Search Results for: coh

I was in Melbourne last week filming this year’s The Path Ahead DVD with Alan Kohler and Robert Gottliebsen. This is the third time Alan has asked Monique and I to participate, and in addition to enjoying it immensely, I am incredibly humbled by the invitation.

We sit around the breakfast table, enjoy some wonderful pastries, fruit and cheeses (a welcome break from my Dr Ross Walker breakfast regime) and I get to debate and hear a range of views about markets and the big picture issues for investors. The dialogue becomes quite animated at times, and I have to admit to often forgetting the four or five cameras recording our every utterance.

Tony Hunter from the ASX holds court, and directs questions that have been received by Alan to the panel, and almost always without notice. I thought I would write about this year’s experience only because one of the questions got me thinking about the clichés that investors often have at the back of their mind when making investment decisions.

Relying on investing clichés can be dangerous, if not because they are prevarications, but because they are the domain of the lazy who seek to grab the attention of those whose concentration has been diminished by the constant noise of the markets – much of which is useless and information-free (the noise that is).

Here is a few that came to mind immediately (some are useless but perhaps others aren’t); Sell in May and go away.  Buy the rumour, sell the fact. Don’t catch a falling knife. Feed the ducks while they’re quacking. Buy dips. Buy low and sell high. Only buy stocks that go up. This time its different. The trend is your friend. You can’t go broke taking a profit. Its time in the market not timing the market that counts.

You may have a few too, and I would love to hear them. Let me know if any have helped or hindered and feel free to add them by clicking ‘Leave a Comment’ at the bottom of this post.

There is no doubt you have heard many, if not all, of them before. They have become part of investing lore and yet they lead more to pain and suffering than they do to enlightenment. So why do they survive? Is it because there is truth in them?

I believe it is because there is a steady stream of new investors entering the market for whom the cliché has not yet become one. They run the risk of seeing the investing cliché as a truth – to be memorized and applied – and in doing so, they are guaranteed to repeat the mistakes made by the many that came before them.

Cliché 1:  You can’t go broke taking a profit

Think about the statement, You can’t go broke taking a profit; A new investor is almost certain to go broke doing just that. Why? Because a new investor will inevitably purchase a share only to see the price decline. Buying a low quality company (not one of my A1’s for example) or paying too a high a price (not estimating the intrinsic value of a company) will inevitably lead to a permanent loss of capital. The share price goes down and the investor, not wanting to accept a loss, holds on in the hope that one day the shares will recover. Then suppose the next investment decision leads to a gain; do you think the investor will hold this share for very long? The short answer is no. The fear of repeating the first mistake, resulting in another loss, is just too great. Better to take a small profit now than to see the shares fall again and have another loss.  The end result of repeating this numerous times is that the investor has several large losses and several small profits. The net result, of course, is a loss. You can go broke taking a profit just as surely as you can go broke saving money buying excessively-priced items that are on sale.

A further example refers to inflation, and its effect on the purchasing power of your money. Trading frequently involves substantial frictional costs. Brokerage, slippage and spreads seriously impinge on the returns otherwise available from a buy and hold strategy. Earning 15 per cent from buying and holding is always preferable to 15 per cent from trading, and that’s even before tax is factored into the equation. Suppose however, you don’t even achieve 15 per cent from trading frequently; after 20 years, you merely match the rate of inflation. Arguably, you have not lost purchasing power, but you have not gained any either. You have been taking profits but have not made any.

Similarly, if you sell a stock (using rising or trailing stops, for example) and make a 100 per cent return, but the shares rise 400 per cent, I would argue you have left a great deal of money on the table. You have certainly lost money taking a profit.

Cliché 2:  Its ‘Time in the market’ not ‘Timing the market’ that leads to success.

Another cliché that comes to mind is the idea that time in the market is the key to success rather than timing. At the outset, let me state that I don’t believe that timing the market or share prices works. Nor do I believe that time in the market works always, and if it sometimes does, the time can be so long that the returns are meaningless. Take for example the investor who purchased shares in Macquarie Bank at $90 some years ago; they are still waiting for a positive return. Or what about the investor who bought shares in Great Southern Plantation when the company listed? No chance of a positive return at all. If you purchased shares in Qantas or Telstra ten years ago, you would now have an investment with less value than you what commenced with.

Time in the market is no good if you buy poorly performing businesses or pay prices that are far above the intrinsic value of a company. For the seventeen years bound by 1964 and 1981 the Dow Jones rose just 1/10^th of one percent. Time, it seems, was not the friend of the merely patient investor. I can show you equally long periods of low returns on the Australian market too.

The point however is that time is only the friend of the investor who buys wonderful businesses at large discounts to intrinsic value. Otherwise, time is an enemy that steals returns just as surely as it steals a great day.

