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Investor type 2: the tester of patience, the value investor

In the Press, Media Room | Comments (24)

Investor type 2: the tester of patience, the value investor

Marcus Padley, stockbroker and author of sharemarket newsletter Marcus Today, investigated “Value investing” as a potentially a potentially adoptable self-managed super trustee identity. Marcus wrote “At its worst, it is a great filter for identifying bad stocks. At its best, it is a disciplined structure for share assessment that works. If you can do it, it knocks the socks off any other. For those that want to pursue it, let me plug Roger Montgomery’s book Value.able. It’ll get you started without having to read boring old textbooks.It’s on Montgomery’s website – www.rogermontgomery.com“. Read Marcus’ 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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24 Comments

  1. Grant Duggan
    :

    I still think how lucky am i,i started investing in June then about month later the wife and i saw Roger on 602 and no sooner had he finnished explaining his method of investing,we were in on the blog site ordering our first copy of value-able.
    I have read the book twice so far,and now the wife is on to it after a little persuasion.She has pulled me up on afew occasions for pushing the bible whilst out on social events,and i must admit the BLOG and names like Ashley,Lloyd,Matthew and others i refer to as the GURUS grads get quite a plug as well.
    So i would very much like thank all who put so much of their time and effort into their posts.I hope down the track i am able to contribute something worthy,as for the time bieng still a 1st year apprentice with many questions.

  2. john
    :

    Hi All

    Could someone please guide me through RMS calculation im still not clear how to calculate intrinsic value using just the 1 table(11.2 ) …sorry about this basic question

    Thanks

  3. Kim Jordan
    :

    And for those who may not have seen it, Marcus’s book ‘Stockmarket Secrets’ is a very entertaining read – will fill in the time while we wait for ‘Value.able – the directors cut’ *_*

  4. john
    :

    Hi All

    Could someone please guide me through RMS calculation im still not clear how to calculate intrinsic value using just the 1 table(11.2 ) …sorry about this basic question

    Thanks

    • Frank
      :

      Hi John
      I am new to this, so exercise caution. My Intrinsic value calculation is $2.15
      Calculation:
      Share Holder Equity $ 122,294,893.00
      Net Profit $60,000,000.00 (Assume ½ profits will continue till 30/06)
      Shares Outstanding 291000000
      Per Share Equity $ 0.42
      ROE 40%
      R/R 14%
      If 100% profits to be retained $1.20 (40%/14%*$0.42)
      If 100% Profits to be paid out $2.78 ($0.42*$6.62)
      Payout ratio 45% (Per Share Earnings 11 Cents, Dividend 5.5 Cents) =$2.15
      *I am not sure if the company keep paying out dividends at the same rate, if the dividends rate change valuation will change. Company is in commodities business so it is particularly hard to value the intrinsic value due to commodity price fluctuation affecting the bottom line.
      Hope this will help….
      Frank

  5. Andrew
    :

    I think the hardest part of value investing is the emotional or psychological element to it. And i think that some people will never quite get to the point and will start speculating as emotion causes people to stray away from there criteria and investing framework.

    I think this part is often overlooked, the plugging in of numbers in a spreadsheet to get a value and then buying a company below that value is the easy part. The true test for all people who have went on the value.able journey will be when the market has a very dramatic day and prices plummet.

    Lets just say for example, there is a crash and Matrix falls by about $4. Will you panic and sell, stay put, or buy more?

    I know everyone will say buy more, but i don’t think that would be the case.

    • Matthew R
      :

      I agree Andrew

      and hence it is so important to switch the market off when making a decision

      it can be made easier with a few pointers though:
      – maintain a high standards for your buy decisions
      – don’t have sizeable debt while you are also investing in the share market (ie pay off a mortgage and no margin loans)
      – always have cash on hand
      – be patient

    • Chris Koenig
      :

      Andrew, the temptation is to sell quickly and buy back lower; however, as there is no way of knowing, for certain, where the price goes after you sell, the decision to stay is a good one. Circumstances allowing, the current and future intrinsic values should remain as they were previously, and the price will eventually go the way you wish. Here the head should rule the heart. Also, you possibly could buy more, providing you can afford to do so. However, be careful to avoid the additional pain of catching a falling knife.

      • Greg Mc
        :

        G’day Chris,

        If it is a company that I like that is being belted well below IV for undeserved reasons, that is one falling knife that I’d like to be given the opportunity to catch. Imagine being able to buy JBH at $10 two months after it was $14! Happy days! Then having the opportunity to buy more at $9 a week later then $7 two weeks after that! It all happened between August and November in 2008 and for those with a sound valuation process and courage in their convictions would have been filling their boots while everyone else was filling their pants. You are absolutely right about the head having to rule the heart.

