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What do you know?

What do you know?

I took an Anzac-weekend break from analysing companies and valuations.

It’s the 20th anniversary of the launch of the Hubble Telescope, which provided the world with new insights into life, the universe and everything. Insights are what this blog is all about, and many of you have insights that are extraordinarily valuable and worth sharing.

Around October last year I received a tip to look at Decmil and Forge. That’s all that was said; “Roger, you should have a look at Forge and Decmil”

So I did. And the rest, as they say, is history. It turned out Forge qualified as an ‘A1’ company and Decmil was right up there too. Both were trading at large discounts to their intrinsic values. That’s two from two.

Another contributor has insights into healthcare stocks, benefiting everyone who visits this blog. And a CEO or two have provided clarity about their business models and their competitive positions.

A frequent question I am asked is: “Roger, thank you for providing these insights for free…but why do you do it?”

Well, first, I want you to see that valuing companies works better. If I can demonstrate that to you, you will have some confidence in doing it yourself, of course sticking to the steps outlined in Value.able. The second reason is that Warren Buffett described himself once as 85% Ben Graham and 15% Phil Fisher. Fisher is the author of Common Stocks and Uncommon Profits and liked “scuttlebutt “– insights from customers, employees and competitors. I would like to see you’re your insights published here.

If you are reading this post, let me assure you are not alone. – value investing, it seems, is much more popular in Australia than I anticipated. So instead of shooting your question or insight to me privately in an email, post it here.

If you don’t want me to publish your thought, just say so and I will refrain. When you write something, it doesn’t automatically pop up. It sits in my inbox awaiting my approval. I have to click PUBLISH before anyone will see it. If you ask me not to, I won’t.

I have been positively amazed at the insights, views, opinions and questions I have received via email and most are worthy of posting here. So don’t hold back.  Click LEAVE A COMMENT at the bottom of this post.

This blog is seen by CEO’s, MD’s, CFO’s and the PR people representing some of Australia’s largest public companies, so go ahead and share your thoughts. Please refrain from defamatory or judgemental language. Remember that every time you buy a share, you are purchasing from someone who quite likely disagrees with you, so don’t worry about a difference of opinion or even the risk of being wrong. As Francis Bacon said: “truth emerges more readily from error than from confusion”. We learn more from knowing we were wrong than from never knowing.

Let me kick things off by asking a few questions. Feel free to answer any or all:

  • What industry do you work in?
  • Who do you regard as the best company in that industry?
  • What do you think makes them the best?
  • Could anyone eventually knock them off the perch? Who do you think is the most likely to?
  • What other industry(ies) do you like? Why?

And use any of these to get our conversation going:

  • Do you receive tips?
  • How do you test them?
  • Do falling shares prices make you freeze?
  • Does your share portfolio have so many shares that it looks more like a museum? How did that happen?
  • How do you track your portfolio’s performance?
  • How do you go about analysing a company?
  • What’s has been your process for investing?
  • What stock do you like the most? Why?

I hope you will take up my invitation to share your thoughts here and eagerly await commencing our dialogue. Start by clicking the LEAVE A COMMENT link just to the lower right of this post.

Posted by Roger Montgomery, 27 April 2010.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Industry: Mining
    Best Company: BHP
    Why: Diversified, patient investors who rarely buy anything at the top of the cycle. Only real slip up was Ravensthorpe but still managed to shift that on without too big of a loss
    Could anyone knock them off: Probably not. That said, competitors like Xsrata are not exactly bad companies. If Glencore decides to go public it would be interesting to see how they shape up in comparison once the books are opened up.
    Other Industries: Anywhere I can get a good return and understand the industry on a basic level before going in to the company in depth

    Do I get tips: Yes from my broker and few professional services.
    How do I test them: Read the analysis closely. Check up on the assumptions. Compare it to other companies in the industry. Research!
    Do falling share prices make you freeze: Not really but can cause a bit of anxiety! Make me reexamine all my investment decisions
    How do you track performance: Use the ASX website! Free and easy. Track versus the ASX 200 index returns
    How do you analyse a share/Process for investing: This has been through a few iterations in my life 1) Buy blue chip shares 2) Buy shares off the tip sheet provided the analysis made sense (It usually did) 3) Use my mining knowledge to focus on small cap miners to chase large returns 4) Sell everything and go on holiday! Just completed the last iteration and am now looking to get back in to the market. Am hanging on for Value.able in order to formulate a new strategy which I will hopefully carry with me in to the future.
    Overall I have probably made a small return when I factor in fees and all associated costs. I am now looking to set myself up with a solid strategy and not worry about which way the markets are moving on a day-to-day basis. And learn some patience!!
    I only hold 1 share at the moment, CFE, which I will reduce my stake in once they payout a dividend shortly. This is worth hanging on for in my opinion as it will be worth a fair chunk of change to me thanks to a large holding. After that I will reduce my holding but still hold the share as I quite like the way they invest in small mining companies as they clearly are better at it than me!

    I look forward to reading the book soon and moving forward from there with real INVESTING not GUESSING!

    Keep up the great work on the blog and TV Roger!

    • Hi Scotty,

      Thanks for the encouraging comments and for sharing. Hopefully you will also share some of your mining industry insights when you get the chance. I can assure you there is a lot of interest.

  2. Dear Roger,

    I am a professional private investor with specialty in oil and gas and mining (I used to work in a bank providing project finance to junior mining and oil and gas companies).

    Love your blog and your analysis and really admire your approach to investing.

    Just a question – I understand you don’t really take the macro/ big picture environment into account in coming up with valuations.

    But how does this work in practice? Say with JB Hi Fi, I understand the valuation is arrived at by using analysts’ forecasts or historical average performance – but say if China is indeed in a bubble and it bursts and Australia enters a depression won’t all those inputs be wrong and so how can a value investor have confidence in his/her valuations without taking into account the macro environment?

    This question has really been bugging me and hope you can help.



    • Hi Kelvin,

      Thanks for your question (be sure to share a few insights here about the gas and mining industries – I imagine everyone will be as interested in your insights as they are with Lloyd’s). You have noticed I put a range of valuations up. This range affords flexibility in decision making, remembering that you are after a very large margin of safety. The fear with a recession of course (or depression!) is that prices will fall precipitously and if you have bought at the highs, you will lose the most. In reality however, a large margin of safety (20%-60%) provides some protection. Furthermore, buying shares in wonderful companies at discounts to their value, does not mean you can avoid the declines, but it does mean that you can be comfortable in the knowledge that you own something worth more and that when sentiment changes (nobody can predict when),the shares are likely to recover. The final two points to make here is that 1) You never bet the farm on any one investment – so you might limit exposure to one company to 5% or 8%, which would mean that even after buying at a substantial discount to intrinsic value, a further decline in the share price will not result in a permanent impairment to your capital. 2) Valuing companies and finding in a sea of almost 2000 that there are three of sufficient quality that are at discounts to intrinsic value, means the rest of the market is very expensive – so watch out! Hopefully while not exhaustive, these thoughts help explain why Buffett – when following his approach-has said you needn’t be too worried about the market or the economy. Actually the only thing I have left out is to watch for a decline in the valuations. If valuations begin to decline, it could be cause for a complete about-face.

