What’s your stock market survival story?
Last night, First Edition Value.able Graduate Scotty G shared his stock market story at our blog. Scotty’s story is far too value.able to not receive its own, very special post! Over to you Scotty…
A Tale of Two Crashes
by Scotty G
2008/2009
An ‘investor’, whom we’ll call Scotty G for anonymity purposes, has woken for work at 05:00 to see that the Dow is off 700 points. He nervously heads in to work to check what it means for his portfolio of ‘blue chips’. He’s down badly and it’s only made worse by the fact that he is in a margin loan, which he kept at a ‘conservative’ 50 per cent level of gearing.
His ‘great’ stock picks are not holding up well in this environment and his ‘genius’ ‘value plays’ like buying Babcock and Brown at $7 because ‘its fallen from $28 and surely at a quarter of the price it represents value’ no longer looks like genius at all. He had imagined himself some sort of Buffet-ian hero, stepping into a falling market and making the tough buy call that would surely pay off. No actual analysis is done to back up these calls.
Finally he is 1 per cent off a margin call. He is tense at work, snapping at friends and chewing a red pen so hard it stains his lips and chin. He capitulates, calls his broker and sells out, including his ‘value pick’ Babcock and Brown at 70c. He feels relieved to be out, but is bruised and jaded by his experience. He vows to return to the stock market some day and do better, but doesn’t know how.
2010
Our ‘hero’ comes across a beacon of light in a sea of information. It is the Value.able column in Alan Kohler’s Eureka Report, penned by a knight known as Roger M (name changed to protect the innocent). He follows the link to the Insights blog and is astounded that the information he has been searching for is all here. He eagerly orders the Tome of Wisdom (known as Value.able to some). Upon receiving it, he reads it in one sitting. Wheels click in his head and light shines in the dark. Could it be so simple? Knowing what something is worth and then refusing to pay above it? In fact, demanding a discount? He set off onto his journey for the Grail.
2011
Our hero is now equipped with a spreadsheet devised from the Value.able rule book. He can value companies quickly and decisively. Many don’t make it onto the spreadsheet, as he can now spot a ‘Babcock and Brown’ coming from a mile away. Stock ‘tips’ from colleagues can now be waved away. When they ask why, he tells them. If they say he’s crazy, he smiles and feels at peace. He knows he is still not perfect, but he’s a darn sight better than he was three years back.
The markets turn down. The spreadsheet is rechecked. MCE and FGE are added as they shift below his 20 per cent discount rate. JBH is added soon after. The markets shift lower. But reassured by the facts this time, and not the hype, he buys more of the above.
Markets shift lower still. Figures are checked and rechecked as more great businesses come within range. The panic of a fall is now replaced by a calmness and certainty that an anchor of value provides.
The market finally slides steeply over several days.
Finally! Some of his best targets are in range.
VOC falls, then MTU (a company he has waited ages to acquire), and finally DCG. Sadly, ARP refuses to come within range, but he his patient and does not chase it.
He retires to his castle (lounge/bar), content with the work he has done and happy to await the next chance to hunt and switches on the sport, deftly ignoring the news and business channels hosting ‘experts’ eager to proffer their take on why things were the way they were. He feels at peace and sleeps soundly that night.
“Ok, stripping out all the ‘poetic’ and imaginative stuff, this is pretty much how it went in real life. I suffered a loss due to poor decisions with no research. I found Value.able, I converted (or got innoculated as some of the greats say) and took advantage of the recent situation. And I do sleep soundly at night.
“Thank you Roger for your willingness to share and to all on the blog for the same spirit of camaraderie. I look forward to many years of sleeping soundly at night.
To Value.able and to Value!”
Thanks Scotty.
If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have; 1. read Value.able and 2. Like Scotty, changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our very-soon-to-be-released next-generation A1 service).
Posted by Roger Montgomery and his A1 team (on behalf of Scotty G), fund managers and creators of the next-generation A1 service for stock market investors, 10 August 2011.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Keith
:
Well, I aside from my Self managed superfund, I sold nearly all my shares in February 2011 and have been sitting largely in cash since then.
Like Scotty, I met Roger in person at a presentation, but I have been following Roger’s articles in Eureka Report as well as his time at his old company.
It was only after Value.able was published and I was convinced his approach matched my temperament, that I started to focus more closely on this Blog.
Roger’s first video blog in July 2011 confirmed in my mind that if Woolworths reached an appropriate margin of safety, I would buy again.
Previously, I bought and sold WOW
Buy – Thu 29 Jul 2010 – $25.61
Sell – Wed 06 Oct 2010 – $29.98
Capital Gain + 62c Dividend = 20.403% gain in 69 Days
which equates to 89.694% p.a.(comparable to gross interest rate)
Hard won experience has taught me expecting to repeat a successful investment in the same stock is extremely unlikely.
Its far better to take the profits and look for a new opportunity.
It still surprises me that people assume that if the share market takes a hammering that I would be badly hit as well.
As the Roman philosopher Seneca once said, “Luck is when preparation meets opportunity”.
So Roger’s blog was part of my preparation as I waited six months for an opportunity to come.
It arrived on the morning of Tuesday 09th August 2011, I bought 1500 shares for my Dad before buying another 8000 shares at $24.01 for myself.
As the WOW market price drifted lower, I was so very tempted to buy another parcel as the price kissed the intraday low of $23.70 just before 11.00 am.
But I crushed this emotional impulse with the iron willed discipline forged in the fires of past losses.
Stick to the plan and my position sizing rules will save me from myself.
I am an investor, not a gambler and share investing is a business not a bet..
Like other readers of Roger’s wise words we are immune to the manic depressive mood swings of Mr. Market and have prospered as a consequence.
Andrew
:
Might be a bit late, but thought i would add my own story.
My story seems a bit less dramatic than those who had to deal with margin loans etc. Bit allergic to debt or borrowings.
I would say what i was doing when i first started investing was “informed speculating” i thought i was making good decisions but really i was just punting. Some paid off like CBA at $35.12 and others didn’t like TLS at $5.00 something. I remember you actuaklly Roger asked me in a ASX education session why i bought TLS and i couldn’t for the life of me tell you. But did learn more in your session than any of the other 3.
I did get into some investments i didn’t quite understand, i punted on Investa property and sold at break even a month before they were taken over. I then later invested in ING Entertainment and decided to sit there until they almost imploded. Have to say, my number one rule now is understand not just the business but the investment. Although i could make better decisions in regards to REIT’s i don’t really pay attention to them now and seems very little value and lots of debt, why bother?
I slowly increased my education in value investing but did not have any real way to value companys so i tried using the chart to time entry points. I at least learnt to look for high ROE at some point between then and now and that helped me get a bit better returns.
I still have excess capital losses on my tax return after a good 5-8 years of investing if you want to judge my success.
On the flip side, a part of my investing story when i was better equipped in my decision making also coincided with the height of the GFC crash. unlike others with margin loans i was actually buying. However, the lack of a clearly defined strategy and valuation method meant that i took a cautious approach. Nothing wrong with that as conservative is better than being aggressive and wrong. But if i had my time again (hindsight is wonderful) i would have pulled the trigger a bit more. I invested less than 5% of available funds, ii could have invested a lot more but didn’t have the confidence.
Got some great results, some more than doubling in a year as the market picked back up (i bought some under the EQPS figure). But i see it as a missed opportunity, i should have bought a bit more when CBA was at $26.00.
Anyway, those investments have helped pay for my wedding and that has resulted in a lot less stress.
So my journey isn’t as dramatic but shows the two sides of “investing” without a real strategy. Seeing speculative punts result in losses and being able to look back and see what decisions could or should have been made as well as opportunities missed due to not having that knowledge and confidence.
Phil Crossan
:
I’m a very recent Value.Able graduate, so many of my purchases are showing losses. Even though it’s far too short a timeframe to judge, I’m pleased to see that the stocks of bought since then have performed better than the ones I still had from before or ones that I may have recenly sold as they were well above intrinsic value. I added MTU today, as it’s priced very well.
So I’ve managed to take Step 2 further and act on my change of thinking regarding investment in equities.
Many thanks, Roger and contributors to this blog.
Roger Montgomery
:
As always everyone, be sure to seek and take personal professional advice. remember, we are under no obligation to keep you up to date nor are we aware of anyone’s financial needs and circumstances. Everything here is educational only. Do keep that in mind.
Manny
:
Hi Roger
Is there a problem with the blog today. It comes up with the following when I post a meesage.
“Hmmm, your comment seems a bit spammy. We’re not real big on spam around here.
Please go back and try again.”
Cheers
Manny
Roger Montgomery
:
Thanks Manny.
Manny
:
Just as an FYI what I noted.. When you reply to someones comment it works fine. I just replied to a few but I think the issue is when you put your message at the bottom (i.e. without context to any existing thread).
Prasad
:
My story is different. Initially I was trading speculative shares based on chatter in popular forums. I also tried CFD after a friend highly recommended them and made a loss and realised it wasn’t for me. Then was about the make a purchase in ABC learning when it was around $8 after seeing an analyst recommendation in a very popular magazine. Luckily I mentioned this to another friend of mine and he said don’t buy it and because he heard all about it at a Roger’s talk at ASX investor hour seminar. I started attending ASX Sydney investor hours and was lucky to attend couple of Roger’s seminars. Subsequently I became a client at Roger’s then company, read lot of books on Buffet and Lynch. However so far I had very mixed results, primarily because I bought in to the market in 2007 just when GFC started. Even though I bought ANZ, QBE and CCP all below “intrinsic value” I made losses from all of them (still holding ANZ). CCP really send me backwards because I invested a large portion of my savings. It took a while to recover from these losses. I stopped all my valuations subscriptions as the investment + cash flow did not justify the cost of it. By the time I wanted to start subscription (saved some money + I bought TRS when it bottomed) Roger had resigned from his company. Luckily Google is such a wonderful thing, so I found his blog + the book, and wished I found it bit earlier.
I know I could be have being lot worse off without the knowledge I have now, however so far wasn’t able to capitalise on what I know and what I am following. Still have the faith and the patience to do so :)
Roger Montgomery
:
Hey Prasad,
Diversification is important as is not betting the farm on any one investment. It distressed me when I heard several investors had followed us (at the time) into a company but without the diversification we had. Fortunately a new approach produces an entirely different outcome.
Andrew
:
I agree with that point Roger, i sometimes hear comments along he lines of you pursuing an Anti-Diversification stance which simply is not true.
My thoughts are and correct me if i am wrong, you are not against diversification (as long as that diversification is due to buying A1’s at a significant MOS whilst holding onto cash whilst waiting for these opportunities present themeselves).
The type of diversifiaction i get the feeling that you are against, and i would agree with you but please ocrrec tme if i am wrong, is buying a lot of average companys without any respect to value in the hope that the wide range of stocks over various industries wills ee some go up at the same time some others go down resulting in a very average return. Or the people who buy into a miner becasue their current portfolios do not have any exposure to it and instead heavily focused on banks etc.
Diversification is not the problem, it is the companys you are investing in to achieve that diversification that can be.
Roger Montgomery
:
Thanks ANdrew, You are spot on…’It is a mistake to believe that one reduces one’s risk by spreading his investments across a broad range of things he knows nothing about’.
