The market still seems expensive
These iPhones are marvellous things. I can write while preparing dinner for our friends, heading down to the local airport to enquire about flying a sailplane over the southern alps or while sitting at the edge of the Kiewa River. I have seen some great posts and will reply to them all on my return at the end of January.
In the meantime I have heard from my editors that my book is coming along and will be printed right after Chinese new year. If you haven’t registered please do, at www.rogermontgomery.com. I am going to do my best at running a J.I.T. inventory system. That means I won’t be carrying stock and will only print copies for those that have pre-registered. After that there will be a wait. As the book will not be available in stores you will have to pre-register, so if you are interested in a copy from the first run, let me know by registering through the website. You can click the link on this website which is over on the right hand side of this post under the menu heading called “Blogroll”.
In the meantime, the market still seems expensive, but remember that valuing companies is not the same as predicting their short term share price direction. The market can get more expensive just as an individual share might trade at double its valuation or even higher! Of the shares I own that were purchased below intrinsic value and whose valuations are expected to rise significantly in coming years, I have not sold. Those whose values are flattening out and whose prices are well above intrinsic value – I have sold.
If you are also still on your annual break, I hope you enjoy it and if you have worked through or have returned to work, my sincerest hope that I can do something this year to make your next holiday more philanthropic, more adventurous, more luxurious or more of whatever it is you seek from your own holidays.
Posted by Roger Montgomery, 8 January 2010
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.
INVEST WITH MONTGOMERY
Bulls
:
Hey Roger, are you buying at these levels?
Market still looks abit expensive, although I could be wrong ?
Engelo
:
I think that would be a great idea. I would definetly be attending.
Regards,
Engelo
Wing
:
Me too, thanks.
Wing
Bob
:
Hi Roger.
Huge fan of your blog.
Just wondering what your thoughts are on the value of WorleyParsons (WOR) with their recent profit downgraid.
Thanks
Bob
Chris
:
Bob, you can include some of the other ‘engineering / service’ companies with WOR as well, many have been smacked down too because of association.
rogermontgomeryinsights
:
Hi Bob,
WOR is one of the companies that I have received multiple requests to value over the Christmas break. I will get to it over the next few weeks.
Engelo
:
Hi Roger,
Can you please recommend some courses or lessons that you know of so I can learn more about value investing (the Warren Buffett and Benjamin Graham style). I have been reading a lot of books regarding value investing but there are still many questions I have and many terms and calculations that I don’t understand. I think a course would help me with this and would greatly appreciate your advice.
Thanks for your time.
Kind regards,
Engelo
Chris
:
Engelo,
Get in touch with the Australian Investors Association and the Australian Shareholders Association, they both run courses on different topics and may have something there for you. Failing that, try the Adelaide TAFE in Currie Street, they have run a ‘general’ sharemarket course.
http://www.asa.asn.au
http://www.investors.asn.au
Chris.
rogermontgomeryinsights
:
Hi Engelo,
Chris’ suggestions are a good start. Its important to know the backgrounds of the people giving the course. Unfortunately there are not many fund managers giving courses on Picking the Best Stocks for example. In the US fund manager Whitney Tilson runs a value investing one day course before the Value Investing congresshe coordinates with John Schwartz – two men I have met with for a coffee or two and respect. As you can imagine, I have received innumerable requests to manage funds, provide share market advice, review and establish share portfolios and run workshops since leaving the financial services and funds management businesses I founded, listed on the ASX and sold. Well, its been more than a decade since I ran a workshop but I was wondering… if I ran a Value Investing day just once a year and invited a few of my high-profile funds management friends to teach alongside me, whether that would be popular. Let me know your thoughts.
Kathy
:
I don’t live in Sydney however I’d definitely consider attending a workshop. Sounds like a great idea Roger.
Chris
:
Me ? I’m convinced that 2010 will be the year of the Stock Picker – not the ASX index hugger at the very least. Anyone that wants to do better than the 5-10% index return will have to dig for it and not in any particular area.
There will be some that will shoot up based on fundamentals because they came through last year in good shape, but there will be some that will go up based on pure speculation – e.g. gold is a great one right now(I’m guessing a fairly even 40:60 split, no ‘hot’ sectors or ‘themes’ this year to suck the speculative $ into like resources was in 2006-2007, but I could be surprised. In 2006-2007, you could chuck money at ANY resources company and you would make a quick buck – it was not difficult – but for this year at least, it will put paid to that).
I’m also going international while the $AUS is strong….ETFs for overweight positions in emerging market and Asian indices, underweight USA and Europe indices.
rogermontgomeryinsights
:
Thanks for your thoughts Chris and for enriching the blog with regular comments.
Chris
:
Roger,
Your formula for valuing businesses centres around ROE / Required Return x Shareholders Equity, but do you remove dividends from your required return? Say for example, I decide I want to get paid a return of 12% to take equity risk but the stock pays me a 4% divvy then the required return falls to 8%.
My other question is around book value of equity. As this is an accounting construct how can it be relied upon when determining value? For example, WTF has equity of ~$71m which must surely understate the value of the WTF brand while there are likely a number of property trusts which must be cum write down. I’m sure someone like Buffett would have a quip about trusting his own view of value rather than that of an accountant which is what you are doing by taking the book value.
It would be interesting to know the assumptions you make in coming to your valuations (perhaps the subject of your book!) as I have seen very few market practitioners who are able to state valuations with as much confidence as you. Having said that, there are very few market practitioners who focus on ROE and, more importantly, marginal returns on capital.
Chris
rogermontgomeryinsights
:
Hi Chris,
No you cannot subtract the dividend yield to arrive at the discount rate. The dividend is paid out of profits and profits are compared to equity to arrive at the ROE. Its the ROE of a company that helps determine its value as a going concern.
If a company has a high asset based due to intangibles/goodwill but a very low ROE, then the reality is that the assets are valued too high on the balance sheet – thats why the ROE is so low. The reverse is also true. A company with a very high ROE has an undervalued asset on or off the balance sheet.
You will have to wait for the book for the comprehensive explanation of this and returns on incremental capital.
Greg
:
Ah, the lovely Kiewa River. I can almost throw a rock into it from my home and will be chasing trout in it probably later today.
I agree that the market appears not to be cheap at present and there certainly aren’t too many bargains that I’m aware of. I know you may not wish to divulge, perhaps lest it be construed as financial advice, but you have alluded to having sold a few things recently, and I would be curious to know what they might be. I’m looking forward to your book coming out also.
Enjoy the rest of your holidays, Roger.
rogermontgomeryinsights
:
Hi Greg,
Thanks for your comments. Nice to meet another mountain man. I have sold a whole bunch of things around early December when I wrote my piece about selling for Alan Kohler.