAGEMENT (Maximum score 30%) – I want the management to act in the shareholders best interest, so I want to see some serious personal wealth in the business, otherwise come challenging times they may not act in the shareholders best interest. A quick scan of the 2010 annual report shows that the board owns approx 850k shares which equates to about $24million dollars. Compare that to the remuneration table and the salary/fees of the board alone are nearly $10million dollars. I think it is fair to say that the board really does not have any serious skin in the game, they do get well paid though! The lack of serious personal wealth in the business means I will give them 15%.
  SERIOUS FAILURE (Always 10%) – I always assign a 1 in 10 chance of failure for any business. This is my margin of safety.
  
  If Woolworths is on sale for $27 per share and use a valuation of $30 (median value according to the polled analysts on ft.com) then I am 75% confident that I could make $3 on every share. There is a 15% chance where I am not so confident in the business so I will give the business a IV of 2.7 x BVPS ($6.15)= $16.6 – this means a loss of $27-$16.6=$10.4. For the 10% chance of serious failure, I only recover BVPS worth $6.15 therefore I could lose $27-$6.15=$20.85 per share.
  
  The expected value of a $10,000 investment is (0.75*10000*30/27)+(0.15*10000*16.6/27)+(0.1*10000*6.15/27) = $9482, this is a return of -5%! When I compare this to my term deposit example, I think I will put my money in the bank. I want to see a return of at least 15%!
  
  It is obvious that the expected value calculation is crude, subjective and sensitive to IV/MOS but it does help you focus. I also have been very brief in my evaluation! But if I was serious about investing in Woolworths at $27 per share, I would focus on the management performance/incentives and improve my understanding of the long term industry economics.
  
  Cheers
- Roger Montgomery
  July 14, 2011 at 9:51 pm:
  
  Thanks Edward,
  
  Baysian probability/Bayes’ theorem at work there. To simplify: 75% chance of making $1,111. 15% chance of losing $3,851 and 10% chance of losing $7,722 if the shares fell to book value. The framework is sound. Putting a 10% chance of the fall to book value I reckon is harsh unless you plan on 100% chance of nuclear ‘event’. Well done.
- Edward
  July 15, 2011 at 1:04 pm:
  
  Roger,
  
  Thank you for the feedback, it is most appreciated.
  
  Cheers
  
  Edward

Jefferey S Nelson
July 13, 2011 at 4:06 am:

One theory from if my memories correct and its not directed at investing only, but
to put the odds or change the game in your favours is with capital of 200,000k,
you would have exposer of only 2.5% in any company which is $5000.
And only have 30 % of capital exposed in a normal market environment with limited draw down to a limit of 2.5% of $5000.= $125.00.
Which is your stop lose.
If your capital is smashed by say a GFC to 150k you would reduce your exposed investment to this new figure down to
$3750. per company (Which is 2.5% of 150k)
And increase going up also. 2.5% of 250k=$6250
A know Roger isn’t a fan of stop loses and im in agreement. But
he who runs away gets to run another day. (That’s if you don’t burn all your capital up running)
Ill See what else I can dig up.
I remember a formula that is used in futures on capital exposed. But im sure Rogers seen them all and dissected most over the years.
This one possibly is very conservative to most people however when you see a drop in the market of 30% in one morning.
Its nice to know that you have Some options.

Roger Montgomery
July 13, 2011 at 5:47 pm:

Thanks Jefferey,

How about you take us through an actual example…
Ash Little
July 13, 2011 at 6:23 pm:

Hi Jeffery,

Thanks for your views

2.5% in any one stock will give you 40 stocks. That is a lot

I could not possible think I could ever find at the same time 40 stocks that are good quality and also cheap.

by default you must get either some woofers are good ones that are expensive.

Sorry mate but this is not for me.
- Jefferey S Nelson
  July 14, 2011 at 2:40 am:
  
  Hey Ash u missed the bit where I said you only have 30% of total capital committed .
  So on 200k this would be 60k. 12 vehicles Max, just a starting point. ( 200k @ 2.5%= 60k)
  