Prasad
:
The lessons I learnt from the mistakes in past:
* Blindly buying below intrinsic value doesn’t work, you must understand the future prospects of the company
*Need to have enough cash reserves in case GFC like opportunities present, the worst thing to happen apart from your stocks going down is the opportunity cost!!!
* 3-4 stocks is too concentrated, 10-12 stocks is good diversification. But when you are just a guy starting with a family and a single income, you don’t have enough savings or/and opportunities in the market with MOS to buy 10 stocks in a short period. Hence cash reserves is the key, again point #2.
Roger Montgomery
:
Now you’re becoming a value investor. Thinking about whether a business has bright prospects – understanding the business and the competitive landscape in which it operates is essential and something I have discussed for example in all my talks for years.
Michael
:
There is a lot of estimation involved in CCP calculating how much profit they have made. I would recommend reading pages 45 and 46 of their financial statements released today to understand this in more detail. The reported profit is based on their estimate of future collections. If collections are slow, they could easily tweak the assumptions, and this would not show up in their profit. Given these uncertainties, I would use a high discount rate. When the tide goes out, you may find that they are swimming naked. Note Roger has stated he owns this stock, so he is comfortable that they are fully clothed.
Roger Montgomery
:
…with reservations about the move into collecting mobile phone arrears.
Ash Little
:
Just my view but cashflow is the key hear..
Given purchased ledger is lower I would expect growth to slow but I am still getting a very conservative $5.50 for 2012.
Given CBA and WBC results recently the lower ledger purchases may be only a tempory blip
Interesting to see what happens
Ron F
:
Hi Roger,
I’ve been missing in action for awhile as perusal.
Firstly, thanks for your efforts creating Vaule.able TV. It is relaxing and rewarding watching it.
It is aptly named, a brand continuance of your book and this site. I think all of us would have difficulty valuing the true worth of your brand’s intellectual knowledge and property.
In the theme of this post, like many others I’ve had horror times in the past with share market price crashes and in times of stable market environment. In those periods anguish sets in, do I hold or sell, exacerbating the real problem of not knowing the value of the company. Thanks to you, we now know in the past we were just living in hope.
During this latest crash my four portfolio stocks’ prices decrease considerably – CCP, FGE, MCE, TSM. Unlike in the past, I am not concerned and still have confidence in those companies.
As you mentioned many times Roger, the times of market volatility offers very good chances to buy at a significant discount. I took advantage of Mr. Market’s fear buying JBH, MTU, ORL, SWH. Since buying, three of them have increased and more than the All Ords.
Company/All Ords.
JBH 12%/minus 3%
ORL 8%/4%
SWL 11%/4%
MTU minus 8%/minus 9%
MTU I bought at the end of July and I don’t wish I waited longer – you can’t time the market. When the MOS presents itself, I will buy if nothing has changed and the long term prospects are still bright.
With them all, it is only early days and the importance of watching for changes always remains.
There has been a lot of debate recently on JBH. I value the opinions and know they have some headwinds, but they are still a very good company and market leader. Before buying I calculated a conservative current and Yr12 IV and I thought the MOS had presented itself.
Switching to another subject Kent Bermingham posted a link 12/8 for reporting dates (BRR radio). Thanks for the list Kent.
Following are others that aren’t stated on the site. Btw the dates on the site refer to either preliminary (appendix 4e) or statutory results, the same below
NVT 2/8
NCK 11/8
CCP 16/8
CRZ 16/8
DTL 22/8
FAN 23/8
FLT 23/8
MND 23/8
REH 25/8
MTU 29/8
The above dates are from websites of companies I’m interested in….probably others have dates. I use Commsec and their dates are sourced from BRR. Other than that I don’t know of any other sites that have an updated list without having to visit a plethora of sites.
Thanks again Roger for Value.able TV and your words of wisdom on market fear, it keeps us focused on value….and thanks to all for the blogs.
Regards
Ron
Davey W
:
Great story Scotty, and well written too. I very nearly ‘took a punt’ with the stockmarket for the first time a few years ago, and ABC learning was one of the stocks I was very seriously considering. Very glad that I didn’t, and that Value.able has provided me with a method for valuing companies.
Greg Mc
:
I recall a time in mid-late 2008 I think it was, when I was watching the business channel. ABC learning had fallen a bit but many people still thought it was a good thing. There was a chap being interviewed and he was absolutely caning it. Growth by acquisition, increasing debt, decreasing profitability etc. Can you guess who that guy was?
Terry harvey
:
Hey Roger, nice job on getting published in the smart money of the financial review. Keep up the good work spreading the value.able message.
Zac
:
Since buying Value.Able ive been doing so much research and am always reading about the news. There’s lots to filter from the crap and I know Roger always says seek professional advice and previously I had done that and im glad I didnt act on their advice.
Anyway with the huge crash of late my stocks of late have been in the negative however im not really too concerned. I’ve learned patience is a virtue and I probably got in too quick in the beginning with MCE and FGE however CCV and TGA im pleased about.
There is no lessons learned like using real money however. Paper trading only does so much.
Anyway I wanted to share this as a valuable lesson I learned the other day is how peoples emotions affect the market. ie If I had a group of 100 people in a room and yelled out FIRE, everyone would panic and run.
If I had the same 100 people and said one of the bins in the room has $500 in it for the lucky finder. Only 1 or 2 at 1st would jump at the chance then slowly more and more as the mob mentality kicks in to get them all moving.
As for this crash, fundamentally since we seem to follow the US Cycles, the top 500 American companies are in far better shape earnings and debt-equity wise in comparison to pre GFC that im confident this low ride wont last too long relatively.
Roger Montgomery
:
Good analogy Zac.
Phil Crossan
:
That’s probably one area where we’d agree with the technical analysts. Paper trading only takes you so far. Evan a small amount of real money concentrates the mind and introduces that psychological component that needs to be managed.
Mark
:
Skint…but wiser :)
Scotty G
:
Great to hear from so many people who have benefited from Roger’s wisdom this time around. Also interesting to read how many of us visited the same traps on the same road to get here. So many margin loans we wish we had avoided, so many recommendations we wished we’d waved off!
With regards to margin loans, I read a comment suggesting that margin loans are still a valid conservative investment tool if you keep the LVR to 50-60% and never buy stock without putting up your own money. All I can say is that I kept my LVR to 50-60% (until the blowout at the end) and put up 50% of the cash every time I purchased a share. And I still suffered.
So if you wish to use a margin loan I can only point to my experience and wish you the best. I would also point out that many vaue investing greats have generated superior returns whislt eschewing leverage as an anathema.
Thanks for all the great replies from everyone!
Steve P
:
After reading more blogs than I can remember abd sucked out a bucket full of great thoughts its time I tried to give a bit back. Having been in property for 30 years its fascinating to see the aversion to the margin – in property everyone has to use it (even the ultra wealthy) so why the aversion in stocks. The logical answer is the speed of the transaction – the property market is also a voting and weighing machine but try selling your house in 0.001 of a second and use a computer to trigger the transcation. The problem with the margin is the application of it to the stock market. If your are on the margin at the top and it crashes you lose at an exponential rate so the exit strategy not to be there. However if you are careful and buy very low on the swing AND in excellent companies at discounts the exponential theory works in your favour but you need to manage it. Its not for every one but people astute enough to work out that buying Rogers way are clever enough to enhance their success. Thanks for all the insights and Rogers invaluable advice. Looking forward to the A1 Service. Steve P.
Ash Little
:
Hey Steve,
Nope disagree,
If your are smart you don’t need leverage
If you aren’t you have no place using it.
Prices can remain irrational longer than you can remain solvent
Quotes courtesy of one Warren Buffet
sapporosteve
:
Ash,
Here is what Mary Buffett and David Clark state about Buffett and leverage from their book “Warren Buffett and the Art of Stock Arbitrage”.
“What Warren has discovered is that a high probability of the arbitrage deal being completed equates to a large amount of the risk being removed. Not that we can ever remove all the risk, but if most of it is removed, then most of the risk of using borrowed money is also removed. It is the certainty of the arbitrage deal that allows him to use large amounts of leverage”. Basically, Warren has figured out that if he is “certain” that he is going to make his projected profit, it is safe to use borrowed money to increase his rate of return”.
“What Warren discovered is that the certainty of the deal – the high probability of success -counterbalances the risk added by the use of leverage. It is the “certainty” of the deal – the high probability of success that makes using borrowed money both smart and safe”.
“Thus if we have a $50 million portfolio, we can borrow another $50 million. Which is what Warren did in his early years to help him produce all those winning years for the Buffett Partnerships. When the rest of the market was taking a nosedive, he leveraged up on the arbitrage deals and made fantastic returns, which countered the effects of a poor performance in the rest of the partnership’s portfolio…….Note that during the Buffett partnership years he set a limit on borrowed money for arbitrage deals to 25% of the value of the partnership’s net worth. He wrote in his 1963 annual letter to his partners, “I believe in using borrowed money to offset a portion of our arbitrage portfolio, since there is a high degree of safety in this category in terms of both eventual results and intermediate market behaviour”.
They go on…”Why doesn’t Warren use leverage with all his stock investments? There are two reasons: (1) If the deal or event that drives the profit isn’t certain, then borrowed capital to invest in it can be an invitation to folly, and (2) If the time element is not certain, then determining the difference between the cost of borrowed capital and the rate of return become an impossible calculation”.
In regards to my personal story I undertook a line of credit for a reasonable amount of money during the start of the GFC (borrowed against our property). At the time the increase in debt was easily payable from our income. This allow me to invest in all the banks which were bought at half price and other companies that were severely undervalued. I also used some to buy Graham’s Net Nets. Both strategies delivered a minimum of approximately 80% profits.
Personally, the issue with debt is whether you are able to manage the repayments (personal cashflow) and what and when you choose to use the leverage for. Using borrowed money to buy dollars at 50 cents and see them return to their original value has a high probability of success I think.
Even the saying prices can remain irrational longer than you can remain solvent is premised on personal circumstances (as Maynard Keynes learnt). Many people borrow to fund their house purchase, so banks are basically betting that you can stay solvent for a long time. Again, it depends as Buffett states on the probability of success (if as we know price follows value then if MCE is “destined” to reach its IV, and it is on sale for around half price, then I can not see why borrowed money makes it any riskier an investment provided one does not go ‘all in’).
I believe there is sensible use of debt which raises the odds in your favour (as Buffett has shown), but many have undertake debts for the wrong reasons (holidays, cares etc) and also ignored the odds/probabilities of a successful outcome. I think Buffett preaches no debt these days because he does no need it to make his deals, as we have seen, he certainly was not adverse to using it in his early days.
regards
Steve
Manny
:
sapporosteve – so well written and great facts.. can’t agree more.
Ash – I do read your posts and find them very insightful most of the times but I do have to totally disagree with you on your view on Leverage. As both the “Steves” have said it has a place as long as it is used for the right stocks (and for the right reasons) and full education/knowledge on using leverage is obtained. From what I have read of WB as well that he has in the past borrowed money to buy businesses so not sure what he was trying to imply with that statement..
Craig B
:
Leverage is one thing, Margin another.
The danger of margin loans is being forced to sell at low prices and realizing losses, even if the economic value of the shares held stands up to scrutiny.
