What did Ben Graham get right?

317 Comments

1. 

   Chris B
   July 30, 2011 at 2:52 am:

   Hi Roger,
   I want to mention my general beleifs, influences and experiences I’ve had investing.
   I’ve been studying and investing in the sharemarket for 7 years. Spending at least 20 hours a week for 7 years reading and investing and analysing. I love it.
   I think to be very good at investing, you must spend more than 20 hours a week on it and be very dedicated and analyse business models and markets thoroughly.
   Most people I find want quick answers, they want a quick way of working out if a share is a buy or not. Unfortunately, it doesn’t work like that. You must have in-depth knowledge of different types of business models and be constantly reading the market. You must also be flexible in your investment style like the great investors.

   Two great influences for me are Peter Lynch and Warren Buffett.
   I think Peter Lynch is underrated, Warren Buffett gets all the attention but Peter Lynch did very well. He returned something like 28% running the Magellan Fund from 1977-90. This is slighly less than Buffett in his early days.
   I want to mention a couple of similarities between Lynch and Buffett. They both read lots and lots of annual reports. They both adapt to market situations constantly. I don’t beleive Buffett buys only shares that he is willing to hold forever, while he is waiting and looking for shares to hold forever, he is doing a lot of other trades that he holds for a year or 10 years but not forever. You need these trades as well because $100k turns into $200k and then when he finds a share he can hold forever, he can invest $200k in it and not just $100k to double the impact of the investment in the brilliant business.
   Lynch and Buffett look for treasures amongst the wreckage, they will have a look at junk bonds when all junk bonds are really cheap and they will pick out the best companies that they know won’t go bankrupt but pay great returns.
   Because they both can adapt to market conditions, they are able to find bargains in any market condition.
   Lynch and Buffett are always looking for the brilliant companies where they make most of their money.
   They both can read financial statements very very well and know all the tricks that companies use to hide the truth, and they know what to look for in various different situations to find undervalued companies. I guess this happens with practice.
   They both speak to analysts, journalists and people in the company often to get more idea about the situation of the company. They both use their phone a lot.
   They both like companies that buy back shares (if it is cheap enough and nothing better to do with the money.
   They both look at 10 year records.

   But Lynch does more shorter term investments than Buffett. Lynch does some investments that Buffett would never do such as Ford and General Motors. However, they both assess companies in similar ways, they look for value eg if a company is selling for $7 and it has $3 in cash on its balance sheet, it may well be undervalued. They both like utility companies that return nice dividends. They both look for companies with high ROE. Lynch sometimes flirts a bit more with companies with high debt but in a controlled way. However, the unique thing with Buffett is that he looks very very deeply into a company, he analyses companies in a way no-one else can. When he makes a big investment in a company, he covers everything completely, he turns over every stone to find answers to every part of the business. If you ever heard Buffett talk about how much sugar in one can of coke and the fact that they can buy aluminium and sugar cheaper than every other competitor and go deeply into Coke’s sales figures, you’d be very impressed. I don’t think I’d ever be able to analyse a company the way he does even if I work for that company. He sets a very high standard. His letters to shareholders and annual meetings are great learning material.
   Lynch takes a few hours at most to analyse a company. He likes the 2 minute drill, you should be able to give a good summary of a company in a 2 minute talk if you buy it. Lynch often held a large number of stocks whereas Buffett doesn’t hold many. Lynch doesn’t hold forever, Buffett’s prefered holding period is forever.
   Lynch gets more 10 baggers and has more diversified “value” investments.
   Buffett looks more deeply and buys less companies but bigger stakes in great companies. He likes to get financial control of the company.

   Lynch didn’t do as well in the later years when the fund got bigger, but he still had a very impressive record, Buffett’s record over 50 years is brilliant.
   Buffett would buy small amounts in a company if it is on his radar, he’d buy small amounts so he can get sent the annual reports sent to him. Lynch did the same thing but for a slightly different reason, he’d buy small amounts in a company to put it on his “tune in later” list.
   Lynch would get great returns on “cyclicals”, companies in industries that are out of favour. Buffett does some similar sorts of investments, it is a fallacy that Buffett only looks for stocks that he wants to hold forever. You can get great returns on cyclicals. Lynch goes for about 20% of the portfolio in cyclicals.
   They both only go for companies that are earning money, although Lynas made good gains, it hasn’t made a profit and would be out of the question.

   I am not smart enough to be like Buffett. And I don’t think anyone out there is smart enough to invest to the degree Buffett does (I don’t just think about money). But all these great investors are drinking the same water. They are value investors just in different flavours. They read lots of annual reports and they adapt to the market. To adapt to the market, you must know the different business models and how different industries work. You must know very well the different profit margins within retail companies, who the cheapest producers are, what is going to happen to food prices in the future and why.

   Peter Lynch has written 2 classic books I highly recommend. Both are brilliant.

   Another great book I’ve read is “The Little Book that still beats the market” by Joel Greenblatt. It talks about Graham’s principles, its a great read in understanding value investing principles.

   My best advice – if you don’t understand the business well, don’t buy it, don’t risk it.
   There have been some good companies with very nice profit growth that have been hit badly in the last few years, Macquarie Group, Nufarm, Downer EDI and Leightons to name a few. I don’t understand Macquarie Group and will never invest in it, Nufarm I was going to look into but would of had a problem with generic competition and I wouldn’t of invested despite their great record before 2009. Leightons was too highly priced but honestly didn’t see the downturn coming despite a few signals. I required a margin of safety before I would buy it, so I avoided Leighton.

   I’ve done quite well so far out of the sharemarket, averaging 20% returns over the last 4 years, I’m very conservative, I won’t take risks, if I don’t understand it, I won’t buy it. I’ve saved a lot of money that way.
   I need to read more annual reports, but there is so much to read and keep up on.

   Chris

   • 

     Robert Double
     August 2, 2011 at 1:20 pm:

     Great post Chris. I thoroughly enjoyed reading it and got a couple of new reads for my book list.

2. 

   Mark
   June 12, 2011 at 1:00 am:

   To all ye value investors who embrace Graham’s law that price shall follow value in the longer term, but tend to depart from value in the short term, I ask: But why is it so? Why should price follow value in the longer term? And why should price not always follow value in the shorter term?
   Price should be dependent on value due to the law of supply and demand – the more valuable something is, the more people will want it and the more they will bid for it; the less valuable something is, then less people will want to pay to have it and so the price the seller offers for it will have to be reduced if a sale transaction is to occur.
   So the curiosity is not that price follows value in the longer term as Graham said – that is to be expected. What is less clear is why price wouldn’t parallel value over the short term.
   Imagine driving due east along the freeway during a storm at night. Although you know you’ll end up east of your departure location (assuming good enough management of your vehicle), but due to winds, fatigue, poor visibility, slippery road, overtaking of slower vehicles, etc, at any random moment in time, who would be able to predict whether your vehicle would be a few centimetres north or south of its random average easterly path (and sometimes you might stray even further away due to detours, bypasses, incorrect turnoffs, etc)
   Hope this helps you believe the investing laws of nature.

   • 

     Roger Montgomery
     June 12, 2011 at 2:18 pm:

     “the more valuable something is, the more people will want it” presumes they all know the value of it in the short term and that they are all rational and profit motivated. None of that is true.

     • 

       Mark
       June 13, 2011 at 9:22 pm:

       I agree – the fact that none of that is true in the short term is because although price is approaching value over a longer period of time, the journey from past IVs through current IV towards future IVs is a path that’s being modified by the jostling of the market participants of the day who buy and sell for whatever personal reasons. Over longer periods of time, the journey from previous IVs to future IVs becomes more visible.

       I like the use of ROE as the input for calculation of IV (as in Value.able) as it reflects the true value of the company for the investor (return on equity = the return relative to the equity from shareholders in the company, ie. for 20% ROE (assuming all things equal), X input of shareholders’ funds, they receive an output of 120% of X).

       ROC is useful in assessing the quality of the company (as it tells you something about how well the company uses all of its available funds, including its debt), but should not be the input for calculating IV.

       Other inputs such as debt ratios, etc are useful in estimating any potential future changes to ROE (eg. high debt/equity might increase the ROE in the short term, but might also risk damaging the ROE later on). However, the IV relates most accurately to the ROE as ROE measures the return on an investor’s investment (which is what is of value to any investor). Hence price tends to head towards value (as it is calculated in Value.able) over longer periods once short term influences average out.

   • 

     Matthew R
     June 12, 2011 at 2:48 pm:

     Do you know the Mr Market analogy of Graham?

     The same applies to health – sensible people want to live a long, satisfying & enjoyable life. However, human psychology often gets in the way and for whatever reason sensible well educated people can do crazy things that don’t align with achieving these simple goals.

     Emergency departments & police stations always contain a variety of young people who for however so briefly failed a simple psychological test that day

     But in the long run, despite possibly a few false starts, most people work it out & settle down. The share market is no different!

3. 

   jeremy
   May 4, 2011 at 12:12 pm:

   Greetings fellow bloggers,
   Im interested to in the Graduate’s views on CSL. I have an IV of $26.47 using R/R of 10%, POR of 42% and ROE of 21.74%. The high Aus$ and share buybacks above IV must surely reduce its future IV? Am i way off?

   Thanks heaps

   • 

     John P
     May 5, 2011 at 12:05 pm:

     Hi Jeremy,

     Your CSL IV looks ok , I have it a bit $25 when I last valued the stock.

     Cheers

     • 

       jeremy
       May 5, 2011 at 2:17 pm:

       Thanks for your replys John P & Jonesy, very much appreciated. I dont own a great deal but i would like to stick to Rogers and the vaule able principles of selling if the price is above IV, particularly with the $Aus concens.

       Thanks heaps again guys.

   • 

     Jonesy
     May 5, 2011 at 12:37 pm:

     Share buybacks above intrinsic value are never good and I agree that they would be detrimental to future IV. However, CSL is a great company and the intrinsic value is continuing to increase in future years (although not to the extent it may have done without the buyback.) As a lot of earnings are in $US then I agree, a continued high $A will not be helpful. However, should the $US improve against the $A then you’re onto a winner and in this scenario, owning a company with a large proportion of earnings in $US will be a good hedge. This just leaves the question about future currency movements – who knows where it will go, I suspect flipping a coin will give you the best guess!

4. 

   Paul Rehill
   May 4, 2011 at 12:01 pm:

   There are often posts from concerned graduates about falling prices and questions about why when no recent news has been released or suggestions that the price is below IV so it is time to buy.

   So based on the facts available to you, assuming your analysis of IV now and in the future is correct and you make an investment, what is a reasonable timeframe for value investors to expect price to catch up to IV (providing nothing major changes to cause IV to fall)?

   From what I have read, 3 to 5 years is a reasonable timeframe to make great returns post analysis. If Mr. Market becomes extremely moody, that is great as price can catch up to value sooner. But if that doesn’t happen, is 3 to 5 years about right or is that too long for you to wait?

   • 

     ron shamgar
     May 5, 2011 at 9:23 am:

     well if you have to wait 3-5 years for price to catch up to current IV you’re in trouble. you assume that if the company’s performs to expectations price should follow closer to IV. you can check the price history of a company and their past IV to see how they both trend or even better if u have software like rogers one above. (though it does help if roger mentions it on TV) :-)

     • 

       Paul Rehill
       May 5, 2011 at 8:21 pm:

       Hi Ron

       Why would you be in trouble? Are you relying on the margin of safety gap to be your major source of return and for this gap to close quickly rather than just requiring your return to be at least your required rate of return over a long investment holding period?

       If a purchase is an asset play (a Graham cigar-butt investment), then a one-bagger would produce a 26% pa return over 3 years or 15% pa return over 5 years. All the more if the asset play turns out to be a 2, 3 or 4 bagger.

       If the security purchase is a growth play with high earning power, then the IV is expected to rise each year so the investment can still rise in value in line with the rising earnings whilst still trading below IV. The margin of safety is supposed to provide a buffer for IV errors, unforeseen circumstances that reduce IV etc. but if these don’t occur and the gap between IV and price narrows, then it will provide an extra return over rising IV.

       So putting talking your own book aside to narrow the gap between price and IV, what is a reasonable period? A short timeframe would make you captive to Mr. Market and less subject to the performance of those wonderful businesses whose IV rises rapidly over time.

     • 

       Andrew
       May 6, 2011 at 10:11 am:

       I agree Paul, the market is a weighing machine in the long term. I don’t think 1-2 years fits into this category. I think i remember Roger saying that it took telstra 10 years or something like that to reach its IV.

       I think anyone who is coming on here and expects the share price to match the IV in a short period of time will be headed for dissapointment.

     • 

       Roger Montgomery
       May 6, 2011 at 10:45 am:

       Here, here!

     • 

       Gavin
       May 6, 2011 at 12:19 pm:

       My Idea of investing is swapping a lump sum for an income stream. The best swaps are justifiable without ever having to rely on swapping the income stream back into a capital amount. It’s what you don’t pay for up front in relation to the conversion of cash flow back to capital that you have the greatest probability of benefiting from in the long run.

     • 

       Matthew R
       May 6, 2011 at 10:52 pm:

       I don’t follow…..

     • 

       Gavin
       May 7, 2011 at 10:18 am:

       Sorry Mathew

       What I was saying was in relation to Paul Rehill’s question and following discussion on how long is reasonable to wait for the market to catch up to IV.

       I answer that question for myself by going right back to what it is that I believe I’m trying to do. That is: Swapping lump sums for a cash stream.

       Specifically to shares – when I buy, I swap a lump sum of cash for a right to that company’s future earnings stream. What I was trying to say is that if I get the purchase right I can rely on the earnings stream to deliver my required return. I do not need to sell to realise my required return, the price could stay cheap or even get cheaper and it wouldn’t matter because I’m not dependent on selling to realise my required return.

       The last point I was trying to make: If your purchase is justified solely on the earnings stream –you haven’t paid anything up front in the expectation of being able to convert the earnings stream back into cash. The opposite is say gold where you pay say $1500 upfront and get no earnings stream so that $1500 is the price you pay for the expectation that you can convert gold back into cash at some future date for a higher price.

       Where you pay nothing for the right to convert in the future – you are in a much stronger position to ignore a down market and wait to take advantage of a high market.

       I suspect that when people are thinking I can buy now for X and sell later for XX their underlying approach to investing is different to mine. This is of course fine. I hope this helps to clarify a bit what my approach is – but it probably doesn’t – I guess there’s probably a lot of supporting thinking that I have left out.

     • 

       Roger Montgomery
       May 8, 2011 at 10:02 pm:

       ..and why quality is so important.

     • 

       Matthew R
       May 9, 2011 at 8:37 am:

       Thanks Gavin, i thought I would ask you to expand your ideas because I didn’t quite get them the first time!

5. 

   Brad J
   May 4, 2011 at 10:55 am:

   I currently have most of my portfolio in the following companies. To follow are the companies and the reasons –

   VOC – I believe this company has the greatest opportunity for percentage growth in revenue and size. It is just about guaranteed with the current contracts they have for the next two years.

   MCE – It has the best moat. With the price it is today it offers an absolute opportunity to pick it up at a large discount. Too bad the traders don’t look at the fundamentals of a business and only focus on price.

   FGE- Its in the right space and the mining boom will continue. It’s well run and has a history of delivering increased profits. Currently at a 35-40% discount to IV.

   I would love to know where you are investing and why.

   • 

     Paul Rehill
     May 5, 2011 at 8:49 pm:

     Hi Brad

     It’s interesting to observe that these 3 stocks have a short ASX listed company history. Graham recommended only in investing in stocks that have at least a 10-year listed history and Buffett and Munger generally followed this with their investing. Roger is a master of investing in small cap stocks that have hardly any listed history so if you invest in stocks that Roger doesn’t invest in after doing your own research, it’s worth considering this 10-year rule (or maybe make it 5 years for Australia) to find companies with great proven historical performance that are also undervalued. I do own Forge because of its high incremental ROE and negligible debt in the mining services sector.

     • 

       Brad J
       May 6, 2011 at 11:25 am:

       Great points Paul, totally agree.

6. 

   Tim
   May 3, 2011 at 6:34 pm:

   Hi,

   Purchased AGK awhile ago prior to finding out about Roger’s book. Still practicing but wondering if anyone here can confirm my 2011 IV of AGK at $8.62.

   Cheers,

   Tim

   • 

     Tim Phelps
     May 4, 2011 at 1:49 am:

     Hi Tim,

     I have it at $8.85 using RR 10%, ROE 7.37% and POR 62.88%. Looks like we’re pretty close.

     Last I saw, Roger rates it B3. That ROE isn’t very healthy though, and looks very expensive at the moment!

     • 

       Tim
       May 4, 2011 at 2:00 pm:

       Hi Tim,

       Thanks for your reply and info. I agree!

       Cheers.

7. 

   Paul Rehill
   May 3, 2011 at 4:38 pm:

   Hi Roger

   I am unsure if anyone coined the terms “intrinsic value” and “earning power” in books pre-Graham but they are important contributions to value investing.

   Another important 3 words from Graham worth mentioning is “Safety of Principal” from “an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

   Your MQR filters help you find stocks that offer a greater safety of principal. Purchasing A1/A2/B1 stocks at an adequate margin of safety assists in achieving adequate returns.

   There isn’t much in Graham’s work that isn’t outstanding. Even though his common stock valuation approach is outdated, it does convey Graham like most investors (not your graduates of course) did then, do now and will in the future value dividends over capital growth income. Some things are unlikely to change.

8. 

   Ilya
   May 3, 2011 at 4:11 pm:

   I was musing about MOS during my waking hours last night and it occurred to me that MOS is not only a great tool for finding undervalued businesses but also to time the market. I know that value investors are not supposed to time the market but good MOS can only develop under two conditions:
   1 – the business is genuinely undervalued during normal market conditions (this can occur for many reasons)
   2 – the market as a whole declines reducing the price of all stocks (e.g. during the GFC).
   In the second scenario the by-product of MOS is to assist us timing the market. Obviously, MOS cannot tell us the top or the bottom of the market but when the stocks decline across the board a juicy MOS would only develop closer to the bottom. “It’s about being approximately right, rather than absolutely wrong”.