  My opinions only, the vehicle is very important just the means to get there.
  Risk management or money management is extremely important but not very popular.
  No one knows the future you can only plan for it.
  E.G
  On above method.
  200,000K IN CAPIATAL
  You find 12 A1 – B3 fantastic companies after the GFC and committee $5000 to the 1st company called xyz the company decides it wants to issue 100 million shares out to start an airline and you decide things have changed and you want to get out and find something better like IRE.
  you loose $2,500 dollars now your capital is $197,500 you have to reduce your position size to $4937.50 per any other company you buy.
  The most important thing in this one is you reduce your position size, if your capital size reduces.
  And increase, when your capital increases.
  Wished id known about money management in 1999.
  There are much more advanced formulas, but this is simple for equites.
  Id like to know what the big fund managers use?
  Maybe Roger or someone in the industry could contribute.
- Roger Montgomery
  July 14, 2011 at 9:36 pm:
  
  Increasing bet sizes as winning run continues is called an anti-martingale bet size system:
  
  Originally, martingale referred to a class of betting strategies popular in 18th century France. The simplest of these strategies was designed for a game in which the gambler wins his stake if a coin comes up heads and loses it if the coin comes up tails. The strategy had the gambler double his bet after every loss, so that the first win would recover all previous losses plus win a profit equal to the original stake. Since a gambler with infinite wealth will, almost surely, eventually flip heads, the Martingale betting strategy was seen as a sure thing by those who advocated it. Of course, none of the gamblers in fact possessed infinite wealth, and the exponential growth of the bets would eventually bankrupt those who chose to use the Martingale. It is therefore a good example of a Taleb distribution – the gambler usually wins a small net reward, thus appearing to have a sound strategy. However, the gambler’s expected value does indeed remain zero because the small probability that he will suffer a catastrophic loss exactly balances with his expected gain. It is widely believed that casinos instituted betting limits specifically to stop Martingale players, but in reality the assumptions behind the strategy are unsound. Players using the Martingale system do not have any long-term mathematical advantage over any other betting system or even randomly placed bets.
  
  In a classic martingale betting style, gamblers will increase their bets after each loss in hopes that an eventual win will recover all previous losses. The anti-martingale approach instead increases bets after wins, while reducing them after a loss. The perception is that in this manner the gambler will benefit from a winning streak or a “hot hand”, while reducing losses while “cold” or otherwise having a losing streak. As the single bets are independent from each other (and from the gambler’s expectations), the same conclusions as above apply.
  
  Source: wikipedia.
Mal
July 13, 2011 at 8:15 pm:

Not sure where you read this- but it sounds like risk management principles that traders using strict trading plans would use. The volatility of using a 2.5% stop-loss if you are doing anything other than technical analysis would destroy the average investor. However, if you were a disciplined trader with a successful system, this kind of risk management would be very appropriate.

I have my own views on portfolio construction. I have always had between 5 and 8 stocks, and have found this works for me. Every time that I have held more, I have found that I have diluted returns without reducing my risk! At any time I will often go overweight one stock, but if this is to occur it is only if they have what I perceive to be very limited downside potential (eg having a liquidation value close to market capitalisation) except in the case of extraordinary market opportunities (at one stage I was 60% GDO). I am not very fussy about industry diversification- as I think the liquidity of the sharemarket mitigates this risk. I think you need to have some sort of macro viewpoint that guides your investment process.

I actually think that risk management is the single most important factor in determining success (particular in short to medium term investing- which is what I primarily do). At the end of the day, if you are using an active investment strategy (and not Warren Buffett buy and hold forever), you need a good risk/reward ratio.

My current weightings are 25% (gold), 17% (specialty metal), 12% (gold), 12% (mining service), 11% (energy), 9% (explorer), 7% (explorer),6% (retailer) and 1% (high-risk option). *The explorers are higher due to capital gains.
- Roger Montgomery
  July 14, 2011 at 7:55 pm:
  
  Hi mal,
  
  Thanks for the contribution. Really interesting ideas. I wonder if you meant to put two allocations to gold (25%) and (12%)?
- Mal
  July 14, 2011 at 8:47 pm:
  
  Hi Roger,
  
  Yes I have two separate gold stocks together coming to about 37% of my portfolio at this time (although I suspect that by the end of the year that will be significantly reduced).
  
  A couple of points to add about risk. Risk needs to be tailored to your investment needs- I am in my early twenties, with no significant need for my surplus capital, so whilst my overall capital is still quite small in the scheme of things, I am more interested in high return strategies, but I expect as my capital increases/ and or I have various commitments- this will change. By the time I retire, I expect my investments to be primarily fixed income investments. I also find it strange that so many people take such a systematic approach to diversification of their personal share portfolios, yet are willing to risk a very large percentage of their net worth on investment properties (owner-investment is another thing of course, but still carries certain risks if you overpay). This is what I was alluding to when I said that the liquidity of the sharemarket mitigates risk. As you are obviously aware, being a fund manager also changes the risk profile that you are allowed to take!
  