Potentially tragic situation, forced upon the seller due to fear and uncertainty in other peoples minds.
Other forms of leverage may have merit if used wisely I’m sure. (I have used leverage successfully, but was it wise? Maybe only in hindsight).
Wish I didn’t have to consider it though. One day.
FrancoD
:
This is my first post.
I have used gearing/leverage for share investing for 20 years. I agree it increases your risk and must be used carefully. I do not believe it should be used if you have any personal debt including a mortgage.It however can enable much greater returns on reduced outlay as a return for the risk. Have found that a home equity loan is cheaper and will not be called like a margin loan although I do use both. Slowly increasing gearing over long periods(years) as your equity, hopefully increases, is the safest. It is all about money management.
Have read “the book” recently and am very impressed with it as an excellent tool for all serious investors. Over the 20 years I have probably made every mistake and continue to make some.It was about 7 years ago that I completely changed my investing as a result of reading a Buffet book and began giving importance to ROE,cash flow etc and I also reduced diversification from many to about 5 to 6 main holdings. It involved a lot of cleaning out the rubbish stocks .
Rogers book has certainly refocused me and hopefully will enable me to actually place values on companies. Have been using it and made a few small purchases at what appeared good MOS.
I also sell options or “Hope”as I like to call it for cashflow on my portfolio.
I look forward to reading contributions on this blog and to a possible service to compare my valuations.
Roger Montgomery
:
Thanks Franco. Please post again sometime. I am sure your views have helped more than a few investors here.
Chris B
:
Great stuff Steve,
I’m hard to please on this website but this is the sort of stuff that I like. I did the same. I borrowed a little during the GFC and it turned out very good. I won’t borrow more than 30% of my loan portfolio. I bought banks at half price and a few more. I also knew about the leveraging on arbitrage that Buffett does but never done it yet. I was going to buy Lion Nathan when the deal was announced with Kirin but thought about it too long and missed the boat.
In hindsight, I beleive I could of bought better shares than the banks during the GFC but I like them for their dividend and they are very stable. I missed Pacific Brands at 20c when the market overreacted when the closed a factory in Australia, 3 months later they were $1.20. A classic overreaction.
In March 2009 there were some great companies selling really cheap. MND, SEK, ARP, COH – All A1’s selling cheap. I realise now that you must keep up to date on great companies and when the market goes down, you must be ready to look at only the best companies.
Roger Montgomery
:
I know you will think it a shameless promo… it works for Branson and Buffett…Thats what our nextgen A1 service is all about!!! Helps you to know what, and when.
Steve P
:
Ash – happy for you to disagree and I’m not going to dispute WB said that and it has merit, but that is a generalisation. Its indisputable that the margin will generate greater returns AND greater losses – thats a fact. Its maths not investing.
As to the smart bit WB is correct you don’t need it – he didn’t, and as far as I am aware, has never said it doesn’t work. I don’t believe the property market is full of stupid people and I don’t consider myself stupid to have a mortgage – thankfully I bought on the margin at 60% and am now at 18% of current value which is about 10% down over the last few years (it would be 16.2% if the value held up). Suffice to say I can hold out until the market comes back and goes up – thats sound management. Leverage is used all the time to get ahead but most people don’t understand it and in that case WB’s statement applies. There’s any number of stupid property players who have failed on the margin.
I go back to my point – the speed of the transaction makes the margin dangerous, don’t get me wrong I understand that, however to write it off because the wealthiest man in the world doesn’t use it doesn’t breach the validity of the proposition that if applied astutely benefits can derive. In conclusion I note that WB has no problem being on the lending side – being astute he puts other people on the margin by lending to them – I assume his homework tells him that they will pay him back when they make money by being on the margin.
Just trying to put a counter to the total dismissal of the margin as a bad thing – wrongly applied its a disaster but correctly and carefully applied it has its place. Education is what I really value hence my attaction to this blog – I value the opinions and have to say that many of yours have been insightful and a great help however I can’t every take blind faith over a full understanding.
Manny
:
Steve P – Totally agree. Glad to know someone else on this blog shares my views on using leverage smartly. (I have already made some other comments on this topic in this thread).
Gina
:
Hi Roger,
This week I bought some CBA at $46 , JBH at $13.76 and WOW at $25.15.In the past I would not have known what to do.Thanks to your book-I am a first edition Value-able “graduate” although I have not posted my photo.I was wondering what you think about buying gold bullion as opposed to gold shares which are still tied to the market, as I was watching Jim Rogers on the business channel and he was bullish on gold and commodities in general at the moment.Also i was considering buying some small cap shares below i.v but then decided to buy the larger caps because they are more liquid.I love your book and enjoy share investing much more than my previous business pharmaacy. What a week! Love reading the blog.Gina
Roger Montgomery
:
Thanks Gina, remember to focus on the businesses. In the short run even the share prices of the very best companies can fall precipitously, so be prepared.
Kent Bermingham
:
Retiring soon or setting up your SMSF?
I have been retired for 5 years now and would like to share with you my experience BEFORE you go and retire and set up your SMSF.
Approaching retirement I talked with a number of my work mates and friends and listened to what they were going to do in retirement. The people with financial credibility were in the main going to set up a SMSF and approach a financial planner to help them with this process.
I saw an advertisement in the paper for a chartered accountancy firm to set up the SMSF, administer and audit it for $990 per year so that is where I went. This was a good move.
Then approached a reputable financial planner for a 1 hour free consultation (other work mates had used their services) and they stated they could look after my SMSF for 1.1% per year on funds invested (should never be a pro rata commission just a fee for service!) and as long as they prepared my statement of advice (what we wanted from retirement, goals, risk etc) for $10,000 extra!.
I must tell you I have an accounting background and therefore have an interest in what is being done with OUR Money.
The statement of advice is sent to me, a 50 page report, on goals, lifestyle, risk, funds invested, recommended companies, glossy graphs etc etc
The long and short of it all after only 2 Years I could see this was only a word processed document and the basis of some calculations in it was questionable to say the least and the wording unchanged in the main each year!.
I also discovered I was invested in companies and especially trusts that were paying huge trailing commissions eg Perpetual Managed Funds for example through the advisor or his company. The financial planners said to invest in these companies so we could see how the rest of the fund was doing in comparison? Why not just look it up on the Internet? Hindsight is fantastic.
I was also paying them 1.1% fees on money we had in the bank and in term deposits – work that one out!
The first year went passed and we made money so we didn’t challenge the way our fund was being managed and the second year passed and we made a huge loss and did not get the answers we were looking or any value added for our money.
I was invested in companies that were over priced, had huge loan books and as a result 10% of my companies went belly up – ABC Learning, Babcock and Brown, Babcock and Brown infrastructure etc etc
Our retirement nest egg was going nowhere and I was not receiving any timely advice, I was doing the calling and it cost us money, our money.
We then decided to move away from the planner and setup our fund on companies that ARGO, AFIC, etc had their funds invested in at the time.
On trying to invest directly with Perpetual and asking for the commission our planners were receiving be now directed to me they stated it could only go to a financial planning organization!
It didn’t take long to work out that there was something fundamentally wrong with how the whole financial system and it stakeholders works.
As you all know the financial planners evolved from the old insurance salesman selling endowment policies and getting paid by commissions and kick backs from insurance companies and this rolled over into Superannuation Insurance and they had to learn financial planning.
So a huge financial matrix and organization evolved with a tangled web of under the table and over the table transactions from one to another.
After another 2 years our fees of $10000 up front, 1.1% ongoing, plus secret commissions etc etc invested in trusts and funds where there management were getting the same piece of the pie BEFORE they paid us a distribution! I wonder whose interests they were really looking after, the Company they work for, themselves. Managed Fund Managers, Banks they were associated with and certainly not us
We are now paying less than $2000 a year and with NO HIDDEN or undisclosed fees and are now invested in companies that we know what they are valued at and that their net tangible assets reflect what the true share price should be.
It has taken us five years to get to a stage where we are very much in control of our destiny and are now able to enjoy our retirement.
I still go to the planner’s free seminars and I still see the same people as me flocking through the door as I did five years ago because they do not know any better and the financial marketing web is extensive.
In conclusion, I would recommend anyone contemplating retirement that they approach an Accountant to assist them in setting up a SMSF and plan, talk with people who have been running their own fund for more tan 5 years, read books such as valuable by Roger Montgomery or books written by Warren Buffett to select stocks you might be interested in and to understand the process and then talk with a financial planner and see what value they can add, then DECIDE what is best for you BUT DO NOT see a financial planner first.
Good luck and happy retirement.
Regards
Roger Montgomery
:
Thanks Kent I am sure my friend Jeremy (Cooper) must have heard a story like yours or two, when he reviewed the system!
Kent Bermingham
:
You can pass this email to Jeremy, I don’t think we will ever change the system! but making others aware may help along with your fantastic site.
as well
Keith
:
Hi Kent, I “retired” in 2006 as part of a forced redundancies at my employer.
The only silver lining, was freed to turn my hobby into a full time career. I could also claim I was able to retire from paid employment before my 40th Birthday.
Like you, in the lead up to retiring, I setup a SMSF and I also saw a financial planner.
I was also given a boiler plated Word document, but I declined their offer of help as I was young enough and well trained enough (former stockbroker analyst, MBA from Melbourne Business School, 20 years of experience in share investing) to go it alone.
For twenty years I had been preparing for the day I cut the corporate purse strings and look after my nest egg from a 20 year career with a single employer.
In the five years since ignoring the financial planner and his recommendations, I have increased the value of my super savings more than two times despite the GFC and general market turmoil.
I have made more and lost less and achieved a lower administrative cost by going it alone.
For me, with another 15 years to my actual retirement age, I am prepared to continue to battle with the blizzard of paperwork that comes with owning an SMSF.
So far the rewards have far outstripped the administrative burdens.
If I had not achieved higher returns at lower risk than the corporate fund, I would have stayed put like many of my friends did.
If you don’t have the skill or interest to take command of your investments, then a SMSF gives you all the headaches with little of the reward.
Far better to have left it in the corporate fund where the annual commissions are comparatively small and the performance is on average steady index like return which frees you from the financial burden during your golden years.
Ash Little
:
Hey Kent, Nice Story
I did 3 years as a financial planner and you are correct in every aspect………This is what made me quit.
Roger,Just my view but I am fair sure the Cooper review and changes won’t make much difference…..
.Like US debt it is ingrained and systemic.
Kent Bermingham
:
Thanks Ash, I am also a qualified Accountant but really didn’t understand how the “Finacial Planning System funded itself!
Thanks for your insights now and ongoing
Macca McLennan
:
Quite a saga Kent You have got most of it right
First step is to decide if a SMSF is for you
SMSF’s are mostly oversold Most people don’t realise how much work they entail
Unless you have a financial adviser “run it” in which case you’re better putting you’re
money into a industry super fund & keeping some money out to put into fixed deposit
&/or shares.