   • 

     Brad J
     May 4, 2011 at 9:41 am:

     Hi llya,

     Great idea in theory but extremely hard in practice. My experience is that the wealthiest investors don’t try to time markets. They do take advantage though of lower prices. Time is the friend of the wonderful business and if you stay with a good business it will reward you.

9. 

   jeff
   May 3, 2011 at 4:03 pm:

   Loving all this talk about being value investors and not worrying about the market fall, waiting for the correct time to buy etc..it is a comfort. Just wondering… Is there any validity in selling out at “high” levels when it is becoming apparent that Mr Market is becoming irrational, and buying back in to the same stock when he is totally irrational and the price is much lower?

   Obviosuly the risk is Mr Market gets over his irrational behaviour sooner rather than later, and the price rises more quickly than expected, but it does provide food for thought.
   I would be interested in graduates comments

   jeff

   • 

     Ron shamgar
     May 4, 2011 at 12:03 am:

     Jeff, I wrote about this under the when to sell post several weeks ago.

   • 

     Andrew
     May 4, 2011 at 8:29 am:

     It can be Jeff. One reason for selling, at least for me is that i have been offered a price that is too good to refuse. I have done the exact thing you are talking about with JBH a few times as it was suffering irrational swings from low $8 to high $14 in very short time frames. It was the closest i ever came to being a trader. However now i look back at that and i actually see a missed opportunity and displeased with my actions.

     Had i known a bit more and read value.able i would have held as i would have been able to work out the value was around $20 and instead of selling i would have bought more and been able to make a bigger profit but the principle worked for me and i made some good profit.

10. 

    Brad J
    May 3, 2011 at 1:55 pm:

    Is the AUD a good reason for MCE and FGE to be sold off by 10 to 15% or more?

    My answer –
    Just Mr Market behaving irrationally. A lot of people are getting scared and are cashing out, which has nothing to do with the business. In the mean time MCE and FGE are having trouble keeping up with all the orders they are getting. Profits are increasing at an alarming rate and this is creating a buying opportunity. MCE will also have huge cost benifits from their new facility which could offset the increase in the AUD.

    Prices could rebound strongly, stay the same or go down further. What matters is what will these companies will be worth in a few years time. My personal opinion is a lot more.

    We are buying part of businesses and should not be distracted by market movements. If we get distracted by price movements we will behave irrationally and this will cost us all enormously in the long run.

    I personally hope the prices go down much more so I can increase my holdings. There is no way I will sell at bargain prices.

    Time is the friend of the wonderful business. Oroton dropped by 50% in 2009 to $2 and Coke dropped by 50% in the early 19th century and you would have still done extremely well if you had held on and not sold, even if paying the high price before they dropped. You would certainly be a lot richer than the many sellers who sold as the price was dropping.

    Do Warren Buffett, Jim Rogers and Roger Montgomery sell when prices of their holdings go down. No they buy more and take advantage of lower prices. We now need to work out if we want to be part of the herd or act as business owners.

    • 

      Paul Rehill
      May 3, 2011 at 4:55 pm:

      Hi Brad

      We’ll have to wait for FGE’s full year results to make sure its earning power is intact. FGE is on an international search for a new Managing Director with engineering and/or construction experience. I think Clough instigated this. Clough seems like an ordinary business so their interference in FGE could be a risk to Forge’s future earning power.

      • 

        Brad J
        May 4, 2011 at 9:47 am:

        Hi Paul,

        In my opinion highly unlikely to affect their earning power. Not impossible but unlikely. Probably just another opportunity to buy their shares at lower prices.

    • 

      Steve I
      May 3, 2011 at 6:31 pm:

      Well said Brad!

11. 

    Ron shamgar
    May 2, 2011 at 11:44 pm:

    One thing to keep in mind when investing in the mining services companies are labour costs. The unions are flexing their muscles and this will put huge costs on the contractors to absorb. You will start noticing this in the next 12 months or so. Watch this space.

    • 

      Callan
      May 3, 2011 at 11:45 am:

      Ron, i agree and labour and materials have been increasingly becoming more difficult. If the demand remains high for the Good mining service companies. Do you think it is out of the question for Mining service companies to pass on the additional cost?

      Also could the shortage of staff and equipment be a deterrent for new competitors?

    • 

      zoran
      May 3, 2011 at 1:35 pm:

      Hi Ron

      You heard it here first.

      After NEXT RESULTS MCE’s IV will be $11.01 for 2012 and $ 13.26 for 2013.

      Buy more now ( $ 7.60)before its too late.

      Cheers
      Zoran

      • 

        Paul Rehill
        May 3, 2011 at 5:05 pm:

        Hi Zoran

        James Montier makes a good point about value investors jumping in too early (about 2 months I think) when Mr Market does his thing. With some patience, the discount to IV could be greater for MCE, especially with excess stock floating around from the placements. Perhaps some institutions are selling down. Acorn Capital recently reduced its substantial shareholding. How about a buyers’ strike for a greater discount to IV?

      • 

        Roger Montgomery
        May 3, 2011 at 11:51 pm:

        H Paul, You might like to check that with a lawyer familiar with the Corps Act before suggesting again!

      • 

        Paul Rehill
        May 4, 2011 at 12:48 am:

        Sorry, I forgot my ;).

12. 

    Joab Soh
    May 2, 2011 at 11:28 pm:

    All,

    First of all, the graphs looks fantastic. It’s a visual explanation of what we do. Once again a timely post to remind us that in the long run price follows value.

    Seems like Mr Market is abit concern over currency movements which may have affected some of us. Here’s a story for you.

    During the GFC, market volatility was very similar (if not worse). In a company where commodities and currency prices has a direct impact to earnings, the company has a team of financial risk managers who has a long track record and reputation of making sound risk management decisions. However, some senior management became more interested about getting updates on where market prices are today rather than whether the company is making more sales. Because of such focus by senior management, everyone down the chain got distracted. So much so that operations team spends time worrying about how today’s currency rates are impacting their sales. And no one was concern about sales volume and no one was focusing on how the company should strategically respond in the long run. As a value investor, what would your view of management be?

    As much as these are distractions to management, they are distraction to us as investors.

    As owners of great businesses, I would very much rather management focus on operations and its growth strategy rather than what currency are doing tomorrow. At worst, even if currency is having a negative impact to earnings this year, great companies will be determined enough to find a solution for the future. And for us, it’s another opportunity to buy great businesses and a cheap price.

13. 

    Tim
    May 2, 2011 at 9:31 pm:

    Hi graduates,

    some A1’s/A2’s and B1’s/B2’s that Roger has mentioned before on Switzer I think are FGE,MCE,CDA,TSM,ZGL and VOC.
    Interested in other graduates thoughts on these companies and how current IV and 2012 IV compare.
    I appreciate the knowledge shared here!

    Cheers,

    Tim.

14. 

    Greg Mc
    May 2, 2011 at 8:04 pm:

    Now you all know I’m not one to piff a grenade into a pavlova shop, given the recent opinions expressed regarding gold, but…..

    Excerpts from tonight’s Eureka report, from Michael Feller:

    “The world is full of problems, including economic imbalances in China, unrest in the Middle East, climate change and a looming shortage of food and arable land. Yet at $US1500 an ounce, safety through gold comes at a price too dear. Unlike assets such as oil, food and fertiliser, the only thing gold insures you against is the straw man of US currency default”

    “Yet for many the move only underscored a suspicion that investment in gold is now being dominated by the same shrill and irrational voices that urge it on.”

    “And while Bass was correct about US subprime, his more recent investment ideas – including comparing America to Zimbabwe – has become increasingly unhinged. So too the commentary from other prominent gold bugs such as Marc Faber and Max Keiser, now on TV even more regularly thanks to bullion’s record levels. But while the personal ratings of these gurus are soaring, their forward arguments stink.”

    and to top it off:

    “I’ve been a fan of precious metals until recently, but now with tinfoil hats from Texas carrying the trade, I can’t stay enthusiastic. Much like Australian property (see Property boom’s Chinese foundations), gold and silver have been hijacked by a morass of highly emotional investors and pundits. There are better ways to be a bear, and that’s in oil and food. Leave gold and silver for the fools.”

    Strong opinions expressed there. My personal opinion is that someone will be very right and someone will be very wrong, I’m just not certain enough who – and so I will retreat to my comfortable position on the fence.

    • 

      Roger Montgomery
      May 2, 2011 at 10:58 pm:

      fortunately I own oil too.

    • 

      darrin
      May 3, 2011 at 7:23 am:

      HI Greg

      Great to have another view of everything. I must say I have been looking at the precious metals to go long. Never thought about other areas. What would be your best ones for oil and food?

      cheers

      darrin

    • 

      Steve I
      May 3, 2011 at 7:26 am:

      Greg,

      I’d just like to point out that those comments from Michael are very emotional and say more about his psychology than anything else. It does not present any real information.

    • 

      Brad J
      May 3, 2011 at 12:33 pm:

      Hi Greg,

      I am like you as I just don’t fully understand gold, so I will stay out. Even Jim Rogers would prefer at present to buy food commodities like rice, soy beans and cotton. I understand these as I can see there will be shortages and prices are likely to go up. A lot of investors here on the blog are arguing it is a inflation hedge. But if you think about it if we are in a long term commodity bull market then the Aussie dollar will act as an inflation hedge. Not to say gold won’t go up, but I wouldn’t touch it.

      • 

        Andrew
        May 3, 2011 at 4:36 pm:

        Another thing i thought i would add to help show either my ignorance or what i prefer to call my hesitation about owning gold is that rice and soy beans have a disticnct use which means i can see there will be a need for it. I am still yet to see a really good use for gold. Inflation hedge or currency at the end of the day i don’t really think there is much of a purpose for it.

      • 

        Ron shamgar
        May 4, 2011 at 12:07 am:

        Don’t forget the weather guys! One good year and crops aplenty…..
        Too bad gold doesn’t grow on trees.

      • 

        Brad J
        May 4, 2011 at 9:51 am:

        Hi Ron,

        A couple of good years and hopefully we will be able to keep up with the rapidly growing demand. Highly unlikely in the long run I would imagine.

15. 

    kostas
    May 2, 2011 at 7:53 pm:

    Hi all.Watching the price of MCE drop .Is it caused from the capitol raising or from the US dollar?Time to buy more or has something changed?

    • 

      Ash Little
      May 2, 2011 at 9:40 pm:

      Hi Kostas,

      I posted a few days ago that the company has said in the past that $a higher the $us will have an impact.

      As it is my biggest holding I have no need to add ATM and will wait the June accounts

      Just my view

      • 

        Michael
        May 2, 2011 at 11:49 pm:

        When the MCE share price was rising, I couldn’t get anyone to agree with me that the AUD/USD rate would be a threat. I see the rate as a threat to anyone that has 80% of its sales in USD.

        Now the share price is declining, there is some caution creeping in. This is the opposite reaction of a value investor. Value investing can be easy to understand, but hard to implement.

      • 

        Steve I
        May 3, 2011 at 7:28 am:

        What will matter most will be their ability to increase prices on the back of a declining USD. A high oil price should allow this to happen I would imagine.

      • 

        Peter M (Mully)
        May 3, 2011 at 11:44 am:

        In relation to Coke, Buffet apparently once said something to the effect of “mirror mirror on the wall, how much can Coke charge this fall?” and the mirror said “more”. Hopefully, Aaron Begley would get the same response :)

    • 

      Sin G
      May 2, 2011 at 10:07 pm:

      Thats a good question, only if we all knew the answer as to what the market will decide over the next few days or weeks but we dont. One thing I have learnt over the past 12 months or so is to do your own research and valuations and make decisions based on your findings.

      I use to ask others how much should I pay, when should I buy, or should I sell, and then tell myself I should have bought on what I read a week ago. The best thing I did was to start making my own decisions which allowed me to gain confidence within myself. This has paid off imensely as I cant blame anybody else for my mistakes making me take responsibility for my own decisions. This has made me a more astute investor.

      However I cant stress the thanks to Roger and this blog for the turn around as this site offers great insights and helps with my decision making.

16. 

    ron shamgar
    May 2, 2011 at 5:04 pm:

    hi,

    i hope everyone here has followed my advice and not participated in the MCE SPP offer. you can buy these shares today at less than $8.

    good thing we’re only simple unsophisticated retail investors! :-)

    • 

      darrin wong
      May 2, 2011 at 6:42 pm:

      HI Ron

      Are they still a good buy and under $8?

      cheers

      darrin

    • 

      Ash Little
      May 2, 2011 at 6:58 pm:

      LOL Ron,

      Lots of people must have followed your advise because I got a call from Austock tonight asking if I would participate in the SPP.

      As the underwritter they must be getting sweaty.

      • 

        Peter M (Mully)
        May 2, 2011 at 8:41 pm:

        Hi Ash,

        If my memory serves me correctly, the SPP component isn’t underwritten. At the risk of sounding cynical, I can’t help but wonder how the share might have performed had it been underwritten.

      • 

        Ash Little
        May 3, 2011 at 6:50 pm:

        You are right Mully, it is no underwritten.

        I would imagine any shortfall will be placed with the insto’s at a nice discount

      • 

        Tim Phelps
        May 2, 2011 at 8:57 pm:

        Really Ash? Wow, that’s surprising, I think most of us here were expecting the purchase plan to be well and truly oversubscribed, unless I missed something!

        I owned MCE before the capital raising and I got in again last week at $8.40 thinking I was very clever for getting a better price than in the placement…….. then Mr Market decided to have an even bigger mood swing than I’d anticipated!

      • 

        Greg Mc
        May 3, 2011 at 8:19 am:

        If you’re lucky Tim, it might drop another dollar or two and you can add a few more.

      • 

        Brad J
        May 4, 2011 at 11:41 am:

        Stay with it Tim and the chances are you will be rewarded. Buying at $8.40 was a good move if you have a long term view.

      • 

        Tim Phelps
        May 5, 2011 at 12:02 pm:

        Absolutely, Brad. Having a long term view really does make you feel better about it, and I have to thank Roger for introducing me to the value investing concept. I think trying to anticipate Mr Market would send you absolutely mental if you spent too long at it!

    • 

      darrin
      May 2, 2011 at 7:08 pm:

      HI Ron

      What is your IV for MCE?

      cheers

      darrin

      • 

        Ron shamgar
        May 2, 2011 at 8:29 pm:

        Check out roger’s valueline portfolio. MCE IV is listed there. You should go with that or preferably try and work it out urself. If ur not sure, post ur figures here and I’ll be happy to provide feedback. Cheers.

      • 

        darrin
        May 3, 2011 at 7:26 am:

        HI Ron

        I am on it.

        10.21 but it was valued last in Feb 2011. Don’t know the USD rate at that time.

        cheers

        darrin

      • 

        Greg Mc
        May 3, 2011 at 6:14 pm:

        Not to mention the current capital raising, darrin. Having said that, I feel that Roger’s valuation at the time was conservative.

    • 

      Christopher
      May 2, 2011 at 7:57 pm:

      Hi Ron,

      I was happy to buy at $8.50, and I am now even happier to buy again at $8.

      I certainly won’t be complaining about being given another opportunity by Mr Market.

      • 

        darrin wong
        May 2, 2011 at 8:18 pm:

        HI Chris

        What is your IV for MCE and ROE?

        cheers

        darrin

      • 

        Christopher
        May 3, 2011 at 12:26 am:

        Hi Darrin,

        Depends which forecasts you use.

        For 2012, around $8.80 for MCE, and around $8.50 for FGE

      • 

        darrin
        May 3, 2011 at 7:34 am:

        Hi Chris

        With FGE at 5.92 yesterday and MCE at $8.00.
        Is the MOS greater enough for us to jump in yet?

        cheers

        darrin

      • 

        Christopher
        May 3, 2011 at 10:12 am:

        Hi Darrin,

        I am very comfortable with a MOS of that size.

        There are still a few things to consider, such as the high Australian dollar (in the case of MCE anyway) which as Ash says could have a double digit % effect on profits. MCE have hedging of A$0.88 for US$1.00, and as far as I know this is in place til towards the end of FY12. They won’t get such a good deal next time. I am aware of a couple of analysts who have been lowering their profit forecasts purely for this reason.

        You might also want to consider if we are in for a bit of a bear run, giving us much lower prices across the board. I’m terrible at predicting the direction of the market and so I generally ignore it.

      • 

        Ian
        May 3, 2011 at 11:44 am:

        I am also not good at predicting the short term direction of the market but somone is selling MCE and it is dropping on reasonable daily volumes.

        Around $7 would seem to me to be a nice opportunity to buy if Mr Market gives the offer.

        In the meantime I will be patient and just watch. I don’t see any point in rushing in at the moment when the direction of MCE and the market seems to be down.

        The market overshoots upside and downside in the short term and you never know where the short term top or bottom is until after it has happened but there can be nice surprises for the patient.

      • 

        Greg Mc
        May 3, 2011 at 6:23 pm:

        Good stuff Christopher. I think that with the rising dollar and falling MCE share price there has been a shortening of the focus, even on this blog. Keep the big picture in mind. I expect that I’ll still be holding MCE in 2-3 years time, at least. The effect of the recent rise in the AUD and its effect on the full year MCE results is largely irrelevant to me – My timeframe is longer than that. The space the company is in and the improvements in efficiency are far more important IMO than the exchange rate.

        MCE close to $7 is a gift in my mind to anyone with more that a 3 month outlook.

      • 

        Ron shamgar
        May 2, 2011 at 8:26 pm:

        Hi christopher, that’s great. In investing, I have learnt that u need to be happy with the decisions u make. Good luck.