  My investments for the FY gave me a very high return, largely due to my overinvestment in GDO when the market didn’t like it but the mathematics were too compelling to say no.
  
  Some more data that I keep for interest:
  Number of buy/sell transactions: 76 (this number is artificially inflated due to a very large number of these being arbitrage-type trades after release of information, or buying on overenthusiastic market responses).
  
  Profitable transactions: 48
  Losing transactions: 28
  Success rate: 63%
  Risk reward (profitable/losing transactions): 2.21
  
  The losing transactions were almost always buying at the wrong time (almost invariably on a dip which had further to go – and in fact this also probably reduced my profits a little bit- which shows that I need better discipline with my trigger finger). My most profitable were high conviction buys. The arbitrages overall had a high percentage success rate but in the scheme of things not really worth it due to brokerage and time wasted.
  
  Interestingly, the losing positions were often of very good companies (and in fact most of them are trading higher than my buy price today), but overall, quite a lot of the them dropped significantly below the price I sold them at, suggesting that my risk management is reasonable. Overall though I have sold out of many good companies way too early after hitting valuation targets, and I have to refine my sell/take profit strategy.

Craig B
July 13, 2011 at 2:28 am:

I’m not long enough in the game to have developed a strategy, but in my first foray two and half years ago I bought shares in 7 firms, and weighted them 37%, 3×17%, 7%, 4% and 2% based on what I thought the prospects were – giving greatest weight to my best prospect, 17% to the next best 3 and so on.

My best returns were from one of the 17% ones, the 7% and the 2%.

Since then I’ve sold 6 of those and added 4 more, and added further to two of those positions when good results were reported and the price was still right.

The current weightings are 46%, 29%, 12%, 10% and 3%. That’s more due to two of them working out better than the others, with the 3% holding being a speculation.

Roger Montgomery
July 13, 2011 at 5:46 pm:

Thanks for sharing Craig.

Stephen
July 13, 2011 at 2:17 am:

Portfolio and weightings:

ARP 11%
BHP 11%
CBA 21%
CTD 9%
FGE 13%
MND 11%
MTU 11%
WOW 10%

Nearly a quarter of the portfolio is weighted toward two mining service companies as I believe despite global issues and tighter contract margains, this is a growth area.

I also have one fifth of the portfolio in CBA because I simply believe they are the best bank at the moment.

The rest of the portfolio exposes me to some manufacturing (ARB), evolving telecoms (MTU), and the services industry via CTM.

I have maintained a 10% holding in WOW despite general weakness in the retailing space.

The portfolio has like most taken a fair hit in the past few months and I’m not sure I see it striding ahead for some time yet. Will just wait and see.

As a general comment though, since I’ve taken the time to study my companies and be confident in them as businesses, I find that the movement of the market doesn’t stress me nearly as much as it used to.

Go figure!

Stephen

Roger Montgomery
July 13, 2011 at 5:45 pm:

Nice portfolio Stephen. if the market rallies (IF), I imagine you are wonderfully positioned. If you have also purchased all at discounts to intrinsic value, the returns could be excellent.
- Ash Little
  July 13, 2011 at 5:53 pm:
  
  You too the words out of my mouth Roger,
  
  Nice portfolio Stephen
Jeff
July 14, 2011 at 12:17 pm:

Hi Guys,

when bloggers are talking about the % of individual stocks held in portfolios, are they talking about stocks as a % of the total portfolio (including cash) or as a % of the share universe held only?

i am interested as I have been wrestling with this for some time… Obviously if the share part of the portfolio is 50% and the cash part 50% and you take the % held in each company as a function of the total portfolio rather than the share part of the portfolio, the % held will be different.

I appreciate there is no “correct” answer to this, but I am interested in Roger’s and others thoughts

jeff
- Roger Montgomery
  July 14, 2011 at 9:43 pm:
  
  I expect its the percentage of the whole portfolio including the cash.

Jefferey S Nelson
July 13, 2011 at 1:03 am:

Hey Roger or Bloggers with the reporting season upon as I was just wondering if there is any directory
that tells you when companies are going to have submitted their end of financial reports, with what date??