OK you want a SMSF
All most accountants can do is set up the fund
Then get advice preferable from a Financial Adviser
Only use one where you pay a fee for service
A SMSF in the pension phase has quite a few benefits
No tax No capital gains
You should also plan to have some money outside the fund
as most people can earn about $25,000 before paying tax
PLEASE GET YOUR OWN FINANCIAL ADVICE ON ALL
THE MATTERS MENTIONED ABOVE
You have some accountancy experience yet it took some time
for the penny to drop
Rogers book is invaluable
All the Best
Macca
I talked to a Financial Adviser
Kent Bermingham
:
SMSF need very little work in most cases but require a certain amount of money to make them worthwhile to setup and do not need a “Financial Advisor” to run them.
I am suggeting you do a lot of reasearch yourself BEFORE putting your heads into the Lions Mouth
Thanks Macca
Craig B
:
Kent, that’s so interesting, and a little unsettling. My father died last year and my mum has been left with a house and some super. This has to last her the rest of her days so my siblings and I have had a look at how it’s being managed. I think she’s fortunate with the people looking after her given some of the horror stories out there. We’re quite happy with the investments being made on her behalf. Some aren’t so lucky.
Although it may upset some folk who hold a traditional education in high regard, I think we really need to add a financial component to the syllabus, starting in about Year 9. At a minimum mortgages and superannuation need to be a lot better understood by people when they head into the workforce, as they are, for most, the two most significant financial matters they will deal with in life.
Too many people are bamboozled by they mystification of finance. Little do they know they needn’t bother with about 80% of what is promoted as important by the financial world. Not sure I hold out much hope though that this veil of esoterica will be lifted, because, on the investment theme, Buffet has been banging on for 50 years about value investing – in the plainest possible English – and yet, with that elephant in the room (the $60 Billion or so) not many seem to take notice. People still think there’s a room of 200 technicians at Kiewit Plaza crunching calculus and grappling with Newton’s principia.
Good luck with it all Kent.
Matt
:
Setting-up compulsory super has been one of the great things to happen.
Unfortunately, this should have been followed-up with educating people on financial matters as doing both things would greatly increase the chances of a comfortable retirement without requiring additional government support.
Politicians spend so much time on the so-called various financial disasters which I think are probably insignificant compared to the loss of individual wealth in poorly run and expensive super-funds/schemes.
Kent Bermingham
:
Craig,
Couldn’t agree more as long as the education is being provided by the experienced INVESTORS and not the Industry in which we are investing, that way we may get more of a balanced view instead of being hearded like sheep into a paddock that reawrds everyone in the finance industry BEFORE the Investor (you)
Regards
Kent
Luke
:
Hi Kent,
Thank you for sharing your experience. I am a long way from retirement but seriously looking at a SMSF. I am thinking of starting it in about 3 years once I have built up enough in my current super fund so there is no hurry right now. The $990 deal sounds quite reasonable to me.
Roger always says to seek financial advice but from what my friends have told me, this sounds like a bad idea. They go to these “financial planners” who sell some fund that takes a reasonably large percentage off the top. People just assume these financial planners are experts and will increase their wealth. The only thing I have seen from these financial planners is an ability to line their own pockets.
Of course, I understand Roger is just saying that we shouldn’t just blindly follow him but if we were to “seek financial advice”, would they really have our interests in mind?
Cheers,
Luke
Kent Bermingham
:
Luke $990 was five years ago, to get my Tax Return and Annual Audit done for the SMSF now costs me $2000 per anuum as the $990 was just to set up the fund initially.
I agree with Rogers coments but to do so only after you have become a graduate and talked to other people who run teier own fund first – then see a financial planner AND if he can ADD VALUE to what you already know negotiate a fee for rhe servive YOU want.
Ash Little
:
The people I use charge about $700 per annum……There are restrictions though.
You must use commsec to do your trades and you must have an ANZ V2 account. Plus the property warrants are out I think…I can certainly live with these restrictions.
I wont mention their name but if you google. “cheap super fund administration is australia” it shouls be in the top 2 or 3 on your search
Hope this helps
Kent Bermingham
:
Thakyou Ash, have they increased their charges significantly each year?
Keith
:
Kent, note they do NOT accept existing SMSF accounts Kent so you are out of luck with them.
My Dad uses the same SMSF provide as Ash and his annual fee is $699 automatically deducted from his bank account in January. Originally it was $599 p.a. and it cost nothing to establish the SMSF.
Whereas, I paid $500 to establish my SMSF in 2006 and pay an annual fee which start at $995 and has recently risen to $1145 p.a.
Although I pay an extra $445 p.a. compared to my Dad for tax audit and return lodgement, I have the flexibilty of choosing my own bank accounts and stock broker.
I had been tempted to setup with Ash’s provider but they would not accept my existing fund.
Fortunately for me as I would have been stuck with CommSec as my broker and its comparatively higher brokerage rate.
When I bought my 8000 WOW I paid the grand sum of $33 including GST.
But to be fair, I separately pay a $77 per month trading platform fee which is refunded if I trade more than 15 times in a month.
In contrast, My Dad had to pay to Commsec $43.22 incl, GST to buy his 1500 WOW shares.
This was 30% more brokerage for a 80% smaller purchase.
Not a big deal on a one off trade, but the costs compound if you are a moderately active buyer and seller of shares.
Ash Little
:
Hey Keith/Kent
Not sure that is correct about not taking on existing funds.
It would be worth giving them a call to find out as I am fairly sure they will take on existing funds.
As the costs are low expect to get taken a message and a call back within 24 hour.
Not sure Keith is correct on brokerage as well. It is slightly more expensive than my etrade accounts but not materially
Zac
:
Kent excellent discussion.
Prior to reading Value.Able I saw so many financial planners and I nearly signed over every cent of my life savings and infact nearly took a margin loan too.
I understand and perhaps its due to needing to have a disclaimer. Roger will always say seek professional advice prior to acting on anything especially anything read here.
I must say every so called ‘professional’ I spoke to certainly didnt have my best interests at heart.
I now have 50% of my savings in an Index Fund and the other 50% in Direct Shares in companies I believe are leaders in their field, below Intrinsic Value and have a healthy balance sheet.
Being new to investing I still feel I wasnt patient enough however I bought into a weighing machine and not a voting system so am not fazed.
So in contrast in the beginning of the year I had my stomach churning and I literally was feeling sick and nearly parting my life savings into the hands of another. Ive now all my life savings pretty much in the ASX however I feel good about it.
The best way to manage risk is education and although Value.Able wasnt a one stop shop for me it provided me with so much peace of mind and as I said above that although im now in the red (since the crash) I still sleep at night.
So Roger many thanks for everything you have done.
Roger Montgomery
:
Delighted Zac.
Peter M (Mully)
:
Other than surviving after paying a professional advisor (never again) to reduce my wealth a few years ago, I don’t have a story to tell.
However, in a market that’s being driven by fear, panic, emotion, misinformation, ignorance, stupidity, newspaper headlines, TV and more “experts” than I can poke a stick at, my practice of using technical analysis to support my fundamental analysis/valuations and verify the integrity of my decision making process has been especially helpful and rewarding.
Whether we like it or not, we simply can’t afford to ignore market sentiment if we want to survive and prosper in this environment.
When used in combination, fundamental and technical analysis is a formiddable tool and an integral part of my survival strategy.
Peter
:
Hi Roger,
My story is a bit common I think.
This time 7 years ago, I decided that I wanted to invest in something either real estate or shares, no real idea what, but I knew that I didn’t want to borrow any money so I went for the shares.
Bought 7 of the top companies and one of which was $10K into BHP at $13. This was both a good move and a bad move.
It was good in that the shares went up and up but it also got me looking (without professional advice) at the big moving companies like ABC Learning Centre and Babcock and Brown. Both of these companies had tremendous reputations at the time.
I sold out of BHP 18 months or so later at $29, feeling very chuffed and put the money into ABC and B&B.
Only to see the money quickly evaporate as the two went down and down. Lost heaps.
Decided that the GFC was lasting far too long, so I got out of everything and went for a term deposit for a year, only to find that I did indeed miss the absolute bottom of the GFC but I missed the massive jump upwards as well).
Today I am back in the market in top 40 companies but am re-reading value.able in preparation for some good buys in the future. My portfolio is nearly totally red with the exception of NCM and CCL.
As for seeking professional advice, I have no idea who I should go to as I know that some will say margin loans are great (one well-known broker firm is happy to arrange the loans for you) while others will be going for companies that Roger wouldn’t even look at. There is just so many different professional opinions out there and everyone in thee media that write columns, give advice etc all appear exceptionally bright and knowledgable. Dilemma, dilemma!
As I have learned in the past few (painful) years, I am in no hurry to make big decisions and will just gather information on my own and see what happens.
Peter
Ash Little
:
Good stuff Peter,
If you are not in a hurry then you will do well
Happy Investing
Matthew D
:
On an unrelated note. Can anyone point me the direction of somewhere that has the complete earnings seasons reporting dates? I can’t seem to find one.
Kent Bermingham
:
http://www.brr.com.au/partner/asx/calendar/2011/01
This site will be of assistance
Jim
:
Thanks Kent- it certainly does help
Cheers
Jim
Matthew D
:
Phew! I remember I was so stressed watching the markets in 2008. I had to stop watching. I was transfixed, glued to CNBC. Where Mark Haines (R.I.P.) would break down what was happening every morning.
I had been watching BHP for a while with my uncle and one morning we jumped. It looked like a good setup. The next morning after I put the trade on to my horror they let Lehman Bros fail (I was sure someone in the meeting would rescue them). My uncle had trusted me with a $10,00 investment and I was feeling the pressure. Constantly checking my iPhone.
We waited then one day to our shock it popped 12%. It was the day they banned short selling financials to my recollection. We were chuffed and sold out all but a $1,000 “long term hold.” As the market headed south all our profits went with it and panicked we pulled out.
The day I saw the market swing 500 points in either direction and futures close cause they were down too far was the day I gave it a rest. Not to mention the failure of the first vote on the stimulus where the market dropped 700 points like a stone in literally 45 seconds.
This experience taught me how I react at those times. Keeping in mind I wasn’t even invested expect for a small failing play on BHP (lost 18% as market slipped).
I now to have my pretty little spreadsheet that has a nice highlighted colour (20% or more under IV on RRs ranging from 10 – 13) on companies like VOC, OZL, PAN, DCG, RIO, JBH, MTU, CAB, MCE, PNA and many more.
I’m ready to execute my 1st order with confidence despite the market noise and am looking forward to more earnings to recalculate my numbers.
Thanks Roger.
You have changed my life.
Great story Scotty. Hope all is well now :D
Roger Montgomery
:
Another amazing story. Thanks for sharing Matthew…and everyone!
David M
:
Hi Roger et al,
I’m Excited!! (apologies to big Kev) Great to read all your experiences over the last few years but aint it grand to feel like there are opportunities out there to be had with the knowledge that we have so much “more competative advantage” over so many other so called investors. Thanks Roger and also to the regular contributors on a great effort. Cheers Dave
Joe
:
Hello Roger,
During the G.F.C I had all my money invested in shares ,my Smsf lost 50% and i had a private equity loan of 250k and the portfolio was only worth 80k I was lucky i did not have a margin loan , i just kept paying the interest.I was upset with myself i got into this mess,I ended up selling all my shares. when i had calmed down i realised the only way to recoup my money was to venture back into the market.I did fair bit of research. I had made my decision i was going to put all of my money into one stock.