      • Thanks Roger for the response.

        I believe there are two way of analysing/investing in the market – 1.) bottom up value driven, and 2.) top down/ macro/ thematic driven (this is not a new revelation!:-)) Probably the first approach produces the higher long term returns, but I guess it depends on the ability of the practitioner. There are stars in either field. Its investment heaven if you can find a stock that gets rated A1 on both approaches!

        My background and experience lean very much toward the second approach. I’m trying to learn about the bottom up value approach via your blog and website, which by the way is awesome and very helpful.

        The reason why my background tilts me towards the second approach is because in mining/ oil & gas, commodity prices have an overwhelming effect on the valuations individual resource stocks. Given that, an investor in the resources sector has to thoroughly research the macro trends and come up with sensible forecasts of commodity prices. I guess thats why exclusively value investors tend to give resources companies a wide berth because a long term investment in a resource stock is really a long term call on the relevant commodity price(s), and not really value investing.

        Within the oil & gas sector, I agree with Lloyd that the Australian sector is over-hyped. The truth is that Australia is gas prone and not oil prone, and all of the large cap oil & gas companies listed in Australia are actually gas/ LNG dominated. Within that I totally agree with Lloyd that Woodside is the pick of the crop, but it is expensive compared to valuations of oil & gas companies outside of Australia. I very much like oil as a commodity, as I believe in Peak Oil and that the supply of oil will likely fall off and will become a major issue starting in the next few years. While WPL will benefit partially from higher oil prices, I wish there is a large cap purely oil producing company in Australia (which there isn’t).

        To invest in WPL, you really need to have a positive view on LNG prices. One major threat to LNG prices is that there may be a glut of gas coming on stream in the world, in the form of unconventional gas (coal seam gas, shale gas etc). But this threat may not actually eventuate as some veterans of the industry (eg. Henry Groppe of Groppe Long & Littell, a firm of petroleum industry consultants based in Texas) have said that shale gas is over-hyped as the decline rates of shale gas wells are much higher than people expect, e.g. could be around 45% decline rate in the first year. So we just have to monitor how the unconventional gas industry plays out.

        Within mining, the sector I like best is gold mining, as I am bullish on the fundamentals of gold. In currency crises, gold acts as a currency, not a commodity, and if you analyse the fiscal deficits and government debts of the UK as well as the US, they are actually bankrupt (so not just the European nations currently prominent in the news). The response of all the government will be quantitive easing (i.e. money printing) to infinity. The only currency left standing will then be gold.

        But again, all of this is from a macro top down view, not a bottom up view of the world. For industrial companies, rather than resource companies, I believe that the bottom up view is much more useful.



      • Hi Kelvin,

        Thank youf or that really useful addition to some of the comments already made. Everyone reading I expect will be very grateful.

  3. • What industry do you work in?
    • Who do you regard as the best company in that industry?
    Macquarie Group
    • What do you think makes them the best?
    Their absolute competitive spirit and desire to be the best investment bank. The high levels they set for themselves. Their ability to switch product streams (from infrastructure funds over the last 10 years or so, to many varied industries now such as aircraft leasing, commodities trading and who knows what else). They don’t make massive company changing investments, its all a small bolt on here or organic growth in another.
    • Could anyone eventually knock them off the perch? Who do you think is the most likely to?
    No domestic Australian Bank can compete with them.
    • What other industry(ies) do you like? Why?
    I don’t specifically like other industries, as I look for value stocks in whichever sector they are. However there are some industries that I avoid at all costs. Airlines such as Qantas, Virgin, Rex. paper & packaging such as Amcor & Paperlinx. I also avoid managed investment schemes (think Great Southern and Timbercorp) resources, steel and agricultural companies (very rarely I’ll make an exception, but generally only when I think a stock is trading at a very large discount to its intrinsic value). I also tend to avoid property trusts except for the top 2 or 3 in the industry. As an example, of the 50 stocks in the ASX 50, I’m only watching 29 of them.
    • Do you receive tips?
    I subscribe to a newsletter.
    • How do you test them?
    I’ve setup an Excel template for industrial companies (also have one for insurance companies and working on banking and property templates). I enter financial data from the annual reports into the model, and there are several ratios that it calculates, including ROE, ROA, EBIT & net profit Margins, growth ratios, debt ratios, CAGR and cash flow ratios. The template also has 3 valuation methods, so I use these to determine if the company looks ok from my viewpoint.
    • Do falling shares prices make you freeze?
    If it’s the market in general, not at all. In fact I start figuring out where I can get some more $$ to invest. If it’s a particular stock, I analyse whether this is a temporary issue, whether its going to affect the company long term. If it’s a temporary issue, then I work out whether I should be taking advantage of Mr. Market and ask myself the question, should I be buying more?. If it’s a long term issue, the I’ll investigate further to see what effect it could potentially have on the company.
    • Does your share portfolio have so many shares that it looks more like a museum? How did that happen?
    I currently have 14 stocks in my SMSF, only 3 stocks in my personal portfolio.
    • How do you track your portfolio’s performance?
    I use an Excel spreadsheet. I track my performance against the performance of the ASX 200 Accumulation index. So far my super fund has outperformed the index by 10% (since inception May 2008). I don’t track the performance of my portfolio, as I liquidated 75% of it earlier this year. Prior to that I also tracked my performance against the accumulation index.
    • How do you go about analysing a company?
    Firstly, I create an Excel model for the company (from my template). Then I download annual reports for the last 10 years; input the details into the model, and at the same time, have a read of the report – to get a feel for the company and its management. If the company results look ok in the model, i.e. ROE is decent, ROA is ok, valuations look ok, margins and other ratios are all ok, then I’ll invest more time into researching the company.
    I then look at the company’s last 10 years history – see what major changes have happened to it and what trends there are in its industry. Has it diversified, sold off parts, has it expanded internationally etc. Then work out a likely growth rate for the next 10 years, and try and answer a crucial question. Can I see this company still operating in 10 years time?
    • What’s has been your process for investing?
    When I originally started investing, I used to follow your “Dogs of the Dow” method. Shortly after that, I discovered Value Investing, and branched out from there. I still do look at my dogs of the dow list, just to see if there’s anything interesting.
    The stocks I’d select for my SMSF are slightly different to my personal portfolio. My SMSF has a lower risk profile, and more stocks geared towards growth. My personal portfolio will occasionally have a speculative stock in it.
    I keep a daily track of stocks that I’m invested in and those I’m interested in, and where they are trading at, compared to my valuations. Each day I ask myself the following question, “Are each one of my stocks worth holding onto? Are there better opportunities out there? What is the risk of switching? (Always mindful of Buffett’s suggestion to imagine you could only ever hold 20 stocks in your entire life.)
    What stock do you like the most? Why?
    There are several stocks I like for their quality and consistency. ARB Corp, Reece, Blackmores, Cochlear, CSL, Soul Pattinson, Computershare, ASX, Harvey Norman, Flight Centre, QBE, Woolies, Westfield, Macquarie Group, Platinum Asset Mgmt, Leightons, Corporate Express, JB Hi Fi, The Reject Shop, Fleetwood, Servcorp, Count Financial, AGL Energy, Origin, BHP & Woodside. It’s hard to pick a favourite from those.

