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Peter Switzer interviews Matrix CEO Aaron Begley

Peter Switzer interviews Matrix CEO Aaron Begley

Peter Switzer called me earlier this week. He was travelling to Perth and asked me to recommend a CEO to invite on his show. Matrix CEO Aaron Begley instantly came to mind.

Value.able graduates will recall I discovered Matrix a long time ago. It was the first business to achieve my coveted A1 Montgomery Quality Rating (MQR). I have written about Martix in Money magazine and here at the blog, and also shared my insights with Peter on the Sky Business Channel.

Here are the highlights of Peter’s recent interview with Aaron Begley.

I often meet with CEOs and advocate you do the same. Attend AGMs and EGMs, or better yet, call the company. If management isn’t willing to speak to shareholders, that’s a fairly good indication to me of what they think of their owners.

Aaron and the board of Matrix check all the boxes I seek in Value.able companies. Re-read Chapter 6 of Value.able for more of my thoughts. And to watch another CEO interview, click here.

Posted by Roger Montgomery, author and fund manager, 4 March 2011.


Roger 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.

Why every investor should read Roger’s book VALUE.ABLE


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  1. I have not tried to apply the iv until now when I am offered an ORG entitlent. My general thought on the method is that it is a moving feast, or a better analogy is the philosphy of “beauty is in the eye of the beholder”. THe value derived will vary depending on the rate of return required. In this sense the iv derived is not something contained within the security and thus is not intrinsic per se.
    My calculation used only historic figures, no forecasts. I think I followed the JBH example fairly closely. My calculated iv was $7.14 now and will be $7.05 after the offer is taken up. Since the offer is to pay $13 per share I can only conclude that there is a lot of blue sky anticipated concerning Origin Energy.

    • Hi David,

      People are factoring in the massive upside in earnings from LNG and gas generally.

      They are not taking into account the capital that will be required to produce this return.

    • Just my thoughts.

      Roger has warn several times that changing the required rate of return does not make your investment decision any safer.

      Most of us also consider that IV is only one aspect of value investing. Good quality business with good prospect is a must and most of all, Margin of Safety.

    • Hi Brad j

      Nice Work

      Thanks for that

      nice story but I will keep what I have got and keep my cash at the ready

    • Brad,

      I’d just like to say thank you so much for the link and bringing this beautiful gem to my attention.

      I may be missing something, but this looks to be one of the best opportunities I’ve ever seen.

      Many thanks,

  2. Hi Roger, Room,

    Atlas Iron (AGO) seems to be going through a consolidation or pullback since its bright start to the year. I am thinking of buying into the company. Does anyone have a view on this one?

      • i was wondering if you can tell me what equity figure are you getting at for Atlas iron for FY11? i currently have $1.70 which includes the giralia acquisition.

      • Hi Roger, Thanks for your reply and video on AGO which has helped immeasurably.

        I also want to take this opportunity to thank you for your book and your blog which as an undergrad, has been instrumental in furthering my experiences and knowledge of investing.

        Do keep up the good work.

        Cheers, Raymond

      • My pleasure Raymond. I will pass on your thanks to my team. Thank you for sharing your Value.able journey with our community. I appreciate your encouraging words.

  3. Interesting that during the financial crisis a lot of the small cap A1’s fell more than the so called blue chips but have now surpassed their previous highs. Also interesting to note that a lot of large caps (blue chips) are still significantly below their previous highs.

    It is easier to get greater percentage growth if you are smaller. This is why Warren Buffett says he could get much higher returns if he was managing less funds.

    So we shouldn’t be surprised if at times our investments fall more than the market but if we know their value and have cash available this is the time to buy more and magnify long term returns when prices catch up to values.

    ORL was a great example of this during the Financial Crisis

  4. I own MCE but am still concerned about the operating cashflow (-$6.2M) compared to Net Profit after tax ($19.25M) in the latest half year accounts.

    I’ve seen a possible explanation being a payment of $30M made in the previous period by a particular customer to ‘jump the queue’ to ensure his order was fulfilled, the logic being that although being paid in the previous period, this $30M really related to operational business for the 6 months to 31 Dec 2010.

    But when I combine the the Operational Cashflow and Net Profit after tax of these two periods (ie the 12 mths to 30 June 2010 plus the 6 mths to 31/12/2011, I come up with a total operating cashflow of $20.154M against a total Net Profit after tax of $37.41M. This is a significant difference between Net Profit after tax and Operating Cashflow. Prior to this, Operating Cashflow of MCE almost invariably exceeded Net Profit after tax by a considerable margin (albeit off smaller amounts).

    Has anyone heard any explanation from the company about this reversal?

    • Hi Ian,

      This happens when a company grows so quickly,

      More of the cash is invested in higher Inventory and debtors.

      Hopes this helps

      • Ash

        Thanks for this response. I went back and compared the inventory and debtors at 31/12/2010 and 30/6/2010 and found insignificant difference. I still can’t figure out an explanation for the significant difference between Net Profit after Tax and Operational Cashflow.

      • Hi Ian,

        Have a look at June 09 compared to June 10

        Then have a think about the timeing differences of deposits received for the Next 6 months,

        Hope this helps

  5. matthewballard29@gmail.com


    I am getting an IV of around 2.17 with a RRR of 10%. I am not looking ahead but just on whats reported to date. I can see that if its full year is as good as its first half its IV will rise significantly. What ball park figures are you guys getting?

    When you say the share price could halve Roger are you referring to an unexpected negative impact with the NBN? Their reporting sees potential upside in it.

    Thanks again for your excellent blog.

  6. Looks like fleetwood has been sold down hard since it’s results, I thought the half year was pretty good………,

  7. Hello Ash,

    Are you able to do a valuation on an exciting company called RQL please?

    Thank you,

  8. I use 12% RR for REA, SEK and CRZ. All are trading well above current IV on my workings. IVs catch up to current market price circa 2013. Good companies but too expensive.

    1st time contributor, long time follower.


  9. Hi,

    Out of curiosity what RR would people place on an online business like REA. Personally I am using a 10% RR but I am not sure whether I am being overly generous? Would others consider this to be a 10% RR??? I know rates this as an A1 business.

    REA have a distinct competitive advantage in the real estate space – they are the dominant player with competitors not even coming close. As always would appreciate the thoughts of the community.

