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How you can be a long-term winner

Media Room, On the Internet | Comments (21)

How you can be a long-term winner

Roger Montgomery’s Value.able will reinvent the way you invest. He reveals his principles for long-term stock market investing in the latest issue of Money magazine. Read article.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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21 Comments

  1. fred
    :

    Hi Roger,

    Regarding MCE, I have only gone thru it quickly but it has failed on one of my test.

    Hope I am wrong……………..??????

    • Roger Montgomery
      :

      Hi Fred,

      Using EPS/DPS numbers of $1.96/$1.57 (2011), 2.23/1.75 (2012) and 2.43/193 for 2013 I get a valuation of $16.90, $20.44 and $22.56. So its expensive currently but may never trade below intrinsic value. That of course doesn’t mean the shares are prevented from doubling or tripling. It just means I won’t be buying them, preferring to find something valuable elsewhere.

  5. Eamon
    :

    Dear Roger,

    Whats your thoughts on Maquarie Group, they seem to continue producing predictable disasterious news.

    Eamon

  6. Graham
    :

    Roger, bought your book and read every article I can find your have published. I am eager to get into investing the way you suggest but prior to the GFC I invested heavily using home loan and margin lending – came close to bankruptcy – I am now left with a debt of $340,000 and only one stock – Neptune Marine Services (NMS) 250,000 stock – in Oct last year I hit green when NMS shares hit $0-90 cents but now the stock is back it around 22 cents. The only way I can get out of trouble with my debt is to keep the one stock I know has the potential to get me out of debt – Neptune Marine. What would you do if in same position – I have followed NMS since listing and know the business well – having all my eggs in one basket is very worrying to me but keeping NMS for the longterm is the only way I can hope to get out of debt. Previous to the GFC and going into the sharemarket I was debt free. What would you do if currently in same position.

    • Roger Montgomery
      :

      Hi Graham,

      I cannot offer you personal advice however, it may be worth speaking to a reputable financial adviser about how you have your affairs structured and whether there are any efficiencies that can be gained from changing anything around. In the meantime, if anyone has any insights (not advice) for Graham about Neptune, go ahead and share. I hope that someone can provide some useful thoughts for you about the company but I must emphasis no advice can nor should be offered here.

      • thomickers
        :

        looking at nms, it is not really investment grade. 0.4% ROE 2010 is poor since inflation will have eaten it all up. 2011 forecast shows it will be somewhere between ROE 5-8%. I think the 22-25 cents/share is fair value for 2011/12 so anything significantly more will be overpriced. hopefully it can be “voted” up so you can sell.

    • Eamon
      :

      The stock has flattened out on a technical perspective, resistance around 31cents. We could see continue oscillation around 20-28cents, until further news from the company. On fundamental count I would believe the stock has suffered a lot through the GFC. I feel people are just not in the mood at the moment to purchase expensive boats, hence reduced maintenance growth. Certainly you shouldn’t take my words literally as I’ve done any research on the stock, merely what I think the industry is going through at the moment and how this might have effect NMS share price.

      Eamon

    • Guy
      :