    • Hi Mike,

      Thats a nice list to get everyone started. Those dogs of the dow stocks were up over 64% in the last twelve months (see a post about me using them to win a public investing competition this year). Thanks for sharing your thoughts and ideas. Your process should get everyone who isn’t being as disciplined, thinking.

  4. 1) What industry do you work in?
    I have a medical background and work in the Health Sector – public and private.

    2) Who do you regard as the best company in that industry?
    Biotechnology and the health care industry is a broad sector and I think caution is required with investing in the sector – on fundamentals let alone the financials of the companies.

    The larger market capitalisation companies such as CSL, COH, RMD have good ROE and good fundamentals. Future risks in health care as with any company includes that the company may not have the unique position in the market in the future that they now enjoy. RMD has plenty of competition in its industry but continues to lead, but will need to continue working very hard to maintain that edge. COH is a leader, but the technology is going to face increasing competition in the future. CSL has fantastic new products appearing all of the time, and spends appropriately heavily on R & D. The CSL share buyback was a positive for future returns, but aside from the Baxter report implications, the current class action in the USA is likely to provide a buying opportunity in the short to medium term. Those short term hiccups aside, CSL fundamentals will continue to strengthen in the future. CSL, RMD and COH all benefit greatly from their international exposure. The Australian health sector may be where they started, but is not where the strong financial futures of the companies are. Our Australian health system (public more than private) restricts health expenditure and funding to the point where to achieve significant growth these companies need to look internationally.

    Stocks based upon the Australian health system like Primary Healthcare, Ramsay Healthcare and Healthscope will remember the lessons of the past – notably Smedly and Mayne. The University of Wollongong site below has lots of interesting history of how these companies have established themselves and some of the lessons.
    Vertical integration helps these companies in Australia with diversification across the sector into pathology services and other related industries, but health is a tough sector. The government is a major source of income and reducing health care rebates with increasing costs of technology and labour costs makes it a tough business. Add to that the playing field isn’t always level – just look at the not for profit private hospitals (and pathology laboratories) in your state that these “for Profit” hospitals are competing against. It is little wonder they go internationally and diversify.

    Sonic Healthcare is another stock that has diversified geographically and across the sector to gain some protection from the Australian earnings challenges. Having said that – it battles with ROE for reasons as above.

    Once we get beyond the larger market cap companies – it gets more difficult.
    Companies are in a very competitive market place with pharmaceuticals – look at Sigma, API and others. Even Halcygen which was mentioned previously in the Healthcare review – is not unique in its product and highly speculative as you indicate to achieve the growth that is predicted. Be very careful of analyst reports – I often wonder if they really understand the market or are caught up in the hype. Selling generic pharmaceuticals is highly competitive – a very narrow moat around these shares mixed up with drug development adds to the risk.

    The next level of companies like Sirtex and Cellestis require a good understanding of the fundamentals to be able to invest. Sirtex is a leader today, but is the technology and treatment unique and can we be sure no one will invent a better mouse trap ? Almost certainly the answer to that is no – so you need great confidence in the management moving forward that they will stay one step ahead of the rest of the market, and you need to follow the share and its market carefully. Cellestis also leads in its field of Tuberculosis diagnosis and holds a unique position in diagnostics and Tb testing which is as secure as you can get for the medium term. With what we have seen CST establish in Australia with little effort, it will logically follow overseas. These are Peter Lynch companies that I can relate to.

    Once we get down to the trial treatments and drugs it is even more speculative. New treatments always sound enticing and the blue sky is often just that. Look at the heart pump shares like Ventracor. The market share was never going to be what was so boldly predicted, side effects of treatment were not recognised early on and even the appearance of new drugs that started to compete. HIN does well in the sector as a market leader but it is an expensive business to develop and trial with a lot of blue sky built in. HIN built a better “mousetrap” than Ventracor and took the lead….In general – as you have indicated this group of shares are often speculative shares and not investing. The hype sounds great, but they are often not a buy on fundamentals for those investing within their circle of competence. (On the other hand, if you speak the technical analysis language – even “shooting from the hip TA” that we all do – you can take the share for a ride if you know what you are doing. You need to know the fundamentals and when risk outweighs return (look at metabolic – the time to get out was before the trial results when risk became greater than benefit… gambling, speculating – more like those who can play poker and calculate the % probabilities.)

    3) Could anyone eventually knock them off the perch? Who do you think is the most likely to?
    That is the problem with this sector. A unique product is hard to find and even harder to maintain. When you buy a share / company you have expectation of ongoing growth – but even if the speculative share gets through its treatment trials, the treatments are likely to be outmoded or no longer the preferred drug within 5 years (patent expiry aside!). It takes a company like COH to maintain its market share by good management and investing heavily in R&D to remain at the forefront.
    Investing within your circle of competence has its advantages in picking the shares but also its disadvantages as you tend to read more into negative developments earlier than the rest of the market. A margin of safety for the investment is helpful, but sometimes that intimate knowledge of the area clouds your analysis as your fundamental assessment clouds the financial analysis.

    4) What other industry(ies) do you like? Why?
    Perhaps just to say that with the exception of WOW that I bought recently – I don’t like retail as a sector. Hard to ignore the dividend stream from Banks, but I value your opinion Roger on ROE and valuing these investments.
    Once you get outside of your circle of competence – and for me that doesn’t include the high level financial analysis – then investing does get more difficult if you are honest with yourself. (Cant wait for the book release !)

    5) Do you receive tips?
    Frequently… but I now ignore them. Burnt long ago.

    6) Do falling shares prices make you freeze?
    Not if I understand the fundamentals of the share and if I don’t – then I shouldn’t hold it. Strong financial analysis would also provide reassurance… it is just not that easy for the average investor to do at the required level – but we will see after the book release :)

    7) Does your share portfolio have so many shares that it looks more like a museum? How did that happen?
    I hold 9 shares across a few portfolios. With shares that provide a good yield, especially when there has been capital growth since purchase, I tend to hold.
    One share… a speculative investment in a biotech share that I have a small holding in… and I missed the exit when it fell so quickly it isn’t worth selling… I am still waiting. A good reminder of stop losses if I play in this sector. Otherwise – I try not to get emotionally attached to my shares so I get blinkered.

    8) How do you track your portfolio’s performance?
    I probably should more.. but I don’t think it would change my decisions that I make. The main danger in not doing it is you forget about the bad investments that you should learn from. After 10 years investing, I am still learning and at this stage can still remember those bad investments lessons.