    Thanks in advance.


    • Hi Robert,

      I put REA, Seek and Carsales on a 12% RR. My reasoning is that there are extremley low barriers to entry for competitors in this space as well as rapid changes in technology and trends that the management will need to stay ahead of.

      Those three in my opinion are strong businesses with strong competitive advantages but they always need to be a step ahead and be ready to change with technology (think phone apps and other innovations).

      With all that said, i don’t put webjet in this category as according to my analysis it does not have the same strength of competititve advantage as the others to make it investment worthy for myself even though it has good financials.

  10. I am getting excited over all the bad news in the market. The more negative Mr Market is, the more I am watching things closely.

    Love being a Value Investor!

    • Hi Ann,

      From last look FMG carries a MQR of B2.

      I see Roger made comments on them being under IV when they were $4.30 in Aug 2010 but even at that stage he was expressing caution on the future of iron ore prices and the impact on a business like this.

      I just don’t see FMG as a ‘turn the stock market off’ kinda business. Give me an A1 with long term tangible prospects anytime. It might go to $10 but I’ll have no regrets about not stepping onboard.

      • I like specific commodities but iron ore businesses do worry me and I have no exposure.

  11. A lot of people are saying that QBE is cheap now but for me QBE has to get under $14.00 before I start looking at it. Any thoughts on the great QBE

    • David Sinclair

      A lot of insurance companies are happy to make underwriting losses and rely on investment returns for their profits. QBE follow a different path. They consistently make underwriting profits, which allows them to invest their float conseratively (mainly in government bonds). Due to the conservative investment strategy the biggest factor affecting QBE’s profits is the level of interest rates. In many of QBE’s major markets interest rates are currently at all time lows. I do not expect this to continue forever. I do not know when it will happen, but interest rates in the US and Europe will eventually rise, and QBE’s profits will rise with them. Based on their past history and my expectations for the future, I think that QBE is currently cheap. Not an outstanding bargain, but cheap. Anyone who expects QBE’s results to continue into the forseable future will no doubt disagree with me, as will anyone who just plugs current numbers into a formula without considering what the future may hold.

      David S.

      • unless you believe interest rates are heading up in America, this company’s share price is going nowhere! their acquisition strategy is not ROE positive and their underwriting margins are flat. so the only way i can see this company substantially improving its earnings and ROE is if rates go up in America….now last time i saw America has high unemployment and their reserve chief has studied one thing all his life, and thats to print money!

        and thats not to mention increased frequency in natural catastrophes….

        good luck making money on this one at the current price.

      • David Sinclair

        Hi Ron,

        Interest rates in America can’t go anywhere other than up. Probably not this year, and maybe not next year either, but do you really think that they will stay at 0.25% forever? Despite the Fed’s best efforts, long-term bond yields in the US are already rising because people are looking into the future and can see a recovery coming. Sooner or later interest rates in America will go up and when that happens QBE’s earnings will improve substantially.

        A “flat” underwriting result of 89.7% is not such a big deal when you compare it with competitors like IAG (100.3%) and Suncorp (99.2%).

        I also think that their recent acqusitions have been more intelligent than you give them credit for. Did you notice that they didn’t buy all of Balboa from B of A? They cherry-picked the most profitable bits of the portfolio.

        Overall, I think that QBE is a good business with reasonable future prospects. As I said previously, I think that the price is currently cheap, but not a bargain. I will not comment on whether or not I think QBE is a good investment at current prices. That is for everyone to make up their own minds about.

        David S.

      • Hi All,

        Based on a Montgomery Value formula, QBE would not currently be an outstanding buy. Perhaps if there were currently an abundance of great opportunities out there for us Value Investors, we would overlook this company and instead purchase the more attractive opportunities presented to us.

        However; QBE has outstanding management with shareholder friendly initiatives that have provided superior shareholder returns over a long period of time. Although it may be speculating a little, I think one needs to have faith in a company like this. They have a great track record with smart and able managers who will continue to make the ‘smart’ decisions. They have lots of cash and will continue deploying that capital into the best assets available (luckily there are some distressed assets in Europe and North America at the moment which they have and will continue purchasing for attractive prices.)

        Even though the situation isn’t as good as it once was (due to short term interest rates being low – the business model is still in tact and therefore will improve as the global economy does), it is a company that won’t write new business or make acquisitions just for the sake of it. QBE will bide its time and wait to capitalise on the best opportunities. If one were to look at the company from a long term perspective, imo; this is as good a chance to buy this great company for a cheap-fair price as ever.

        It’s growth prospects may not look outstanding at the moment, but you can be sure that management will act on any good opportunities as they arise. Hence shareholders will more likely than not continue to hear good surprises if one is a long term holder.

        That being said; QBE will unlikely shoot the lights out and won’t be a ten-bagger any time soon. I would rather trust and own a proven business model though (bearing in mind the lack of current A1 opportunities) than sit in cash and earn meager returns on my capital.


      • hi David, all i said is that qbe is a good business but if you buy today you will not make money for a while. is that what you are looking for as an investor??

        if so, good luck.

    • One of the best of the insurers IMO. The strong AUD and weak USD is not helping them ATM; which means we’d see a considerable turnaround if/when the AUD retreats to .75c. Notwistanding tough market and weather conditions they’re ROE has been in decline the last few years. I bought in at a MOS on their 2009 Valuation but am now sitting a premium to their 2010 valuation. :( .On this one I failed in the creed of well run great companies (check), with great fundamentals (check) bought a great price (fail).

    • QBE is a fantastic business and if you are looking at insurance, it doesn’t get any better. My IV is coming in at around $20. The upside potential is when the bond market turns and they can get significantly higher yields on their insurance book. Whilst saying this, I’m not sure the specifics of their investment portfolio and whether they are at risk of a fall in sovereign bond prices. Does anyone know the answer to this or where you can find more information on a break-down of their investments?

    • David Sinclair

      Sorry, that should be “Anyone who expects QBE’s *current* results to continue into the forseable future will no doubt disagree with me…”

      David S.