I bought 200,000 shares in this company price range 30 cents to 1.00. I was very nervous for quite awhile This wounderfull company is called forge group.I have sold down over half my holdings and diversified .I rang forge a couple of weeks ago ,it must be my 50th call since I have had the stock they say they cant keep up with the amount of tendering there got on there books .My tip forge could be the next monadelphous
Greg Mc
:
Blimey, Joe! Good thing you chose the right company for that move, you’ve come out of that better than anyone could hope to achieve. I certainly wouldn’t have had the stomach to put all my dough into one stock, in fact, not only would I have not been able to sleep at the time but I’d still be suffering now from nightmares about what could have gone wrong.
However, time has shown your decision with FGE to be a very good one (ballsy too!) and hopefully you won’t find yourself in a position again where you’d feel you had to try it a second time. Well done.
sapporosteve
:
That photo is a laugh. I assume that is the Value.able Graduates up the back…….
Manny
:
Craig B and others
Well I know you might have been burnt on Margin Loan but I guess we cannot say that they should be totally avoided. Indeed it increases your losses when markets go down but it is to do with one’s risk profile and how you play it. I also don’t agree with someone’s comment above that if you are an investor you can’t use Margin loan’s. I have held stocks for many many years in ML.
The bottom line of all this is you need to play at around 50 – 60% LVR at most times rather than stretching it to 70-80%LVR. The other very very important point is to never buy new stocks without putting some of your own money (in other words if the equity goes up in your Margin Loan Portfolio when your shares are going up, don’t use that equity to buy new stocks. People are tempted to leverage of that equity, I suggest add more cash and then leverage of that cash up to 50-60%).
Unless people are flushed with money and do this for a living maybe not having a margin loan may be ok. But if you only can save small amounts of money after you make your living expenses from your salary I cannot see another option to a have a decent upside. Offcourse just like non-margin loan investing you still have to have strategies to protect any downside.
You should also remember with ML you cannot buy a lot of specys which is a good thing. Another point, Interest cost is not only tax deductible but if you are keeping your LVR to 50–55% the dividends will cover most of if not all of the interest cost.
Cheers
Manny
Ash Little
:
Hey Manny,
Buffet is quoted often here but I think this is a good one on leverage……..If you are smart yoiu don’t need it and if you are not then you have no place using it…………
Just say no IMHO
Mal
:
I think margin loans should be avoided at all costs, I completely agree with Ash’s statement above. There are a few people out there who can consistently make 20-30% pa, and in general they don’t need/operate a margin loan facility. In Australia you can put money into a term deposit or high-interest cash account for ~6%, if you have a personal mortgage you can pay it off and effectively get 8% (though probably more). I don’t know what the rates are for margin loans but I imagine they would be 8% plus. With a risk-free return of 6-8%, you really need expected returns of 20% plus to bother investing capital (especially with the volatility of today’s market), and I think the proportion of people who can consistently do this is very low (and probably don’t require margin).
Then you have to add in the added risks & stresses of margin positions- including the fact that you are at the behest of what other people deem to be be fair price. A 50-60% LVR won’t protect you from the likes of the GFC and you may be forced to sell at a much lower price than you actually want. Furthermore, if the stockmarket takes a while to reach the right price (all the while hoping that you have in fact made the right decision(s)), you are continually paying 8+% on your borrowings, which compounds fairly quickly.
Roger Montgomery
:
Good perspective Mal. Thanks for providing it. There’s some interesting counterpoints (on each side) with this subject.
Manny
:
I guess if you have used ML effectively and safely it can be a powerfull tool (Don’t confuse ML with CFDs. CFDs you can loose more than you put in). I dont agree at all that you need expected returns of 20-30% to make sense of it. You math on that is not correct. In fact it is the contrary. On the upside you need a lower return than buying shares without a Margin Loan. As I had mentioned in my post above, you have totally ignored the power of dividends in the equation and also the fact that you are getting dividends for 100% the value of your holding where as the loan is only for 50-55%. The dividends will more or less wipe out the interest. I can provide detail real examples if you want. You only need a smaller percentage return than non margin loan investors to have better capital growth. I am not sure how you came up with 20-30%. It is not only incorrect but it is actually the opposite of it. I am happy to provide some examples to make it clearer if you want. Feel free to let me know.
As far as downside is concerned, offcourse you have to prevent a margin call and at times it is a better way to mitigate risk for people who have a ML. For all other non-MLoan users they can get more emotional (it is evident from your stories that lot of people on this blog lost a lot of money during GFC and they did not even have a MArgin loan. So how do you explain that?) during times like GFC and keep holding on to stocks that have poor fundamentals and loose a lot of money whereas ML users will get rid of some of the stocks or will be asked to get rid of some of the stocks which have underperfomed and reduce their LVR further during turbulent times. Loosing money with or without a margin loan is all about risk management.
You can easily apply Value.able principles and use Margin Loan more effectively than using 100% of your own money and buying small holdings and letting your emotions take control during SELL decisions. You take emotions out of the game with ML
Mal
:
A few points (I have had to mess with my formatting here so it doesn’t get rejected as spam several times!):
1. Arbitrage
A poster above has mentioned use of leverage for arbitrage transactions- absolutely agree that you need to leverage arbitrages to make it worthwhile (after spread, brokerage etc). You need reasonable actuarial skills to arbitrage effectively, particularly if you are up against hedge funds who are on the whole more liquid and have more rapid access to synthesised information than you.
Mal
:
2. Trading systems
There are definitely ways that you can use margin loans effectively. I have no doubt that experienced traders with a track record of success could use these sorts of loans with a systematic money management system to great success. If that’s you, good on you. If anyone has a system that consistently returns well in excess of the loan rate (over a period of years), it makes sense to use leverage in general.
Mal
:
3. Risk/reward
Whether the return is in the form of capital gains or dividends it doesn’t matter, as soon as you have an interest bearing loan, you need to cough up the ~8% pa to service your loan. The average investor will not lose money on total returns of 5,6 or 7%, however if you have a loan (of any description), you will lose money unless you make over and above the interest. Each percentage point above the breakeven point, however, supercharges your returns.
If a margin call occurs, particular if it is due to non-sensical market volatility (a la recent times), not only do you lose a significant chunk of your capital but you also have to overpay on the spread (ie forced-sell). The 20-30% figure is an assumption on my part: most successful money management/trading systems advocate higher risk-reward ratios as the basis of successful investment, and given that an 8% risk pa is a given, 20-30% would give you a risk reward of 1:3. Obviously high probability trading/investment systems can have a lower acceptable risk/reward ratio.
There are no hard and fast rules, but there are significant risks with margin loans. The sharemarket is a risky enough place to park your capital (esp. with a very good risk-free rate in Aus), and I personally feel that you should think long and hard about adding more risk to the equation. For experienced traders and investors with a clearly-defined role for margin-loans in the confines of a successful, tested money management system- they could probably be a useful addition to the arsenal.
Keith
:
I totally agree with your quote in that if you can’t make money with your own savings then leverage will make it worse, as you will lose your money faster.
On the other hand, if you have a prudent investment strategy that over the long run produces good returns, then a moderate degree of leverage is tax effective and financially rewarding.
I took out my first margin loan a few years after I started working and investing as I was sick of the government taking a huge chunk of my meagre salary without any benefit to me.
As a single, young wage earner, I was not party to the largesse of a government handing out money to new mothers, first home buyers and other vested interest groups.
As the late, great Kerry Packer once said “The Government is not doing a good enough job to pay extra [Tax]”.
Moderate tax deductible debt should be considered in any person’s financial strategy is an option to be explored and discarded if not appropriate.
Craig B
:
Only 25% of my funds were on margin and I still went close.
Rick
:
The events of the past week have been coming for a very long time. It’s just started and has a very long way to go. The debt overseas and here in Australia was and is out of the norm. It must be removed before the share market can operate in a predictable and functional way. I own almost zero shares.
I own FGE…The rest are gold and silver etf’s…I’ve done very well this year using common sense instead of conventional investing. The world has changed. there is no convention for what has happened over the past 20 odd years. Australian housing is so ridiculously over priced, that alone has to unwind before any normal share market can exist.
There are times to not own shares. That time is now.
Ash Little
:
Nice thoughts Rick.
Have you looked into counter party risks with your gold and silver exposure.
Take Care
Rick
:
Thanks Ash. I hear you re counter party risk. There is no doubt some, I have spread the risk as far as practical. I do believe (and have confirmed in discussions with the etf’s) the Australian etf’s are far more sound than the American which are rumored to be anywhere up to 100 times the value of the actual asset held. Scary I know.
Either way, Most of my assets are presently in super. Spread across cash (50%), silver, gold and a small parcel of FGL.
I can see this market really tanking. It just has that feel. I’ve read some good stuff from very smart operators that predicted the GFC that are saying there is no where to go long term but down.
My thoughts are, there needs to be a whole lot of changes in the western world before any market can operate efficiently and effectively. Personally, I don’t think it’s wise for me to ignore my gut feel.
That gut feel comes from.
1. Manipulation of real unemployment numbers.
2. Real inflation not represented in the stats.
3. The real fact that Australia doesn’t really do much. We mine, BUT, 85% of Aust mining is foreign owned.
4. The massive personal and household debt.
5. The lack of future wage increases.
6. Ridiculous housing prices, not sustained ANYWHERE else in the world but here.
7. Demographics. Very much leaning to reduced spending, AND down sizing of housing.
8. The impending cost of energy. Whether it’s tax or depleting supplies, it’s coming.
9. Nothing’s changed in the US. They are still spending far too much and doing too little. Probably Europe and the UK too.
10. After many years of 7-10% growth, you’d think China’s due for a rest.
11. China’s housing is also very expensive.
I don’t want to scare anyone. I just think this is a time for ultra vigilance. If you are buying shares in companies hat have REAL intrinsic value, well, that’s another story. There will be changes in the way people spend their money and therefore changes in company profits both here and overseas. With change of course there will be opportunity. Working out where that will be is the key I guess.
I do know, that if I shifted my precious metals in to stocks this Monday, I’d be about 40% better off than having been in stocks alone (not value able stocks, ASX etf’s). I’m not ready yet.
Really great book Roger. I also bought one for my brother in-law. It opened up a whole new tool box for me that I’ve already well and truly benefited from (FGE, MCE, WOW).
Roger Montgomery
:
Thanks Rick – a good perspective, thanks for sharing.
sapporosteve
:
Rick,
If now is not the best time then when is the best time to own shares? But I see you still hold Forge. If you had bought ANZ or CBA this week your dividend yield is about 7, 8 or 9%. That beats actually giving them your money and they give you 5 or 6% if you are lucky. On top of that, you get undervalued companies who are part of a long term oligopoly and there are no competitors on the horizon. The sharemarket can never operate in a predictable and functional way – if it did then I would simply put all my money into since I could be assured of it’s predictability. Predictably you can get 5 or 6% on your deposit or buy their shares and get 8 or 9%.
Many people mistakenly believe that there is a connection between the stockmarket and the economy. Studies by Littler et al (sorry I cant cite the paper’s actual name) show that there is very little if any correlation between the economy and the sharemarket. This study supports Roger’s position of focusing on the business not the broader market. For example, Buffett stated the best return for shares was in 1954 (I think). The US economy was in recession. In 2009 the Australian economy grew about 1 or 2 % I think. The sharemarket returned 45% or thereabouts.
