The patience pay-off
When one is invested in a high quality company and the share price is below the estimate of intrinsic value, the best thing to do is exercise patience. Of course, this can be easier said than done when Mr Market acts irrationally.
Let me illustrate. In May of last year, we at Montgomery considered that the share price of Kathmandu (ASX: KMD) was materially below our estimate of its intrinsic value. We were confident of the company’s quality and prospects, and so decided to build a position when the share price was around $2.20.
We watched the share price drift lower over the next month to $2.00. Comfortable with our analysis of the company, we were thankful that Mr Market was being so generous, and accumulated more.
During the next six months, the share price appreciated to around $3.20, materially narrowing the gap implied by our estimate of the company’s intrinsic value. This was certainly a much more enjoyable period to hold than when we initially purchased the company and watched the price declined.
Yet in the lead up to Christmas last year, the share price once again began to drift south as the market became nervous about the retail climate. In February, many retailers released results that were weaker than expected. Kathmandu reports a month later than many of its competitors, and so the market naturally applied these results to their expectations of the company. By the start of February, the price had fallen 20 per cent from its November peak.
Once again, we were more optimistic about the company’s prospects than Mr Market, and saw the weakness as an opportunity to further increase our holdings. The company went on to report a very pleasing financial result, and within a month the share price had reached a new high of $3.65.
Since then, the share price has fallen around 10 per cent, and many other stocks have also experienced material declines in the past week. This is the time when the true mettle of value investors is tested. Patience truly is a virtue when it comes to long-term investing, and it can be difficult to ignore the influences of Mr Market. But as it shows with our patient accumulation of Kathmandu, it can certainly bring its rewards.
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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Cameron Black
:
Hi Roger,
Do you currently still maintain a position in KMD, and if so do you still believe it represents good value given it is now at $1.53 after today’s AGM?
If there has been subsequent articles about KMD I apologize for not having been able to find them.
Thanks,
Cameron
Roger Montgomery
:
Hi Cameron, haven’t owned KMD for quote some time.
ANTHONY SCELZI
:
Hi Roger, KMD does not register on Skaffold . Any chance you could tell me what your I.V is for this stock ?
Roger Montgomery
:
Hi Anthony,
NZ subscription required. Stay tuned on the IV…
Andrew Legget
:
Your story of Kathmandu reminds me of JB Hi Fi. The retail game can be quite a volatile one. JB Hi Fi at least swung from one extreme to another over the short period of time so i took a slightly different plan and bought at the low swing and sold at the high swing confident that fair value was somewhere in the middle. In hindsight i was probably still at the lower end and there was more room to go but i am not going to complain about an investment i made a significant profit from. I am happy to make these mistakes that result in an approx 30% return over a short period over and over again.
I completley agree with yor sentiments Ben, patience is a big asset to the value investor. Value investing can be a bit of a tough game and the market can and will continually test you, sometimes mocking you for sitting on the sidelines (think Buffet around the dot com boom period). This is why a clearly defined and logical philosophy of what you are looking for is important in my opinion.
You do need to be a bit of an individual, the part in the Buffet book “The Snowball” talking about the inner and outer scorecards is a good lesson for the value investor.
At the end of the day, we invest to make money not to show how clever we are, if you don’t think you can and will make money then don’t do it. If the market or a particular stock shoots up 50% in that period then that is even more of a reason not to then pull the trigger as there is now even less chance to make money off it.
Allow those who think they are clever to think that, we will just stick to investing wisely and profitably. I will be quite happy to be seen as a rich idiot that missed out on all the booms and held a boring and unglamourous portfolio of boring, stable but quality companies.
Michael Sloan
:
Hi Roger, I must admit I have been very slack with this one and haven’t even looked at the numbers. I can’t get past the the idea of a bricks and mortar retailer of camping/outdoor adventure gear being a great business. It’s one of those ones I “feel” could go gangbusters for a few years and then suddenly fall in a hole, a very large hole, due to some undisclosed business model problem…. competition from online sales, saturated market or possibly something darker we’re currently unaware of. Immediate thoughts are what are the barriers to entry to this sort of business, surely high margins can’t be maintained (assuming they’re currently good), aren’t campers frugal/cost conscious, is it really that big a market? There must be an abundance of other channels for such gear. I know they’re “going global” but I mean they’re just a camping/outdoor gear retailer! Somehow they got a hold of my name and address and I receive regular junk mail which goes straight into the bin, unopened. I’m probably being affected by the Peter Lynch school of investing, in reverse… no personal experience, just can’t relate to it. Possibly there are many more investors with the same “gut feel” as me, thus the stuttering share price performance? (although it has done pretty well!). It will be interesting to see if they’re still around ten years from now and still a “great business”.
Roger Montgomery
:
That will certainly be interesting to see. I for one believe they can be but it will depend on management and capital allocation.