    • Kent Bermingham

      Just been to a small meeting that some QBE Shareholders were invited to attend, It was great to sit back and watch the analyst present his magic to the attendees, earnings per share are increasing, strong ROE over many years, strong and reputable company etc etc etc.It was sad to see so many retirees just nodding their head and I eventually couldn’t resist in giving the analyst my ValueAble analysis.
      Share price has only grown from $10 to $17 over 10 years and after excluding CPI has not performed well, ROE is actually declining over the last few years, debt is increasing,Qld floods has done nothing for Brand Image, Mamagement practices haven’t changed for 20 years, Funds are invested in 80% Cash and Fixed Deposits, each country in which QBE operates acts independently, Board will turnover in 10 years and I cannot see moves into emerging markets and I have an Intrinsic Values of between $14 and $15 and I have recently sold my QBE shares and invested in some companies with a margin of safety to their Intrinsic Value.
      Needless to say I won’t be invited back but I hope I recruited some more graduates.

      • LOL Kent,

        I find that when all the talking heads on TV are recommending a stock(particularly a large one like QBE) it is best to avoid.

      • Kent Bermingham

        Ash your thoughts on FGE move on LYC and Management changes? It makes me very, very nervous and I would like to hear your thought?

      • Yes, I was shocked when I first read it but realised it was a different company.

        Strangely enough, the people at LYC are going to have a hard time with the word “Forge” since “Forge Group” is doing construction work for them while they are planning on a business deal with “Forge Resources”

        Plenty of forging for Lynas :)

  12. Patience can be very difficult but if you purchase a good business and have confidence in your research and believe that everything returns to its true value then it maybe worth the wait.

  13. Brian Mc Erlean

    Hi Roger and Bloggers, my top three stocks are FWD ARP and MND but they will not come back to the prices I am prepared to pay: FWD $9,50 ARP$7 MND $13.50. These are the prices I bought them at last year. I am tempted to pay too much for ARP as I like it so much.
    I have too much JBH FGE MCE. The debate on JBH is interesting. Compare the ROE of Wesfarmers and JBH if you want to sleep well at night.
    This value investing is hard work because so much patience is involved but it certainly is profitable. I looked at the spread last year for FWD and there was a 70% spread between the high and low. As Buffet says the maket is a casino for transferring wealth from the impatient to the patient.
    Roll on Oil Crisis, US or European Loan default or somthing else from left of field. It has taken me 25 years to understand patience and cash are required at all times.

  14. Hi All,

    Interesting that Berkshire’s latest result (a huge outlier) is the first and probably the last for a very long time, where the market’s outperformed the company 2 years in succession. Highlights how difficult it can be to consistently achieve over-performance vs the market.

    There’s a good summary on WB’s latest letter in this weekend’s AFR that’s worth a look if you can put your hands on a copy.

    Hat’s off to Matrix, Forge & Roger for un-earthing them.

    Now back to the hard work of finding the next top 300 break-through Businesses…


  15. Ash Little. I too like the balance sheet of CMI limited ( cmi ) and my valuation is over $3.00 but like you said competitive advantage is something I must look at. Thank’s for your thought’s Ash

  16. Hi Forum

    I am interested to hear what valuations others are coming up with for MCE –
    I am using a Required return of 12% and a ROE of 35%.
    The ROE I have selected is lower than the projected ROE for 2011 however, it what I have calculated as a sustainable ROE in the long term based on Comsec forecasts on EPS.

    2011 – $8.66
    2012 – $11.94
    2013 – $15.89

    Based on
    RR 12%
    ROE 35%
    POR 9.5%

    • Hi Peter,

      That payout ratio seems very low, and produces an unrealistic growth rate. The consensus figures I’m looking at suggest a POR of about 36.3% for 2012, and I’d suggest using something similar for 2011. The POR is only heading in one direction.

      • A PAO of 36.5% for 2011? Why? They are paying out 3 cents in the first half of 2011 and you are suggesting that they are going to pay some 17 cents for the second half? Is that likely?

        This all sound like complete gambling to me; 2 cents in H1 2010, 2 cents in H2 2010, 3 cents in H1 2011 and then, you suggest (based on a estmated 55 cents NPAT) 17 cents (if not more) in H2 2011! What is the point of estimating future IV if one picks a seemingly totally random number for any of the parameters?

        The POR is actually dropping (at least short term) believe it or not as the NPAT increased more than the 50% rise in dividend.

        The problem of being too cautious is that you miss out on gains as there are not too many companies like MCE on a small share market like Australia. Being patient works better in a large market like USA and there will always be a nice pool of prospect due to the sheer size of the market.

      • Mikael,

        Christopher states POR of 36.3% for 2012, which is in line with my own calcs. I also have the POR for 2011 as 12%.


        I am interested to understand though why Christopher / Roger recommends using a POR close to 36% in the 2011 valuation rather than the forecasted 12%? 12%, or thereabouts will be the POR for 2011, that is what the analysts are forecasting.

        While I have read page 111 on implied growth rates in Valuable, I am not entirely sure I understand how I am suppose to use this metric. I have the implied growth rate for MCE 2011 at ~44% and dropping to ~24% for 2012. I can see the implied growth rate is relatively hight for 2011, but apart from observation, would I be adjusting my IV on this? Apologies if this is maths 101……. and help education would help…..

        Thanks in advance


      • Hi Robert,

        I agree that this is the most challenging part. As a rule of thumb, I consider any growth rate over 20% to be unrealistic, and 19-20% would only be appropriate for the very best of companies (which MCE probably is).

        As you can see from your calculations, the 2011 growth rate was not sustainable – it nearly halved in the next year. This means that if you used the same numbers to calculate IV as you did implied growth rate, your IV will overestimate MCE’s true worth.

        So I would definitely suggest adjusting your IV whenever you see growth rates like those. You can do this by adjusting ROE (which is falling slightly over the next couple of years on the consensus figures) or by adjusting the payout ratio. MCE’s payout ratio is that of a young company, and is being kept low by their need for cash as they ramp up capex. Once they have finished building Henderson, and are presumably earning even greater profits, the payout ratio will rise dramatically.

      • Hi Mikael,

        I agree MCE won’t pay a 17c dividend in H2 2011. There are a couple of reasons why we should adjust the POR to make our IV more accurate though.

        Firstly, a POR of 9.5% and a ROE of 35% implies a growth rate of 31.68% This is not sustainable, even for MCE which in my opinion is one of the best run companies in the country. (Pages 111-112 are your friend here).

