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Merry Christmas from the Value.able Graduate class of 2010

Insightful Insights, Investing Education, Value.able | Comments (55)

Merry Christmas from the Value.able Graduate class of 2010

It is my great pleasure to present a very special tribute (thank you to my team) for the Value.able Graduate Class of 2010.

Thank you Jesse, Michael (Bali), Young Les, Michael (Aussie Battler), Matthew, Justin, Lior, John, Rad, Gary in Paris, George, Dan’s Mum, Steven & Sophie, the Master Chefs, John and Paul for sharing your Value.able journey with our community. And a second thank you to Steven for posting his Value.able 12 Days of Christmas at Facebook!

Thank you for your support this year. We have created an incredibly valuable community of investors that share sound ideas and mentor those just beginning their value investing journey.

Thanks to you – the Value.able community – 2010 year has been a year of firsts…

The First Edition of Value.able was released, went global and sold out in just 14 weeks.

Most excitingly, Value.able Graduates have applied their new skills and produced over 6,000 extraordinarily insightful comments here at the blog!

And one more thing…  for those who have requested holiday homework, my soon-to-be-released blog post will most certainly provide a challenge.

Thank you once again for joining the Value.able community. I wish you and your family a safe and peaceful Christmas and a prosperous 2011.

Posted by Roger Montgomery, 21 December 2010

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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55 Comments

  1. Pat Fitzgerald
    :

    Hi

    Noni B has had a downgrade. It looks like many retailers will not be having a Merry Christmas.

    Market Update: Noni B Limited, the retail fashion group, today announced that it expects to report an after-tax profit in the range of $1.5-$1.9 million for the first half of FY2011 (pcp: $3.6 million).

    I do not own NBL.

  2. Brad S
    :

    Hi Roger,

    Merry Christmas, its time to celebrate!!

    2010 was a very Value.able year indeed. I wonder if 2011 could be a MQR year….any thoughts of writing another book?

    Enjoy the holiday season.

    Brad S

    PS How do you get your photo to appear on the blog ?

    • Roger Montgomery
      :

      Hi Brad,

      Instructions for putting your photo up were posted here in the comments. I am not sure of which post it appeared under, but it does exist. Thank you for your encouraging comments and I am delighted to have ben of assistance.

      • Ashley Little
        :

        Hi Brad.

        Matthew R was the one who posted it and it was 2 to 3 weeks ago I think

        Hope this hopes.

        Maybe Matt can post again

      • Matthew R
        :

        Hey Brad,

        It would be great to have a face to put to your name.

        Here is the info:

        “Go to http://en.gravatar.com/site/signup/ and enter the email address that you regularly use for your posts

        Create the account and upload a picture

        Voilà– next to every post that you have EVER made with that email address will be your face (or pet)”

        ==== Roger then posted this request in reply: ====

        “Thanks for the tip Matthew. I won’t publish comic characters or anything offensive. Only photos of yourselves.”

        Cheers,
        Matt

      • John M
        :

        Hi Brad,

        I didn’t know how to do a link so I have copy and pasted the Matthew R’s comment.

        Posted by Matthew R on November 19, 2010 at 11:02 pm
        To everyone who contributes comments:

        I just realised there is a way to have your mug displayed next to posts that you make.

        Go to http://en.gravatar.com/site/signup/ and enter the email address that you regularly use for your posts

        Create the account and upload a picture

        Wholla – next to every post that you have EVER made with that email address will be your face (or pet)

        I wonder who the first person will be to choose as their picture a deep sea riser buoyancy module? Probably not Ken!

        Blog post: What A1 stocks am I looking at right now? 17 Nov 2010

  3. Scott T
    :

    Merry Christmas everybody!

    And to you Mr Montgomery, a massive thank you.

    Thanks to your wonderful book, and your insightful and thought provoking articles, posts and appearances, my SMSF has had the best year ever (that’s with 10 years of history).

    In a lack lustre sideways market I was able to pinpoint and cut out the dead wood from previous poor decisions, and focus on quality businesses trading at a big discount to IV.

    The difference in fund performance is simply startling.

    Again thank you, I hope to be able to shake your hand again in 2011

    All the best

    Scott T

  4. Matty
    :

    Interesting slide on the ANZ CEO presentation recently;

    Of 50 largest companies listed on ASX in 1980, only 9 remain today…..