    9) How do you go about analysing a company?
    I no longer read analyst reports – I think they are often more about the hype that they create to make their predictions come true. With smaller market cap companies, I look at the management / board and in particular do they own part of the company (and did they put their own money in to it). I avoid companies with significant debt, and companies that I don’t understand the product or market.
    I need to develop the financial analysis – so still waiting for the book, but in the meantime I value your opinion, and follow one newsletter.

    10) What stock do you like the most? Why?

    Cellestis – initially for the same reasons that Peter Lynch would, which is reflected in the fundamentals. I understand the product, and have seen it move through a market…. and I am comfortable with the financials.

    • Hi Peter,

      I have to admit to looking forward to your post. Thank you for your contribution. I too have suffered the effects of too much insight – selling early. My solution has been to look at how far out I have to wait for intrinsic value to catch up with the priced-in optimism. Thank you again. I am sure I speak on behalf of everyone reading the blog, that like several other contributors, your future posts will be keenly sought.

  5. Hi All,

    Great to see so many passionate investors here. Based on this I am probably going to make this a balance between information and debatable points :)

    What industry do you work in? Financial services.

    Who do you regard as the best company in that industry? Would have to say CBA, but I have liked WBC from the early 90s. That said I was concerned by Gail Kelly’s approach recently to tell her customers that it was bad luck that prices were going to rise. Maybe education would be a better approach (pen instead of the hammer?).

    What do you think makes them the best? Strongest brand presence. Tightly managed financials. Strong strategic plan and execution to plan. Don’t get caught up in ‘fad’ activities.

    Could anyone eventually knock them off the perch? Who do you think is the most likely to?
    I’d like to say WBC, but the lack of diversification into markets that are yet to boom may see them left behind once the sovereign debt crisis is resolved. On this what do you think of ANZ’s push into Asia? No retail Australian bank has been succesful doing this to date and is the bubble set to burst in the region as it is predicated on the China Syndrome.

    Do you receive tips?
    Many. The more people you interact with, the more tips you get. You must get a million a week.

    How do you test them?
    Fundamental analysis 1st – strong focus on ROE and debt ratios. Look for consistent historical performance. Search out further information and don’t act impulsively on a tip.

    Do falling shares prices make you freeze?
    No, I have learnt (from you and Buffet) that drops bring opportunity to reassess value buying.

    Does your share portfolio have so many shares that it looks more like a museum? How did that happen?
    I am new so my portfolio has been in flux. It has just started to settle down and will have 10-12 stocks in it at a time. I am to kepp re-assessing value over time to identify when its time to add and drop contributors.

    How do you track your portfolio’s performance?
    So far this has been against the index.

    What stock do you like the most? Why?
    Fundamentally sound companies. CSL, ORL, WOW, WBC, QBE – looking at FGE based on your analysis as well. My portfolio is largely based around medium to long term investment, so strong continuous performance is essential to the end value of my investment.

    My favourite is definitely ORL. How can you argue with back to back years of 70%+ ROE.

    How’s the book coming along? We are eagerly awaiting it.

    • Hi David,

      Yes, there have been a few tips here and there, but I have many friends who can tell you that I have missed out on millions not buying their tips. They simply didn’t fit my criteria. I am sceptical about the push into Asia. Regarding the book; I have discovered through the book publishing process that being a perfectionist is costly. We pulled the book out of the jaws of the printer when a few typos were discovered. Correcting the text of course threw the alignment out so it was back to the typesetters and another round of proof reading. The changes also impact the index so its back to the indexer to make sure the index isn’t referring to any incorrect pages. Happily its done and it will be with the printer this week. You will soon be able to secure the copy you pre-registered for and be valuing the best listed companies in minutes.

  6. Hi,

    My passion for the stock market would be 80% technical analysis and about 20% fundamental analysis. Although I am heavily weighted towards the technical side I really respect your ability to value a business. For my long-term portfolio I am looking at buying into or adding to my positions in great businesses such as WOW, WTF, IRE, COH, WPL and the four major banks. I believe you value the stock market (XAO) at around 4200 and I believe that level will probably be hit this year. I would be interested to here what your valuation was in November 2007 for the market. At that time the charts said to me to get out at 6400. I later got back in at 3800 in 2009. I am now sitting on 90% cash waiting for lower levels.

    • Hi Scott,

      Thanks for the compliment. My value for the ASX is a bit higher than that now, although its still lower than the current market. Remember though, that a market valuation doesn’t have the same gravitas as the valuation of an individual company. I will have a look at the index file in the next few days and perhaps post it here so you can have a look at the valuation yourselves.

  7. Rodger,
    I like your “What do you know?” blog concept and have enjoyed reading the posts so far, so I thought I’d add what I could.
    I work in the wholesale debt markets, more specifically in the issuance of residential mortgage backed securities.

    Who do I regard as the best company in that industry? Unfortunately given that who I deal with are the usual suspects in banking, and that the areas I deal with make up only a portion of their business models, my insights in this regard are limited. That said, from those I deal with I’ve found QBE to be exceptional operators.

    What stock do you like the most? Why?
    QBE is probably the stock I like the most. (This is coupled with it being possibly the most disappointing stock I own from a pure share price perspective.) The reasons for liking this stock are similar to the reasons covered by Rodger in his blog, but my experiences have added to the company’s attractiveness.

    What other industry do you like? Why?
    The listed hybrid market is an industry I have found myself in over the past couple of years. Prior to this I knew very little of hybrids, but in the midst of the GFC I started to look at lower risk areas I could understand and invest with confidence.

    Hybrids have their pros and cons, and I can see both sides. They can deliver predictable cash flows and less risk, but they don’t have the potential to grow exponentially over time like a top quality equity investment. That said there are examples that have nearly doubled in the last 12 months whilst taking on close to zero risk and paying very attractive coupon payments.
    The market has a tendency to value hybrids incorrectly treating them as equity instead of debt. This has created some great opportunities in the past eighteen months.

    The problem I’ve found with value investing is dedicating the time to properly know and understanding the drivers of the business and the industry the business works in with enough certainty to invest capital. Debt on the other hand is a credit decision requiring less work (and reward) than an equity decision. With a credit decision, an understanding of the instrument, a quick analysis of the balance sheet, and a general knowledge of the business and industry will sometimes suffice.

    It obviously depends on the risk appetite, but the comparable risk and reward pay off hybrids are attractive. The lack of potential exponential upside is compensated for the reduction in risk, ease of analytics and regular cash flows.

    Does your share portfolio have so many shares that it looks more like a museum?
    Yes, being conservative and new to hybrids, I purchased a number of hybrids instead of going only into only the one or two I thought were the best. This cost me dearly in missed opportunity but I tell myself it was worth it for the comfort diversification delivered.
    I’m currently closing out a number of these positions and looking to go more narrow and deep on a couple of A1 equity investments.

    • Thanks Kevin,

      Great insights into QBE and a very helpful addition to the pool of knowledge. Your thoughts about Debt and Equity are wise. And remember that if you own a bond and are therefore a creditor to a company, you don’t get served nice bikkies at an AGM either.