    • 

      Peter A
      May 2, 2011 at 8:16 pm:

      Has anyone else received a call asking their intentions re: the Matrix Share Purchase Plan?

      I was called tonight, supposedly from the selling broker (Austock). I told him I was planning to purchase on market, and he said that he understood.

      Sounds like they’re (understandably) having a bit of trouble getting takers at the moment. Will be interesting to see if others receive the call. Since my surname starts with A, I may have been amongst the first.

      Peter A

      • 

        Roger Montgomery
        May 2, 2011 at 11:01 pm:

        I wonder whether the terms allow a repricing? Will have to have a look tomorrow…

      • 

        Ron shamgar
        May 2, 2011 at 11:37 pm:

        Hi Roger,
        If u can put in a call to Aaron and ask if he can reprice it at $7, I’m sure the SPP will be oversubscribed just from this blog!
        Cheers

      • 

        Adam W
        May 3, 2011 at 3:47 pm:

        Clause 11 of the terms and conditions state that ‘MCE may change, suspend or terminate the SPP or these Terms and Conditions at any time whether becuase of … any other circimstance relevant to the SPP or MCE.’ The issue price is set out in clause 4, so arguably clause 11 allows the issue price of the SPP to be amended.

        Adam W

      • 

        Brad J
        May 3, 2011 at 5:35 pm:

        I would be very surprised if the share price fell a lot below $7 as this is where the next major resistance level is for traders. If they lower the SPP it will probably be a further catalyst to drive the share price down lower, so I have a feeling they won’t. Soon the traders will be out and the investors will be left. If we concentrate on the business it will reward us in the long term.

17. 

    Steve
    May 2, 2011 at 3:51 pm:

    Many seem to ignore Ben Graham’s discussions and thoughts regarding intelligent speculation. This is the only way I can see how value investors can hold gold. It earns nothings so how can it be valued? According to Roger’s five sell criteria, because it has no intrinsic value or performance criteria, you can only use “sell if there is a better opportunity”. But how do you know when to sell if you don’t know what it is worth as opposed to alternative investment?

    If someone can tell me its current intrinsic value, then I can set a price at which to purchase some.

    In addition to this, I am also unable to reconcile those value investors who proffer that they “ignore the market/macro issues”. So why are you buying gold?

    However those who gold might be right but for the wrong reasons.The following argument is based more on Graham’s intelligent speculation rather than outright value investing.

    Gold may rise simply because of “true” supply-demand shortages but not because of money printing and inflation concerns (See Paul De Grauwe and Magdalena Polan “Is Inflation Always and Everywhere a Monetary Phenomenon). In brief, the study shows that money printing is not an inflationary problem for those economies where inflation is below 10%.

    I believe we need to think differently about commodities. We tend to think they are all the same. But they are not.

    China’s growth and the pressure it places on resources in not an issue of future population but current population. For all the talk of China, there are still 800 million poor Chinese in comparison to the “wealthy” 400 million. China already uses approximately 50% of all minerals so imagine how much is required to bring the “other” 800 million up to the same standard of living. Then add to this India, Indonesia, South America and the Middle East and if you think that we have enough of ALL commodities then you need to do some sums.

    There are only 2 metals that have sufficient supply – that is aluminum and iron ore. All the others are in a shortage, will be for some time and may be insufficient to sustain a global population of 7 billion or higher. Indeed, the growth of the emerging markets may actually reveal that there is not enough to go around full stop. For example, there is enough lithium globally (per capita) for each person to have one iPhone. That’s it, no iPad, no electric batteries etc.

    Rare earths and other rare metals (such as zirconium, tantalum dysprosium and others) are critical metals for a range of products. So in order to build a wind generator you need a certain quantity of specific rare earth metals. So if you wish to build a wind generator, you may have enough iron ore but without the essential rare earth like dysprosium you can not build wind generators. It’s like building a car and then finding that there is no materials for the steering wheel – no steering wheel, no car. This is the critical factor that those who believe there are enough resources miss. Iron ore – yes, rare earths and other technology metals (including gold and silver) – no.

    The issue is also one of economics – the economics of scarcity not abundance. Imagine you want oil. You can choose between 20 separate little scattered buckets holding 1 litre which must each have a well, etc or one big bucket which holds the same amount (20 litres). The big one is more economic and extraction from the 20 may be feasible if oil is $400 a barrel.

    So we will need to consider how these strategic metals are allocated between competing uses. Imagine choosing between using 1000 tonnes of a rare metal to produce 1000 solar or wind generators which will supply energy to 1 million people. But this same amount will also build one nuclear generator that supply clean energy for 10 million. There are only 2 ways that I can see to determine who gets what – government regulation or the price mechanism. Who decides?

    In all my investment I try to avoid confirmation bias, so I spend considerable time looking for facts and figures which will refute my concerns and research about the limited amount of resources. I am yet to find a logical argument based on facts, figures and rigorous analysis rather than speculations about productivity or population numbers or history.

    So we need to think in terms of supply and demand of each individual commodity, not as a big bunch. Because not all commodities are the same, then Gratham may well be right – this time it MAY be different.

    A crash in China sometime in the future leaves Australian investors panicking and selling everything associated with resources. However if my argument above is solid, the deeper fundamentals (which reflect a true resource shortage based on actual supply/demand numbers, not speculation about inflation and money printing) will quickly show that resource prices are/were functioning on supply/demand characteristics (think oil since 2008) and not money printing or inflation hedges.

    So if one does the appropriate amount of research then Ben Graham’s intelligent speculation philosophy and methodology can be applied and those who profess to be value investors can then apply the other genius’s great philosophy – be greedy when others are fearful.

    • 

      Steve I
      May 2, 2011 at 7:57 pm:

      Steve,

      Your thoughts are very thorough but I’m not sure what point you are trying to convey.

      You say that you always try to avoid confirmation bias but it also depends on the facts that you are using for inputs. Statistics can be altered significantly to achieve a desired outcome. Case in point: you mention that monetary inflation is not a problem below 10%. US inflation is currently over 10% as measured by the traditional method and tracked by Shadowstats. The current CPI is less due to hedonics, geometric weighting and substition, with the headline around 6%.

      This sort of inflation is not a problem until it is a problem. You can’t just ‘fix’ inflation when it is moving towards hyperinflation. In the past, when governments have annual deficits over 40% and they start monetising debt, which they are, it leads to hyperinflation. The delay in this case is reserve currency status, but this is only a delay.

      I have no problem with your comments about supply/demand and they have a lot of merit. However your comments about money printing are, to be frank, naieve. To say that gold won’t rise due to money printing is just plain wrong. This is the exact reason why AUD is currently rising against USD. If gold is money and there are no alternative safe havens (ultimately) at this point in time, then there will be massive adjustments. Try and think about supply/demand mechanics when you have a significant increase in supply of paper money, the demand of alternative stores of wealth will inevitably increase.

      • 

        Ash Little
        May 2, 2011 at 9:52 pm:

        Hi Steve & Steve,

        I largey agree with the second steve. But the first steve makes come good points about supply and demand for commodities.

        The mistake I made in the past was to view gold as a commodity. It may have been at some stages in the past but the truth is it is a currency.

        Once I viewed gold as a currency not a commodity I had a lightbulb moment.

        Steve I makes a good point. It is not really $A strength but the weakness of all the other major currencies who are printing money and making their currency worth less.

        My personal view for what it is worth is that there is no way the S&P500 or world commodities would have reached the level they have without QE2

      • 

        yavuz
        May 3, 2011 at 12:20 am:

        A couple of small corrections to first Steve’s comments:
        In the list of elements Steve provided only Dysprosium is rare earth, others are not. Rare earths are not so rare as their name suggest. Lithium is also not a must for batteries, etc… There are substitute elements for all. They all become more cost effective to use at some price point. Also China’s intensity of metal usage is not as high as it was in today’s major industrialized countries, such as USA, Japan, Germany, England. Also there is one issue people may forget when discussing gold. Marginal cost of production has risen significantly, industry cost curve has shifted to the right (more expensive) in the last decade or so. There are not many large producers producing at a cash cost of $300 or $400 or even $600. Add to amortisation , depreciation, rehab, closure, costs, total cost of production goes up significantly higher. This may not help if the price of gold should or should not go up but it needs to be taken into account in the supply-demand equation, in the long run.
        Yavuz

      • 

        Steve
        May 3, 2011 at 9:31 am:

        Steve I,

        I stated the study’s finding to show that there is credible evidence that money printing does not lead to inflation. If you are able to get the paper it may be worth a read. In addition to that, you may want to have a look at Richard Koo’s Balance Sheet Recession regarding Japan. Both provide counter evidence.

        I need someone to explain that when the private sector banks print money (pre 2007) there was little inflation or concerns but when governments print everyone goes off about inflation.

        I can not see any hyperinflation on the horizon but happy to consider it if there is solid evidence available.

        Gold may well be rising because of a true supply/demand characteristics, but I see a lot of people simply stating that we are going to have inflation so therefore buy gold. That’s not value investing in my book, that is speculation – you may be correct but it is speculation none the less.

        Gold’s rise looks a lot like irrational exuberance. Here is an excerpt from Howard Marks, from Oaktree Capital – a value fund manager:

        “I’ve said it many times: no asset can be considered a good idea (or a bad idea) without reference to its price. How can we evaluate whether the price of gold is right?
        As with oil, you can list gold’s attractions as enumerated on page two. But how do you turn them into a price? And don’t you have to be able to turn them into a price in order to invest intelligently? Consider this conversation:

        Howard: How do you feel about gold here at $1,400 an ounce?
        Gold bug: Great. I ’m sure it will hold its value from here and keep up with inflation
        Howard: Would you be equally sure if it were $2,000?
        Gold bug: A little less, but yes.
        Howard: At $5,000?
        Gold bug: That’s a tough one.
        Howard: And at $10,000?
        Gold bug: No; there it would be ahead of itself.
        Howard: So the price of gold matters?
        Gold bug: Sure. Howard: Then how can you be sure it’s fairly priced at $1,400?
        Gold bug: Hmm . . . . .

        The point is, in investing, price has to matter. Nothing can be a good buy solely on the basis of its attributes alone, without considering the value they give rise to and the
        relationship of price to that value. And there’s no quantifiable value against which to compare price in the case of gold. There; that’s it. Either you agree with those statements or you don’t.”

        Yavuz – I have heard this point about rare earths several times and it has also being mentioned by Roger – rare earths are not rare. But please consider this: to mine a resource you need a sufficient amount in one place to make it economic. You need to first find it, have water and other infrastructure, separate and refine all the different types of rare earths and then process it to the client requirements. That is my point about oil – yes it may well be everywhere but that is the problem. Some rare earths (Heavy rare earths) and rare metals are not in sufficient quantities to allow economies of scale mining.

        Please provide a list of substitutes for these elements. When China withheld supply from Japan, he Japanese stated that they were working on substitutes to rare earths. Let’s observe their actions after this. They took a $350million stake in Lynas securing an 8 year supply – 8 years …….does not sound like the substitutes are here soon.They have taken various other stakes in other countries as well.Then the Japanese government announced a very serious recycling program for rare earths. Substitution here soon?

        In addition to that, why is the price of rare earths skyrocketing (if you argue it’s a bubble then the rise in the gold price must be “frothy”); why are acknowledged experts stating that there is a supply shortage until at least 2015; why has China stated that they will start importing these materials themselves after 2015 if they provide 95% of current production? Could it be because there is not enough to go around?

        Ash – what should the price of oil be if there was no QE2? Was $140 prior to the GFC/pre QE2 about shortages because there was no QE! or 2 then?

        Many here supported Jim Rogers regarding his statements about commodities.

        My argument is that what people may believe is that commodity prices are a result of money printing and inflationary expectations. You may want to consider that it could also be simply a supply/demand dynamic – just what Gratham (and Rogers) are saying.

      • 

        Steve I
        May 3, 2011 at 8:07 pm:

        Steve,

        You really need to change your way of thinking about currencies 180 degrees.

        You mention the price of gold and focus on this side when the whole story is not the value of gold, but the value of the currency used to purchase it. Therefore, it is not exuberance of gold, but the realization that the currency used to purchase has little value. Therefore the theorical price of gold (in paper currency terms) is infinite and the theoretical price of fiat currency is zero.

        Don’t look at Japan. It has different characteristics (historical high savings, positive terms of trade, goby debt funded via citizens etc). Look at Weimar Germany, look at France, particularly south America. Hyperinflation is associated with unsustainable government deficits, debt monetization and credit expansions. We have had a massive credit expansion via the fractional reserve banking system. By itself it is not always a inflation problem as without government intervention it also has an equal and opposite amount of credit destruction (eg great depression).

        Remember, gold is currency, not a commodity. There is no fair price, it is all about relativity. We have a massive amount of paper money and derivatives and a very small gold market. Consider that supply demand dynamic.

        You are on the right about rare earths but you should, in my opinion, improve your understanding about monetary systems as you have some wrong fundamental premises that cloud your thinking. A lot of people have different views on this matter so you need to have a strong BS filter and ultimately some people will never agree. Some people don’t think there is a problem until it hits (gfc), but others can and do see the writing on the wall.

      • 

        Paul Rehill
        May 4, 2011 at 1:04 am:

        Hi Steve I

        Out of interest, can you share how you have exposure to gold and oil, when you entered those positions (market timing), your holding position time horizon and if there are key indicators that you monitor that would trigger closing your exposure?

        Thanks Paul

      • 

        Steve I
        May 4, 2011 at 8:35 pm:

        Hi Paul,

        Gold: MML RMS FML (aug/sept 2010)
        Oil: HOG (March & May 2011) & MCE (sept 2010)
        I’ve managed my positions somewhat, so have been a little bit active depending on the value I’ve seen.

        I only want to invest via stocks (no futures etc) as I want to have leverage via profitable companies with no debt that are increasing output and I can apply the value investment framework. I didn’t start earlier as I didn’t have the ‘light-bulb’ moment until last year. However I continue to devour as much information as I can digest.

        Time frame is approximately 3-5 years, however i may increase or decrease exposure during this time. If things go too well, I’ll look to gradually de-risk.

        Key indicators that ill watch are not necessarily price. The primary motivation will be the resolution of the issues that we face – ie removal of excessive inflation via significantly positive real interest, sound fiscal policies world-wide and a change to the monetary system. With regards to the oil side of it, I see it fitting in during the same period and will probably continue to be an issue for longer than gold as there are supply demand issues when it comes to cheap fuel.

      • 

        Paul Rehill
        May 5, 2011 at 10:31 am:

        The World Bank seems to have revamped their commodity price data that you might find useful to match your thinking to past events and their impact on prices. You can access monthly, quarterly or annual price data and download it as an Excel file through the Databank link on:

        http://data.worldbank.org/data-catalog/commodity-price-data

      • 

        Steve I
        May 5, 2011 at 5:18 pm:

        Paul,

        This sort of transition is completely different, in my opinion, to events that have transpired between 1960 and 2011 (the data series). I don’t think we have ever experienced a world reserve fiat currency losing its status combined with worldwide inflation.

      • 

        yavuz
        May 3, 2011 at 8:29 pm:

        Steve,
        On Lithium; depending on who you listen to, there is (or will be) either shortage or excess of supply. Obviously substitutes will not come into effect until such time price of the metal in question becomes too prohibitive to use for a specific application. I am not going to provide a list of substitutes for every application of these metals as it does not nake sense to discuss in generalized terms. However I will give some examples. For example for there is plenty of Lithium to go around for laptops, ipods, etc.. The real excitement around for Lithium is for electric car batteries, because this is where it will be used mostly. Alternatives to LiMH batteries are Sodium Nickel Chloride batteries or Zinc-Air batteries. There is a lot of Zn & Ni to go around for this application, if we ever run out of Lithium. On rare earths; users will consider every alternative to ease shortage, if there one. There are two important projects, that I know of, at the study phase currently with the objective to start production in a short time frame. One is the Nolans project of Arafura Resources. Second is Kvanefjeld project of Greenland Minerals And Energy Ltd. Kvanefjeld project has been known for very long time, however because of pricing and supply/ demand issues, it has not been progressed to project stage so far. It is now; with plans to process 7.2 million tons per annum of ore. Then there is Mountain Pass rare earth’s plant (of Molycorp) project that was shut down prior to the current crisis. This plant is also being brought back into production as we speak. Then consider also antother rare earths projects that will be brought into investors attention via an IPO this month (Kimberley rare Earths). As you can see all of these projects are at different phases (some advanced, some exploration). I am sure higher a price signal will speed up all these projects, just like the wave of iron ore projects around the world now.
        Yavuz

      • 

        Steve I
        May 3, 2011 at 11:56 pm:

        Steve,

        Check the deflation or hyperinflation viewpoints expressed by FOFOA.

18. 

    Simon Anthony
    May 2, 2011 at 2:33 pm:

    FGE down 15% over last 3 weeks! Interested if any Value.able graduates have re-purchased FGE as a result of this recent Mr Market mania?

    • 

      Roger Montgomery
      May 2, 2011 at 3:13 pm:

      Buy stocks like you buy groceries not diamonds….But pay in Aussie dollars not US ones!

      • 

        Jonesy
        May 2, 2011 at 3:37 pm:

        Exactly. I’m a real hoarder when it comes to specials at Coles / Woolies and this is the mentality we should use when it comes to slices of great businesses we own as well. The only difference is that you don’t tend to break out in a sweat or get butterflies in your stomach when you hit the “Buy” button on 6 tubes of toothpaste or 2 dozen cans of cat food…

      • 

        Simon Anthony
        May 2, 2011 at 3:44 pm:

        Agreed! However I may put some of these FGE shares on lay-by for now and pay at the end of the month :)

      • 

        Ash Little
        May 2, 2011 at 4:05 pm:

        Haven’t you heard Roger,

        Bin Laden is dead and they are celebrating in the streets in America.