        Secondly, if the consensus figures are correct and the POR rises to 36.3% (or anything in that ballpark) in FY2012, then our FY2011 and even our FY2010 IV’s will overestimate the true value of MCE if we use a POR of 9.5%. This is because the numbers in the multiplier tables are based on more than one year of results; e.g., a company earns $1m NPAT for every year in perpetuity with a 50% POR, except this year, where it earns $10m; just using this year’s figures will produce an incorrect result.

        Tying it all together, we could consider lowering MCE’s ROE to make the implied growth rate more realistic; Peter has already lowered his a little. However, given the increase in the POR predicted in the consensus figures, and taking into account where MCE is in its life cycle, I would argue that the POR definitely needs to be modified as well. I appreciate that departing from MCE’s actual figures is frustrating, but we must be careful not to be blind in our application of Roger’s formula, especially when we can see a significant change just around the corner, or where it produses an objectively unrealistic result.

        I should add that MCE are a real favourite of mine and I hold the stock.

      • Nothing is sustainable in the long run so one could (almost) argue that all companies are overvalued using the Roger’s formulae. Growth will slow down for sure but not for the next few years. They are using all capacity they got access to and thus have to decline orders. Once Henderson comes on line and has been operating for a year or so we will have a better picture of the growth potential in MCE. Massive cost cuts are coming as indicated by Aaron. One thing I have learned over the years in share markets is that it is oh-so-very-tempting to sell great companies too early because they cannot possibly just keep on growing.

  17. Simon Anthony

    Looking at the Berkshire’s latest portfolio holdings release, one thing that certainly caught my eye was Buffet’s had increased his stake in Wells Fargo (WFC), a long time Buffet favorite. In the quarter ending Dec. 31, 2010, Berkshire’s position had grown to over 342 million shares, up from 336.4 million. The ROE of WFC is a mere 10.5% !!! Certainly not an extraordinary business in my opinion. Could this be a case of needing larger and larger businesses to supply the liquidity needed when you have 300 million to invest at a time ?

  18. This is a really terrrific business and a great Australian success story….

    Whether you’re a China bull or bear, the world needs energy and there hasn’t been a major oil find onshore for decades so we’re looking in deeper and deeper water – this is a big tail wind for this business and as Aaron points out, they own their own IP.

    So yes, I’m obsessed with MCE – how many times do you buy a stock, see the share price more than double in 7 months and still consider it, (objectively) undervalued ?

  19. I also send you thanks Roger, for uncovering a wonderful company last year at a huge discount to intrinsic value. Peter Switzer also does a wonderful job with his interviews. He is not afraid to ask the hard questions.

    For Jim Rogers fans here is a link to a fairly recent interview.
    Jim is still very bullish for commodities.

    • “He is not afraid to ask the hard questions” ?
      So why did he not ask why Henderson was 50% over budget ? Why did he not ask why Henderson was 9 months behind schedule ? So why did he not ask EXACTLY what is MCE’s competitive advantage ? Mr Begley comes across as a less than impressive CEO, and Switzer’s interviews are way too fluffy.


      • Hi Lina,

        Yes you are right. I quote from the website of The Subsea Company: “Matrix Composites and Engineering Limited announced today that it is undertaking the construction of a new state of the art facility in the Australian Marine Complex (AMC) Subsea Cluster at Henderson, south of Perth.

        To be built in two stages on an 8.4 Hectare site, the Stage I complex will incorporate an integrated buoyancy manufacturing facility that includes bulk chemical storage, warehousing, composite sphere manufacturing, composite layup and casting, painting, dispatch and one of the world’s largest full scale hyperbaric testing centers.

        When completed in 2010 this facility will house the largest and most sophisticated syntactic foam buoyancy plant in the world and will more than double Matrix’s current production capacity…Construction of Stage 1 is underway and operations are due to commence in April 2010.

        In the Results presentation for the half year ending December 30, 2009, the company said: “Construction commenced on Henderson Manufacturing facility, Stage 1 on track for completion in Q1 FY11”

        The company’s pre-quotation offer document dated October 2009 reads: “The proceeds from this Offer will primarily be used to assist Matrix to construct a purpose built facility…at Henderson” and “Matrix expects to develop the Henderson Property in two stages over the next three years.”

        On November 13, 2009 the company announced: “I am very pleased to inform you that the contract for the Henderson site works has been awarded to the Georgiou Group and site works have commenced.”

        In February 2010 the Investor Presentation for the HY2009 results stated: “Construction has commenced, Stage 1 to go online in Q1 FY 2011, Stage 2 planned for completion in 2013.” I assume Q1 FY 2011 means July – September 2010.
        On April 14, 2010 the company announced a capital raising of $13.5 million and said “Henderson Facility construction is on schedule” and “First production at the Henderson facility is expected in Q1 FY11”
        On August 9, 2010, the ‘Commentary on Annual Results and Investor Update’ read “Construction on Henderson Stage 1 has commenced and we expect to commence commissioning trials in October 2010 with full commissioning in December 2010”
        On the same day (9/8/2010) the ‘Investor presentation’ read: “Stage 1 nearing completion” and “Henderson Stage 1 Buildings and Plant construction and procurement proceeding rapidly with commissioning in Q1/Q2 FY011.”
        The annual report released 1 September2010 stated: “The HEnderson project is on track for commissioning late 2010 calendar year…”
        At the 15 October, 2010 Annual General Meeting the shareholder presentation read: “Henderson Stage 1 commissioning in late Q2 Fy011”. Presumably that means December 2010. The company also said “Potential risks to revenue and profit…commissioning delays with Henderson resulting from system integration issues.”
        In the 1 December 2010 Investor Update the company stated “Henderson Stage 1 commissioning commences in late Q2 FY11 and concludes Jan/Feb 2011”
        In the 8 Feb 2011 Investor Update the company stated; “Henderson Stage 1 commissioning proceeding through January to March”

        Perhaps the length of time taken is a temporary competitive advantage, offering a first mover benefit against a competitor who may experience similar delays!