    I hope we are all still standing as firmly this time next year.

    Merry Christmas and Happy Holidays to everyone.

      • Ashley Little
        :

        Hi Matty & Roger.

        If you go and have a look at Buffet’s letters to shareholders over an extented period of time he probably never had a buy and hold strategy for listed stocks..It was just the unlisted ones that that he never sold

      • Roger Montgomery
        :

        Hi Ashley,

        Buffett is known for saying “Our favourite holding period is forever”. And in the 1986 Berkshire Hathaway Annual Report, Buffett wrote that “we expect to keep permanently our primary holdings, Capital Cities/ABC, Inc., GEICO Corporation, and The Washington Post. Even if these securities were to appear significantly overpriced, we would not anticipate selling them, just as we would not sell See’s or Buffalo Evening News [companies fully owned by Berkshire Hathaway] if someone were to offer us a price far above what we believe those businesses are worth… Despite the enthusiasm for activity that has swept business and financial America, we will stick with our ’til‐death‐do‐us‐part policy.”

      • Ashley Little
        :

        Hi Roger,

        Yes very true. I did not mean to suggest that wb does not look at holding businesses for the long term… I just wanted to suggest that he does sell them if better opportinities are around.

        The 2008 letter to shareholders says

        We made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips)

  5. Peter
    :

    Hi Roger,

    Thanks for writing the book and your diligence in keeping the blog up to date. You’ve made a massive contribution to my awareness and knowledge. The book has already been paid for hundreds of times over.

    I’m looking forward to continuing the journey in 2011.

    Cheers,

    Peter

  6. Brian Aitken
    :

    Hi Adam & Roger, I calculated the IV for NCK @ $2.08 2011 & $2.20 2012, when I bought them back in Oct for $1.58, so I’m pleased I’m getting the hang of these valuations. I’ve bought a few other A1’s also, MCE, SWL (A3) & FGE on my research following your valuation criteria Roger, as well as JBH. I’m getting rid of some rubbish (AMP,BFG,VMG,BYL) & feel confident I’m replacing them with quality shares. Thanks so much for sharing Roger, my retirement looks a little more hopeful now following the devestation of the GFC. One of the shares I’ve held onto & may be worth keeping an eye on in the next year is GCS. They seem to be nearing what I would imagine your A list criteria would be Roger. What are your thought?

  7. AndyC
    :

    Hi Roger,

    You are a quality operator.

    I’m glad I stumbled upon some value investing videos online a number of years ago when you were running your funds management business.

    At the time I felt that your main contribution was to re-iterate Graham and Buffet’s investing principles.

    I don’t say this lightly when I say that you may have added an extra nugget to the picture. Namely, that we should think very hard about intrinsic value in future years in relation to current prices when we purchase a share of any business.

    This is simple to understand, but I certainly didn’t ‘get’ that so clearly until you articulated it in your book. Thank-you very very much. I will keep pointing my friends and colleagues in your direction.

    I look forward to more involvement in this Aussie value investing tribe.

    Best regards,
    Andrew

  8. Stuart
    :

    Dear Graduates and Roger,

    Thanks to all for a fantastic blog. Like Rod I have been more a silent partner and feel at times intimidated by the knowledge and ability of fellow graduates. I am not one for new years resolutions but I have committed to myself to become a more active contributor in 2011. Time has been my enemy this year but hopefully 2011 will see me turn a corner. This year I have been more focused on family and getting my daughter through VCE…which she has done beautifully.

    Take care all and never loose sight of what the real priorities are.

    Merry Xmas and Happy Investing and Prosperous New Year to all.

    Roger…take a well earned break and the best wishes of all Value.Able graduates.

  9. John M
    :

    G’day everyone,

    I really loved the Value.able Christmas video; very artistic.

    Congratulations Roger, on achieving the #2 spot in the charts, as well as now currently wearing three distinguished hats – Author, Analyst and Fund manager, and all by your 40th Birthday – truly an amazing achievement worthy of praise. I don’t know how to indicate applause on a blog – so just imagine that you can hear my loud and enthusiastic clapping. Well done mate.

    Hope everyone has a safe and peaceful Christmas holiday. I am looking forward seeing everyone here again in the New Year.

  10. Christopher
    :

    Hi folks, Im in my 20’s and started investing early this year. Its been fantastic reading all your insights and getting to know a few of the regular characters through silent reading!