  8. Hi Roger, and everyone else

    I have enjoyed reading the responses to date and thought it only fair to add to the conversation. Conversations like this are stimulating and, although I am not sure what I can add to it, I think the more voices the better.

    • What industry do you work in? – I am a self-employed historian working mainly within the heritage and museum fields, although I should confess to a previous life as a lawyer

    • Who do you regard as the best company in that industry? – nobody makes money in the heritage/museum field so I couldn’t suggest any as an investment in money terms; in terms of broadening one’s education and outlook (equally if not more important) there are many to recommend.

    • What other industry(ies) do you like? Why? I like necessities – providers of food and money (WOW, CBA for two) will always be with us. Perhaps it’s my background as a lawyer but I think that, for better or worse, litigation will also always be with us (IMF looks interesting, although it may not be a smooth ride)

    And use any of these to get our conversation going:
    • Do you receive tips? I look for tips, actively seek them out, from brokers, newsletters, blogs, and yes, I’ll even take them from the taxi driver. I’m not too proud to listen to anyone.

    • How do you test them? Listening to a tip, or advice, does not mean accepting it. Most tips are quickly discarded. Many others are discarded after more work and only the rare one results in a buy. I generally quick test them by looking at ROE. If it is below my required rate of return, that’s the end of it. If it is above then a closer look is taken. My ultimate requirements are two-fold. First, I try to value the company based on ROE and equity per share, to ensure that I can buy it at a reasonable discount. Second, I look at the cash flow and income statements as well as the balance sheet for the last ten years, primarily to ensure that all relevant figures are trending up. I must confess that if the latter test is passed with flying colours (strong ten year trends), then I may allow myself to buy at or about value rather than wait in vain for a significant discount.

    • Do falling shares prices make you freeze? Yes. I know they shouldn’t but the initial freeze seems instinctive. A quick dose of logic and I’m soon thawed out.

    • Does your share portfolio have so many shares that it looks more like a museum? How did that happen? Working in the museum industry I’m a little disappointed at the pejorative sense in which you use the term – objects in a museum may be old but are extremely valuable. ;-) That said, I have had a number of holdings which have underperformed and should not have been retained. I think there are two reasons this happened – inertia, and foolish hope that some of them might revive. I have just this week weeded out most of them and written myself a note to never let it happen again.

    • How do you track your portfolio’s performance? I use a broker’s online portfolio.

    • How do you go about analysing a company? See above re tips

    • What’s has been your process for investing? See above re tips

    • What stock do you like the most? Why? As I mentioned, I like banks. I currently hold CBA, ANZ and WBC. Why three – because they are all exposed to slightly different markets and each has a slightly different focus. They are probably all priced over value which might influence my buying but not my holding. I also like WOW. IMF looks attractive although I have yet to make the plunge. I am a little concerned about the instability of income, although their current cash holdings seem sufficient to cover that. I am also concerned about growth having to come from overseas. The US market is huge but so are the attendant risks. Others on my watchlist are ORL, CSL (if only some more bad news would come out and ‘force’ the price down a bit more) and DJS.

    • Hi Paul,

      Thank you for your input. There is always someone who benefits from the exchange of information and ideas. Yes IMF’s results will tend to be lumpy as their recent results can attest. Its the nature of the work they do. Regarding the screening out of companies with ROE’s that are lower than a reasonable discount rate, I wholeheartedly concur. Regarding the reference to a Museum, my apologies and please understand that it was a reference to ‘collecting’. Well done on ORL and CSL, both A1 companies and worthy of careful study. Sally at ORL is brilliant, so brilliant that I believe she is destined for a career turning around some of Australia’s biggest companies. That is something to ask about at the AGM if you are a shareholder. Find out about the terms of her contract. Has anyone noticed a change in the quality of the product at ORL? I have received feedback that the quality is changing.

  9. Speaking of WOW’s high return on equity, (see Ted’s post above) they seem to be trading right about on there intrinsic value at the moment (around $26.80).. Roger what is your valuation for FY11 and FY12?

  10. Gday Roger & fellow readers

    What industry do you work in? Public practice accounting

    Who do you regard as the best company in that industry? Very widespread and too many companies. However from personal experience the big boys that everyone knows PWC,Deloittes etc are partnerships(therefore we cant buy in) however their profitability etc is far lower than an efficiently run smaller practice, with owner managers.
    I hold shares in a small listed acounting firm only becasue they are a tax and audit based business (recurring work every year)and dont have high incomes from trail commission etc unlike COU etc, which looks about to end. If you want trail and commision buy BTM or PPT.

    Do you receive tips? I will have a look at any company I hear about and I dont know much about. This happens in small listed businesses more than the big blue chips. I watch your money your call when i can and read the AFR and anything else related to investment i can get my hands on

    How do you test them? check the numbers and the story myself, and look at the businesses trend. Why would i want to buy a business in decline(Disclosure – I do own TLS though!!, fool me)

    Do falling shares prices make you freeze? I would like to say no, but last year I sold MQG at near the lows.. Big error, but as long as I learn from it, and dont do it next time the world is going crazy it should be a good lesson. And I wont forget it thats for sure, still beating myself up about it.

    Does your share portfolio have so many shares that it looks more like a museum? I have about 10-15

    How did that happen? I have been into shares for many years, and just want the value of my investments to rise over time. At my age, 30, I want to build a decent size portfolio that I can hold for the rest of my life.

    How do you track your portfolio’s performance? AFR, charts etc

    How do you go about analysing a company? Read recent ASX releases, see who owns the shares, are management big owners, is EPS and DPS growing

    What has been your process for investing? Its unusual and runs opposite to what most every commentator says. When i buy shares, I see the money as spent and try not to worry about short term share price movements, as long as the business is improving over time

    What stock do you like the most? Why? I have a few. As mentioned above, ARP is a sensational company, but I think may be slightly overpriced now, but has run very hard off the lows.
    BHP – The best run business in the world, definite bottom drawer stuff. I made the mistake of trying to “game” the share price, and have been taught a lesson by the market. I have put this in the bottom drawer and will ride the ups and downs hopefully until I am a very old man. ( I have some clients who bought BHP at 2 pounds in the 60’s.. Incredible stuff. ) To be honest I often wonder what the BHP of the 2020-2030’s will be, Im searching, but havent found anything yet.
    WOW – Incredible Returns since listing in 93. I have a close relative working their, and I can tell you they run the place on the smell of an oily rag (There are some funny stories, which as an ordinary person I see as being really tight and stingy, but from a shareholders perspective, I love it!). Management are bred in the business and not imported, and the business keeps growing.

    Keep up the sensational work Roger

    • Hi Ted,

      Thank you for you contribution and for your insights. No wonder WOW have such high rates of return on equity! I don’t think you are alone in your experiences with selling at the bottom. It is important to separate rational and fact based conclusions from the muddying influence of emotions.