        The US dollar is rallying and the press reports that the US will return to it’s former glory.

        BTW I also believe in the tooth fairy.

      • 

        darrin wong
        May 2, 2011 at 6:46 pm:

        HI Ash

        When do we jump into FGE?
        I can’t find out any reason why it is been sold off.

        cheers

        darrin

      • 

        Ash Little
        May 2, 2011 at 9:35 pm:

        Hi Darrin,

        This is a very hard question to answer because I don’t need to jump into FGE because I allready hold.

        It is starting to be of interest to me again but I can’t recommend it to you because I don;t know your presonal cercumstances

        Hope this helps

      • 

        darrin
        May 3, 2011 at 7:38 am:

        HI Ash

        I hold no FGE at the moment but would like to based on my research for 2012, 2013. Question is how do I know when to buy?

        cheers

        darrin

      • 

        ron shamgar
        May 3, 2011 at 8:32 am:

        i suggest you go back and read roger’s book. the answers are all there. no one here will tell you to buy anything. if you believe FGE has excellent prospects and is trading at a large enough MOS, than maybe you should buy. i hope that helps. cheers.

      • 

        darrin wong
        May 3, 2011 at 7:51 pm:

        HI Ron

        Sounds good. I will re read Rogers Book.

        thanks

        cheers
        darrin

      • 

        Rob
        May 3, 2011 at 11:49 am:

        Darrin,
        Only you can answer that. It’s your level of comfort, your MOS and your portfolio. None can do it for you.
        As Ron says reread Roger’s book, do your research and with practise the decision will come more easily.
        Cheers
        Rob

      • 

        Rob
        May 3, 2011 at 11:52 am:

        “None” should be “Noone”.
        Hey Roger I have a request of your IT guys. can they allow you to edit your own posts before they are moderated?

      • 

        Roger Montgomery
        May 3, 2011 at 3:57 pm:

        Good one Rob. I’ll ask my team to add it to the list.

      • 

        darrin wong
        May 3, 2011 at 7:52 pm:

        HI Rob

        That is true am I able to sleep at night from my decisions.

        Rereading rogers book over and over.

        Thanks

        cheers

        darrin

      • 

        Steve I
        May 2, 2011 at 8:02 pm:

        Also interesting to hear that he is already burried out to sea. I thought this a bit odd. The US dollar safe haven story will probably be tried, but will be very weak I think.

      • 

        Jeff Burnett
        May 2, 2011 at 8:22 pm:

        they buried him at sea so that his grave would not become a shrine…….that is, a place of pilgrimage for terrorists!

        jeff

      • 

        Rob
        May 2, 2011 at 10:06 pm:

        Listened to ABC tonight. Expert said burying @ sea was best thing to do to prevent a shrine or mausoleum being built around his remains and being an ongoing focus for his followers. I guess like Lenin etc.

    • 

      darrin
      May 2, 2011 at 7:11 pm:

      HI Simon

      I have been watching FGE the past few weeks. I don’t know why there is a sell off.
      haven’t decided whether to jump in yet or not.
      Patience is very difficult card to hold all of the time when facing Mr Market offers.

      cheers

      darrin

      • 

        Steve I
        May 2, 2011 at 8:37 pm:

        Darrin,

        FGE is not unique in the case of this sell-off. Therefore consider whether Mr Market is being silly or knows something that you don’t.

      • 

        Simon Anthony
        May 2, 2011 at 9:59 pm:

        If FGE falls to $5.50 then I’ll grab my pole for a little bit of bottom fishing!

      • 

        Ron shamgar
        May 2, 2011 at 11:41 pm:

        It’s been a bit quiet on the contract winning front lately…plus markets are a bit jittery at the moment. Maybe an opportunity soon.

    • 

      Greg Mc
      May 2, 2011 at 7:28 pm:

      G’day Simon,
      I already have a fair few of these bought between 2.47 and 4.95. I’m interested in their decline but I think I will wait and see for a bit longer. I think there is a reasonable MOS now, mind you, but as it is already one of my larger holdings, I’m not inclined to add to it unless things start getting really silly.

      • 

        Simon Anthony
        May 2, 2011 at 10:01 pm:

        It’s a bit like shooting fish in a barrel, once your MOS gets out beyond 45%, so what do I recommend bring along a extra gun and extra ammo!

    • 

      Steve I
      May 2, 2011 at 8:40 pm:

      Simon,

      I actually exited FGE a little while back due to my personal concerns about rising input costs (such as fuel etc) which I think could risk reduced margins and i therefore saw value in other areas. However, this probably won’t be noticed yet and is something to consider when forecasting IV for future years.

    • 

      ken fraser
      May 3, 2011 at 12:05 pm:

      Simon, I am fully invested unfortunately. The argument to always keep a certain percentage of cash available is sensible but I find it hard to do when I see opportunities available at discounts to IV. My last buy price for FGE was $6.30 and I have already committed to the spp of MCE. When a share purchase plan is offered we should always wait until the closing days before committing to take up the allocation. This is a good lesson.

      • 

        Tony C
        May 4, 2011 at 12:25 am:

        HI Ken

        All we need is for 400 other people to have put there Cheque in the post straight away and MCE could announce the spp was overscribed. My dad did the same ohh well hes read the book done the numbers hes not worried

      • 

        ken fraser
        May 4, 2011 at 10:44 am:

        Tony, Great, thanks.

    • 

      Stephen
      May 3, 2011 at 6:46 pm:

      Hi Simon,

      Yep, I stepped in today and purchased another packet of Forge shares.

      At $5.79 they were trading at a MOS of about 22% to my forecast 2011 IV.

      They may drop again tomorrow but I’m not fussed if they do.

19. 

    Greg Mitchell
    May 2, 2011 at 1:45 pm:

    Hi Roger,
    Having recently finished your book, I Just want to thank you for opening my eyes to a methodology for valuing shares, for the interesting views provided in the blog and for the homework as it has helped me put the theory in to practice.
    Look forward to seeing the homework results.
    Regards
    Greg

    • 

      Roger Montgomery
      May 2, 2011 at 3:08 pm:

      Thanks Greg. Delighted it has changed your view.

20. 

    frank h
    May 2, 2011 at 12:17 pm:

    Hi Roger, I am in a slight quandary on how to value mining stocks with this $A being so high .after reading valuable which i found very informative ,i couldn’t find a reference.Since most the stocks i own were bought before buying the book so i am fine there .I only hold one mining stock since i find them mostly overvalued and unpredictable plus earn nothing.I bought RMS at $1.05 ,at the time i thought may have been a good price,but now i am not quite so sure watching them lose roughly 25p.c.in 2 weeks,with this $A cont. to go higher i suspect they will come down more.Any insight would be appreciated,as i am tempted to buy more. Kind Regards,Frank

    • 

      Roger Montgomery
      May 2, 2011 at 12:30 pm:

      Hi Frank,

      There are some highly qualified resource company investors right hear reading this blog. Pop your stocks up and other investors will give you their thoughts (but never advice).

      • 

        Jonesy
        May 2, 2011 at 12:47 pm:

        That’s Market for you again. A couple of weeks back you’re “pretty sure” your valuation is good. However, add a few days of market pessimism and it becomes infectious with you now questioning your previous judgement. What is important to remember here is that the value if the company may not have changed but due to a number of factors, which all transpire to make other owners of the business more depressed, they are willing to sell you their stake for less than what it’s worth. Luckily these are the same people who will buy your shares off you when the share price has rallied over intrinsic value and they feel “safe” getting back into the market. Gotta love emotions, but without them we’d all be like Mr Spock (who I consider would have given Warren Buffet a run for his money)

      • 

        Greg Mc
        May 2, 2011 at 7:32 pm:

        You’ve just produced a fair chunk of truth there, Jonesy.

    • 

      Steve I
      May 2, 2011 at 2:59 pm:

      Frank,

      I think you need to settle down a bit and stop worrying about price. One of the great benefits of being a value investor means that we don’t need to panic when price changes, as long as we constantly think about value.

      Now, has the value changed? Your concern is with regards to the AUD being high. Well, its actually mostly just high against the USD, which is going to die a slow death. It also won’t be in a straight line and it is also relative to all fiat currencies. The Euro has also been strong relative to the USD in recent periods, just not as strong as the AUD.

      Therefore, if you are looking at the price of gold, why are you worried? The price of gold has gone up in USD terms, but is actually fairly flat in AUD terms. Now, the AUD cannot go up against the USD forever as parts of the economy will either start to break or traders will see better value elsewhere. They are all fiat and relative.

      Therefore, RMS has taken a big hit for no reason. The recent news flow is good. The gold price in AUD is stable and the long term fundamentals for the gold price remain intact, if not significantly better.

      My take is that there is either a bit of a shake-down going on or else there is a liquidity drain from overseas investors, such as Japanese, withdrawing funds from stocks to place elsewhere or local investors selling stocks to invest overseas.

      Either way, in the meantime, the AUD will probably continue to be relatively strong and the price of gold will also be relatively strong, except for the inevitable bouts of short term volatility.

      • 

        Roger Montgomery
        May 2, 2011 at 3:16 pm:

        One other scenario Steve that is doing the rounds over here in analystville is big downgrades on the horizon this week out of the Macquarie conference thanks to analysts failing to have such a high Aussie in their models earlier in the year.

      • 

        Steve I
        May 2, 2011 at 8:08 pm:

        Roger, that would make sense and I guess it would definitely impact, however the recent sell-downs seems very indiscriminate (ie regardless of currency impact on profit). It doesn’t bother me too much, but feels either like an inefficient market at work, liquidity squeeze or manipulation. I’d be interested to know why just for interest’s sake. Either way, it does make some buying opportunities!

      • 

        Roger Montgomery
        May 2, 2011 at 11:00 pm:

        …with 90% cash, its something I have been a litle too eager for.

    • 

      Mal
      May 2, 2011 at 9:16 pm:

      Hi Frank,

      Use Roger’s search function to find the gold blog- you will find quite a few thoughts on RMS over there. Since most cash costs are reported in USD/ounce, the easiest way is probably to calculate profits in USD then convert into AUD. RMS is trading at an enterprise value of approximately 300 million. EBITDA is likely to be in excess of 100 million but you need to look at each quarterly.

      The main thing that is keeping RMS at current valuations is ongoing success/mining at Wattle Dam. If the grades start to fall off, they will actually relatively rapidly produce less gold and become less profitable. 22000 ounces at ~500 total cash cost is VERY good (and grades ~ 20g/t), so for the moment you are safe, and likely to be until 2013 according to management’s guidance. It looks like Block B will likely last until next quarter (ie similar grades) and then they will hit aim to process the ore from Block D (similar grade) before hitting Block C which is actually the lowest grade ore they have (probably have significantly higher costs). Management hasn’t indicated the quality of this ore, but it will be economical *BUT- look at the calculations below to see how they might be affected.*

      RMS is currently milling about 33441tonnes
      at 20.7g/t –> 692000grammes
      = 22 000 ounces
      at cash costs of ~500/ounce total cost is approx 11 million to operate (this includes capital development).

      If the grade drops off, even to a comparatively high grade of 15g/t
      33441*15g/t –> 500000g
      = 16200 ounces
      cash costs c~690/ounce

      As you can see if and when the grades drop, they are likely to relatively quickly become uneconomical.

      They are trading at an EV/EBITDA ratio of <3 and although the cash costs of Mount Magnet will be higher than those at Wattle Dam- I've just noticed some promising grades. RMS, based on past operational performance, has the requisite skills to effectively mine out the highest grade stuff first, and have good underground mine capability, so I would watch this space to see if they can bring the cash costs down- it wouldn't surprise me.*They don't seem to be very good at exploration however!*

      For a value investor this is starting to look cheap. Noone here is going to tell you when to buy/sell. I would suggest doing as much research as you can into the stocks you invest in. I personally find that I am much more insensitive to price changes the more confident and more I know about a stock.

      • 

        Matt R
        May 3, 2011 at 2:35 pm:

        Mal

        As an investor who obviously knows a lot about gold, could you please explain what happens to the gold that a producer mines? Who do they sell it to? Who makes it into bullion bars? Who buys it at the current market price?

        Much apppreciated

    • 

      Mal
      May 2, 2011 at 9:39 pm:

      On another note, resource stocks are getting absolutely hammered- which opens up a lot of opportunities for people who are willing to take the SIGNIFICANT risks. A few that have caught my eye (listed from lowest to highest risk- please note they are all producing income) and looking pretty cheap although probably beyond my risk appetite for the time being:

      FMG (Iron ore)
      AGO (Iron ore)
      GRR (Iron ore)
      KZL (base metals)

      Risks (in brief):
      – currency- stronger AUD will negatively impact australian operations (all of the above)
      – metal price- iron ore looks to be going strong into 2012, base metals seem to have softened
      – operational risks
      – tax (MRRT + carbon tax) – will affect bottom line if goes through

      Quite a few of these seem to have been factored into these prices.

21. 

    Jonesy
    May 2, 2011 at 11:12 am:

    Margin of safety is very important to comprehend and enact (although it does require a serious degree of patience at times). The “Mr Market” analogy however, is easy to understand in practice but in reality is an ongoing battle to apply. I look forward to the time, when I see the balance of my portfolio drop 1-2% in a day, and my immediate reaction isn’t despair. We would all be much better investors if we could turn off our brains emotional centre. I can guarantee that if I told you that next week Matrix’s share price will drop to $5, 100% of people currently holding the stock would say that they would buy more, but I would also be prepared to bet that in practice much less than that 100% would top up if the price did plummet due to the conflicting emotional and rational parts of our brains fighting each other. Regularly revisiting the “Mr Market” analogy is the only helpful antidote to this!

    • 

      Roger Montgomery
      May 2, 2011 at 12:24 pm:

      Agree 100% Jonesy. If it were true, we would all be writing puts too.

    • 

      Stephen
      May 2, 2011 at 5:03 pm:

      Hi Jonesy,

      I’m with you. I hold FGE and MND and have watched with fascination the sell off in the past week. MND because it was pretty stretched and profits were taken and FGE because….well, I don’t actually know why?

      All I know is this, I’m human and I like to see my stock prices rise. My mantra likes most peoples would be “just a little more up”. But every now again as I watch one of my stocks dropping on sentiment, I think “please God just a little more down”.

22. 

    Paul
    May 2, 2011 at 10:01 am:

    Hi Roger
    I have found one of the most valuable insights in your book (there are many) to be the cashflow analysis. I now use this to identify bad businesses operating off debt or capital raisings. I don’t like Worley Parsons for this reason even though its ROE is ok and many Value investors e.g. Team Invest like the company. Also it is way overvalued.

    You mention that this method can’t be applied to banks.

    Are you aware of alternate approaches that could be applied to avoid the Babcock and Browns (I reluctantly admit I got burnt pre Value.able) or Westpac in the 80s. Even Macquaire just before the GFC could have been toast if they had won 2-3 deals they bid on (e.g. remember the Qantas buyout, etc).

    Many thanks – we are in your debt
    Paul

    • 

      Steve I
      May 2, 2011 at 8:25 pm:

      Avoid those who use or are willing to use excessive debt or leverage?

23. 

    Ron shamgar
    May 2, 2011 at 12:38 am:

    Hi everyone,

    What if I said you can own the only business that reports traffic congestions around the country? A pure monopoly! And at the same time make a fortune of money? Well guess what…. Australian traffic networks is doing just that!

    http://www.smh.com.au/business/gridlock-is-good-the-man-who-gets-money-for-jams-20110501-1e2vq.html

    And by the way u can own this business, it’s listed on the NASDAQ.

    • 

      darrin
      May 2, 2011 at 11:47 am:

      HI Ron

      What was your IV for NST.
      Have used data from e trade but can’t get a reasonable IV from it.

      cheers

      darrin

      • 

        Andrew
        May 2, 2011 at 12:40 pm:

        Hi Darrin,

        Sorry to interupt, but was curious. Whats your definition of a resonable IV?

        I have seen this mentioned by a few people over the course of me being on this blog but i have never quite understood it. Are you using the same method you use to value other companys? If so and you agree with those figures, why should you doubt these figures?

      • 

        darrin
        May 2, 2011 at 4:41 pm:

        HI Andrew

        Reasonable IV would be one that most of us would get imputing the same figures that is used to calculate. In that way we have an idea that we are on the right track. Do you have an IV for NST?

        cheers

        darrin

      • 

        Andrew
        May 3, 2011 at 8:29 am:

        Sorry Darrin, can’t help you there. The investing of money into companies that dig up coloured metallic rocks goes against my little version of value investing. I know what my strengths are resources aren’t one of them, so i ignore them all.

        I can honestly say i have never bought anything relating to gold.

        I was just a bit curious to see what your definition of reasonable IV is, as i think for some people it means that they have a preconceived idea that the company should be worth more so they question their initial result despite the fact they are happy with the results the exact same method has returned for other companys. In this instance it might not be the result to be questioned but maybe your preconceived ideas about the value.

        I will leave the analysis and value calculations to those who know what they are talking about in regards to gold. The lack of me being able to clearly identify a competitive advantage and joined with my uncertainty about future prospects and associated risks is one that i can’t overcome.

      • 

        Austin
        May 2, 2011 at 2:14 pm:

        Hi darrin,

        I am interested to know all other Value.Able graduate’s IV…

        I’ve got $0.60 by June 2011 by estimating NPAT of $10million.

        Assume EQPS of $9million at June 2010, this include the $4million they raised in late 2010.

        That should give ROE of 100%, POR of 100% should give a multipier of 70x to 100x…

        I know this has the implied growth of 100% to NPAT (may not be achieved)…

        So i ignore the POR, go with a very conservative calculation… of 20x Book Value $9million/298million share… this give $0.605

        Roger, appreciate if you could teach us a bit about how we should account company that pays no dividend but at the same time they also cannot deploy their extra cash to achieve ROE as high as previous year…. Please help!!!