    January through to april was lots of speculation, transaction fees and charts with very little gain but since learning about value investing and enjoying uncovering and researching great business’s not only is it fun but rewarding. What I appreciate most is the principles behind it and Rodgers teaching. You have helped “give a leg up, not a hand out” (to quote Rodger). There is such a wealth of knowledge on this blog but I dont come here to take but rather to learn, think and make my own decisions and for that I am greatful! All the best to evrybody on the blog, next year I hope to share in the discussion.
    Thanks again
    Christopher

  11. Ken Milhinch
    :

    From the wide variation of IV’s that are posted on the blog, it is apparent that many of you are using some numbers which may not be accurate. To assist, the following guidelines may be worth reading.

    1. Always take your numbers from the Annual Report. Do not try to extrapolate numbers by using EPS or DPS multiplied by number of shares. This will almost always give you an incorrect answer.
    2. Annual Reports are freely available to anyone who logs on to http://www.asx.com.au/asx/statistics/announcements.do Just enter the ASX code and click on 2010.
    3. There are only 5 numbers required to perform an IV using Roger’s method. That should be easy to get right shouldn’t it ? Guess again.

    NPAT This is the profit after tax shown on what is usually the first page of the financial report. You should ignore any numbers attributed to “minority or “non-controlling interests”.

    Equity This is shown at the bottom of the page labelled “Statement of Financial Position” – what used to be called the balance sheet. Again, ensure you leave out those minority interests.

    Lst Yr Equity Right next to it on the same page, again ignoring minority interests.

    No. of shares Buried deep in the notes to the report, usually under the heading “issued capital” or “contributed equity”. Look for the number at the end of the year.

    Dividends This is the easiest to get wrong, as it appears in several places, and each number can be different. The place to look is the page headed “Statement of Changes to Equity”, which usually follows the Statement of Financial Position. Be careful to exclude any numbers in the minority interests column here too.

    Finally, on reports where there are two sets of numbers under headings like “Parent Entity” or “Consolidated” you should always take the larger set of numbers

    By way of an example, you might like to look at the WOW Annual Report to check their numbers. Note we will use the numbers under “Consolidated”

    NPAT (Pge 88 of the AR) $2020.8 – note the figure of $17.2 for non-controlling interests which should be ignored.

    Equity (Pge 91 of the AR) $7570.4 – note the figure of $247.3 for non-controlling interests which should be ignored.

    LY Equity (Pge 91 of the AR) $6812.5 – note the figure of $244.8 for non-controlling interests which should be ignored.

    No of Shares (Pge 137 of the AR) 1,231,139,756 at the top of the page

    Dividends (Pge 95 of the AR) $1349.2 and once again, note and ignore the figure of $16.8 for non-controlling interests.

    There you have it. All you need to do is select a RR% and perform the calculation. Remember that the higher the RR%, the more conservative your IV will be, and conservative is good !
    Using 10% for everyone (or, in my opinion, anyone) is sure to give you some over optimistic valuations. Good Luck.

    Ken

    • Roger Gibson
      :

      Ken,

      I had lazily been using EPS figures from Commsec and multiplying by No of shares and in the majority of cases getting the same answers as using NPAT. However in a number of instances my answers were clearly high. Commsec EPS figures seem to be based on NPAT but before abnormals. Am I right in saying the NPAT to use should be after abnormals?

      I can see arguments both ways as abnormals are one offs and having been accounted will make the company more profitable in coming years.

      My question I assume also impacts on future earnings as presumably Commsec’s predicted future earnings are also before abnormals and maybe for some companies there is nothing abnormal about abnormals!!

      Thanks for your notes.

      Roger Gibson

  12. Nic Arena
    :

    Hi Everyone,

    Have a great Christmas and a happy new year.

    My tips for 2011 are:
    1) FGE
    2) TGA
    3) ANG
    3) KAM
    5) LYL
    Roughie: SFH

  13. Rod S
    :

    Dear Roger and the Gang,
    Thanks for all your posts.
    I have been one of the silent readers, I guess I am a shy type.
    I have a spread sheet with intrinsic value, yield and growth. I ned the income to live on but still want growth.
    My top picks for 2011 are
    1 FGE
    2 JBH
    3 ANG
    MMS also is up there, but with their massive debt, I will give them a miss.
    I hope 2011 proves as much fun as this year.