        On the cost issue:

        The Prospectus reads: “completion of the stage 1 buildings at the Henderson Property is expected to cost approximately $22 million. Matrix intends to apply $13.75 million of the funds raised for the Offer towards these costs, and will seek debt funding for the balance.”
        In a market update on 22 December 2009, the company said: ” Debt finance to assist in funding of the Henderson Development has been arranged. Matrix has agreed on the terms of credit approved facilities totaling $28.75 million to be provided by National Australia Bank Limited.” And “The original Stage 1 building scope has been extended to include additional laydown area that was originally planned to be part of Stage 2,…”
        On April 14, 2010 the company announced a capital raising of $13.5 million to be used, “primarily to fund plant and fit-out of the Henderson facility.” The company also noted: “The fit-out costs for the facility are expected to be approximately $26 million, which will now be fully funded through a combination of debt and equity.”
        The annual report released 1 September under the heading Year In Review, the company said …commenced the development of our new $60 million state of the art facility in Henderson” and “The company has commitments totaling $60million for the development of the Henderson site ($30m) and the cost of plant and equipment ($30million) to be located at the Henderson site”
        In the 8 Feb 2011 Investor Update the company stated; “Final build cost estimated at $64 million (plant fit out and building).

        So yes, Lina, there have been delays and additional costs to what has been described as a very complex build (with a lot of automation). But given the regular updates by the company, what do you believe it is a sign of?

      • Hi Roger,

        The skills and expertise required to design, manufacture and market composite mining products are very different to the skills required to install and commission a large and sophisticated capital project.

        I would suspect that Matrix are operating out of their sweet spot in building the Henderson facility (it’s not something they’ve done before), and they are coming up against the sort of hurdles that can beset even an experienced engineering firm.

        It’s instructive that even at this late stage of the project, Aaron Begley still sees the commissioning of the plant as the major risk to the organisation (according to his answer to Switzer). That tells me that they’re still not out of the woods just yet.

        Hopefully they can get on top of things quickly and won’t have to sink too much further cash / capital into this exercise. Luckily their cash-making ability has been sufficient to mask the issues thus far. Hopefully that happy set of circumstances will continue.


      • Roger,

        So as long as they keep telling the market about delays and cost overruns it’s ok ? Where are the cost estimating skills ? Where are the project management skills ? Where is the accountability ?
        This hysteria has reached the point where one of your posters here has described MCE as “one of the best run companies in Australia” and that is just plain silly.

      • Hi Lina,

        Your opposition to MCE is noted! Such passionate opposition is consistent with someone who may have missed MCE, disagreed with the thesis or sold it too early. Thats investing and thankfully there are both a multitude of opportunities and a vast variety of opinions.

        As an important administrative matter, I note that you Posted on March 5, 2011 at 8:51 am: “Typical Switzer interview. No hard questions, no new information. Lina”
        Lina, you used Ken Millich’s email address! If you are Ken, please refrain from using ‘Lina’ as a pseudonym to make disparaging remarks or frequent another blog.

      • good detective work roger! :-)

        if ‘Lina’ is indeed ken, than i’m sure he’s furious from missing out on matrix…. :-)

        keep up the good work Aaron Begley!

      • Hi Room,

        Given Lina doesn’t like VOC as well this may be a good one too I think

        Just my view but it gets a WOW from me.

        Thanks Nic

        no advice BTW

      • Me too for a while I have to admit. Had a good look a little while ago. Met with company more recently. Discount to IV and a B2. Of course share price could halve and it trades ‘by appointment’. Be sure to seek and take personal professional advice.

      • Kent Bermingham

        Great comments team
        We must keep this blog, honest,open and very professional with some humour as most of us enjoy the comments and RELY on it’s integrity to assist us in helping us make our final investment decisions – masquerading should not be tolerated or accepted.

      • Took another look at VOC after the above comments.

        I get Net Debt/Equity at 95%.

        Unless I’ve stuffed the calculation (always a distinct possibility!), wouldn’t this preclude the business on the basis of debt.

        For the calc I added together all the current and noncurrent financial liabilities, subtracted the cash available and then divided by the equity.

      • Hi Scotty,

        As Roger says a B2.

        The dollar figure of the debt is not high and if it can keep growing without adding to the debt then the rating will improve

      • me too :-)
        i bought at $1.40 and kept writing on this blog thats its a good little business thats worth $2+.
        and yes, from memory, Lina kept complaining about this one also….
        i hope everyone else on this blog rushes in to push the price further up…..

      • George Economou

        Hello Roger, Ash and fellow contributors,

        The share price has gone up about 50% since they released their half year results, the average number of daily trades have quadrupled as well and Citigroup have taken a 5% stake. I think their days of obscurity may be coming to an end. I also bought in recently but was too afraid to say anything given Lina’s response to Nick.

        Thanks again everyone, I’m still an undergraduate but thanks to Roger’s book and blog I’ve learnt heaps. I wish I’d known this stuff 20 years ago.


      • Roger,

        I confess, you got me. I doubted you would post anything I said about MCE, so I used my wife’s name.


      • Hi Ken,

        I did find your contibutions to the blog fantastic. You have a lot to offer.

        But seriously mate you used Lina well before the MCE comments.( so let’s not try to sugar coat it)

        I and may others would love you to keep posting and I hope you do.

        People disagree with me lots but it does not stop me posting (As I often say “just my view”)

        I hope you continue posting under KEN as we will all get lots out of it

      • Ash & Room,

        Considering VOC is now on trading halt suggest to me that there are ‘other reasons other people’ are buying it, so I wouldn’t want to attribute the recent increase to just Roger committing to it.

      • Hey All

        I became a little suspicious this morning – after seeing these last few posts from Ash and Roger, there was a huge scurry of activity this morning on this particular stock. Much bigger volumes than normal ,trading as soon as the market opened pushing the price up 10% in a matter of hours.

        I’m hoping that this is a coincidence and that people aren’t blindly jumping on board without doing their own research first. Roger has repeatedly informed us that we should be doing our own research and deciding whether a stock is suitable for our own investment needs. Otherwise we are not being value investors, we are speculating.

        I had a look at the last annual report and half yearly results and I would agree that some superficial stats look good with huge increases in revenue and NPAT. However, closer examination of the financial report does highlight a few red flags – net debt to equity is currently 70%, working capital (current assets minus current liabilities) is negative and there are no net tangible assets. Whilst this does not preclude an investment, it should at the very least warrant a closer scrutiny of the financial statements and further assessment to ensure you have a good understanding of the business and it’s sustainable competitive advantages.

      • Hi Jonesy,

        Of course people are rushing in without doing their homework.