Don’t use time then as a band-aid to heal your investing mistakes. Stick to A1 businesses bought at discounts to intrinsic value and time will be your friend. So what are the businesses that time has befriended the most? What businesses have been increasing in intrinsic value the most over the last three, five or ten years?

The following Table should offer the answers.

Remember, these companies may be higher quality (Some are my A1’s), but they might not currently be cheap and I have not discussed the path of their intrinsic values in the future, which arguably is more important for the investor.  Be sure to seek personal professional advice before transacting in any security.

The table reveals the companies that have demonstrated the highest growth in intrinsic values over the years and perhaps unsurprisingly, if my method for calculating intrinsic value is any good, you will find a very strong correlation between the increases in values and the increases in share prices.

If you have any questions of course, or would like to contribute a cliche you once thought of as a lore to live and invest by but now see it for what it is, feel free to share by clicking the ‘Leave a Comment’ link below.

Posted by Roger Montgomery, 22 May 2010

by Roger Montgomery Posted in Investing Education.

• 86 Comments
• save this article
• 86
• POSTED IN Investing Education.

IRESS Market Technology (IRE) is one of Roger Montgomery’s A1 businesses. So are CSL and Cochlear (COH). In his appearance on Your Money Your Call Roger shares his insights on the defensive healthcare sector, revealing valuations for Ramsay (RHC), Sonic (SHL) and Primary Healthcare (PRY), and discusses the outlook for IRE in the event of another stock exchange entering the Australian market. Watch the interview.

by Roger Montgomery Posted in Media Room, TV Appearances.

• save this article
• POSTED IN Media Room, TV Appearances.

Roger Montgomery always talks about buying A1 businesses at great prices, but what does a business need to do to get Roger’s A1 score for quality and performance? High ROE that is also superior to its peers, strong competitive advantage, stability of earnings, low chance of default, great management, low debt. In his appearance on Your Money Your Call Roger also shares his thoughts on UGL Limited (UGL), Dolomartix (DMX), Cochlear (COH), Incite Pivot (IPL), Alumina (AWC) and AWB Limited (AWB). Watch the interview.

by Roger Montgomery Posted in Media Room, TV Appearances.

• 2 Comments
• save this article
• 2
• POSTED IN Media Room, TV Appearances.

Mark Twain (1835 – 1910) said; “I Am Not So Concerned With The Return On My Money As The Return Of My Money.” It may surprise you to know he was quite the investor and liked to make comment about his observations.  His quips always revealed a deep understanding of the nonsense that goes on in the stock market.  What fascinates me is that the mistakes Twain observed during his lifetime are being repeated today.

I am occasionally asked why I spend so much time offering my insights when many observe that there is neither an obligation nor financial need.  The reason is quite simple, I enjoy the process and of course, the proceeds of investing this way.  I find it reasonably undemanding and so I have a little time to share my findings.  And there’s the ancillary benefit of seeing hundreds of light-bulb moments when people ‘get it’.  I note Buffett’s obligations and financials are even less necessitous and yet he has devoted decades to educating investors and students.  I really enjoy my work.  It is fun and thank you for making it so.

Investing badly in stocks is both simple and easy.  But while investing well is equally simple – it requires 1) an understanding of how the market works, 2) how to identify good companies and finally, 3) how to value them – investing well is not easy.

This is because investing successfully requires the right temperament.  You see you can be really bright – smartest kid in the class – and still produce poor or inconsistent returns, invest in lousy businesses, be easily influenced by tips or gamble. I know a few who fit the “intelligent but dumb” category.  Because you are bombarded, second-by-second, by hundreds of opinions and because stocks are rising and falling all around you, all the time, investing may be simple but its not easy.

Buffett once said; “If you are in the investment business and have an IQ of 150, sell 30 points to someone else”.

Everyone reading this blog is capable of being terrific investors.  But it is important to know what you are doing and to do the right things.

To this end I have asked a couple of investors with whom I have corresponded for permission to discuss their correspondence because it provides a more complete understanding of the research that’s required before buying a share.

I regularly warn investors that what I can do well is value a company.  What I cannot do well is predict its short-term share price direction.  Long-term valuations (what I do) are not predictions of short term share prices (what I don’t do).

Generally the scorecard over the last 8 months is pretty good.  The invested Valueline Portfolio, which I write about in Alan Kohler’s Eureka Report, is up 30% against the market’s 20% rise.  I have avoided Telstra and Myer, bought JBH, REH, CSL and COH.  Replaced WBC with CBA last year and enjoyed its outperformance.  Bought MMS and sold it at close to the highs – right after a sell down by the founding shareholder – avoiding a sharp subsequent decline.