There are times to not own shares. That time is not now.
Steve
Rick
:
What I should have added Steve is, for me, after the harsh lessons of the GFC, my prime motive is to preserve capital. I hear you re Littler et al…..Shares are a hard game. Rewarding when you get it right though.
You’ve also got far better tax benefits with your bank shares than interest in the bank…..I do think there’s a risk that banks will not be able to sustain their profits given my points above. Banks were always going to do well while we gorged ourselves silly.
You know the whole point I’m wanting to put out there is the whole western world is heading in to the perfect storm. Over the past three decades, we spent too much, we now need to both reduce that spending AND pay back the money (a double wammy)…We are aging, we’re producing less, we’re consuming less, the tax base is depleting.
I agree Robert Double. To me it seems obvious, and I’ll be ready to pick up value-able shares when the time comes. In the mean time, I’m happy to grab the odd share when I think their revenue won’t be too far affected.
Keith
:
I am agreeing alot, but like Rick I don’t like banks.
I even sold my prized eight hundred CBA Float shares which cost me $5.40 because I would rather not own stocks that are addicted to the suckling the Government’s debt teat to make money.
If you were to take one lesson away from the Storm Financial debacle, it was the backing of the Major Bank’s local branches in Queensland that let the promoters fleece unsuspecting Mums and Dads of their life savings.
Although I am not a greeny or environmentalist, I sleep better at night knowing my money is in a health care company like CSL whose products help save lives rather than in any Australian Banks that turn a blind eye to unsavoury practices in their pursuit of profits.
Robert Double
:
Rick I am in a very similar position to you. 95% in fixed interest and cash at the moment with the only equity holding being FGE. I believe markets will be falling further as the world goes through it’s deleveraging process.
Manny
:
Hi Rick and Robert
I do own FGE too (thanks to Value.able) but my questions is that with all this doom and gloom scenario that you are outlining why even still hold FGE. What makes you think if the market tanks that FGE will not tank with it. In fact even though it is a good company you could see the swings FGE has had during the past 1-2 weeks. There were days it was down 6-8%. As markets are irrational they will not spare FGE. Will be keen to hear your rational.
Cheers
Roger Montgomery
:
Hi Manny,
If you own Forge it should ONLY be because your own research and analysis and logic indicated you should.
Rick
:
All true Manny……
“Will be keen to hear your rational.”…………It’s because I’m not always right (not even close to be honest). I try and hedge towards what I think…That’s the best I can do without a crystal ball…To be completely in or out of shares, to me, doesn’t make sense…….As much as my primary goal is capital preservation, I also see FGE as a great share that should still thrive with what I’m thinking will occur to world markets.
Tim S
:
Hi All,
This is my first comment on the blog which unfortunately is more of a question. Hopefully I can contribute to the blog more going forward but as I am currently on the road touring Aus it can be a little difficult at times.
I was hoping to find a spreadsheet (similar to what Scotty G uses) that incorporates a MOS or discounts rates greater than 14% and ROE greater than 60%. Unfortunately the Value.able book doesn’t show the included spreadsheet beyond these levels. Is there one available here?
Any help will be much appreciated
Tim
Roger Montgomery
:
Don’t do it guys. Be conservative.
Tim S
:
Hi Roger,
Greater discount rate, greater the conservatism?? Please correct me if i’m wrong?
Cheers
Ash Little
:
Hi Tim,
Just my view but you don’t make a stock less risky by raising the discount rate.
MOS is the one to use for being conservative
Hope this helps
Tim S
:
Cheers Ash,
Ok. So a discount rate of 10% is better than 14% I assume?
The greater the MOS is what I am aiming for when investing in quality businesses that have high ROE.
Ash Little
:
Hi Tim,
I may not be getting this but discount rate and MOS are not the same thing In my view.
Hope this helps
Tim S
:
Hi Ash,
Maybe I am getting these two confused too. Sorry for the miscommunication. Some where along the lines I think I got them mixed up as being one of the same thing.
Keith
:
Tim, take the advice of an old investment hand [ie. Me :) ] and start the other way around.
That is, work don’t try to guess what to buy, calculate how much you can afford to lose.
Investing is a high risk activity and you should never invest money you can’t afford to lose. So not next months rent money or bus fare or even your roadies wages.
Treat Investing as a long term project and start with learning what the numbers mean rather than cranking the handle on a machine (eg. Black Box) or twiddling with numbers on someone else’s spreadsheet (eg. Grey box).
Warren Buffett summed it up best
Rule 1. Never lose money.
Rule 2. Don’t forget rule 1.
Even though Roger had suggested Woolworths as a good long term choice for further investigation compared to Wesfarmers, I looked at all possible downsides before I even thought about how much I would pay for the stock.
Tim S
:
Cheers Keith, appreciate your wise words.
The only reason I was hoping to get a spreadsheet with higher ROE is so it would be easier to calculate the likes of Oroton as they have an ROE of around 80%. But as being conservative is best, better to make the calculations well under these numbers.
Chris B
:
Good points Keith,
I see a little downside in Woolies too. I won’t invest.
Buffett has broken this rule many times. But its a good one to go by.
Some say Buffett only invests long term – incorrect, he just prefers to invest long term.
Some say he doesn’t invest in companies that have high capital costs – incorrect. He’s bought a few companies that have high capital costs.
I think people get the wrong idea about Buffett and try to sum him up in a few golden rules, I’m not saying you are. Its just something that I’ve observed.
Nigel
:
We’ve all studied Value.able and found the great companies, but alas the prices have been high.
Then all of a sudden the market swooped as if by devine intervention, allowing us all to hop on,
Don’t have connections in high places do you Rog.
Roger Montgomery
:
That would be cheating and I am pretty certain He loves us all equally.
Ian de Gruchy
:
Hi Roger
Pre reading Value.able my investment strategy was a wing and a prayer based on unrealistic broker recommendations and valuations.
After reading Value.able, I valued all the companies in my portfolio and was shocked to find how many just didn’t hold up to scrutiny – so thank you for empowering me to sell – which I did. I keep a watch list of the eight companies I sold and they just keep going south as they search for their IV. At the same time started reshaping my portfolio with some of the regular favorites MCE,FGE,VOC etc. I now have 13 stocks in my portfolio with a couple more, QBE and ORG that are on the chopping block but now just seems like the wrong time to sell and I have time to wait for a better opportunity.
So like others that have stated in this blog – I sleep better at night – in fact I have come to learn that these are rare occasions to add to the portfolio and recently picked up some more VOC and MCE.
So thank you making me become more engaged with and have a greater understanding of the businesses I am invested in with the knowledge that just because the market reacts the way it has, it doesn’t fundamentally change the IV of those businesses.
I still have a lot to learn but I can say I am a lot better off since reading your book, your insights and the insights of all the contributors to this blog.
As you say – This too will pass. I’m looking forward to the next few years not the next few months. So with the future in mind, rather than being disconsolate, I am actually enjoying process of researching companies and investing in general. Knowledge is a powerful thing.
Thanks again
cheers
Ian
Andrew M
:
What a change in perspective!
As a (hopefully) rational person, I’ve always fallen on the value side of the fence, but previously lacked decent tools to understand and measure this. I could (and would) turn off the market during a downturn, but this was primarily to protect my sanity. Thankfully I never got into the margin trap. Many of the successes over the last 15 years have been more luck than good management, assisted by a definite lazy approach (many of the downturns were history before I triggered they had started).
Since reading Value.able earlier this year, adding Roger’s tools to the arsenal, and doing a lot of research and subsequent valuations on companies, I’ve hit this downturn much more prepared. There are some definite target and price points, and some very obliging people out there. I’m positively enjoying the chaos!
Andrew
Leisha H
:
Dear Bloggers,
Scotty G could easily read Leisha H! My BNB story is almost identical, but I had the misfortune of also holding Allco. These had been recommended by “advisors” along with ABC learning and various infrastructure funds. I managed to get out of ABC early, but the resultant carnage with the rest was quite impressive to say the least.
The turn around for me came when I decided to take control of our investments myself. I began to educate myself, first by joining AIA, then subscribing to a value investing newsletter (some of whose recommendations I now see were purely speculative). I was fortunate to attend a lecture of Roger’s early on in the process, and so began my enlightenment. I now buy shares the same way I buy shoes- only the best, and only on sale!
Thanks to Roger’s methodology, I can recognise the best companies, and most of the time, I can recognise when they are at a decent discount to IV. Reading the blog has added to my confidence and I thank you for your collected wisdom.
My biggest mistake was holding on to dogs in the hope that they would come good. I finally cleaned out my portfolio earlier this year and said goodbye to my few remaining shockers. So now, I believe I only hold investment grade companies, and have managed to increase positions in some of them this week.
It was incredibly satisfying to remain calm when others were panicking. Like others here, I have added some wonderful companies to my portfolio this week.
Roger Montgomery
:
Amazing stories everyone. Good on you for ‘getting it’!
Ash Little
:
Agreed Nice Story Leisha
Slide
:
Hi all
Taking large losses in recent times seems to be a common theme for many of us. (For me iSoft, ABC learning and CLQ). I think this aspect of taking our medicine for not properly and rigorously assesing the true financial and operating position of companies will stand us in good stead. We do indeed learn a lot more from failure than success, and a note of appreciation to Roger who has equipped up with the tools now to make superior decisions that will lead us down a more successful route – hopefully for life!
Ash Little
:
Nice Slide…..
You are right; you will always learn more from your mistakes than your successes
Happy Hunting
Austin
:
In 1984 a child was born in the Gan’s family in Malaysia. In his early childhood he was taught with good financial habits. He went to Secondary school (year 7) in 1997, in the same year he started reading business news. In July the same year, Asian market crashed (see more at http://en.wikipedia.org/wiki/1997_Asian_financial_crisis), he was sitting in front of a TV everyday listening to news about how bad the market had tanked. In 1998 his father started buying shares and he chipped in 50% of his saving into buying shares. In 2000 he sold all his shares and made some money. Years goes by and he hasn’t invest in shares because he has to go to college, and then to Australia for his Engineering degree, he needs cash in short term.
In 2007 he graduated in July, started working in September, ASX200 peaked on 12th October, and he knew, the same thing he saw in 1997 might happen here in Australia, so he watches the news everyday, starting from the collapse of Northern Rock Bank, and then a few banks were bailed out by US, and so on…
All goes according to his plan, shares tanked, just like he was directing the whole thing, he went on and bought his first ASX stock, the NAB, on 30th April 2008. Share goes down again, ASX index down from 5500 in April 2008 to 3500 in November 2008. His holdings halved, and then comes a family issue which forced him to sell all of his shares at the lowest point of ASX200 on 28th Jan 2009.
He knows one day he is going to come back, an engineer will earn significant money, and he will need to think of a way to grow his money anyway, so he reads many things available in the internet, Comsec video, ASX video, Money Magazine, AFR, Business Spectator, Eureka Report and etc in search of a right way to invest in stock market. While he was doing that, his savings went up, and so did the ASX200. As he read Money magazine and Eureka Report, he came across those columnists whose “paper portfolio” had made significant profits during 2009, some of them like Valueline and Speculator.