        Regards,
        Austin

      • 

        Roger Montgomery
        May 2, 2011 at 3:09 pm:

        That scenario would produce declining ROE, in the absence of you giving me anything else that changes.

      • 

        darrin
        May 2, 2011 at 4:38 pm:

        HI Roger

        So what would your IV for NST be for 2011, 2012 and 2013?

        cheers

        darrin

      • 

        darrin
        May 2, 2011 at 4:44 pm:

        HI Austin

        I agree we need some help with this.

        The etrade data was of no help. Tried Commsec and westpac. Must be using the same data. My IV was 0.50 by June 2011.

        cheers

        darrin

      • 

        ron shamgar
        May 2, 2011 at 5:01 pm:

        hi Darrin,

        if u use analyst forecasts, then the IV is more than double today’s price.
        the real question is are these forecasts too optimistic with the current strong dollar and it assumes production keeps up with forecasts.
        if you read a recent interview with their MD he claims the company will be valued at 500million in the next few years.
        also Tim Treadgold from Eureka report has mentioned them as having potential.

        please do your own research as prices may drop in the short term. and i do suggest diversifying in this area.

        cheers.

      • 

        darrin
        May 2, 2011 at 7:14 pm:

        Hi Ron

        I agree with you I like this NST. Seems to tick all of the boxes for Valu able. Is this One!!!

        cheers

        darrin

24. 

    Rob M
    May 1, 2011 at 7:17 pm:

    Hi All,

    I am interested in people’s opinions on dollar-cost-averaging…

    I think it was in the (newsletter name withheld) (been a while since I read it) that showed the benefits of dollar-cost-averaging. Just wondering what people on this blog think of the strategy and how it can fit into their value investing approach, or whether it is not a relevant consideration?

    • 

      Roger Montgomery
      May 1, 2011 at 9:13 pm:

      This will help Rob M. Not many people talk about Dollar Value Averaging being superior to DCA…http://en.wikipedia.org/wiki/Value_averaging

    • 

      Ash Little
      May 1, 2011 at 9:52 pm:

      Hi Rob

      My wiew is if it is cheap and depending on the liquidity of the company just buy it.

      If you are a business owner and you see another business you want to buy that is very cheap you just buy it. You dont go offer to buy 5% in the hope that it will get cheaper.

      If you have done youe research and purchased a great business at a discount to IV then it does not matter what happens to share price.

      I find people who use dollar cost averaging have either no idea of the IV of the company they are buying or have not given themselves enough MOS.

      Just my view and I hope it helps

      • 

        Ron shamgar
        May 2, 2011 at 12:43 am:

        I agree ash. Though on some occasions I did benefit from this exercise.

      • 

        Rob M
        May 2, 2011 at 9:39 am:

        Thakyou Roger, Ash and Ron.

        There’s plenty to think about there!

      • 

        Ilya
        May 2, 2011 at 1:41 pm:

        Thanks, Guys. I am for one is quite impatient and once I see a business I like I tend to rush into buying it, which needless to say hurt me many times. I have slowly came to realisation that what Ash is saying is absolutely true – every time I either didn’t give myself a high enough MOS or used rosy assumptions to make MOS tell me what I wanted to hear. Patience is very hard to learn but I am working on it. I am the first one to admit that my investment temperament is flawed but I am hoping to get better. Some of us learn on our own mistakes :-)

        Try using RR of 12% and above and MOS of at least 20% and you shouldn’t need to dollar cost average too often.

      • 

        Steve I
        May 2, 2011 at 8:43 pm:

        I agree 100% with Ash.

    • 

      Paul
      May 2, 2011 at 10:21 am:

      Hi Rob
      If you are interested in dollar cost averaging there is an approach AIM Automatic Investment Management by Robert Lichello that effectively buys more of a stock as the price falls and sells stock as the price rises.
      “It is a plan that gives the investor a systematic and logical model for managing the ownership of long term investments. It is tax efficient in that most capital gains generated are long term in nature (over 12 months of ownership). It is generous in its realized profits (approx. 30% LIFO gains generated between a buy and a sell). It is a contrary model buying into market weakness and selling into its strength”.
      I don’t use it but know of people that do. They have back tested and come up with figures that suggest much better returns than a buy and hold approach.

      Paul

      • 

        Roger Montgomery
        May 2, 2011 at 12:20 pm:

        Hi Paul, Thank you for that. I had to remove the link because I haven’t got time to check its safe etc…

        Here’s something I found (I also found some caveats that are reproduced below) and of course you can simply cut and paste into your browser or google Robert Lichello to find out more:

        In the late 1970’s Robert Lichello published a book titled “How to Make $1,000,000 in the Stock Market – Automatically” which presents a stock market timing system that claims to do exactly that. In this article we will briefly explain this system then back-test it to see if there is any credence to these claims.

        What is AIM?
        Robert Lichello named his market timing system Automatic Investment Management or AIM. AIM is an algorithm that provides a logical system for managing your investments. It can be used with a stock or mutual fund portfolio. This system will instruct you when and how much to buy or sell.

        To calculate AIM’s buy and sell quantities you need to know two things: how much money you have invested in the portfolio and the current value of your portfolio. To illustrate, let’s run through a couple examples.

        Example of a buy order:
        
        Portfolio Control (Amount of initial investment) = 1000 shares @ $10 per share = $10,000

        One month later the stock price falls to $8, Portfolio Value = $8000

        Add 10% to the current portfolio value = $8800.

        Subtract 8800 from 10,000

        Which equals = $1,200

        Note, a positive value indicates a buy signal.

        Because the value of your investment has decreased AIM has signaled you to buy 150 shares, the equivalent of $1200.

        One of the interesting features of AIM is each time that you buy more shares your portfolio control increases by half the purchase value. In this case, the portfolio control would increase to $10,600. This is a built in risk regulator that will stop you from exhausting your cash reserves when the market is going down or building too much of a cash reserve when the market is going higher.

        Example of a sell order:

        Portfolio Control (Amount of initial investment) = 1000 shares @ $10 per share = $10,000

        One month later the stock price rises to $13, Portfolio Value = $13,000

        Subtract 10% from the current portfolio value = $11,700

        Subtract $11,700 from $10,000

        Which equals = -$1,700

        Note, the negative value indicates a sell signal.

        Because the value of your investment has increased AIM is telling you to sell 130 shares, the equivalent of $1700.

        In both cases AIM has you making the correct decision, buying when your portfolio value goes lower and selling when it goes higher. If AIM is strictly followed it can be used to take much of the emotion out of investing.

        I also found the following caveats:

        Here is how Lichello’s AIM system answers the questions:
        
        1. Lump Sum or Periodic Investment – AIM was meant to be a lump sum system where you would invest, for example $5,000 or $10,000. However, you could invest more money once in a while by adjusting the control.

        2. cash – In the case of AIM, Lichello initially recommended a 50-50 split between stock and cash. Later, he increased it to 2/3 stock, 1/3 cash. In the latest edition of his book, he recommended 80% stock, 20% cash. Lichello did not propose a way of handling excess cash. The cash would just build up in your account.

        3. Running Out of Cash – Lichello does not really deal with this, except that he mentioned that you can add more cash if you have it.

        4. Investment Choices – Lichello did not give much guidance in this area.

        5. Control Value(s) – Lichello advocated one control value for the portfolio. His control value would increase by half of any amount added if value dropped, and it would increase by the full amount of any new money added.

        6. growth – AIM makes no provisions for growth. Excess cash simply accumulates and the control only increases on buys.

        7. risk – AIM assumes risk is controlled because the portfolio is diversified. Also, between rebalancings, any stock can be replaced by another, as long the same dollar amount is bought.

        8. Rebalance Frequency – A potential rebalance is done monthly or quarterly. However, a SAFE value is then calculated (equal to 10% of the stock value). Rebalancing only occurs if, and to the extent, that the difference exceeds SAFE. For example, assume the control is $10,000, and the stock value is $12,000. SAFE is then $1200. Since $2,000 is greater than $1200, a sale will take place, but only for $800.

    • 

      Gavin
      May 2, 2011 at 12:02 pm:

      As a value investor, what you are doing when you purchase is making a decision on value in relation to price. The decision has a value and a price component. You decide what you think the value is but others decide the price on offer and you have no control over that.

      Recognising you have no control over price leads you to the logic of averaging. Value Averaging makes more sense to me than time interval (dollar cost) averaging.

      Even if your valuation abilities are omniscient you still face two problems regardles of whether you average in or buy all at once:

      you don’t get fully invested because the price doesn’t get low enough against your valuation before it takes off on a speculative run.

      You get fully set too early and prices go much lower then your entry price before they recover to reflect business value.

      These are the costs that you just have to live with if you want to be a value investor. The abity to stick with value investing is in knowing that wearing these costs are a normal part of an overall successful strategy.

25. 

    Zac
    May 1, 2011 at 7:05 pm:

    Hi Everyone, hi Roger,

    (first post!)

    Is anyone keeping watch on macroeconomic factors? The revenues of our coys, MCE, FGE etc. are resource related, and largely tied in with the demand from the country with the largest demand for them (China..).

    These forecast earnings growth figures are based on assumptions of continuing demand.

    It has been said that half of all building construction in China is driven by the government. This largely came about after 2008, because they were trying to boost the economy in the midst of the GFC. Additionally, interest rates currently are way below where they are supposed to be in relation to inflation, which has spurned cheap lending and speculation in the domestic housing market (sound familiar?).

    The Chinese government has tried to slow things down..but many people don’t think they are doing enough. In addition, it is hard to gauge the accuracy of their economic figures, due to lack of transparency or them not being released at all.

    China does not have an independent central bank, and there are various levels/tiers of government all working their own agendas, which makes it hard for them to coordinate fiscal policy.

    —
    An interesting video here, by Hugh Hendry, of empty office blocks in a majoy city in China: (http://www.youtube.com/watch?v=ektMQGbW3wk).
    —

    How does this affect what we do? Maybe there will be another economic crisis soon, and there may be more opportunities to buy well run Australian companies below their calculated IVs. But after that the real sustainable demand for our resources will be seen, and we may have to expect lower growth figures for earnings and other things.

    When I was working through Roger’s book, one thing that really got me was reliance on brokers for the forecast EPS. Just listening to Sky, and even Bloomberg, most of these brokers and ‘advisors’ keep spinning the lines of their occupation, that China will keep on growing… that its a good time(always) to buy, because brokerage fees are what keep them in their job. Invariably what they say is also what they believe, and this will be reflected in the Research section of our online brokering webpages. I don’t work in the economic analysis field, so I would have little other idea how to project these figures. Any help will be welcome.

    • 

      Roger Montgomery
      May 1, 2011 at 9:19 pm:

      Hi Zac,

      Yes many of us are aware of that risk and I have talked about it hear at the blog a year ago. You may like to simply type “CHINA” into the search box at right of the home page. The issue is of course is the impact on perceived demand and so, on prices of commodities. IMF says Australia is at risk. The commodity boom will last many years however it won’t be a straight line, big corrections are a given. Jeremy Grantham advocates a particular approach in his latest post at GMO.com.

    • 

      Steve I
      May 2, 2011 at 8:46 pm:

      Zac,

      Broker forecast eps is a tool only. However, it is a very convenient starting point. Also, they might come to a different conclusion to yourself using those very same figures.

26. 

    Craig B
    May 1, 2011 at 5:32 pm:

    Simon,

    Graham died in 1976. Nixon killed the old Gold Standard in 1971. Different era’s.

    In Graham’s time there was obviously little evidence supporting the utility of Gold as a hedge against inflation.

    I’ve read Charlie Munger actually defending Graham – he has usually been associated with criticism of the great man – describing his efforts in the field of Security Analysis as an attempt to create a methodology that ANYONE could use, so perhaps any critique should be viewed in the context of what he set out to achieve. Charlie Munger has been in a better position than most over the years to judge.

    It is possible for any analyst to be “right” if the timing is cherry picked. A broker could conceivably have had a client in and out of say, ABC Learning (handy example for this blog), at a tidy profit through sheer dumb luck, and in the wash up he’s free to provide any triumphant explanation he pleases. If it’s early in the broker/client relationship the client would be none the wiser as to the broker’s abilities or methods.

    That’s just to say that one positive experience shouldn’t fill anyone with confidence that it will be repeated again and again. If I went out and bought gold today I’d be relying on someone else to come along later and value it more highly than I did when I purchased. If I buy shares in a company at a discount to IV, (and lets assume here that there are high returns on equity, good cash flow, and bright prospects…all the prerequisites) there seems to me more logical reasons for someone to come along down the track and value that firm at a higher price.

    I know this argument is weakened by an ever increasing gold price, but I think it’s sound reasoning, and I find that attractive.

    Could be my aversion to Sod’s Law too. Why is everything 10% cheaper a week after I buy it? I know the moment I launch into Gold everyone else will wave by-by and leave me with a shining bar in one hand and something else in the other.

    But good luck to the prospectors.

    • 

      Roger Montgomery
      May 1, 2011 at 9:25 pm:

      …and let us all know when you do jump in Craig B!

      • 

        Craig B
        May 1, 2011 at 9:40 pm:

        That’s Gold Roger!

27. 

    garry howlett
    May 1, 2011 at 5:17 pm:

    HELP?? Thanks to all who contribute to this blog, your help, insights and knowledge are much appreciated and valued. I have noted whilst doing the easter homework that the 2011 forecasted EPS and DIVS used by Roger ( i have used these for the homework) vary somewhat to the figures that I get through the online broker service i use. In some cases by as much as 20%..As this can significantly effect future IVs, what does one do? Is it better to average more than one brokers forecasts to possibly get a fairer view?
    many thanks in advance.

    • 

      Andrew
      May 2, 2011 at 8:47 am:

      Hi Garry,

      There are many different sources of forecast data. If you are using your broking house and it is an online one than more than likely it is morningstar who kind of average out all the different analysts research and publish that. The problem with this is that some companies (especially those that are favoured here) can sometimes have only on eanalyst submitting their research to morningstar.

      Roger more than likely uses a different analyst that he has found and trusts or comes up with his own forecasts. If you are willing to part with some cash you can join up to a place that gives out forecfast information. I don’t use one and you will ened to shop around.

      It is best to be approximatley right, the game is to find quality companys and not to match Rogers figures.

      Remember what Roger talks about in this very post. Margin of Safety. By adopting a large margin of safety you will have extra insurance against any error in your calculation or analyst figures.

      Don’t get too caught up trying to match Roger or try to be to precise. By using the concept of big margins of safety you will more than make up for anything else and a reason why Ben Graham through to Roger Montgomery shout about it from the rooftops.

      • 

        garry
        May 2, 2011 at 3:57 pm:

        hi Andrew,
        many thanks, and yes it is morningstar that i use.

28. 

    Simon Anthony
    May 1, 2011 at 1:11 pm:

    Hi Brad J

    Thankyou for responding to my post. If you read it again you will see that the point I made was in regards to gold as an alternative to common stocks as an inflation hedge. The fact that Warren Buffett has returned more than 20% per annum for 45 years doesn’t change the fact that Graham was wrong. Gold CAN be purchased as an investment tool used as a hedge for inflation. As Roger points out “I reckon he’s glad he took Graham’s advice and ignored Gold”. That maybe true also, but it doesn’t get Graham off the hook for what he wrote. As always history will determine who is right and who is wrong when it comes to investing, it’s up to us to learn from the mistakes we (& others) have made in the past and to try not to repeat them.

29. 

    fred
    May 1, 2011 at 12:03 pm:

    Hi Tim,

    Technology one( TNE ) looks like a good company and thanks but @ p/e 16!

    • 

      Steve I
      May 1, 2011 at 5:59 pm:

      PEs are not welcome here :)

    • 

      Ron shamgar
      May 1, 2011 at 9:01 pm:

      Hi Tim & Fred ,

      I’m no Roger, but I think it’s an A1 or A2 and my Fy11 IV is 73cents. Way too expensive for me. Cheers.

      • 

        Tim
        May 1, 2011 at 10:26 pm:

        Thanks for your thoughts Ron

    • 

      Ash Little
      May 1, 2011 at 9:36 pm:

      Yes correct Steve

      Swear jar Fred

      • 

        Greg Mc
        May 2, 2011 at 7:46 pm:

        Yeah fred, wash your mouth out with soup!

        hur hur…..

      • 

        Ash Little
        May 3, 2011 at 6:57 pm:

        Hey Greg

        That was GOLDen

        Thanks

30. 

    fred
    May 1, 2011 at 11:48 am:

    Hi Roger,

    Warren Buffet said that at one stage he should off bought more Coke shares even if it was a little expensive rather then buying what he did buy @ the time. Good businesses in good sectors.

    • 

      Rici Rici
      May 1, 2011 at 10:22 pm:

      I think this refers to Warren’s view that its better to buy a wonderful business at a fair price than a fair business at a wonderful price.

      I think this also shows Warren’s progression from using Graham ‘absolute current value’ (which often involved buying many ‘last puff cigar type companies’, to one that focuses not just on todays value, but the value tomorrow.

      To put it another way, listen to Roger when he talks about company xyz having an intrinsic value of $10 but rising to $13 in two years time. Which is the figure to focus on?
      (and the answer is not crystal clear because there are numerous other factors to consider, business endurance etc etc)

      • 

        mike
        May 2, 2011 at 11:53 am:

        It would be interesting to know what the Margin of Safety was when Buffett bought Coke if he thought it was expensive. Maybe Coke was trading above his valuation, but Buffett still bought shares anyway.

        In my opinion, Margin of Safety definitely needs to be considered, but if the qaulitative factors of the business are so good and they can’t be quantified, MOS needs to be put into perspective. In other words, a quality company may still be a Buy even if its trading above its intrinsic value (which is an estimate anyway).