  11. Michael Mclean

    What industry do you work in? Manufacturing/Resources/Mining
    Who do you regard as the best company in that industry? BHP Billiton
    What do you think makes them the best? The people they employ. BHP are one of my employers biggest customers’ and in my opinion from observing their operations on the ground level as a supplier all the way up to the corporate level as a shareholder I believe it is the systems they have developed to get the best our of their people which results in a successful company. Note: I’m only exposed to their coal mining operations in Central Queensland.
    Could anyone eventually knock them off the perch? Who do you think is the most likely to? In the context of a direct competitor, no, I don’t believe so. However, I do believe there is a strong possibility the size of BHP could be significantly effected by the China when the bubble eventually bursts.
    A question for you, Roger. BHP are spending billions ramping up their production and most recently this week there was talk in relation to an expansion at the Abbot Point Coal Terminal. So, why would BHP spend so much money on infrastructure if this bubble burst in China is going to happen sooner rather than later? Will the industrialisation of India maintain the momentum lost by China? This is is just something I cannot find an answer for. All the talk from the coal face (literally) is that BHP are ramping up and spending, spending and spending. It just doesn’t make sense to me.
    What other industry(ies) do you like? Why? The banks. My pick is WBC. Although expensive, I’m going to wait for an opportunity down the track.
    Do you receive tips? Yes and I use to act on them. A brief background on my past investments. 3 years ago I invested 10k at 21. I learnt the hard way by not researching properly and understanding what I was doing. I lost 25% of what I initially invested and to be honest I wasn’t disappointed because I felt that was the price I needed to pay to learn a new skill. I returned to shares late last year feeling a little wiser and willing to spend the time researching rather than just listening to a hot tip. I still receive tips but I gather opinions from various sources before deciding if they are worth researching further. I don’t invest in speculative companies and so far I’ve made some solid gains.
    How do you test them? Fundamental and Technical Analysis. Along with all the news afr, eureka report, and of course, your blog.
    Do falling shares prices make you freeze? I operate fairly tight stop-losses so I stick to my judgement. Hesitating or becoming “attached” to a specific purchase could prove costly.
    Does your share portfolio have so many shares that it looks more like a museum? How did that happen? No, I’m in the process of researching but I’m only trading with BHP at the moment because I feel they are the only company I know enough about. Although I’m not in anything presently and haven’t been for two weeks nor will I return until the market settles. While I’m only new to the share investment scene I feel everything is a little too sensitive at the moment.
    Thanks for taking the time to read my reply. I appreciate your honest insight. It’s a very calm approach which seems to go against the grain of the typical approach. It is up to you if you choose to publish this reply on your blog.

    • Hi Michael,

      Worth posting Michael. Your first investment foray, so early in your career, reminds me of my own. Discipline is the key and it appears you are now developing that. A couple of points: First, nothing goes up in a straight line, not even coal. Second, managers of some very large companies have, in the past, made some lousy investment choices. No-one is immune. And finally, many of the projects that companies like BHP are involved in have very long lead times and irrespective of the short term outlook must be undertaken. The risks in the short term can be mitigated by, for example, variation clauses in contracts and even the term of the contracts themselves.

  12. I’m quite keen on SRV, I first started looking at this business after reading ‘Common Stocks and Uncommon Profits’ which put me in the growth frame of mind.

    Its a market leader with its main rival being Regus, I believe that the rapid growth it is pursuing comes at a good time with international property and leasing opportunities abundant coupled with a strong dollar making new leases and fit-outs relatively cheaper.

    I value SRV at around $2.80 without taking into account any compounding of retained earnings or growth prospects….

    My question is can anyone provide insight into how they value growth prospects (mathematically) ?

    Is paying 30% over fair value for a bond style valuation worth it?

    your comments and the comments of your readers would be most welcome.

    • Hi Anthony,

      SRV you will be pleased to know has been an A1 for some time. The price however has risen beyond intrinsic value, which I put at $1.35 to $2.27. That will rise significantly however in 2012 if it can meet expectations. Valuing growth is the great mystery. Beavering away, it took months to get it right. There are so many dead ends that it is easy to give up. But keep going. Its there. I have every confidence there are investors who have worked it out and may be willing to share. I am happy to be the impartial observer…

  13. What industry do you work in? Banking
    Who do you regard as the best company in that industry? CBA are the most conservative, which will work over time
    What do you think makes them the best? Quite conservative and very big
    Could anyone eventually knock them off the perch?in terms of roe, macquarie could, you never know what they have up their sleeve
    Who do you think is the most likely to? no one really
    What other industry(ies) do you like? Why? And use any of these to get our conversation going: nothing particular

    Do you receive tips? i get ideas from places like here
    How do you test them? check the numbers and the story myself
    Do falling shares prices make you freeze? no, i always have a look
    Does your share portfolio have so many shares that it looks more like a museum? got a few, i pay no brokerage so went a little nuts last year, but slowly bringing it down
    How did that happen? no broekrage
    How do you track your portfolio’s performance? use an online, downloadable service
    How do you go about analysing a company? check the story, check the maths and make a judgement, over time my ‘bs’ meter is becoming more refined
    What’s has been your process for investing? Havent had a robust process yet, im still refining it, something i think will take my whole life
    What stock do you like the most? Why? probably qbe, i just think they are so well run.
    Love your blog, check a lot!

    • Hi Simon,

      Thanks for the comment. No doubt everyone wants to know about the zero brokerage. Perhaps I should explain that barbers don’t pay for haircuts either. Hopefully it won’t take your whole life, but you will keep learning that long. Thanks for the support.

  14. Managed to drop a few concluding lines of the preceding post:


    I think your doing a great job in bring some long overdue rational advice to the Australian investment scene. Unfortunately, the average investor in this country has been starved of such quality advice and thought, removed from the conflicts of interest that riddle the investment advisory arena. Keep up the great work.


  15. What industry do you work in?
    Retired oil and gas industry professional, now a full time investor.

    Who do you regard as the best company in that industry?
    ExxonMobil (XOM) based on pure long term economic performance. The Australian oil and gas sector is over-hyped, overpriced and characterized by a propensity to promise the earth and deliver much less. One exception to the latter is Woodside (WPL), but it trades on a multiple typically two to three times that of its international peers based on any standard oil and gas value measures (EV/BOE, proven reserve DCF, etc). The overpricing of the Australian oil and gas sector is a long term phenomenon arising from a number of uniquely Australian phenomena. These include restrictions on investment mandate of most fund managers with a bias against international equity investment, their propensity to index hug accompanied by an emphasis on being “fully invested” at all times, plus the limited diversity in the Australia oil and gas space. Add to these factors the continuing inflow of super money and appreciable overpricing of all Australian stocks relative to international peers tends to be the normal circumstance.

    What do you think makes them the best?
    XOM is a company that has a focused identity and objective. It doesn’t pretend to be something else and it ruthlessly efficient at allocating capital in a capital intensive industry. As a result, it consistently outstrips its global peers in all performance measures and has done so for a couple of decades.

    Could anyone eventually knock them off the perch? Who do you think is the most likely to?
    Not likely and no contenders are apparent. Its peers consistently pursue “diworsification” (thanks to Peter Lynch for that term) strategies and destroy value in large licks while learning no lessons in the process (BP and Shell’s two decade long, abortive love affair with all varieties of renewable energy alternatives are classic examples of diworsification).