  14. Christopher
    :

    Merry Christmas Roger,

    Congratulations on a very successful year, and a big thankyou for making mine a little more successful too. All the best for 2011!

    Christopher

  15. david martin
    :

    Hi roger and all the graduates.

    I was studying the recent announcement by TRS and was curious to see if others came up with a similar reduction on ROE and resulting valuation to mine.

    I was holding the stock at the time but when the profit downgrade came i factored in the revised profit and recalcuated its ROE to be around 40% which gave me a valuation of around $12.70.

    Given that even after the announcement it was trading at a premium (to even this figure) I sold it.

    Has anyone else looked at this and if so, Is your valuation on par with mine?

    Regards and best wishes for christmas and the new year.

    • Roger Montgomery
      :

      Hi David,

      Beginning on page 213 of my book, I discuss changes in intrinsic value over time (admittedly in the context of examining the relationship between intrinsic value and book value). It is vital that you gain some confidence in where the intrinsic value is headed as well.

    • Peter
      :

      Hi David,

      I’ve revised my valuation following their earnings downgrage and now have their 2011 IV at $9.07 based on the following numbers.
      Equity per Share – $2.13
      ROE – 39%
      POR – 82.75%
      RR – 12%

      Hope this helps.

      Peter

      • Peter
        :

        Hi David,

        With reference to my previous post, I omitted to add that i’ve got their IV increasing to $10.18 in 2012. Of course, this is dependent on a whole bunch of variables including the consensus forecasts that one chooses to use.

        Peter

    • David Sinclair
      :

      Hi David,

      Are you thinking about the likely performance of TRS over the next 12 months or over the next 10 years? If you have a 10 year timeframe in mind then the current situation should only affect your valuation of the business if you expect it to be sustained for a considerable time. If you expect the drop in sales to be temporary (that is, to last for only a year or two) then the effect on the business over the long term should not be that dramatic. That is why I do not base valuations on either current year or forecast ROE. Basing a valuation on forecast ROE is likely to produce an unrealistically low estimate of IV for a good business facing a temporary setback, which could lead to missing out on a good buying opportunity. (Of course, your assessment of whether the setback is temporary or permanent is the key here!)

      I look at both the historical ROE as far back as I can get it and the current forecasts. I also try to get a feel for the business and its likely future prospects (for example, does a rising ROE indicate an improvement in the business or just the natural business cycle). After I have done that I decide on what I think is a reasonable, but conservative, estimate of the average ROE for the next five to ten years, and that is the ROE that I use in my valuations. Sometimes it is higher than the forecast ROE, somtimes it is lower. When the forecasts change I try to assess whether this is a temporary or permanent change before I make any changes to my expected ROE. I use a similar process to come up with an expected future payout ratio rather than using either the current year or forecast figure. All of this probably means that my IV for a business will change even less often than Roger’s. It means that I am less likely to get excited about a business when the current performance is above it’s medium/long term average and more likely to look into those that have run into recent difficulties. As I said before, though, a lot depends on making an accurate assessment of the cause of the difficulties and how long they will last!

      Another David.

      • David Sinclair
        :

        Hi Roger,

        Perhaps a blog post on this issue with an example or two would be a good idea. You occasionally drop hints in comments that you use historical numbers to get your valuations as well as forecasts, or that you use a higher payout ratio for businesses that are unlikely to be able to sustain their current growth, but a lot of commenters seem to plug forecast numbers into the formula without much (or any) cosideration of how well they represent the medium/long term prospects of the business. Generating valuations based on the numbers for individual years is useful for learning the process, but it could lead people astray if that is all they do.

        David S.

  16. Adam
    :

    Hi Roger,

    I’ve just done an IV calculation for Nick Scali, it appears to be at a discount of around 45% if my maths is right..

    2011 Equity per share: $0.309
    Payout Ratio: 70%
    2011 ROE: 57%
    RR:12%

    The maths gives me $2.60 for 2011 and also about $2.60 for 2012.

    Roger can you give me your current 11/12 valuations?