        As Roger says this is a B2 which would not be a suitable investment for everyone.

        Default risks are higher for B2’s as show by today’s capital raising.

        That said they have all been suitably warned by Roger in the past

      • William Gill

        HI Roger
        There is no such thing as a quick dollar, but obviously plenty of people looking for it.
        The price increase in VOC this morning sent alarm bells of for me, I am sure some readers did not stick to the principles of valuable and research VOC to see if they would be comfortable owning it.
        Never the less they were all warned, but I do think research first, is one of the most important steps . Even VOC looks ok you must understand the company you are buying.

      • VOC eh? I’ll have a closer look but my early cheap and nasty workings suggest that I may be a bit late to the game this time.

      • By my maths it still has a way to go yet Greg Mc

        I think Rogers $2.45 is the 2010 valuation.

        I am getting something starting with a High $3 for 2011 but the capital raising today could change that.

        B2 though so not for the feint hearted

      • Capital raising announced the day after the stock is added to the Eureka Report Valueline portfolio.

        As we all know the MQR are designed to avoid stocks which will require further funding from investors – and VOC was given a B2…it seems that Roger was spot by giving it a lower rating.
        Other than that, the company does appear to be in a very exciting industry and despite it being fast changing..management seem to be efficient at managing it.

        Its a pitty that once Roger commits to a stock that the price becomes almost untouchable..especially when I was halfway through allocating my position to this one. Will be watching with interest to see the terms of the capital raising and I may have a chance to complete my allocation through that!…assuming the IV is not harshly impacted of course…

      • Hi Roger,

        Thanks for the timeline. There could be many reasons why things have changed:

        – maybe they have made changes to increase capacity (due to the influx of orders they are receiving and their projections about future demand).

        – maybe they have changed the production lines to be able to make new products that they are developing

        – maybe they have Forge group working on the construction and FGE have made plenty on the deal (okay this one is from my dreams!!)

        The reality is we are not working in this business. When making investments in businesses you have to have a level of trust in the managers to make the correct decisions. The Matrix guys seem to be doing a good job, so I am happy for them to manage my very small stake. Go for it Aaron and your team – post some huge profit numbers and dazzle us!!

        Michael S

  20. Hi folks,

    Has anyone out there had a look at Corporate Travel Management (CTD).

    CTD is a travel agency used by business to coordinate and arrange corporate travel. It’s been around for about 10 years and has pursued a growth stratedgy that has seen it open in Brisbane, Sydney, Perth, Melbourne and Aukland.

    It has achieved a number of industry awards over the past decade and has around 600 business clients on the books.

    CTD floated in Nov 2010 after raising approx $20m to complete the acquisition of Travelcorp and enhance operating capital.

    CTD is able to enter into long term contracts with business leaders and has an excelent retention rate. It is not capital intensive to operate and given the fact that most travel is booked and payed for instantly, it generates good quantities of cash for minimal business outlay.

    As the IPO raised funds for the purchase of Travelcorp, it is of course hard to anticipate at this stage what the effect on ROE will be. However given the upgrade to profit announced last month, I’m comfortable that ROE will be maintained.

    In terms of competative advantage, I can say with some experience that the larger players in the Corporate travel industry such as QBT offer a service that is ordinary at best. I am encouraged by the number of businesses CTD have on the books and the awards for excellence it has received.

    As for IV, I’ve used the following figures in my calculations. I am of course open to criticism (polite):

    $34,154,500 (2011 est). Based on last years equity I’m working off an average of:

    $22,951,000 Equity
    70370000 shares on issue = Eq/share 48.5 cents
    NPAT $7,750,000 (est)
    Divs $3,875,000 (POR 50%)
    ROE 33%
    RR 12%

    IV $2.12 (2011)

    I’d be happy if any others would like to share their thoughts, but I think this business may just tick enough boxes to deserve a bit of attention.

    • Don’t you think that businesses will be cutting back unnecessary travel with rising oil prices and be increasingly moving towards more teleconferences and video chat?

      • Steve,

        No, there is always a need to conduct personal meetings/inspections/briefings etc so I don’t believe there is a downtrend in business travel. In fact airline travel is growing at a steady clip and this includes business people. Many businesses rely on personal relationships and as much as we’d like to believe that teleconferences, and paperless offices are the way of the future, the reality is that most execs network in person. Also a lot of workforces have fairly mobile components and compamies like CTD are able to tailor cost effective travel for them.

        Oil prices and travel also don’t concern me overly. I agree with what is spoken of when it come to oil into the future but I believe the time frame is too far out yet to impact. As for the short term oil dramas, I’m looking through that.


      • Fair enough. I guess my view is framed with the concept that we are going to have continued oil crises over the next few years with demand exceeding available supply. Should this persist, this will lead to many businesses having to reduce fuel expenditure including travel. Obviously there will be continued travel which forms a core part of business operations, but I do think that teleconferences and paperless offices won’t be a choice, they will be an economic necessity due to cost constraints.

        Clearly the outlook depends on one’s view of future oil prices. I believe that the timing is near and that this is all happening between now and 2015 (also brought forward if the problems in the middle east persist). Prices will spike up and down and overall they will be higher due to supply constraints.

      • Hi Guys,

        I like the look of CTM but Skype is changing the need to meet in person.

        Perhaps due to the distances involved maybe the Bush is leading the City on this one.

      • Hi all,

        As usual time will tell the story on whether the company ticks all the right boxes or not. CTM remains for me a very interesting company in the minnow stage and I’ve been happy based on my assessment of the business to invest some money.

        It’s been interesting though to apply the theories of sound management, brand loyalty, debt/equity and competative advantage to this company at his stage. We sit here and value companies daily and speak amongst ourselves about whether or not we got it right. Witness the thousands of words written here about Matrix and Forge etc. Despite all that however, at the end of the day each one of us takes a little leap of faith when we lay our money down. What we do here is only ever risk management, never risk cancellation. It’s what makes this whole invesing practice just a little bit exciting.

        So, I’ve enjoyed looking over CTM and I’ve enjoyed reading others comments about it. I like the look of the company and I actually think they my have found a potential lucrative niche.

        We should keep discussing it though. It’ll make it easier for me down the track to decide whether or not I’ll let you buy my CTD shares at $5 a pop!!!