He was convinced by one of them, and he went on to follow… the Speculator, because every time Speculator mentioned a share, it went up the next day, that of course was before he started to follow. He went on to trade high risk companies but ended up with loses. He then tried another way, read the Broker Alert under Eureka Report, and bought DOW, which he then sold at 40% loss. It was so miserable in July 2010.
One day out of the blue on 18th August 2010, just 4 days after his 26th birthday, he decided to visit http://www.rogermontgomery.com, and bought a book called Value.Able(best birthday gift ever from Roger M). During that time he has also keep himself updated with Roger’s blog, Eureka Report, his TV appearances. He lost a lot of money to a point where he say it doesn’t matter anymore, just buy whatever Roger M says and hope that it will go up, and he’ll sell it before anyone else do… (Sorry Roger M, i know you kept saying “seek professional advice” but i wasn’t sober during that time). One 19th August 2010, after Roger M mentioned about MCE, he dumped other shares and bought MCE at $3.96 and ORL at $7.05. It was a lucky ride, he made it, buy and sell them before the others do. Along the journey of reading the book, he had also bought many good quality shares like ARP,DCG,FGE and in February he managed to break-even his investment in ASX stock. In early March 2011 he started to restructure his portfolio the way Roger taught (in April and May 2011 Roger mentioned a lot about constructing a portfolio). Since then, he always reminds himself of the things he learnt from Roger M:
1. Avoid bad stocks.
2. Uncover great stocks.
3. Pay less.
(Source: One of the seminar slides created by Roger Montgomery)
and also some quotes like:
1. Keep calm and carry on.
2. Think telescope not microscope.
Some notes to keep:
1. It is very important to keep cash in wait of opportunity. Roger M invested only 10% of his fund at one time when there is no value in the market. Warren B has also kept reminding the importance of having cash.
2. It is very important that you do your own research. Roger M and Warren B reads a lot of financial reports. Warren B says you should take as much accounting course as possible, to understand how financial report was being manipulated. Warren B also reminded
How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg.
Abraham Lincoln
In June 2011, Gan went on an oversea business trip for 3 weeks and enjoyed the break, kept himself away from the stock market noise.
In early August 2011, his portfolio went down by 30% from February high, he was laughing looking at the third bear market of his lifetime, and wonder, what is his birthday gift this year???
Regards,
Austin
ron shamgar
:
Great story Scotty.
I agree with everyone’s thoughts. focusing on the businesses and their value helps to silence the noise around us. There are and will be great opportunities out there in the next couple of months.
BUT as i have advocated in the past:
Know when to take profits as well!
Decide on a strategy of when and how to sell. (the hard part in investing)
Don’t fall in love with a company.
Be realistic when calculating IV for companies with high ROE and low payout ratios as they cannot sustain this into the foreseeable future.
In addition, consider physical gold and silver, or quality producing gold and silver companies, as a small portion of your portfolio. it seems to me they will outperform the market in good or bad times.
Good luck out there and sleep well.
andrew
:
I really like reading these stories. I was lucky enough to have a partial knowledge of value investing during the gfc and managed to take advantage of it. I have of course made many mistakes and have learned a great deal from roger, his book and his blog (including fellow graduates) since.
I agree with earlier comments that there has definitley been a swing in mindsets seen here with people seeing opportunity rather than wondering if the 7% drop of company xxx is something to be concerned about.$
But that’s not the purpose of this comment. Just thought I would share with people an amusing thought I had.
Not sure if people remember the nicorrete ad where a person called “gary” is about to light up only to have a cheersquad with matching “gary” tshirts sing “no gary no” over and over again until he puts the cigarette down.
I could just imagine the benefits of a similar service to shareholders by having the same thing in company boardrooms for whenever a ceo decides to take part in a risky aquistion etc that perhaps benefits the ceos short term bonus targets instead of benefitting the shareholder.
I can just see it:
“I think we should buy coles for 22 billion”
Cheersquad “no richard no, no richard no, noooooo richard”
Scary thing is I can actually see some real life positives in this service
Andrew
:
Also may i say that i have found it interesting measuring my forecasting abilities. As this is the first FY reporting period since i finished and practiced value.able.
So far i have only had 3 companys report that i had forecast valuations for.
My forecast was $3.00 higher than what JB’s annual report calculated for me and i was $6.00 lower for Cochlear as well as being pretty damn close to CBA. I think this is all reasonably close for an amatuer and i am getting better at it i feel. David Jones should be interesting i have went out on a limb and tried to work things out for myself (not using broker forecasts and relying on their announcements and my own logic and analysis) and forecast a value of around $2.20.
Brad
:
Reading these tales ( and I have a few of my own!) reminds me of the old Jewish saying that you have to fill your head before you fill your pocket
Brad
:
S&P downgrades US debt and American treasuries rally, US 10 years to 2%, – go figure that one!
Aren’t “they” buying the security “they” are concerned about?
I might re-read “Extraordinary popular delusions and the madness of crowds”…….
Ash Little
:
Good call Brad,
But I have been saying to myself it can’t go lower than this………………………But it has.
Keiron
:
I’ll take the other side of the situation. I knew the 2008 crash was coming so only really starting investing late 2008 and mostly in 2009. I managed to make decent amounts (40 – 80%) on low quality stocks such as PBG, MQG, LEI.
Then I found out about quality and how to properly value companies and was able to remove many low quality and over priced stocks from my portfolio. Now I am happy to be looking for good quality in a cheap stocks.
Jim
:
Hi Scotty
As Dr Zachary Smith would say, “Oh the pain, the pain….”. But as I’ve learnt, what doesn’t kill you makes you stronger. Thanks to Roger, the value.able graduates have had their fear controlled by reading and applying the principles and will triumph in the end. And thanks to Ash, Ron and others in the Value.able community we know we are not alone in what for many will be some dark hours.
Eternal thanks to the whole Value.able community and particularly Roger
Jim
Matty
:
Nice one Scotty. I will write my story if I survive this market turmoil.
Martyn
:
Great to hear Scotty just wondering where the beam me up solution to finding the cash comes from or are we suggesting that those A1 stocks haven’t been A1’s for long enough or with enough margin of safety to buy in the past. If like myself you have been fully invested the past few days have been a white knuckle ride and I don’t expect it to change any time soon, the fundamentals are still poor across a range of economies and ultimately all companies earnings are driven by their economy in some way shape or form. Lets not kid ourselves that we are completely removed from the bigger picture – didn’t a President campaign on “it’s the economy stupid” I think we can turn it around and say we would be stupid to ignore the economy (not the newspaper headlines but the real economic data). Today I made a tough call to sell some speculators (at a significant loss) to ensure I have some cash reserves, in case this bounce is not so bouncy but I also bought a couple of good shares based on sound fundamentals (WOW, BHP). Sometimes you just have to run after that train because it may be a long time before another pulls into the station (just hope I am getting on the right train).
Roger Montgomery
:
Thanks Martyn, for everyone reading here…seek and take personal professional advice.
Craig B
:
In 2008 I made two share market recommendations to friends. One was RAMS and the other Babcock & Brown. The rationale had a lot to do with low prices but little grounding in decent analysis. Fortunately none of my friends are that stupid and I had none of my own money down.
In March 2009, again I had none of my own money down, but I did have plenty handed to my a month earlier by the CBA and ING which I had invested in the following: PBG (ave price $0.41), FLT ($6.40), BRG ($0.64), UXC ($0.44), OKN ($0.67), JET ($0.87) and IIF($0.115).
So throughout that month – March 2009 – I was forced to contemplate the following low prices for those companies (in the above order): $0.15, $3.74, $0.47, $0.26, $0.54, $0.55, $0.06.
I got the first margin call one morning at work and simply transferred funds from my savings account. The next one had me activating that overdraft that always seems to be on offer from the bank. With the third one I raised my credit card limit. Running out of options, I ducked out of work one morning to the CBA branch on Flinders St and organised a personal loan. It must have been a close run thing.
Only one of my work colleagues knew what trouble I was in and his twice daily council over coffee was needed. My wife was occupied – daughter #2 was weeks old. We’d moved house in January. I’d started on a new project at the New Year. I’m not sure what other people made of me at that time, as it was all a bit of a blur.
Back in December I’d done some research. I downloaded data from the ASX. It was the monthly All Ordinaries high (I think) since the 1890’s. I compared each months figure to the same month a year earlier and sorted the results to find the greatest 12 month falls. November 2009 was the winner at 63%. There were only two or three others above 50%.
The companies were chosen on two criteria. 1-Their prices must have fallen a long way. 2-They must be able to survive the coming recession. It wasn’t hard to work out the first of those, even if I was using earnings multiples as a guide. You can judge for yourself the risks I took regarding the second. Pacific Brands anyone?
Had I read Roger’s book at the time (yet to be published of course) I would have known about the importance of ROE, the dangers of high debt to equity, and the signs of competitive advantage. I would have assumed much less risk and chosen better companies.
I never required that personal loan. March 2009 proved the low point for most companies and mine came up with the rising tide. I was out of all bar UXC by this time last year. I was fortunate where Scotty wasn’t.
Bloody margins loans. Run a mile.
Rici Rici
:
In my opinion the true moral of this story is if one has a margin loan one cannot be a ‘true’ investor.
To quote Keynes ‘ the market can remain irrational longer than one can remain solvent’
Look at the recent movement in MCE, i would bet with a high degree of certainty that a major cause MCE’s recent share price fluctuation has been due to ‘investors’ acquiring positions on margin loan in the belief that since intrinsic value is higher than share price, that its ‘safe’ to buy on margin.
Orlando
:
I have a little smile as I read this. I also got smashed in the rout of 2008/2009 with shares like ABC Learning, Aristocrat Leisure etc. I was away from the market for a while to dust myself off and re-gather my thoughts.
I read Roger’s book when it first came out and it was the first time that share valuation did not seem to require some sort of financial doctorate to achieve. Roger has restored my faith that there are still people around that are prepared to share knowledge willingly. Don’t get me wrong I still accept full responsibility for my own choices but at least now feel more empowered and confident that I am not investing blindly. That allows me to sleep soundly at night.
Orlando
Roger Montgomery
:
Thanks for sharing Orlando.
Kent Bermingham
:
Scotty G you are not in the boat alone as I also had both Babcock and brown companies but worse still I paid a financial Planner to tell me how to invest in bad companies.
I don’t know about sleeping well at night as these memories still haunt me but I also have invested as you do now but am still waiting for the fruit to ripen.
Craig B
:
Cracking tale Scotty. We crossed paths. More later.