    What other industry(ies) do you like? Why?
    I really don’t like oil and gas and sector for passive equity investment because of the primary determinant of value for most companies is the oil price, a factor completely outside management control. The secret to successful investment in the sector is to back the lowest cost producers with substantial reserves and development opportunities and ride the price cycle. Even then, buy timing is critical to success and remember to sell at the top of the cycle. There are a few lessons here, yet to be learned, for the Australian investment community infatuation with high cost, yet to be proven, CSM based LNG projects. There will be some investor misery experienced in this sector in coming years.

    As for my personal investment strategy in Australian equities, I am long term overweight healthcare, but in a focused manner (CSL, COH, BKL and SRX). These represent close to 50% of a portfolio of twelve Australian stocks. Financial services (no banks) are the second most represented sector in the Australian portfolio. One retailer (ORL) and an interesting micro-cap stock TSM which bridges the financial and retail sectors. No resource stocks at this stage (I took that money off the table in recent months). I guess I look a bit different to the typical Australian equity investment portfolio, which gives me some comfort.

    Do you receive tips?
    Invest on a tip – never. Research a company based on a tip – occasionally.

    How do you test them?
    Refer screening and valuation criteria noted below.

    Do falling shares prices make you freeze?
    No. At a stock specific level a falling price may cause me to examine my assumptions about the company, but I never sell simply because a price has fallen. If the falling price is due to some fundamental change in the company that reflects on value then I may sell. More often the contrary applies and my examination will lead me to buy more if the fallen price is right (CSL is a current example that is moving into tempting territory).

    Does your share portfolio have so many shares that it looks more like a museum? How did that happen?
    In one respect yes. ASX Limited which I have owned for a decade. It was a great company with high ROE and then blew its brains out with a grossly overpriced purchase of Sydney Futures Exchange. I also owned the latter at the time (another great company). The sum of the great parts became a an under-performing, underachieving, low ROE business. Fortunately I sold a significant percentage of the holding on the transaction, but the remainder I retain in hope that management may get its act together in the face of emerging competition and drive a bit of a return to the glory days. The potential is there, but the record of exchanges elsewhere when faced with this challenge is not good and writing this prompts to reconsider the strategy.

    How do you track your portfolio’s performance?
    I focus on absolute long run return, with a target of 10% atax including dividends. I have comfortably exceeded this for that last decade in all but FY 2008 and 2009. Overall volatility in annual return over the last ten years has been minus 11.9% to plus 28%.

    How do you go about analysing a company?
    Most importantly I research the Board and management to determine whether there is quality and integrity in leadership. Then source data for the last three to five years in the financial accounts, plus notes to the accounts, plus recent company investor presentations. The data is input into a few simple valuation methodologies based on projections of return, DCF/owners earnings, reality checked against historical data/record projected forward (ongoing ROE valuation methodology). This generates a range of valuation from conservative to realistic expectation against which current price is compared.

    What’s has been your process for investing?
    Initial screening on ROE (20% plus) and debt levels (less than 50% D/E) to develop an initial list of companies worth further analysis, then detailed research as described above.

    What stock do you like the most? Why?
    In Australia CSL, COH and REH. Absolute standout quality and integrity in every respect from leadership to balance sheet. Factual no nonsense disclosure from these guys. They don’t needlessly and unendingly spruik the company, abusing the ASX disclosure regulations, as occurs with vast majority of the the listed companies on the ASX.

    On valuation and potential the micro-caps TSM and ITX are well worth a look at. I’ll let you determine exactly why, suffice to say interesting business models, high ROE, growth prospects and entrenched franchise positions – all off a small base.

    Internationally, Li Ning Company Limited (listed on the HKX under code 2331) for market niche, ROE, balance sheet, focus, integrity and market growth potential.

    • Great post Lloyd,

      Thank you. Everyone pay attention to Lloyd’s post – full of A1/A2 stocks (CSL, COH, ITX and ORL) and full of A1 guidance. This is useful material.

      The ASX did indeed spend too much buying the SFE. Putting aside the fact they could have bought it years earlier for $2.99 and arguably baulked, the fact remains that the ASX must now digest the rather large amount of goodwill that has driven returns on equity down. In time they could do it provided they leverage (figure of speech) the monopoly they will retain in clearing and settlements.

      Three thousand funds chasing a couple of hundred stocks that are at once big enough and make money, does tend to mean that in aggregate, Australian stocks oscillate at a premium to intrinsic value. An Australian value investor, must act a little like a goldfish, swimming about hoping for the occasional crumb to fall within reach.

      And we have just been talking about North-Ryde based, ITX here in the last week.

      • Roger,

        I hope your right about a turn around in ASX Limited, but I am coming doubt it for the following reasons.

        A couple of weeks back Iress Market Technology (IRE) jumped upward around 15% on rumors of an imminent takeover by ASX, which is the largest shareholder in IRE. IRE is a great business, but its trading at more than double intrinsic value, so that an acquisition by ASX would be nothing more than a repeat of the value destroying Sydney Futures Exchange acquisition. Let’s hope ASX Board and managements’ strategic vision goes beyond further shareholder value destruction that arises from buying good businesses at grossly inflated prices. The ASX has its foot on IRE and can wait until the price is at or below intrinsic value, so no need to do anything until the time and the price is right.

        ASX Diligence in Regulatory Role and Potentially Adverse Valuation Impact
        A further comment I would make is that the ASX seems massively conflicted when it comes to exercise of its market oversight role. A significant part of the regulatory role will be removed to ASIC in the near term, but major market oversight role remains with the ASX . A case in point, the need to reign in the abuse of market disclosure regulation. Increasingly across the listed company arena we have seen an unconstrained (by the ASX) move from the disclosure of facts and data relevant to valuation/pricing to a form of company disclosure that is nothing more than spin, deliberately omitting those aspects, details and facts that bear negatively on valuation and price. This spin based selective disclosure is designed to mislead through either omission or ambiguity.

        The oil and gas sector is notorious for this practice. For example well test results are released without the relevant data (choke size, pressures, duration etc) to make meaningful assessment of the significance of the rate quoted and oil and gas reserves are quoted in the most unqualified and unconstrained way absent any regulatory stricture as occurs under the SEC regimen. Endless upside, without downside or risk is the way this is interpreted by the less informed. And yet the ASX makes no move to enforce fact based disclosure, because I believe of its conflicted role. The more spin and upside, the more trade on the market and the bigger the ticket that the ASX clips. At some point this must come home and bite the ASX with complete and total removal of its market oversight role due to its lack of diligence and/or the establishment by new exchange entrants of a higher and more honest standard of disclosure.

        Another irritating and deceptive example of a failure of market oversight is the granting of suspension of trading from the most prosaic reasons, often simply to allow the spin doctors 48 hours or so to work up nothing more than a media release. Facilitating these practices will I think ultimately see the destruction of further value in ASX Limited.