        The falling knives that hurt you are the poorer quality companies that have been defying gravity then all of a sudden physics happens to glance in their direction.

  6. Ron F
    :

    Hi Roger,

    A thoroughly deserved plug.

    Repeating Marcus and what you have mentioned many times is to, learn the skills and have financial patience.

    Like any success in life, it’s achieved by dedication, self-discipline and putting in the yards. You have certainly done that Roger.

    Regards
    Ron F

  7. Simon Anthony
    :

    For those of you that watched Lateline Business on Tuesday night 15/03/2011 you would recall Marcus Padley question how value investors could value uranium stocks that had (share price) fallen 30-50% e.g deep yellow, when you don’t know what the spot price is going to be going forward! Well obviously Mr Padley isn’t a Value Investor because if he was he would know that a company (deep yellow) that has a negative ROE has a value of zero and has no place in your portfolio filled with A1/A2 businesses.

    • Andrew
      :

      There has been some demand on this blog for a discussion on uranium especially in regards to era.

      Without going into a specific company though and just looking at the main point, i tend to agree with Marcus. I stay away from mining and resource companies for a range of reasons and one of them is that as they are commodity businesses they have no power over pricing.

      This is set by the international market.

      As I have no idea about what that price is in the future i cannot forecast with any great certainty what the future for this business is and what its results are going to be.

  8. Craig B
    :

    I’ve mixed feelings about [some ‘experts’].

    I read their articles in the papers each week, listen to their podcasts, and hear on the radio numerous times.

    I trial their newsletters but found, a bombardment of financial information that I find either superfluous or completely useless. The idea that each morning I’m going to absorb the latest readings of countless indices, exchange rates, and financial news headlines, simply because they are compiled into the one document, and then, apply all this information to my investing – presumably that same day – is just silly.

    The only thing this bombardment might make a punter do is throw in the towel and hand over the cash for someone else to manage minus an annual 2% charge of course.

    On the other hand, some defend the investor and list their biggest bugbear as the Finance Industry itself, making everything out to be so esoteric and obscure that the average punter can’t help but get screwed.

    How confusing!

  9. zoran
    :

    MCE

    Roger said MCE’s IV is $ 11,where have all the believers gone?Now is the chance to fill your boots with MCE,FGE,MLD and other A1’s

    If they were good 10% ago they are even better now.

    Cheers
    Zoran

    • ron shamgar
      :

      Big MOS Zoran – big margin of safety!!!!
      so if its value is $10 u want to buy at $7 or $6…….

    • David V
      :

      Hi Zoran,

      Roger said the IV is around $11- not the price.

      I own MCE so would be happy to see it at $11-, but even happier to see future IV at $111 :)

    • Greg Mc
      :

      G’day Zoran,

      VOC is the blog flavour of the month now, MCE is yesterday’s news! (yes, I’m being facetious, but I know what you’re saying)

      While some of the regular names have dropped a bit recently, they’re not exactly bargain basement prices yet, and have bounced a bit today. Hopefully Mr Market will have further conniptions about things that don’t really affect our preferred quality businesses and we might get a better opportunity to have a dip.

      • Ashl
        :

        Hi Greg Mc,

        MCE still has a special place for me.

        It just not want to start with a 7 ATM

        :( very sad

        maybe next week

      • Frank
        :

        Hi Greg

        Wonder if you had a go at valuing VOC?

        I ran some numbers this week:

        Company currently incorporates 9 Million share holder equity, we could expect the net profit to be around 7 Million for the full financial year (considering the first half year result ending 30/12/2010 is around 3.5 Million), number of outstanding shares 51 million. Company currently doesn’t pay any dividends to the share holders.
        Calculation:
        ROE=9 Million/7 Million=78%, per Share Equity 0.18 Cents (9 Million/51Million), Expected Return 12%
        Conservative 50% ROE, I.V valuation: 0.18 Cents * 13.05=$2.3
        Leaving ROE at 60% I.V: $0.18*18.19=$3.21
        I have not included the new equity rising to this equation as I can’t determine how this would affect the bottom line. If any of you guys know how the company is going to employ the new equity please let me know. I am interested in buying this company but need to conduct more research.

      • Ash Little
        :

        Hi Frank,

        The return on incremental capital is the key here,

        I have no clue ATM but have a bit of a look at the track record of the Board.

        They are no dummies.

        Hope this helps

  10. Matt The Fat
    :

    I think his comment regarding identifying bad stocks is the real strength. The number of friends who have mentioned they settle for ASX200 returns defies belief, when you consider the number of bad companies – even bad blue chips – that just by avoiding your return is immediately better than ASX200.

    Fully agree with Marcus’s comments.

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