Ash Little
July 13, 2011 at 6:39 pm:

Hey Jeffery,

Try to get one from a broker,

If not they are on comsec and etrade but I find this a bit clunky
Scott T
July 14, 2011 at 10:29 pm:

Hi Jefferey,

The vast majority of large companies have this date on their website under a heading usually called “financial calendar” or “important dates”

For the smaller ones, I just ring the company secretary and ask them. Here is the list I compiled today of the announcements I am looking forward to:

CCL CC AMATIL Tuesday, 9 August 2011
CBA CWLTH BANK Wednesday, 10 August 2011
TSM THINKSMART Thursday, 11 August 2011
CCP CREDITCORP Tuesday, 16 August 2011
TOX TOX FREE Wednesday, 17 August 2011
ARP ARB CORP Thursday, 18 August 2011
MND MONADEL Tuesday, 23 August 2011
BHP BHP BLT Wednesday, 24 August 2011
WOW WOOLWORTHS Thursday, 25 August 2011
MCE MATRIX CE Thursday, 18 August 2011
VOC VOCUS Wednesday, 24 August 2011

All the best

Scott T
- Scott T
  July 19, 2011 at 3:52 pm:
  
  Oops typo here. Matrix’s release date should read Monday, 22 August 2011
  Sorry about that.
  
  All the best
  
  Scott T

Kent Bermingham
July 12, 2011 at 10:08 pm:

Who is being watched this reporting season?
Roger when are you going to publish the revision to the original list?

Roger Montgomery
July 13, 2011 at 12:09 am:

Sorry Kent,

The market falls and a few company briefings have been keeping us busy and I am currently putting the finishing touches on our Fund’s first annual letter to investors.
- Craig B
  July 13, 2011 at 2:04 am:
  
  Roger,
  
  Will the letter be available to people not in the fund?
- Roger Montgomery
  July 13, 2011 at 5:42 pm:
  
  No it will not Craig. Thanks for asking.
- Kent Bermingham
  July 13, 2011 at 10:36 pm:
  
  I understand it is amazing how you make time to answer our blogs and complete all your internal and external obligations, really appreciate your work.

David King
July 12, 2011 at 5:29 pm:

Cash while I wait for the tumble coming, with about 5% in AI’s like MIN, FGE RKN etc.

Roger Montgomery
July 13, 2011 at 12:18 am:

Thanks David.

ZORAN
July 12, 2011 at 3:40 pm:

Hi Roger

MTU 20%
MLD 20%
TRG 20%
CTD 20%
IRE 20%

After that just sit tight and enjoy.
Cheers
Zoran

Roger Montgomery
July 13, 2011 at 12:18 am:

Thanks ZOran,

Thats a concentrated one…

Andrew
July 12, 2011 at 3:20 pm:

Its a thought provoking question Roger, i have to say i have not really come up with a portfolio construction strategy other than find businesses which i think are quality and then invest in them if they are trading at an adequate margin of safety.

I look forward to hearing what others think as it is something i would like to explore a bit. One thing i will say is that my rule is to never invest in mining companys.

I don’t have any particular rules in regards to being over exposed to a specific industry.

I guess if you have to put it down into a sentence i would say my strategy is to be over-exposed to wonderful companys at discounts to value.

Fortunatley i don’t need a construction strategy for my portfolio as i don’t have one at the moment, I don’t have enough free cashflow to invest in the market. I think if i was to have an MQR at the moment i would say C1. So looking forward to reading the replies and getting a strategy together when i need it.

Roger Montgomery
July 13, 2011 at 12:19 am:

Indeed Andrew!
- John P
  July 13, 2011 at 5:42 pm:
  
  However you choose to build a portfolio still gets back to holding great businesses with good cash flow and low debt levels.Personally I am quite comfortable to hold a big position in a limited number of stocks provided they meet the above criteria and there IV is in range and future prospects are bright.
  I have two examples of stocks I hold as a large portion of my portfolio and to have sold them early to reweight my portfolio would have been very costly.
  I purchased CSL when they floated at $2.40, then bought more years later when they dipped to $15.00. CSL then went on to reach the $100 mark before a one for three share split.
  Another example in the micro caps was Ammec which was bought at .30c and was taken over by CPB @ $4.00.
  The point I am making is that both companies had excellent management, a competative advantage and free cash flows. If I had followed the level weighting portolio theory that would have been very costly. Just my few.

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