      • Hi Stephen

        I have had a look at CTD. It is a cyclical business and is in a growth or expansionary phase which I believe ties in with the current economy. I would be willing to get in If I can pick up at the right price.

        My ROE is slightly lower than yours.
        Based on their upgraded profit guidance, If they achieve the midway point of guidance, NPAT 8.1m and pay out 50% in dividends, then equity at end of FY 2011 should be about 37.8 mil.

        Beginning equity for 2011 is 11.7 mil. At HY 2011 it becomes 33.3 mil after listing and capital raising. The average of these 2 figures is 22.5 mil.

        I have averaged ending equity of 37.8mil and the average of HY report of 22.5 mil. which gives me average equity for the full year of 30.1 mil.
        Based on that I get an ROE of 27%.
        IV is 1.82 with RR of 12%

        Is this business deserving of a lower RR for IV purposes. I am not sure. Is there a methodology for selecting the appropriate RR for a new listing or a certain industry.
        RR seem to be picked at random somewhat and therefore you can skew it to give you a IV that you want.
        From the vals that I have completed the prices seem to have gravitated close to the 11% RR.

      • Hi Peter,

        Thanks very much for sharing your very comprehensive calculations. We’re not too far apart with the figures, but our RR varies. I think this acounts for the variance of the IV.

        It reallly illustrates how two people can look at the same stock and come to different conclusions.

        Like you though I think its in growth phase so the next report will be very interesting indeed.

  21. Dear Forum,

    I think we should cease the back patting and focus on finding the next crop of good companies at significant discounts to their IVs. Roger, can a post be created to encourage this goal. Maybe a revamp of the 12 stocks of XMAS from all graduates would be beneficial.


    • Hi Steve,

      I was thinking of the exact same thing 2-3 months ago. That is, I bought some and have since then earned a good return, so i need to find my next MCE. However, I soon realise that there’s only one MCE ( literally). Every company has its own strength, weakness, and prospect. And it is so hard to find a good company that tick all the boxes.

      Accordingly, why not continue to buy the best thing and maximise the full potential. “too much of a good thing is a wonderful thing”

      I am disclosing that I own MCE shares, bought more recently, and will continue to buy more at discount against rising IV.

    • I have been thinking along the same lines. It has almost turned into the matrix and forge blog before Rogers post about JB hi-fi.

      From someone where these companies do not fit into his investment criteria i will disclose from a personal point of view i have found the continuing discussions and valuations about these companies a bit of a bore but that is me being selfish and i know everyone else is interested in them so I have just sat on the sidelines.

      I liked extremely the 12 stocks of christmas post and enjoyed contributing to it. I think it was good that it focused on more than just valuations. I would gladly welcome a “What stock woudl you like to find in your easter egg?” post. We already have missed the “what stock would you spoil your partner with on valentines day?”. I know i am so romantic.

  22. Hey Guys,

    what about RKN i beleive it IV is about 2.50 what are your thoughts ?

    I agree with steven m that ACR is cheap


  23. Ash Little, Have you had a look at CMI Limited ( cmi ) at all, I have had a look and it looks Ok in my opinion.

    • Hi Fred,

      Just had a quick look,

      They are now just recovering from a near fatal heart attack during the financial crisis.

      Balance sheet is now repaired but a very checked financial track record suugesting a lack of competitive advantage

      The business did not really excite me too much so I did no go to the valuation stage

      Just my view

      • Peter Kruckow

        Hi Fred
        They look to have had a big turn around, it appears they had a fair sort of shuffle up in the office around the time of the financial crisis that’s paid off for them. The main concern at the moment, other than identifying their moat, is ASIC has been called in and are dealing with a ‘Declaration of Unsatifactory Circumstances’. I’m not 100% sure of what it all means , but get a feeling that maybe the’re not the right people to be looking after a business that you or I might want to own. Possibly Ash or another of our learned friends ,who understand what implications this might have on a business could enlighten us or at least me , please anyone.

      • I am no lawyer but it needs to be looked at if it is a breach of the takeovers legislation.

        A parcel of shares representing 9% of the company was sold to the MD’s daughter off market with funds supplied by the MD.

        The MD owns 36% of the company and my understanding of the legislation is that if you own more than 20% of the company you (or an associate) can’t acquire more (unless they are under the creep provisions but we wont go into that here) without making a full takeover offer.

        The question then might be whether the MD and his daughter are associates.

        ASIC have been put in contol of this parcel of shares and have to sell this over the next 3 months.

        Apart from the bad press the effect on the business would be close to NIL but I am no expert on what will happen to the share price given such a large chunk needs to be sold.

        That said the MD has breached the law and to me it looks like an intentional breach so as you say “maybe the’re not the right people to be looking after a business that you or I might want to own”

      • Peter Kruckow

        Thanks Ash for clearing that up and confirming my suspicions. Just was’nt too sure because the legal forms aren’t that self explanatory. All this research must be starting to pay off because I did get a bit of an inkling that things weren’t as they should be . Thanks again


      • I’ve mentioned something to this effect previously in another thread but I wouldn’t trust these guys at cmi as far as I could throw them (and my throwing arm is not what it was 10 years ago).

  24. When people get over excited by a stock, this is when big money gets lost. Don’t expect Matrix to rise like it has for too much longer.

    • Well the share price is just barely keeping up with a rapidly rising IV. It is still trading at a significant discount to its IV so no wonder it is rising at a rapid pace. Worry more about companies like COH trading at huge premiums to their intrinsic values.

      • Current value

        Equity 31 Dec 2009 – 41.1m
        Equity 31 Dec 2010 – 84.5m
        Average equity 62.8m
        NPAT 30.1m (2010 calender year)
        ROE 48%
        Equity/share $1.21
        Dividend payout ratio 11%
        RR 13%
        0.41+11.27= $11.76

      • Mikael,

        Do you think the payout ratio is sustainable at 11%?

        I think it is more likely to increase meaninfully soon. This will really alter the valuation.


      • Is it not possible for MCE to have other growth opportunities in the oil services area? Whilst the payout will increase if there are no further growth opportunities – the oil market is huge and they may have more prospects for expansion.

    • Please don’t make such sweeping statements (specifically on a blog such as this). People being excited does not necessarily lead to losses. Being excited based on a logical investment philosophy and process with a company that ticks all the boxes, and continues to present a significant margin of safety, is rational and what we are here for.