    Regards, Adam

  17. Nic Arena
    :

    Hi Roger,

    I have noticed over the past 6 or so months as I read basically every comment and post that alot is repeated (a lot of people also asking the same questions). Although I love the current system as it keeps everything fresh and current, I was wondering if it would be better for individual stocks to have their own area/posts where people could just post or ask questions about that stock. It would be good for all the insights created for say Forge Group to be in one area and people can read the comments dating back to whenever the post was created. Recently heaps of information was posted in “What are your Twelve Stocks of Christmas?” about many different companies and this information could be reposted by bloggers in the companies specific “folder/blog”.This would allow people who are interested in investing in a specific company to read all the great insights from bloggers, get a great range of opinions and do it without having to search through many blogs and also allowing you a bit more time (to keep educating us) and not having to keep typing “… already been answered or discussed in a previous blog ….” This would also allow people to just comment on your specific topic that you have posted to keep it relevant. I still very much like the current format as it is always great to read your insights into the investing world and comment where necessay but a “history” of a stock/business would be more user friendly and very helpful.

    If my investing knowledge before your book and website was considered a stock it would be a Peter Lynch “ten bagger” now.

    Have a great christmas and thanks again.

    Nic

  18. Matthew R
    :

    over 6000 comments? Crikey, the value.able community has been busy!

    I’m not alone when I say I have learnt an incredible amount. I’ve learnt not just “the value” but so much else as well. I have been inspired to read, to think and to question much more than I ever did previously.

    Thank you to you Roger, and the other regular contributors for mentoring this community. I have learnt an incredible amount, and as Ashley put it, “the financial rewards have been good as well”!

    Merry Christmas and a happy new year to Roger and all of the Value.Able community,

    Regards,
    Matt

      • Ashley Little
        :

        Agreed Roger,

        That photo was a classic.

        Thanks for you Input in 2010 Matthew……Dont know how you find the time what with this surgery stuff as well, but glad you do

  19. Ian
    :

    Hi Roger,
    Thank you from a very appreciative Value.able graduate from the class of 2010.
    Thank you so much for writing Value.able. I must say it has to be the best book on investing that I have read. By applying what you have written, the return on the investment in purchasing the book is already many times.
    Since “graduating” and after careful research and consideration I have purchased shares in 5 companies between August and December that would all have a MQR of A1, A2, or A3 and I have pruned 3 average stocks out of my portfolio. The overall performance of those recent purchases (in a very short time I know) has been very encouraging.
    After you announced MCE as your stock for the 12 days of Christmas the price has risen dramatically. I hope that there is not a Roger Montgomery Effect (RME) starting to happen to the price of shares that you recommend.
    Once again thank you so much for taking the time to write Value.able. It has been a big help to me and I am sure to many other people.
    Wishing you and your family a very Merry and Joyful Christmas and a happy new year.

    Ian

    • Roger Montgomery
      :

      Hi Ian,

      Despite warning people that I don’t know what shares prices will do, that my valuations could change from one day to the next, that they should do their own research and that they should seek and take personal professional advice, they still close their eyes listen only to what they want to hear. Remembering that my estimates of intrinsic value do change, the share price was below intrinsic value on the evening I appeared on the show. Two days later it had risen beyond the lower bound of my acceptable range. I believe intrinsic value will continue to rise in 2011 and 2012 but that estimate is based on what I believe now. If my opinion about a company’s prospects and competitive advantages change, so will the future intrinsic values.

  20. Andrew
    :

    Bring on the challenging homework Roger. Looking forward to it. I have enjoyed every minute on this blog and the conversations that follow in the comments section. I have found not just yourself Roger but other Value.Able graduates insights extremley interesting and have helped me.

    I am looking forward to further learning more from everyone here and have already found myself to be much improved in the filtering of businesses from investable businesses and trash which should be ignored. Which has been put to good use lately as i have hopefully helped a family member stay away from a horrible business in my opinion (AMC) and an extremley average one in Toll. I won the AMC battle but hopefully i can win the war and send another convert your way Roger.

    Thanks for all your time and effort Roger and everyone else behind the scenes in value.able land and to all the people on this blog. Merry Christmas to you all and no doubt we will all be back to discuss our homework.

    Have a good new year everyone.

    • Andrew
      :

      Also Roger, many people have thanked you about the help you have given us through your blog, tv appearences and book about finding great businesses and working out a good price to buy them.

      May i thank you for the reversal and your help in helping us learn and find those which we should stay away from. I for one never knew what to make of the cashflow statement in the report and focused on the P&L and various aspects of the balance sheet. But ever since your book i have become a lot better in understanding the whole picture. And some of those pictures can be quite scary, thank goodness i understand just how scary and i can then stay away from them.

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