      Hello Graham,

      I also am not offering any personal advice. Also keep in mind that there is lots of relevant information that you have not given us such as your current income, the value of your house and other assets etc. An advisor would require this information before they could advise. As for the NMS stock you own I have to say that if I were in your position I would get out (not a recommendation of course!). The intrinsic value of that business even if you take an average on ROE over the last 3 years (to be generous) is fairly close to it’s current price. It’s average ROE is roughly 5.8% over the last 3 years. Currently you would be better off with the money in your mortgage because your mortgage is costing you around 7 – 8% and NMS only makes 5.8. Even better yet if you use the concepts generally outlined in Roger’s Book and then conduct your own research to find exceptional businesses at a large discount to intrinsic value you could start to claw back the money you have lost in the gfc a little possibly even a lot faster than mortgage rates. As an example you may have read in one of Roger’s blogs that MCE was an A1 stock. Also he discussed that he had bought it because it was at a substantial discount to his estimate of its intrinsic value. Then (doing your own home work) discovered that the company was indeed cheap. You may have decided that holding the stock with a ROE of just 5.8% and a value that appears to be roughly the same as or lower than the current price doesn’t make a lot of sense. Especially when you compare it with an A1 business like MCE. It has little debt, return on equity of 30% and an intrinsic value of almost double the trading price as at the time of Rogers article. So on around the 18th of August you sell your nms stocks at the trading price of 25 cents. This gives you $62,500. You invest that into MCE at $3.95 the closing price of the stock. Fast forward to today. NMS has traded sideways and even lost a little since 18th of last month. MCE on the other hand has risen 15% to $4.55 today. Your $62,500 is now worth nearly $72000 instead of the $55000 that is it worth now. Also even if you didn’t spot MCE there are a lot of other companies out there with excellent returns on equity that are trading at around their estimated IV. Even these are arguably superior to a business with a ROE that is less than what your mortgage is costing you. One of the messages in Roger’s book is to make rational decisions based on the facts. Don’t let emotion get in the way of a sound decision. If your money is costing you 7% and you are invested in a stock that only returns 5.8 the rational thing to do is to sell the stock and put the money back into the mortgage. If you think you have found a stock that will out perform mortgage rates buy that stock. Again this is just how I would approach this situation based on the information provided. I would suggest not that you seek advice from a financial advisor. The only reason they can give you advice is because they have a certificate to say they can. It doesn’t mean they are good. Roger doesn’t give advice irrespective of whether or not he has the certificate. Still based on Roger’s book and articles and the fact that he stands on the shoulders of giants like Buffett and Ben Graham using their proven systems modified and streamlined to make it make sense to investment noobs like myself. I would go with Roger. Now since you can’t get advice from Roger use the tools he suggests to make the best recovery possible from the situation you find yourself in.

      Cheers

      Guy

      • Roger Montgomery
        :

        Hi Guy and Graham,

        Guy, you make some very good points around comparing the possible and uncertain return from a company to the guaranteed and certain return from paying down a mortgage. It is useful to clarify that one of the things an advisor might suggest is diversification. That is, not putting all your money into any one stock – even if that stock is MCE. The problem with diversification (Peter Lynch referred to it as deworsification) is that returns can become mediocre from buying the third best thing and the fifth best things and so on, and you might end right back where you suggested; the guaranteed return from paying down the mortgage. None of this Graham constitutes advice but Guy has indeed given you some food for thought and armed you with information to assess the merit of any personal professional advice you do receive. And to be forearmed is to be forewarned.

  7. Brock Goobanko
    :

    With the practice calculations there is an error! WBC should have a ROE of 12.5% not 20%.

    Am I correct or is there something I am missing?

  8. Lloyd
    :

    Roger,

    Nicely presented reasoning, but I I couldn’t help but note the terminal footnote to the article “See page 48 for another view of investing in the sharemarket.”

    A case of “pearls before swine”?

    At least as far as some might be concerned it seems so. Hardly surprising as your logical, rational approach isn’t likely to boost magazines sales and doesn’t provide fertile ground for the feverish, irrational, speculation that otherwise abounds.

    Regards
    Lloyd

  10. Andrew
    :

    Hi Roger,

    Great article and one that will hopefully help many people realise the folly of chasing quick returns and buying poor quality businesses. It isn’t always easy to turn off the market though. I’d been speculating for only a couple of years and now, after a couple of months of investing still find it hard to tune out Mr Market. Though after reading your book and working my way through “The Essays of Warren Buffett”, valuing businesses this way seems to make to make so much sense that i find it hard to believe anyone follows modern finance theory. Hopefully now that your a regular contributor it will help get the word out that there is a better way.

    I’ve also found my library to stock some great investing literature, unfortunately some not so great also, and have loaned several books about Buffett recently. Would be great to see a copy of ValueAble in there one day. Could be a way to reach an entirely new audience and help a lot of people get their investing journey off to a great start.

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