      • 

        Steve I
        May 2, 2011 at 8:49 pm:

        Mike,

        MOS still counts, however it is future MOS that is being considered.

31. 

    Richie
    May 1, 2011 at 11:09 am:

    Sorry guys wasn’t a jibe, just a fun joke!

    Ron I think you have a great eye for stock picks, mightn’t have come out the way I wanted it to.

32. 

    Richie
    May 1, 2011 at 8:55 am:

    (continued) All under the watchfully eye of professor Roger Montgomery (who is wheelchair bound from some ancient battle with a technical analyst vilan!)

    No seriously hgl is this an investment quality business?? The business is fragmented but nicely niched. Seems like a strong dollar supports this business as it lowers it’s import costs

33. 

    Richie
    May 1, 2011 at 8:49 am:

    The ‘valuables’ (think the invincibes)

    Ash you can be the guy in the purple latex suit making impossible I/v’s in the blink of an eye

    Ron you can be the guy who has a really big head that swells when he had a bright idea and springs for legs who can jump really high. Why? Cause you ‘jump’ to conclusions (especially about Roger owning gdo!)

    All under

    • 

      Roger Montgomery
      May 1, 2011 at 9:09 am:

      Guys,

      I am watching very closely and I disapprove of any personally directed jibes towards each other. To Mattyc, I will not be publishing your posts unless you use your real name. It is a policy that applies to everyone here – no exceptions.

      • 

        Rici Rici
        May 1, 2011 at 10:24 pm:

        For what its worth i second this.
        I have seen far too many blogs decent into anarchy once personal attacks are allowed in any form.

        Focus on the issues, never the poster.
        Debate the issue, not the credibility of the poster.

34. 

    Richie
    April 30, 2011 at 9:59 pm:

    Hey guys just looking at hgl group (hng).

    What do the ‘valuables’ think?

    Looks like a nifty little business with a decent mos.

    • 

      Roger Montgomery
      May 1, 2011 at 1:59 am:

      Hi Guys,

      (Richie, these comments DO NOT refer to your post at all)

      I am noticing a migration to our blog by seasoned forum posters who wish to promote their own product/view/opinion/stock and redirect you to their sites. To those who might wish to engage in such activity, you may find your efforts more richly rewarded elsewhere.

      I have also recently been informed of comments suggesting these people know, or know someone who knows, my model inside and out. Since the full and complete model I use is new and entirely original and since it hasn’t been revealed to anyone, such statements must be untrue and really lend weight to the argument that you should believe very little of what you read on forums – and another reason why I won’t advocate turning our blog into one.

      Separately there seems to be a an unnecessary debate about a stock called Aurora. My 2013 valuation is $3.91 or thereabouts. If you believe that the venture will become cash flow positive imminently, then the $3.91 offers a high rate of return from the current price today and suggests the stock is cheap. If you don’t believe the cash-flow-positive-imminently argument then as a value investor, you can still do very well, buying other things that do meet your criteria. As a value investor we must assume even our best judgments will sometimes be incorrect and so we must insist on bargain purchase price that allows a margin for error. That is why I don’t have a $7.50, $9 or $13 “valuation” for Aurora. Once again, one can make outsized returns (as many Value.able graduates have demostrated) by sticking to the knitting. You won’t catch every opportunity but that is what waiting for the ‘fat pitch’ is all about.

      To those exploring valuation theory; projecting EBIT and multiplying projected earnings by [a P/E of] 15 is not a valuation.

      And finally, no posts will be published if you use a web-type alias or handle rather than your first or full name. Your first or full name is one of my preconditions to having your posts published here.

      Thanks all and good evening.

      • 

        darrin wong
        May 1, 2011 at 6:44 am:

        HI Roger

        Which Aurora stock are you referring to?

        cheers

        darrin

      • 

        Roger Montgomery
        May 1, 2011 at 8:53 am:

        Have a flick through the comments and you should be able to find it.

      • 

        darrin wong
        May 1, 2011 at 8:07 pm:

        HI Roger

        which blog can I target my search to?

        cheers

        darrin

      • 

        Roger Montgomery
        May 1, 2011 at 9:08 pm:

        Try the search bar at right of the home page.

      • 

        darrin wong
        May 1, 2011 at 9:44 pm:

        Hi Roger

        Did search bar option and typed in Aurora came back with no result.

        cheers

        darrin

      • 

        Rici Rici
        May 1, 2011 at 10:10 pm:

        In the words from Star Wars:

        ‘stay on target, stay on target’

        On i side note, Roger, would you consider periodically creating a thread ‘whats your IV view’.
        In this thread people can talk to their hearts content about different stocks.

        This might help in avoiding contamination in other threads (ie stocks not relevent to the specific thread can just be referred to the generic ‘whats your view’).

        Just an idea

      • 

        Roger Montgomery
        May 1, 2011 at 11:01 pm:

        Hi Rici Rici,

        We had the technogeeks in last week and showed us a list of things we can do to improve navigation etc. We are onto it. Thanks for the suggestion. Its on the list.

      • 

        Rob
        May 2, 2011 at 12:13 am:

        Hi Darren,
        I think it was Luke S who posted this ages ago. As you’re aware Roger’s search bar doesn’t search the comments. If you want to search for Aurora in comments try this in Google.

        aurora site:http://rogermontgomery.com

        Darren if you want to find something else like say MCE just substitute it for aurora like this

        MCE site:http://rogermontgomery.com

        I’ve made a bookmark of the first search i did like this and just change the first word(s).

        Roger, as Luke suggested if you want you can have the Google search embeded in your site and it will search just your site. I’m sure it’s free and works a treat and I don’t think there’s any risk attached.

        Cheers
        Rob

      • 

        Marty
        May 2, 2011 at 6:40 am:

        Thanks for that tip, Rob. I had no idea about the site: option in Google. I have tried many times to find info on the blog about specific things but that makes it so much easier.

      • 

        darrin
        May 2, 2011 at 10:08 am:

        Hi Rob

        thanks

        cheers

        darrin

      • 

        Greg Mc
        May 1, 2011 at 9:45 am:

        ‘The fat pitch’

        The market throws up these opportunities at times. Investors can pick and choose between those that make sense to them and suit their personal requirements and risk profile, and others that they can elect to leave alone. I think that the desire not to ‘miss out’ on an opportunity and therefore have a swing at most things that come along can be very strong and potentially dangerous. The concept of sticking to one’s knitting really strikes a chord with me and means that I leave some things alone, even though I might suspect that there is potentially money to be made (eh, Steve I?). It’d be pretty boring if we all agreed on everything all the time, after all.

        Nice article too, Roger.

      • 

        Steve I
        May 1, 2011 at 6:15 pm:

        Greg,

        It would definitely be boring if everyone always agreed! The whole fun with investing is that you can have 100 people look at a situation and have 100 perspectives. Many of those same people can be successful even though they had a different view.

      • 

        Matt R
        May 2, 2011 at 11:24 pm:

        Steve I

        I would suggest that the fun thing about investing is that you can get 100 people look at the same thing, and come up with 150 perspectives…

        gotta love it, and i do

      • 

        Steve I
        May 3, 2011 at 7:38 am:

        Nice one Matt! I like it.

35. 

    Brian
    April 30, 2011 at 7:56 pm:

    Graham was no static thinker, and his methodology did evolve. Also, although quite a bit of what Ben Graham wrote is still relevant to the modern day investor, if you ask me his most valuable and enduring contribution, especially as represented in “Security Analysis” and “The Intelligent Investor”, is the attitude and ‘tone’ he brought to the whole field of security analysis. (This is most obvious if you think about his historical antecedents.) In his writings he is always considered, detached, calm, patient, and clearly master of all relevant material. He is also an articulate and demystifying teacher. Oh, in his private life he was also a bit of a roue.
    The best so-called value investors seem to have most of these qualities. (Minus, perhaps — but only perhaps — the last.)
    Actually, I think Roger probably qualifies.

    • 

      Roger Montgomery
      May 1, 2011 at 1:08 am:

      Hi Brian,

      Indeed, like all of us, as we experience more, so our mental library expands. In 1949 Ben Graham demonstrated some interest in watching shares prices (rather than values); “Somewhere in the middle of the Bull market, the first common-stock floatations make their appearance. These are priced not unattractively, and some large prices are made by buyers of the early issues. As the market continues to rise…the quality of the companies becomes steadily poorer; the prices asked and obtained verge on exorbitant. One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history. The heedlessness of the public and the willingness of the selling organisation to sell whatever may be profitably sold can only have one result – price collapse.” The Intelligent Investor 1949.

      Then in the 1976 Edition he wrote:

      “…contrary to our investment philosophy…companies that combined major size with a large good-will component in their market price did very well as a whole in the 2 1/2 year holding period…A fact like this must not be ignored…It is clear that at least a considerable momentum is attached to those companies that combine the virtues of great size, an excellent past record of earnings the public’s expectation of continued earnings growth in the future, and strong market action over many years.”

      Then

      • 

        Steve I
        May 1, 2011 at 5:57 pm:

        I think momentum is a very important concept. If it is considered like a pendulum. It (price etc) can swing too far in one direction, much further than expected, but then it will over-correct to the opposite direction.

        This concept is a great way to think of the formation of bubbles and I think Graham’s comments about momentum are very important.

        As Jeremy Grantham has mentioned in the past, generally the value investment school finds it difficult to deal with bubbles and I personally believe that this is an area that should be better understood in order to improve one’s investment strategy.

        I’m not saying this approach is mutually exclusive to value investment. It can, and does, go hand in hand. What I’m trying to point out is that it is a concept that could potentially have a greater level of discussion.

      • 

        Roger Montgomery
        May 1, 2011 at 9:24 pm:

        Steve, we are all open to refinement and improvement. One blogger suggests my approach works well but an ‘edge-case’ exists that the model doesn’t capture. Thankfully I have considered it, modelled it and where we are certain of the outlook we can capture those events. The risk is higher however and so our position is smaller. Apologies I can’t elaborate, but far too much value in the result to hand it over to those who wish to compete.

      • 

        Steve I
        May 2, 2011 at 3:07 pm:

        Black swans are flying this year!

      • 

        Rici Rici
        May 1, 2011 at 10:42 pm:

        This is a very interesting concept that you have highlighted.

        I strongly recommend reading George Soros’s recent books as they cover this in quite good detail (reflexivity).

        I would add another point, which may or maynot be of use to Roger, and that is (in the words of buffett) one can’t be a little bit pregnant.

        In otherwords, there are different schools of ‘value’, just as there are different schools of technical trading etc etc.

        In my opinion the risk of consistently focusing on pure ‘value’ is the risk of the business cycle itself.

        Sometimes its better to just sit on cash rather than lower ones standards through purchasing lower quality ABSOLUTE value plays (Something which Buffett tends to show with remarkable consistency).

      • 

        Steve I
        May 3, 2011 at 7:39 am:

        Rico ricii,

        I have read about the reflexivity concept but haven’t read his books. I think I’ll need to put that one the to-do list.

36. 

    Tim
    April 30, 2011 at 7:29 pm:

    Hi Roger,
    Could you please advise me your MQR for Technology One (TNE).
    Thanks in advance.

    • 

      Roger Montgomery
      May 1, 2011 at 12:51 am:

      Hi Tim,

      I am putting together a new blog post that will include a list of companies and their MQRs. TNE should be among those included. Stay tuned.

      • 

        Tim
        May 1, 2011 at 11:24 am:

        Look forward to it, thanks for your time Roger.

37. 

    DarrenW
    April 30, 2011 at 6:41 pm:

    Hi Roger, I bought your book about 3 months ago and have been a reader of your blog since then. The book was great and was exactly what I was looking for because I knew I wanted to invest in high quality businesses but I wasn’t sure how (and I had not even entertained the concept of calculating a “true” or “intrinsic” value of a company.), So cheers for that!

    I only got into the market less than 6 months ago and just bought a few big name stocks that I liked the look of (eg. WOW, NCM, COH) with the rationale that I should do ok in the long term. Well after reading value.able I sold off most of them (after realising I’d paid more than their worth) and actually started doing some research and value estimating.

    I now own SWL, MML, MCE, ACR, ZGL, FGE, DWS, WOW and WTF and am much more confident I have bought at good prices. ZGL was up 50% after only month so I am certainly impressed with that (althought not getting too excited about short term fluctuations).

    Anyway, I have many questions but I’ll limit myself to 2 for now:

    1. Regarding the above article, you mention “and three year forecast of intrinsic value which updates daily”. How is it possible to have intrinsic value update on a daily basis when the inputs to the formula are only reported half yearly or quarterly?

    2. What’s a realistic average compound growth rate of my portfolio over 5 to 10 years assuming I have mastered the value.able way of investing? I know everyone will have different results and there are variables like whether you reinvest dividends etc. But what’s a good growth rate to shoot for? I would be really impressed with 15-20% pa, but maybe other value.able investors are getting 30-40% pa?

    Thanks and cheers to everyone else who contributes to this blog as well.

    • 

      Roger Montgomery
      May 1, 2011 at 12:50 am:

      Hi Darren,

      In answer to Question 1: COvering all stocks requires a daily dose of updates because while the profits are reported twice a year, there are ‘operating updates’ during the year, then there are share issues and buy backs, acquisitions, mergers and divestments and all of these events impact intrinsic values.

      In answer to question 2: I cannot give you an answer other than to suggest that by acting rationally over very long periods of time, you should be able to to do better than those who don’t act rationally (read Ben Graham’s Mr Market allegory again).

      Finally, be sure you are doing your own research – and thoroughly, and always seek and take personal professional advice.

      • 

        Dabas
        May 2, 2011 at 11:23 am:

        Roger:
        You often mention professional advice and that is fair and square.
        What is difficult is to find reliable professional advice and also make sure its cost is not larger than any profits this advice generates.
        I have tried several such ‘advisors’ and find them to be more likely to be brokers rather than advisors in the sense that they like to peddle a limited number of products that seem to be the ones that generate the most commissions for them.
        My first question to any such advisor will be to ask if they have read your book! :)

      • 

        Roger Montgomery
        May 2, 2011 at 12:24 pm:

        I hear you Dabas. The search is almost harder than the one for a suitable stock.

    • 

      Rob
      May 1, 2011 at 6:50 am:

      Darren,
      Warren Buffet averaged approximately 20% over 40 years. This means his investment doubles every 3.5 years. I’m sure you would be happy with that.
      To average 40%, while it may not be unachievable, it’s probably unrealistic.
      Cheers
      Rob

      • 

        DarrenW
        May 1, 2011 at 1:14 pm:

        Thanks Roger and Rob for your responses, that helps clear up some things in my mind.

        I think I’ve still get a fair bit to learn but I’m confident I’m on the right track with value.able. Cheers.

38. 

    ron shamgar
    April 30, 2011 at 6:24 pm:

    hi everyone,

    interesting article in today’s AFR pg. 43 titled “An alternative view from the peak”. the article is some of the views of Jeremy Grantham head of GMO. he is fond of making big calls, especially recently about Australia’s housing bubble, but thats another matter.

    if you’re too cheap to spend $3 to buy the paper, here are some valuable excerpts:

    “the fact is no compound growth is sustainable….if we maintain our desperate focus on growth, we will run out of everything and crash.”

    “the prices of all important commodities except oil declined for 100 years until 2002 by 70%…..since then the entire decline was erased by a bigger price surge than after World war2”

    he says “Britain doubled their wealth in 100years, Germany in 80, japan in 20 and S. Korea in 15……now china with a population of 1.3billion has started to double their wealth every 10 years or less with India joining the charge….”

    he labels this not just “peak oil” but “peak everything and the greatest challenge facing our species.”

    he says “if china stumbles and good weather helps crops then these events will probably break commodity markets en masse”

    finally, this is Grantham’s investment strategy, “given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and i owned none of them, then i would have to throw myself under a bus……if on the other hand – more likely – they come down, perhaps a lot, then i will grit my teeth and triple or quadruple my stake and look to own them forever!”

    something to think about……enjoy ur weekend.

    • 

      Steve I
      May 1, 2011 at 11:40 am:

      Just read GMO quarterly newsletter online for free and you can get it straight and in full from Jeremy. It’s always a good read.

      • 

        Roger Montgomery
        May 1, 2011 at 3:00 pm:

        Here’s the link: http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf

        His conclusion; “For me personally it will be a great time to practice my new specialty of regret minimization. My foundation, for example, is taking a small position (say, one-quarter of my eventual target) in “stuff in the ground” and resource efficiency. Given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and I owned none of them, then I would have to throw myself under a bus. If prices continue to run away, then my small position will be a solace and I would then try to focus on the more reasonably priced – “left behind” – commodities. If on the other hand, more likely, they come down a lot, perhaps a lot lot, then I will grit my teeth and triple or quadruple my stake and look to own them forever. So, that’s the story.”…is an articulate explanation of the approach I too have adopted and which was discussed here at the blog on 13 Jan 2011: http://rogermontgomery.com/what-does-my-2031-crystal-ball-predict-2/

      • 

        Rici Rici
        May 1, 2011 at 10:51 pm:

        My opinion as to this:

        Refer to Sun Szu art of war: ‘know yourself, know your enemy, a thousand battles a thousand wins’.

        Translation: why do i need to recreate the battlefield, why dont i just wait until i find a battlefield suitable to my strategies.

        I have no skill set when it comes to commodity speculation, so i just stand on the sidelines, waiting for an opportunity for me to apply the skill sets i possess.

      • 

        Jonesy
        May 4, 2011 at 10:14 pm:

        Whoa. Just read the whole document – thanks for the heads up. I’ll join you in recommending everyone has a read of it. Very very interesting points (and I got my calculator out a few times to check as it didn’t seem possible!) – it gives you a real reality check and certainly doesn’t help when you’ve just finished reading Cormac McCarthy’s “The Road” and you glimpse what the post apocalyptic future without sustainable resources could be like.