      In fact, if you don’t think that the intrinsic value of Matrix will continue to rise then I think you should re-read Value.able (or even read it if you haven’t), check your valuation formulas and rethink your views on world trends.

  25. Dear Roger and Value.able Graduates,

    I have calculated a 20% MOS for Acrux (ACR), which has a A1 MQR. The half yearly report paints what appears to be rosy future with a 17% dividend to be declared this month. Any thoughts would be appreciated.

    Steve M

    • Hi Steve,

      I had a look at this 2-3 weeks ago. Problem is with the declining profit, which means declining ROE. IMHO declining ROE/value is a no-go for the value investing, even the MOS is tempting.


      • Steve,

        as I understand it, the dividend is a one-off enabled by the lump-sum advance payment from Eli Lilly in the US. Acrux expect to start receiving royalties from Lilly this year, and they don’t appear to have made much income apart from that payment, so it’s early days, and the level of risk won’t please all. That said, I like their prospects and I do own some.

        Cheers, Rod

      • I’ve owned ACR for a while now. My biggest problem is trying to forecast EPS. I’m not sure that I believe the broker forecasts. Income will be based on ACR meeting their milestones which are even bigger payments than the last one. Also, who knows how much market share they will have once in production? Looks fantastic still, but future EPS are vague at this point and therefore hard to value.

        The reason I continue to hold is that should the milestones continue to be met and if their products have solid commercial success (which seems likely), I believe the price will go through the roof.

    • What has ACR got, and does that match up to Roger’s tests on page 120 of his book?

      You can do the maths all day and come up with wonderful 2011 IVs , but good IVs do not a great company make. ACR’s competitive advantage has yet to be confirmed.

      ACR has new technology “transdermal drug delivery” and folk are getting excited about that technology being used to deliver Axiron to help with testosterone deficiency. However we have yet to hear whether patients will re-order after they have tried Axiron.

      Another possibility is that, having bought Axiron rights, Eli Lilly will soft-pedal to protect its Cialis market.

      I am an anxious ACR shareholder.

      • The reason I like ACR is that it seems as though they will have a competitive advantage in the market as patients said they would use their product over the others. This seems to be significant and provides the potential to take up a larger share of the large market than is estimated. Without this information I probably would not own it.

    • I agree Lina, nice guy, good intentions but no real challenging questions. It is like 60 minutes without Richard Carelton

      • Not sure what questions you wanted asked. I for one found the full interview informative. What questions would you have asked and how would you have ‘grilled’ the CEO yourselves?

  26. Hi Roger

    You said last week on YMYC how good it was to see a good small company become a bigger company. After seeing the S & P March quarterly rebalance and owning many shares that are A1’s on the new ASX 300 list, I know what you mean. Interesting also are the companies that have dropped out.

    My heartfelt thanks to you,your book, your blog and everyone’s contributions to the blog especially Ashley, the Ruling Nerd


    • I had a look at the change in ASX300 and can’t believe how many of my relatively few holdings have now entered the list!

  27. Edward Vesely

    Hi Roger,

    Thanks for posting this very interesting interview on your website. It’s actually good to see and listen to one of the key executives of Matrix who are helping to grow our family’s long-term investment in this company. What strikes me about Aaron Begley, apart from his professional and self-assured demeanour, is his relative youth. It’s wonderful to know that Aaron has many more years in him yet.

    My only hope for the Matrix team though is that expectations of the company, especially of those reading this blog, don’t get ahead of themselves. Yes, the share price has gone vertical in the last few months, and the business is making gains, but it would be wise to acknowledge that the company will experience setbacks from time to time. Because business performance won’t always rise in a straight line, future returns won’t necessarily look as good as those of the past. However, from our point of view, with patient capital invested in the company, we’re happy to back the team at Matrix for the long term given the success they’ve already achieved, pre and post float.

    After this blog has run its course, may I suggest that we stop blogging about MCE, remove them from the spotlight, and let them get on with the job of running the business. Perhaps this can help reduce the possibility that the share price might get ahead of itself ;-/ Did one other blogger say that we’re all getting a little “drunk” on MCE ??

    If the executive team and Board are reading this blog, then I’d like to wish them continued success for the decades ahead. No doubt, it’s a tough gig competing in the global oil and gas industries, but with executives of Aaron’s ilk at the helm, I’m sure they’re well placed to deal with the strategic and competitive challenges they’ll no doubt face in the future.

  28. Hi Roger,

    Listening to Aaron Begley speaking on Switzer about Matrix has reaffirmed the unique business this is in Australia and the professional way the business is run. Nice to see Matrix in the ASX 300 also. Thank you again for a wonderful find and your willingness to share you valued expertise.

    • Hi John,

      Don’t forget FGE as well,

      But back to Matrix,

      Anyone who names their company after one of the best movies ever made is just……..well is just a champion.

      Nerds Rule…………


      • Ash,

        That was exactly what I wanted to say about Matrix. LOL. Guess I am comfortably in the placed in the category of Nerds..

        To the rest who are watching the above video, you have missed the “best” part of the interview.

      • Is this blog real or is it a figment of our imaginations? What better way to make money if we are in a global financial Matrix, than by investing in Matrix? loI

        I must agree with your assessment of the movie. I have to confess to being a Sci-fi junkie/nerd as well.

  29. A timely interview given that MCE (as well as FGE) is to be added to the S&P ASX300 index after close of business March 18th that will prompt buying from index funds that track that particular index and enable active fund managers whose mandates often restrict fund buying to index constituents to now actively consider these stocks for portfolio inclusion. Having worked for many years as an institutional portfolio manager I know that my index (passive) portfolio management colleagues would typically start buying index addition names 3 days prior to index inclusion, and for passive funds they like to buy as much as possible at the day closing price as this is the price that their fund’s performance gets measured against as opposed to the active funds that typically try to match or better VWAP (value weighted average price) for the day.

    • Brian Mc Erlean

      Hi John, that was a v. interesting piece of information as I thought Fund managers would have been buying as soon as the ASX 300 attainment was announded. I noted MCE and FGE stocks moved on last week and I thought that sudden advancement was all we would get. Looks like there may be more to come.That is the advantage we individual investors have over fund managers, we don’t have to obey any else’s rules. Great post!

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