But this year, there have been a couple of reminders of the inability I admit to frequently, that of not being able to accurately predict short term prices.  And it is understanding the implications of this that may simultaneously serve to warn and help.

Even though I bought JB Hi-Fi below $9.00 last year, its value earlier this year was significantly higher than its circa $20 price.  And the price was falling.  It appeared that a Margin of Safety was being presented.  And then…the CEO resigned and the company raised its dividend payout ratio.  The latter reduces the intrinsic value and the former could too, depending on the capability of Terry Smart.

The point is 1) You need a large margin of safety and 2) DO NOT bet the farm on any one investment – diversify.

You can see my correspondence about this with “Paul” at http://rogermontgomery.com/what-does-jb-hi-fis-result-and-resignation-mean/

The second example is perhaps more predictable.  Last year, Peter Switzer asked me for five stocks that were high on the quality scale; not necessarily value, but quality.  We didn’t then have time to reveal the list, so I was asked back, in the second half of October 09.  By that time, the market had rallied strongly, as had some of the picks.  The three main stocks were MMS, JBH and WOW.

But because I didn’t have five at that time, I was asked for a couple more.  I offered two more and warned they were “speculative”.  “Speculative” is a warning to tread very, very carefully – think of it as meaning a very hot cup of tea balanced on your head.  You just don’t need to put yourself in that position!  But I was aware that viewers do like to investigate the odd speculative issue. A company earns the ‘speculative’ moniker because its size or exposure (to commodities, for example) or capital intensity render its performance less predictable or reliable, earning it the ‘speculative’ moniker.  Nevertheless, based on consensus analyst estimates they were companies whose values were rising and whose prices were at discounts to the intrinsic values at the time – a reasonable starting point for investigative analysis.  ERA was one and SXE was the other.  Both speculative and neither a company that I would buy personally because their low predictability means valuations can change rapidly and in either direction.

My suggestions on TV or radio should be seen as an additional opinion to the research you have already conducted and should motivate investors to begin the essential requirement to conduct their own research.  Unfortunately, I have discovered to my great disappointment, that some people just buy whatever stocks are mentioned by the invited guests on TV.  Putting aside the fact that I have said innumerable times that I cannot predict short-term movements of share prices, it seems some investors aren’t even doing the most basic research.

As I have warned here on the blog and my Facebook page on several occasions:

1)   I am under no obligation to revisit any previous valuations.

2) I may not be on TV or radio for some weeks and in that time my view may have changed in light of new information.  Again, I am not obligated to revisit the previous comments and often not asked.  Only a daily show could facilitate that.  An example may be, the suggestion to go and investigate ERA because of a very long term view that nuclear power is going be an important source of energy for a growing China followed by a more recent view (see the previous post) that short term risks from a Chinese property bubble could prove to be a significant short-term obstacle to Chinese growth.

3)   I don’t know what your particular needs and circumstances are.

4)   I assume you are diversified appropriately and never risk the farm in any single investment

5)   The stocks that I mention should be viewed, in the context of other research and your adviser’s recommendations, as another opinion to weigh up – to go and research not rush out and trade…rarely is impatience rewarded.

There are further warnings that are relevant and described in the correspondence related to the post you will find at http://rogermontgomery.com/what-does-jb-hi-fis-result-and-resignation-mean/

One investor wrote to me noting he had bought ERA and it had dropped in price.  This should not be surprising – in the short run prices can move up and down with no regard or relationship to the value of the business. But like JBH before it, ERA had of course made a surprise announcement that would affect not only the price but the intrinsic value.  In this case, it was a downgrade and a rather bleak outlook statement relating to cash flows.  Analysts – whose estimates are the basis for forecast valuations here – would be downgrading their forecasts and as a result the valuations would decline just as they did when JB Hi-Fi increased its payout ratio.  Over the long-term the valuations in ERA’s case, continue to rise (these valuations are also based on earnings estimates – new ones but which it should be noted are themselves based on commodity prices that are impossibly hard to forecast), but all valuations are lower than they were previously.

Our correspondence reminded me to regularly serve you with NOTICE that there is serious work to be done by you in this business of investing.  In a rising market you can pretty much close your eyes and buy anything but you should never conduct yourself this way.  If you work appropriately during a bull market, you will be rewarded in weaker markets too.  And while many may complain when I say on air “I can’t find anything of value at the moment”, I would rather you complain about the return ON your money than the return OF your money.

Posted by Roger Montgomery, 5 March 2010.

by Roger Montgomery Posted in Companies, Insightful Insights.

• 41 Comments
• save this article
• 41
• POSTED IN Companies, Insightful Insights.