    • 

      Gavin
      May 1, 2011 at 1:06 pm:

      I haven’t read the AFR article but it seems to be based on the latest GMO quarterly letter. Regardless of agreement or not with Grantham – I have never found reading his articles a waste of time.

      http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf

    • 

      Ilya
      May 1, 2011 at 1:50 pm:

      The cries of “we are running out of stuff” have been with us since the beginning of time and yet the “stuff” is more plentiful and cheaper than ever. Measured is real money i.e. gold, the price of oil, for example, right now is at a record low.

      IMHO the various “peak theories” are a construct of multitude of miserablists who see every additional human being born into this word as an extra drain on scarce resources. A more thoughtful observation however shows that human beings are inventors, thinkers and producers capable, providing the governments let them, of solving shortages and crises of any nature.

      I personally think that current commodity prices have much more to do with frantic money-printing than any real shortage of commodities.

      • 

        Roger Montgomery
        May 1, 2011 at 3:05 pm:

        I very worthy counter-argument Ilya. Thank you for your contribution.

      • 

        Ash Little
        May 1, 2011 at 5:50 pm:

        Yes IIya,

        Your ruler story really go me thinking

      • 

        Craig
        May 1, 2011 at 6:05 pm:

        Hi llya
        I enjoyed your post and I agree. Smells very “this time its different” to me.
        Cheers

      • 

        Steve I
        May 1, 2011 at 6:07 pm:

        Ilya,

        I’m also pretty sure we didn’t have 7,000,000,000 people living on the planet since the beginning of time. We also haven’t had the majority of the world population moving to a middle class type lifestyle with all the demand on resources that ensues (food, water, energy).

        It’s easy to pass things off as a ‘its different this time’. However, based on the facts and if you consider the facts without any pre-conceived ideas or agenda (e.g. ‘miserablists’) then this is actually a problem.

        It is my personal view that we have both money printing and a shortage problem. The shortage problem hasn’t yet been hit, but it is starting to kick in. The idea of infinite resources in a finite world doesn’t make too much sense to me. However the idea of compounded population growth, on the back of cheap energy over the past 100 years, is a reality.

      • 

        Rob
        May 1, 2011 at 7:15 pm:

        Ilya, I’d love to agree with you….but.
        I’ve posted here before about Prof Al Bartlett of Boulder City Colorado. You can go to his website or google youtube Prof Al Bartlett and you’ll find his videos.
        His message is quite simple and he uses very simple arithmetic to explain it.
        His premise is “The Greatest Sortcoming of the Human Race is our inability to Understand The Exponential Function.”
        Prof Bartlett addresses many issues, population growth, peak oil etc but if you watch this video on youtube at about 3 min 30 sec he uses a wonderful analogy with bacteria to explain it to us. http://www.youtube.com/user/wonderingmind42#p/c/6A1FD147A45EF50D/2/CFyOw9IgtjY
        All 8 parts of the lecture are well worthwhile but takes over an hour to watch.
        When you watch it, ask yourself at what time will we know we’re in trouble and how quickly and drastically will our inventers, thinkers and producers need to solve them.
        BTW, not only is our inability to understand the enormity of the exponential function a problem but all the things we righteously do make the situation worse.
        Improvements in medecine, public health, sanitation, peace, law and order all lower the death rate which helps to increase world population which makes the problem worse.
        So what makes it better? Contraception, abortion, war, famine, disease, murder, accidents and pollution all increase the death rate, lowers population growth and helps to improve the situation.
        Now call be a miserablist, but before you do watch his lecture and then let me know what you think.
        BTW, I think that inventors, thinkers and producers will eventually embrace Prof Al’s thinking.
        Cheers
        Rob

      • 

        Roger Montgomery
        May 1, 2011 at 9:14 pm:

        And a worthy rebuttal…very interesting this one, thank you Graduates!

      • 

        Ash Little
        May 1, 2011 at 9:44 pm:

        Thanks Rob,

        I found them very interesting

      • 

        Ilya
        May 2, 2011 at 11:02 am:

        Rob, I think while you mention it, you actually overlook a very important point – the current population growth is not driven by higher birth rates but improvements in longevity. As somebody smart once put it “we are not breeding like rabbits, but rather don’t die like flies”. These improvements are not infinite. Once the wave of baby boomers start their transition into the afterlife the situation, in the West at least, will reverse dramatically.

        Most of the world right now is at below replacement birth rates. The problems with much of the “peak everything” agenda is to extrapolate current population growth figures exponentially into the future and see a huge problem. But if we consider declining birth rates in much of the West, South and North America, Asia and China’s one child policy, the current population boom cannot be sustained.

        I am actually more worried about the situation where the humanity will struggle to maintain current living standards on declining human capital. Maybe we can rely on Africa and the Middle East to supply all human capital for the world’s needs but I have my doubts. This is already a huge problem in some countries. For example in my native Estonia, the population is projected to halve by 2050 – imagine the impact on tax base, welfare system, healthcare… economic growth.

        I am much more convinced by Julian Simon’s arguments that are summarised in this article:
        http://www.wired.com/wired/archive/5.02/ffsimon_pr.html

        From the article:
        —————————————————————–

        The paradox is that those abstract principles and speculative analyses seem so very logical and believable, whereas the facts themselves, the story of what has happened, appear wholly illogical and impossible to explain. After all, people are fruitful and they multiply but the stores of raw materials in the earth’s crust certainly don’t, so how can it be possible that, as the world’s population doubles, the price of raw materials is cut in half?

        It makes no sense. Yet it has happened. So there must be an explanation.
        And there is: resources, for the most part, don’t grow on trees. People produce them, they create them, whether it be food, factories, machines, new technologies, or stockpiles of mined, refined, and purified raw materials.

        “Resources come out of people’s minds more than out of the ground or air,” says Simon. “Minds matter economically as much as or more than hands or mouths. Human beings create more than they use, on average. It had to be so, or we would be an extinct species.”

        The defect of the Malthusian models, superficially plausible but invariably wrong, is that they leave the human mind out of the equation. “These models simply do not comprehend key elements of people – the imaginative and creative.”

        ————————————————-

      • 

        Roger Montgomery
        May 2, 2011 at 12:23 pm:

        Great stuff Ilya. reading with interest.

      • 

        Ilya
        May 2, 2011 at 2:31 pm:

        I have to give one proviso; I think the Malthusians may be right for the wrong reasons. While I don’t think the peak theories are correct, the environmental movement has clearly captured the imagination of our political classes. This means politicians are likely to accept these theories as gospel and apply the wrong cures. There is a real danger that these projections will become a self-fulfilling prophecy by the virtue of governments slapping restrictions and taxes on use and exploration of resources instead of letting human ingenuity create more resources and find substitutes.

      • 

        Steve I
        May 3, 2011 at 7:43 am:

        Illya,

        Constant government intervention and regulation is a significant factor and most peak theorists understand this fact. They have not allowed the necessary developments and innovation that is require due to increasing levels of intervention to such a point that nothing is done to fix the problems.

      • 

        Ian
        May 1, 2011 at 7:23 pm:

        Absolutely right Ilya, Malthus was wrong in the 1800s and he is still wrong today. I think it was a Saudi oil minister that observed (paraphrased) we did not move out of the stone-age because we ran out of stones

39. 

    Robert
    April 30, 2011 at 5:24 pm:

    Hi All,

    The ABC’s Catalyst program did a special on peak oil this week.. For anyone that didn’t catch it: http://www.abc.net.au/catalyst/oilcrunch/
    we seem to be headed to an oil crunch… Soon.

    Rob F

    • 

      Ash Little
      May 2, 2011 at 6:00 pm:

      Hi Robert
      Thanks for that,
      Makes MCE’s future look bright

40. 

    Simon Anthony
    April 30, 2011 at 12:38 pm:

    WHAT DID BENJAMIN GRAHAM GET WRONG ?

    In regards to alternatives to common stocks as inflation hedges Graham wrote (The intelligent investor 4th Ed.) “The standard policy of people all over the world who mistrust their currency has been to buy and hold gold.In the past 35 years the price of gold in the open market has advanced from $35 per ounce to $48 in early 1972-a rise of only 35%. But during all this time the holder of gold has received no income return on his capital, and has incurred some annual expense for storage. Obviously, he would have done much better with his money at interest in a savings bank, in spite of the rise in the general price level. The near-complete failure of gold to protect against a loss in the purchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in ‘things’ “.

    Investment philosopher Peter L. Bernstein felt that Graham was ‘dead wrong’ at the time about gold and other percious metals as an inflation hedge as history proved Graham was wrong as over the next twenty years the price of gold outpaced inflation. Even today some 40 years later at $1500 per ounce the price has increased by 4285% over 40 years! That equates to an Average interest rate of 9.87% compound over the last 40 years!.

    • 

      Steve I
      April 30, 2011 at 2:55 pm:

      Simon,

      Nice point. The heart of value investing finds it difficult to truly understand the degradation of paper currency. I think there is a strong bias to ignore this issue.

      • 

        Roger Montgomery
        May 1, 2011 at 12:41 am:

        Interesting Steve and Simon. 1) I own Gold. 2) I consider myself a value investor. 3) Warren Buffett does too and his “heart of value investing” has returned more than 20% per annum for 45 years! I reckon he’s glad he took Graham’s advice and ignored Gold.

      • 

        darrin wong
        May 1, 2011 at 6:57 am:

        HI Roger

        Your most recent post of the interview on switzer you said that your fund is currently holding only 12 stocks and 12-13% invested. Any particular reason for holding a large proportion of the funds in cash?
        Also you mention in the above post that you own gold, do you mean physical gold or gold companies?

        cheers

        darrin

      • 

        Roger Montgomery
        May 1, 2011 at 9:05 am:

        Hi Darrin,

        If you are an investor in the fund, you will have private access to the holdings and thoughts. I own futures contracts – just like Jim and George.

      • 

        darrin wong
        May 1, 2011 at 8:03 pm:

        HI Roger

        This is the montgomery private fund. Minimum investment is $1,000,000.

        Are there any plans for a retail fund for small investors?

        cheers

        darrin

      • 

        Roger Montgomery
        May 1, 2011 at 9:08 pm:

        Yes there are. Stay tuned.

      • 

        darrin
        May 2, 2011 at 4:50 pm:

        Hi Roger

        Looking forward to investing in that one.
        This would save me a lot of time and research and blogging. Happy to trust you with my funds.

        cheers

        darrin

      • 

        John M
        May 2, 2011 at 10:34 pm:

        Hi Roger,

        That is music to my ears.

      • 

        Greg Mc
        May 1, 2011 at 9:57 am:

        The fund is pretty new too, Darrin. I’m not sure that current prices justify immediate insertion of all of a fund’s cash into the market.

      • 

        darrin wong
        May 1, 2011 at 8:04 pm:

        HI Greg

        Your comments make sense. Thanks

        darrin

      • 

        Scott T
        May 1, 2011 at 1:32 pm:

        Darrin,

        Roger is the most patient, skilled and disciplined fund manager / investor / entrepreneur, I have ever met, and I’ve met plenty ( I’m old). Rogers approach takes time, as his new fund receives capital inflows, he is under no false mandate to be fully invested, or maximum 20% cash or any of the other artificial barriers fund manager erect for themselves.

        Rogers fund is invested as he sees fit, if he cant find bargains today, the cash stays in the bank.

        All the best

        Scott T

      • 

        darrin wong
        May 1, 2011 at 8:06 pm:

        Hi Scott

        Thankyou for your comments. Helps me to learn more about investing. There are no hard and fast rules.

        cheers

        darrin

      • 

        Steve I
        May 1, 2011 at 11:38 am:

        Roger,

        Your comment belies the fact that gold is just money. It’s certainly not a case of invest 100% in stock or invest 100% in gold. Sometimes gold is good and sometimes stocks are good and sometimes both. Gold has substantially outperformed Berkshire for the past 10 years.

        Not only that, Buffett hasn’t ignored gold in private. Yet his public comments have reinforced the whole ‘barbarous relic’ concept.

      • 

        Rici Rici
        May 1, 2011 at 10:59 pm:

        Has anyone considered that it might just be a prudent way to potentially achieve ‘alpha’ whilst keeping the majority of the funds safe.

      • 

        Roger Montgomery
        May 1, 2011 at 11:04 pm:

        Returns to end of Feb: +3.28% versus benchmark +1% (12% invested).

      • 

        Paul Rehill
        May 2, 2011 at 11:25 pm:

        That 20% sure beats 9.87% compound which is not very good, and not good if your purchasing and/or selling timing turns out to be poor.

    • 

      Brad J
      April 30, 2011 at 5:14 pm:

      Thanks Simon,

      I have to say that these numbers don’t look nearly as good if you go back just a short period of time when gold was trading under $800. I would still rather invest my money in companies who produce products where there is more certainty about exactly what they will get for their product. Even better, if there is a significant moat they will have the ability to increase prices for what they sell at a stead rate. Not to say gold won’t go higher, I just think that from my point of view it pays to have absolute certainty about where I invest. Don’t forget that Buffett has achieved a 20% return over a similar time frame, which is double the return you mention for gold, so maybe Graham wasn’t so wrong.

      • 

        Steve I
        May 2, 2011 at 8:29 pm:

        Brad, consider that it completely depends on your perception of certainty. The things that you deem certain will be perceived less or more certain by others.

41. 

    Brad J
    April 30, 2011 at 11:07 am:

    Is MOS the most important?

    Yes, extremely important but not as important as choosing the right business. WB said time is the friend of the wonderful business but the enemy of the lousy business. So I would argue that choosing the right business and staying with it are the most important things. Provided you don’t pay a totally silly price for the business you will do well. He also said the best investments he ever made were when the numbers almost told him not to as he felt so strongly about the business.

    Looking at the ORL graph above. If you had purchased above intrinsic value in late 2007 and held on you would have doubled your money. This is even after the share price fell sharply the following year. BTW I do try to buy with a significant MOS in just about all cases.

    I encourage all to do their research on FGE. With IV over $9 and the current share price at around $6 there is a significant opportunity and a good MOS. It may go down or up in the short term, but if it is the right business (I think it is) then time will reflect its true value.

    • 

      Roger Montgomery
      May 1, 2011 at 12:38 am:

      Spoken like a true Value.able graduate!

    • 

      Paul Rehill
      May 2, 2011 at 11:17 pm:

      Hi Brad

      FGE have a 2013 revenue target of $500m (2010 revenue was $247m). The question is how big can they get?

      Using a RR of 15%, my IV for FGE is $7.16 at 30/6/11 rising to $8 in June 2012 and $9 in June 2013. This assumes FGE:
      – earns 37% on equity per share at June 2010
      – earns 31% on retained earnings
      – has a POR of 19% for 5 years which increases to 90% (as I have a question mark on how big they can get beyond 5 years so drop the POR to be conservative)
      – investors will not pay more than 10 times earnings in 10 years time.

42. 

    Michael
    April 30, 2011 at 11:07 am:

    Hi Roger,

    Are you able to comment on the lessons from the Qantas chart in 2008. In the first part of the year the price seems to be well below IV after the price falls – maybe justifying a buy. Then in the second half of the year the price continues to fall, but the IV falls even further, and the stock that you may have purchased at a discount is now at a premium to IV.

    Maybe the answer is don’t buy an airline in the first place.

    Thanks

    • 

      Roger Montgomery
      April 30, 2011 at 2:52 pm:

      Spot on Michael – avoid capital-intensive businesses.

      • 

        Steve I
        May 2, 2011 at 8:31 pm:

        Like Transuban, for instance?

        Sorry Roger, I had to poke :)

      • 

        Roger Montgomery
        May 2, 2011 at 11:02 pm:

        You haven’t been keeping up to date with your reading…

      • 

        Steve I
        May 4, 2011 at 8:47 pm:

        Sorry Roger, I don’t follow…?

43. 

    fred
    April 30, 2011 at 10:21 am:

    Hi Darrin wong,

    Tower Limited ( twr ) is looking very good in my book but do your own research of course and seek professional advice

    Good luck

    Hastie Group Limited ( hst ) is one that I owned before value-able, Blue scope steel ( bsl ) is another. Thanks always Roger

    • 

      darrin wong
      April 30, 2011 at 4:36 pm:

      HI Fred

      Thankyou for your post. Will have a look into tower.

      cheers

      darrin

44. 

    Matthew R
    April 30, 2011 at 9:35 am:

    I’m reading Klarman’s Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor at the moment. I found this was an elegant summary of discount rates and decided to share it here for everyone to read.

    ——– The Choice of a Discount Rate ———– (p. 125-127)

    The other component of present-value analysis, choosing a discount rate, is rarely given sufficient consideration by investors. A discount rate is, in effect, the rate of interest that would make an investor indifferent between present and future dollars. Investors with a strong preference for present over future consumption or with a preference for the certainty of the present to the uncertainty of the future would use a high rate for discounting their investments. Other investors may be more willing to take a chance on forecasts holding true; they would apply a low discount rate, one that makes future cash flows nearly as valuable as today’s.

    There is no single correct discount rate for a set of future cash flows and no precise way to choose one. The appropriate discount rate for a particular investment depends not only on an investor’s preference for present over future consumption but also on his or her own risk profile, on the perceived risk of the investment under consideration, and on the returns available from alternative investments.

    Investors tend to oversimplify; the way they choose a discount rate is a good example of this. A great many investors routinely use 10 percent as an all purpose discount rate regardless of the nature of the investment under consideration. Ten percent is a nice round number, easy to remember and apply, but it is not always a good choice.

    The underlying risk of an investment’s future cash flows must be considered in choosing the appropriate discount rate for that investment. A short-term, risk-free investment (if one exists) should be discounted at the yield available on short-term U.S. Treasury securities, which, as stated earlier, are considered a proxy for the risk-free interest rate,” Low-grade bonds, by contrast, are discounted by the market at rates of 12 to 15 percent or more, reflecting investors’ uncertainty that the contractual cash flows will be paid.