Jason A
:
Hey Roger,
I had an interview recently and one of the questions I got was along the lines of, “If there were three companies, with 5 years of balance sheets for each, and you had to use only one metric, which metric would you use to determine which was the best of the three”
And instinctively I just came out with ROE. I went on to talk about wanting to find the company with the highest sustainable ROE or if you saw one of the companies generating high profits on low equity then you know they have a competitive advantage and that would be the one to investigate further (I was thinking of Sees candy at that point). Just amazed how it has sunken in now to that level of recall. Not sure what will happen now with the job offer (fingers & toes crossed) but I just wanted to say thanks! Being able to bounce things off you and read the blog as been a big contributing factor to how I’m developing and I really appreciate it.
stevec
:
I like that story, I’m Scotty G but without investing in 2008 because i knew i didn’t know how. I’ve been following the website now for approx. 9 months and haven’t posted – i’ve felt like doing so a couple of times, but have refrained. No point in posting if i can’t add something of value not sure i will now, but at least i can add another story. I’ve been a subscriber to Eureka Report (OK to mention!) since not long after its inception. Now, that goes back a long time – did i ever invest after reading all the great contributors over the years, NO! But, I’ve always wanted to invest our money, without a financial advisor (been there and not going back – think National Mutual 10 year investment plan when i started work at 18, i think i got my money back, just, broker took the rest), BUT willing to learn and listen to those i think are excellent in their field. I think most of the contributors at ER over the years have been top quality and at the end of the day it was Roger M, Charlie A (buy commodities and hold for 20 years in the bottom draw!), and Gerard M that I tried to understand and soak in their expert commentary. I went off ER for about 6-9 months and didn’t subscribe one year, then my cousin said “Have you heard of Roger M, I’ve just read his book”- about September 2010. I said “yep, it’s the only way i’m ever going to invest – quality businesses at …”. Remember, i still hadn’t invested in shares (businesses) since i started receiving ER – 2005 i think. Anyway, my cousin has read the book in mid 2010, started investing and going great guns – doing alot of his own research and working hard at it and a mile ahead. So, i read the book about Jan 2011, i like Roger M, i like the book, I’ve got really good equity – line of credit and some cash saved up. Off i went in about March/April, couldn’t buy some of the companies quick enough, you guys know the ones! They were below IV – maybe 15%, but my big lesson was just around the corner, MOS!! What’s that again i thought – believe me i know today. Rightly or wrongly i’ve chased/averaged the 2 remaining companies all the way down to yesterday, other companies i got out early enough without losing money (June 2011) when i realised how greedy i was getting, but i was in too high with the two companies i’ve kept. I know they are good businesses and i’ll be okay, if not i will just have to hold and pay interest which fortunately i can do, provided i don’t lose my job. There were companies i wanted to buy yesterday, but the MOS wasn’t quite large enough for me – funny that. I read the post the other day from the chap who said he was closing his share account and never investing in shares again. Believe me, I’ve felt that way too, i’ve learned some lessons the last six months (does anyone else who read the book in Jan 2011 wished they read the book in 2010 or the last 2 months) the hard way (haven’t lost any money), but i still want to invest my way and not hand my hard earned to a representative of major fund or bank. If i had $500k or more i would gladly pass it to Roger M and his fund – maybe one day. For now, the A1 service Roger is about to offer will be great, i understand it won’t do everything, but will offer a lot – looking forward to it. I’m like Scotty G is today.
Roger Montgomery
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Thats a really frank and honest account SteveC. Short term changes in price are indeed something that can be demoralising. But in the short run the market is a voting machine. I cannot predict short term share prices and even buying ARB (an A1 amongst A1s) in 2007 at a 15% discount to intrinsic value, did not prevent the subsequent 40% decline in prices. Since that decline, the price has more than tripled. Provided the value of the business does indeed continue to rise – the business could of course go broke in the meantime, then the price should converge with value over many years because in the long run we believe the market is a weighing machine. ALways do your own research and always seek and take personal professional advice – that can help with an understanding of diversification too.
Geoff Morris
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Hi All
First post with my rollercoaster experience with Mr Market in last few years.
1. 2008 – Mr Market scared the heck out of me and sold everything except ARB & index funds. Convinced all banks are going broke. Turns out to be a great decision – by accident. Even started adding to index funds after Lehman Bros crash – all luck
2. 2010-11 – discovered another investment book called Value.able. After 25 years investing I am very cynical about investment books so am reluctant to get overexcited about identifying great companies and working out their value using a simple formula. Also know there are huge risks blindly using any formula. Put my accountants hat on and ask questions such as what if company uses accounting shenanigans; how do I work out RR; what if earnings estimates are not credible? Am very reluctant to use it. Stay attracted to great companies paying good dividends above interest rates.
Keep reading the RM blog….starts sounding like another site for spruikers to promote shares they have bought to dump on others. Thankfully RM tries to clean out the spruikers so we are talking about companies not shares.
I finally work out a way to logically use the formula – use the credible discounted cash flow method to identify shares using today’s price, expected dividends and the formula to work out the most optimistic future valuation – if the return is still negative or mediocre – avoid. Helps me avoid great companies like DMP, COH and IRE which are way over their optimistic IVs
Even with optimistic IVs and assuming optimistic ROEs, I cant identify any shares to buy or hold – end up selling 90% of portfolio in June 2011 including ARB – my favourite long term investment.
Market collapses in July/August 2011. Using a combination of RMs formulae and great dividend yields on great companies, put orders in for JBH, TSM and ORL on Monday, August 8. Watch their share prices falling off a cliff heading for my more conservative IV calculations on Tuesday. Prices end up reaching my prices for ORL ($6) & TSM (50c) for dividend yields of 8%FF!!!! Cancel order for JBH when the market rebounds and hold onto FGE & MCE while others are panic selling – unlike 2008 all decisions based on logic rather than emotion Still have butterflies in stomach though.
Next day read FinReview with rumours of CLO taking over FGE – On No!!! Realise that the risk of being taken over at low prices not considered by me – cant see any solution but interested in RMs opinion.
Feeling good but still very cautious – have a light bulb moment – dont use RMs formulae to work out the value of a company; just use it to work out very conservative or very optimistic valuations to help with making buying & selling decisions, stay sceptical about a company’s prospects and concentrate on great companies.
Thanks
Geoff M
Matt R
:
Scotty G
Your story and mine are remarkably similar. I too would like to thank Roger, Ash, Lloyd, Ron, Matthew R etc for their insights. Especially Roger for his continuing generosity of spirit
Regards
Matt R
Roger Montgomery
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Hi Matt,
of course I do wish we could always avoid the downturns too. But that will never be possible.
Paul Kulen
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WOW Scotty !, I could not have put it into words so eloquently myself.
You have managed to express poetically the mood, emotions and actions of many value-able graduates over the last week. Thank you for sharing your experience.
Roger, I can’t thank you enough for your generosity in educating and empowering us to deal with this wild roller-coaster ride. In years gone by I would have panicked and walked away broke and hurt vowing never to ride again.
Today as the ride slows I have no fear, I smile ear to ear waiting for the next opportunity to ride again.
PK
Roger Montgomery
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Thanks Paul. Great to hear.
Ash Little
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Hi Scotty,
Great stuff mate,
Brings a tear to my eye reading that
Rob
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What I’ve noticed this time around is the marked difference in posts on this site compared to the pull back around Easter time.
Back then, there were a lot of posts querying the drop in price of many of Roger’s A1 companies. It was obvious people had trouble turning the market off and were concerned about prices.
Remarkably, this time around there are many more “waiting for opportunities” type posts.
That’s a great indictment that you are getting through to people.
In 2008, my broker, a Peter Lynch follower and value investor, would say “What’s changed Rob, there’s nothing really changed that will effect the value of the business, don’t worry.
This time around I don’t even ask the question!
Cheers
Rob
Graeme
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Nice post, and I am sure I am not alone in that this story is all so familiar. Though I must admit I did not have a margin loan, but I started with little knowledge on the value of shares. All the shares I bought, luckily were good quality (more luck than anything) but what I did do was buy shares that were to expensive.
Now with more knowledge and the ability to put a Value on shares, I have learned from previous errors and not repeat them. So far so good.
Graeme
Scott T
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Great work Scotty, an excellent story and well written.
All the best
Scott T
Stephen
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Scotty/Roger,
I told this story a couple of days ago and I’ll tell it again today.
Never during a “crisis” have I felt so calm.
I know my businesses. I know their advantages. I have an idea of their IV. I’m sleeping at night.
I’ve been fully invested for several weeks. I bought shares that were then at a comfortable discount to IV. I even bought one company when it was at IV.
Some of those have fallen another 20 percent since then. Would I like to have invested yesterday instead of 3 or 4 or 5 weeks ago? Of course. But I don’t have a crystal ball. I would think being a value investor, that over time I will buy a little earlier than most during a downward slide and sell a little earlier than most during an upward move.
My portfolio is overall in the red at the moment. It won’t be there for ever, so I’m not concerned. I did manage to pick up a little ARP and a little MTU. I didn’t get them at the bottom of the market…oh well!
Stephen
Roger Montgomery
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Great further reassurance. Be patient. Think telescope not microscope. What could the business be worth in five, ten and twenty years?
Liz
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This is my current telescope.
I think the thinking has become more complex right now. No one knows what will happen but everyone knows that we live in an interdependent world and what’s happening elsewhere is not going to right itself quickly. Regardless of AU being in a better position we are not immune to the global forces. That in turn means ‘value’ is difficult to ascribe to most asset classes right now. Even ascribing a high MOS may not be enough to push the buy button on stock like ARB. I mean the MOS for everything may need to be a good deal higher just to get back to current prices.
In terms of seeking professional advice – I always have – but right now they don’t know what will happen either! I also think that professional advice should not only include your broker but also your accountant so you can cover tax implications as well.
So, I have 3 strategies a) I have sold some stock at a loss to increase my level of cash and offset most of it against profits for tax purposes. With a bit of cash set aside at least I create more choice, I will worry less, and, I’ll buy when markets become a bit more stable. b) I’ll hold stock like WOW that fit into the ‘need’ category and those where I think the strongest will survive and rebound in a better market c) I’ll work for a bit longer d) exercise patience!
Jim Whitlam
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Great story Scotty, that’s what it;s all about. I am betting a lot of other Value able graduates slept much better through this big dipper than they did on the 2007/8 ride.
Roger is a beacon of sanity in the mad house
Chris B
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Hi all,
Most people here are comparing the recent sell down to the sell down we saw during the 2008 crash. In 2007 to early 2009 the market tanked around 50%, whereas this most recent sell down has only seen a fall of 20% – and who knows – we might yet retest the lows seen in 2009!?!?!?
All I wanted to say is that people need to be careful. Personally I’m convinced that Roger’s value investing methodology will work in the long run, but much of each person’s success/failure will have a lot to do with their phychological profile and tolerance to volatility, especially in this market.
The world is laden with debt and it is going to take a very long time for the world to reduce this debt. Therefore it is quite possible – and in my opinion, probable – that we will see volatility in equity markets for a very long time to come – and shares that are trading at a discount to value may very well be trading at a larger discount to value in 1 or 2 years time.
I am sure that many investors that read this blog have taken this recent market dip to ‘load up’ on equities. Just be careful that you have not over-extended yourself, just in case the markets to continue to tumble.
It is often cited that value invetors are ‘too early’ in. A great way to solve this problem is to average in. Sure it is true that if you use the averaging in strategy you might not get fully invested before the next bull market is born. But the potential reward for having spare cash on hand (for even bigger bargains) far exceeds the risk of having none in the event of another savage market crash like we witnessed in 2008.
These are just my opinions. I am by nature conservative. I am only around 20% to 25% invested in equities at the moment – even after the recent sell down, and i would be absolutely delighted to see another market crash.
Thanks Scotty G for the time taken to share your story – and for all others who cared to comment.
Chris B