    It is essential that investors choose discount rates as conservatively as they forecast future cash flows. Depending on the timing and magnitude of the cash flows, even modest differences in the discount rate can have a considerable impact on the present-value calculation.

    Business value is influenced by changes in discount rates and therefore by fluctuations in interest rates…….

    At times when interest rates are unusually low, however, investors are likely to find very high multiples being applied to share prices. Investors who pay these high multiples are dependent on interest rates remaining low, but no one can be certain that they will. This means that when interest rates are unusually low, investors should be particularly reluctant to commit capital to long-term holdings unless outstanding opportunities become available, with a preference for either holding cash or investing in short-term holdings that quickly return cash for possible redeployment when available returns are more attractive.

    • 

      Roger Montgomery
      April 30, 2011 at 9:51 am:

      Thanks Matthew, Is your copy signed?

      • 

        Matthew R
        April 30, 2011 at 4:23 pm:

        Not exactly…. it is a PDF

        Copyright issues aside, at this stage in my investing life I’m more interested in knowing rather than owning the content (especially at up to $1,000 a copy). I’m sure Mr Klarman understands.

        It is an excellent book and I would recommend it to anyone who has not read it

      • 

        Tony Connellan
        May 1, 2011 at 12:31 pm:

        Mathew R
        Is the pdf available for sale? If so how much and where ? I like to read all around Value investing but the book on Amazon is too expensive for me. Hope you can answer.
        Tony Connellan

      • 

        Roger Montgomery
        May 1, 2011 at 3:03 pm:

        Hi Tony,

        I am not sure I can allow anyone to respond with anything other than the purchase of the book here at the site. I won’t be able to publish a response that might show you how to get a “pdf” version.

      • 

        Matthew R
        May 2, 2011 at 12:56 am:

        I understand Roger

        Tony – patience and resourcefulness, and it will soon find you :)

        Best wishes

      • 

        Gavin
        May 2, 2011 at 10:44 am:

        Hi Mathew

        I’m sure Seth Klarman would understand your point. Otherwise he would have had his copyright lawyers closing down the free net versions.

        Actually I recon he probably thinks it’s totally ironic that his investment book now fetches a speculative premium.

        I can’t work out what value a signature adds to the content either?

      • 

        Marty
        April 30, 2011 at 10:36 pm:

        Does that increase the intrinsic value???

        But seriously, unlike most people on this blog, I am an absolute newbie to buying stock. I bought my first in the dip after the Japan earthquake (for no other reason than I had some spare money then). I remembered Roger saying to be greedy in the book, so I put what I thought was a ridiculous buy price and what do you know, I got them!

        By the way, my first post, so thank you Roger and the Room for all you have done for people like me. I love getting up each morning and seeing what has gone on.

      • 

        Roger Montgomery
        May 1, 2011 at 1:10 am:

        Hi Marty,

        Welcome, learn as much as you can. Take a very slow and cautious approach. Diversify your holdings and the sources of your advice, but always seek and take personal professional advice. You won’t find personal advice here.

      • 

        Justin S
        May 2, 2011 at 11:45 am:

        Have not written in awhile, but could not help myself….

        Thanks Matthew, Is your copy signed?

        Very funny response Roger!
        (from a lowly owner of a much tabbed, underlined and highlighted pdf copy)

        Does it sit on your bookshelf in between a Buffett-signed copy of Cunningham’s ‘Essays of WB’ and a Munger-signed ‘Poor Charlies’???
        (it bothers me that you may indeed have a genuine ‘yes’ response to this question!)

        On the topic of QAN and other such companies, I like a Buffett analogy I read awhile back that I thought I would share….

        A successful businessman gets a letter from a far-away cousin to inform him that an equally long-lost relative has just passed away. The letter speaks of their lack of funds and requests some financial assistance to provide the relative with a decent funeral. The businessman promptly provides the assistance along with a short note of consolation. Only a few weeks later however, he receives another letter stating that the deceased-relative did not own a suit and could more funds be provided to cover the cost of the suit he was buried in? Once again, slightly more warily, the businessman complies with the request with the expectation that this will be the end of the drama. However, another few weeks pass and a third letter arrives, once again requesting more money to cover the cost of the suit. This time, the furious businessman, wondering why he should continue to fork out for the same suit, writes out an indignant response. He soon gets a reply back… it turns out that the suit that had been used in the burial was rented!

        cheers
        Justin

      • 

        Roger Montgomery
        May 2, 2011 at 12:27 pm:

        I do have a small collection of personally autographed books from a bunch of authors.

45. 

    Jim
    April 30, 2011 at 8:32 am:

    Hi Roger
    Thanks for a great article. I thought MOS was the most important thing-it is still second.

    The most important thing to me is avoiding the iSofts, Nufarms of this world even at a good margin of safety. I think the community would agree that C4-5 businesses are not worth venturing into even with high MOS

    Cheers
    Jim

    • 

      Greg Mc
      May 1, 2011 at 10:06 am:

      Agreed, Jim. There’s no MOS with a poor business.

46. 

    Nick Mason
    April 29, 2011 at 11:34 pm:

    I’ve been reading Warren Buffets biography recently, ‘The Snowball,’ and as well as containing much information on Warren there is also a lot on Ben Graham which readers of this blog might find interesting.

    Graham was an intensely intellectual man who was also a serial womaniser. Often during dinner parties he would leave abruptly to go upstairs to his study to work on mathematical problems, read poetry or listen to opera. Graham said that he remembered the things he learned far better than the people he met and in the end retired from investing to concentrate more on these intellectual interests.

    Another quote and idea propagated by Graham, and which Buffet said were important words on the subject of investing were,

    “Investment is the most intelligent when it is the most businesslike.”

    When you consider that Value.able investors, when contemplating buying shares in a company, view this as buying a part of the overall business, you’ll see the logic of these words. It also underlines the incredible importance of thorough research and due diligence when contemplating a purchase.

    Best Wishes to all.

    • 

      Paul Rehill
      May 2, 2011 at 10:48 pm:

      Hi Nick

      I like the important compounding investment theme Alice Shroeder delivers in The Snowball. This is reinforced in Poor Charlie’s Almanack as one of Charlie’s big mental models as well as references to the compound interest tables he has on hand.

47. 

    Ron shamgar
    April 29, 2011 at 9:48 pm:

    Hi, I was thinking today about the blog and realized that there’s about $300million sloshing around here looking at the same 25-30 stocks.
    I worked this out by looking at Rogers Facebook page fans of 1500+ and multiplying that by $200k of an average investors funds.
    Now if you can imagine that’s about $10million for each valuable stock mentioned here.
    no wonder that when Roger mentions a company he likes or owns price move dramatically. Zicom was capped at $60million when Roger mentioned it. You could say that currently approximately 10% of this company is now owned by this blog’s members….

    Something to think about for future AGMs or as a blocking stake for a low ball takeover offer!
    ;-)

    • 

      Lei Lei
      April 29, 2011 at 11:05 pm:

      Your assuming quite alot there.
      Not all of us follow exactly what Roger does either. Zicom did not make my portfolio!

      • 

        Roger Montgomery
        April 29, 2011 at 11:41 pm:

        Great to see independent thinking Lei Lei. Good stuff!

      • 

        zoran
        May 1, 2011 at 3:21 pm:

        ZICOM

        I also do not have Zicom in my portfolio.Reason is that, by the time I heard about it ,it doubled.
        Am still having sleepless nights about it.

        Aiiiii.

        Cheers
        Zoran

      • 

        Ron shamgar
        April 30, 2011 at 12:05 am:

        I am quite certain bloggers here own MCE,FGE,VOC,ZGL,DCG,ORL,etc….

      • 

        Roger Montgomery
        April 30, 2011 at 12:34 am:

        If that is true, I suspect there would a lot less after the last week or two…

      • 

        Ash Little
        April 30, 2011 at 2:02 am:

        If we get a nice 20-30% pullback then alot more of us should be owning these stocks.

        Forget the price movements and concerntrate on the business in my view

      • 

        zoran
        May 1, 2011 at 3:23 pm:

        I agree Ash.I still own same number of the above and will double on them should they drop by percentage you mention.
        Cheers
        Zoran

      • 

        Ron shamgar
        April 30, 2011 at 7:06 am:

        But seriously Roger, this community one day can influence the outcome of company directions. Imagine bloggers here owned a combined 10% of ITX. We could have had a blocking stake from getting it take over on the cheap!
        Even though this is by no means a newsletter or investing advice, I am aware of one investor newsletter who has used it’s members to vote in tandem to block a low ball takeover and delisting of a company recently.

        Just a thought…

      • 

        Rob
        April 30, 2011 at 1:22 am:

        I agree Lei, Lei. I don’t know how you could assume an average of $200K and even if you did it would mean it would all have to be liquid to start off with. I guess I disagree with the sloshing around bit.
        I’m certainly not in all the stocks Ron mentions below and not anywhere near the extent that he mentions above and Ron, I do have a portfolio greater than your average.
        BTW, I’d like to be better represented in the portfolio you put up last week. It’s pretty good.
        Cheers
        Rob

      • 

        Ron shamgar
        April 30, 2011 at 10:39 am:

        It’s obviously a very rough estimate but I wouldn’t be surprised if it’s in the ball park. Don’t forget many people here sold a lot of their blue chip junk after reading Rogers book.
        Regarding the portfolio, I would probably take out GDO at the moment as the forthcoming debt funded acquisition changes the risk profile of the company.
        Thanks for your feedback.

    • 

      Michael
      April 30, 2011 at 10:59 am:

      When Roger mentions a stock, the price may rise temporarily, particularly if it is a small cap. However, if the only buyers of the stock are from this blog, guess what happens after all bloggers have bought? Thats right, the price will fall without any buyers.

      The point I am making is that company must continue to perform well and the price be justified by its fundamentals for the weighing machine to keep the price rising over time. We are sometimes seeing a little too much attention given to a few short term votes for stocks.

      • 

        Michael Horn
        May 30, 2011 at 11:03 pm:

        Actually of the stock mentioned by Ron Shamgar on 30/4/11 – MCE, FGE, VOC, ZGL ,DCG and ORL – I do not hold any of them. My view on investing is that it is better to find these hidden gems oneself, those flowers that blush unseen, before their names are bandied about. I look to the poet Gray for inspiration, who wrote:

        “Full many a gem of purest ray serene
        The dark unfathom’d caves of ocean bear:
        Full many a flower is born to blush unseen,
        And waste its sweetness on the desert air.”
        — Thomas Gray (An Elegy Written in a Country Churchyard)

        Also, these days to ensure I invest time and effort doing my homework, I have a rule that my minimum investment is $30K. When I used to invest smallish amounts (circa $5K), I was loath to expend more than a few hours investigating a stock, but $30K or more helps me to focus my mind.

48. 

    darrin wong
    April 29, 2011 at 8:24 pm:

    HI Roger

    Another great blog.

    You are the Guru of value investing.

    cheers

    darrin

49. 

    Ash Little
    April 29, 2011 at 7:00 pm:

    Great post Roger,

    I am personally indebted to you for teaching me MOS.

    This is this most important lesson anyone can ever learn

    Thank You

50. 

    Jonesy
    April 29, 2011 at 6:40 pm:

    Roger – I think there’s a need for a FAQ section on the blog, not sure if this has been mentioned before – recurrent questions and topics seem to include:
    – calculating future equity per share
    – source data for forecast earnings and dividends per share
    – choosing required return
    – what constitiutes a margin of safety
    – whether it’s OK to buy with no margin of safety to IV if future IV is forecast to increase at a good clip
    – whether / how to include newly raised capital / newly issued shares in forecast estimates of IV
    I’m sure there’s lots more I’ve missed. I know there’s no hard and fast answers for some of these, but at least it will give some guidance for the people new to the site and hopefully it will stop the blog getting increasingly clogged with the same questions, I know you’re trying to cut down on the clutter!

    • 

      Roger Montgomery
      April 29, 2011 at 10:34 pm:

      Already being planned and scoped Jonesy…We have planned continual improvement and more features.

    • 

      Andrew
      May 2, 2011 at 10:49 am:

      I think it would help, especially to help avoid the same posts come up over and over again. However, i think one problem is that we need to also promote discussion and the answers to some of your areas are very much up to interpretation, with discussion comes the chance to think about what we do and be open to improvements.

      Roger, may i suggest instead of a question and answer style thing that you simply offer some general guideline as to these answers, similar to what you do in posts. That should help the people who want to know the asnwer and learn about it but also provide ebnough of an opening for people to disucss these concepts a bit more.

      I look forward to seeing osme of these new improvements Roger, this bog is great and making it even better will make this a great class of knowledgable thinkers to develop the future of value investing. Who knows maybe one day people will be looking to a Sydney? based fund manager, his book and the movement/community (take your pick) he helped start to learn about the art of value investing.

51. 

    Parag
    April 29, 2011 at 6:14 pm:

    What are the 2 lines Roger? Are they your min (continued performance) and max (analyst estimates of future) valuations?

52. 

    Luke
    April 29, 2011 at 5:28 pm:

    Hi Roger and Room,

    I wrote a similar piece of charting software after reading your book a few months ago and came to the same conclusion. Stocks like DCG and ORL show a very close correlation between the price and the value.able IV model over time. Looking at those types of plots makes it very easy to see that price will catch on to the IV over time. Glad to see we are on the same wavelength.

    I did find a few stocks that gave different outcomes but most of my data was sourced from a script that ran over commsec (and therefore the data was often inaccurate). I updated the data for the businesses I was most interested in from their financial reports. Funnily enough, WOW has traded above IV for a lot of the recent history.

    These plots also let me adjust the RR until I found what I consider the “market RR” where the price was closest to the IV over time. Of course, my RR could be different to the “market RR” but it is interesting nonetheless.

    I see that in your graph, you have a horizontal IV line for each year. In my program, I interpolated a straight line between the reported points per year which, in the case of ORL, gave a very close fit until that recent half year report came out. I expect that your method of visualisation is superior since it focuses more on yearly performance.

    Cheers,
    Luke

    • 

      Roger Montgomery
      April 29, 2011 at 11:21 pm:

      Hi Luke,

      Thank you for the kind compliments. The team that built them work for Nintendo and EA Games, Google and Porsche. They really are some of the best in the world. Combining their expertise and knowledge with the best data in the world and updated daily has really been helpful to say the least.

      I am certain the guys however would be delighted to receive your feedback. I will pass it on.

      Regarding Market RR’s – I remember thinking about this even at university and wondering; why do I need to know what the price is, when its already there? The point of estimating intrinsic value is not to come up with the price!

53. 

    Tim Phelps
    April 29, 2011 at 5:09 pm:

    I have been generating these exact type of graphs, tracing IV and price for certain stocks on my computer. I’m pleased to say that my ORL, TLS and QAN graphs look quite similar to Roger’s, but the process of entering and formatting data in Excel is so painful! Oh what I would do for this software!

    Roger I just had a question about the ORL chart, why is the IV in 2006 positive even though they lost money in that financial year?

    • 

      Roger Montgomery
      April 29, 2011 at 11:14 pm:

      Ah Tim, 11 secret herbs and spices! Seriously, we’ll get to that in time.

      • 

        Tim Phelps
        April 29, 2011 at 11:47 pm:

        Haha can’t wait, Colonel Montgomery

54. 

    Andrew
    April 29, 2011 at 4:59 pm:

    Ben Graham is no doubt one of the fathers of value investing. Like you Roger i believe that he has a lot to add ot a value investors arsenal but also some things which i disagree with.

    I think it is obvious he is bang on the money in regards to the voting/weighing machine analogy, there have been so many examples of this and you have given some more above Roger. Thankyou for that. Also, Margin of safety is probably the most important investing rule to come out.

    I do however think the whole cigar butt thing was not a good strategy and he was way too overly diversified. You could almost say that part of his strategy was borderline trading rather than investing. That could be blasphemous i know but he would hold numerous positions in lots of companys and would sell as soon them in short time frames if they hit intrinsic value. I could be completley wrong its been a while since i read up on graham and going by what i loosley remember.

    I tend to be more Buffet/Munger than Graham. I believe that we should only focus on quality companys and not just any company under intrinsic value. This takes even more guesswork out of investing as the companys can almost run themselves.

    What you say is completley true roger, if you focus on the long term rather than short term and make decisions on the long term value and performance of the underlying business you will become such a better investor.

    Thanks for the post Roger and keep up the good work. Hope everything is going well down motgomery HQ

55. 

    Emily
    April 29, 2011 at 4:16 pm:

    Ahhhhh, today is a good day to (try to) turn the stock market off. Particularly when you have no available funds to buy at these delicious prices. Sob.
    Well done to those who went on a shopping spree today ;-)

    • 

      Ash Little
      April 29, 2011 at 6:58 pm:

      Hi Emily,

      Hope you had a great trip OS.

      Personally I am not finding things overly cheap ATM

      I will keep my cash at the ready

    • 

      Ilya
      April 29, 2011 at 9:10 pm:

      Yep. My feeling exactly. I bought some stocks yesterday and hey presto, could’ve bought more cheaper today. I have to work on my timing. I’ll just have to turn the market off for now and concentrate on IV :-)

      • 

        Rob
        April 30, 2011 at 1:06 am:

        Ilya,
        I agree. It’s one of the most difficult things to do. When you pick the stock and employ the right MOS that will be your buy signal. Patience, it’s hard eh?

    • 

      Ron shamgar
      April 29, 2011 at 9:35 pm:

      No shopping spree just yet, but soon….

      • 

        darrin wong
        April 30, 2011 at 7:22 am:

        HI Ron

        Looking forward to joining the shopping spree

        Last few weeks having trouble finding stocks with good discounts to IV.

        cheers

        darrin