        Company Screening by length of remuneration report
        An unrelated issue, which I would like receive your opinion is the mater of annual remuneration reports. For many companies we have reached the stage where the length of the remuneration report in the annual report far exceeds the commentary on the state of the business, its strategy, objective and approach (just look at TLS under McGaughie/Trujillo for an example). For me, when a company does this, it sets bells ringing by indicating that the priorities of the Board and management are completely wrong. I suggest that it is another unappreciated criterion that can be used to pick the wheat from the chaff in the stock market.

        The Best Australian Oil and Gas Company
        I overlooked mentioning in my initial post that the best and most consistently high performing Australian oil and gas company is to be found in BHP Petroleum. It is a pity that this is not a pure play, rather than buried in the resource conglomerate that is BHP. Outside of BHP it would be priced on a multiple at least twice the value that is imputed for it within the conglomerate. But if you want exposure to oil price, BHP may yet prove the best way to achieve it because of its high oil/gas reserves ratio when compared to the balance of the Australian oil and gas sector which is full of gas (pun intended).


      • Hi Lloyd,

        Once again Lloyd thank you for the insights. I am sure they will be of great value to everyone that reads this post. Have you considered making a submission to the ASX who have recently conducted a review of announcement and reporting protocols for mining companies? You should.
        I was deliberate in my wording regarding any improvement in return on equity for the ASX – “If they can leverage their monopoly…” I should have emphasised “if”. I liked the screen idea to help investors avoid companies managed by Santa’s help-yourselfers.
        And finally, BHP today is a very different company to the BHP of yesteryear.

      • Lloyd Taylor


        Although I have not made a formal submission to the ASX on the matters raised I have provided them via email suggestions and details over the last five years and have exchanged views with their Market Surveillance unit. In each case the latter expressed disinterest in the matter and noted that the subject of reserves reporting was subject to review (for the last five years!?). No sense of urgency, or concern, or willingness to enforce even lax standards of reporting; nothing more than token Market Surveillance evidenced by nothing than the issue of the occasional “speeding ticket”, all to no effect. Hence my cynicism as to the ethos of the ASX when it comes to its regulatory responsibility and my belief that the conflict of interest with its role as a monopoly exchange overrides the regulatory role.

        The interesting aspect is that there was far greater integrity and enforcement of the limited regulation of well test and reserves reporting in the nineties. This I know from personal experience, running operations in a listed ASX entity at the time. Standards and enforcement went to hell in a hand basket after 2001 and have been on a downhill slide ever since, with no apparent leadership will in the business to address what has now become rampant abuse of market disclosure.

        Small investors really need to be aware of this situation, that disclosure outside of the interim and annual financials is frequently incomplete and misleading, to the point of deliberate deception. The capability of reading between the lines of the flood of spin is now a prerequisite to successful Australian equity market investing. This requires a very good understanding of any sector, its dynamics and the company involved, particularly the character and ethos of its leadership.

        On BHP I agree that it is a different company, which seems to have sidestepped a repeat of the worst of the Prescott era fiascos (Revensthorpe being the exception). However, the business is massively capital intensive and even a momentary a loss of discipline in capital allocation can bring it seriously unstuck. A few things and events lead me to the conclusion that the capital allocation discipline in BHP is not as deep and entrenched in the corporate ethos as say that of an ExxonMobil and thus a greater margin of safety is required. This leads to some pretty substantive analysis of the value add/destruction arising from the Billiton merger, but as that is in the past I won’t go there, suffice to say a caution is warranted.

        In passing I also note that whenever I see the BHP Billiton logo it reminds me of a physical representation of the time sequence of an inflating (commodity) bubble! Lets hope this is not prophetic symbolization.

      • Hi Lloyd,

        Yet another terrific addition to the investing ‘thoughtbank’. Thank you for taking the time.

      • Hello Roger

        My dear spouse owns some WDS Ltd shares (code WDS), which until recently were trading at around $1.70 to $1.80 and were the subject of a one for 7 entitlement at $1.70 last November, which she gladly and loyally took up. Suddenly in April they shed more than $1 of this and closed today at 47cents. Have a look at their most recent announcement and tell me how a mining services company can have so little insight into its immediate future contracts business as to produce such a result except by the most supersonic of high-speed spin. Read the ASX enquiry into the sudden fall, and the response. Any comments, fellow WDS shareholders?

        Lloyd, your blogs are terrific, and I think Roger’s site is just the greatest

      • Lloyd Taylor



        This company used that argument that Coal Seam Methane (CSM) drilling would step up with all the planned LNG developments to the extant that their already significant share of the growing CSM infrastructure market would be major growth opportunity. Currently, with around 25-30% of the market they are barely profitable, so doubling the market size really does little to improve their economics in a high variable cost game, which is what drilling is.

        Another subtle point to note about the Coal Seam Methane (CSM) industry. It was very precisely and correctly called CSM at the outset, but morphed into Coal Seam Gas (CSG) in the last 18 months. The only hydrocarbon constituent in the product is methane (CH4) the lowest value readily mobilized hydrocarbon product known to humanity. In contrast, conventional hydrocarbon gas contains higher value, heavier hydrocarbons, including liquids which sell at or near parity to oil. Conventional hydrocarbon gas is thus worth much more than coal seam methane (CSM) on a unit volume pricing basis. By changing the terminology of CSM to CSG the industry is subtlety implying to the uninitiated a higher value to the product by suggesting that Coal Seam Methane can be equated to conventional hydrocarbon gas streams. Not so in reality. Has the ASX done anything to correct this?


      • Hi Lloyd,

        Thanks for those insights. Its is always useful as investors to obtain arguments from all sides and Lloyd’s post strongly questions the investment merit of CSG players. You thoughts are valued Lloyd, thank you for sharing them once again.

      • This is an amazing post from someone who sould be repected.

        I have long been thinking that Coal seam gas ect is a hugh bubble.

        I feel hubbled to get info from someone whow clearly know more about the sector than the general public.

        Keep Posting

      • Hi Ashley,

        You are far too generous in your praise. Thank you. Pay attention to some of the comments made after my posts. There’s some really useful and very valuable material there too and arguably from investors who may not even know the value of their contributions.

  16. Do you receive tips? Yes.
    How do you test them? Sometimes I look for their ROE on the last 5 years on ______.com.au. If the ROE is juicy, I write them down.

    Do falling shares prices make you freeze? Not quite, I have a budget to invest in stock, if I blow it, that’s it, but won’t let myself go broke because of the market.

    Does your share portfolio have so many shares that it looks more like a museum? How did that happen? Yes. I never cash in the profit, I keep it in shares. If I invested $10000, I will end up with $10000 plus some shares that I hope not to sell.

    How do you track your portfolio’s performance? I use ____.com.au, it’s free. Shows you the profit and event tracks the dividends automatically, I guess it monitors all the ASX dividend announcements. I even created for myself a “fake” portfolio with all the shares that I would like to have, but don’t have money to buy. Kind of A1 exclusive portfolio. On the paper, I am very rich.

    How do you go about analysing a company? Check when certain funds managers that I respect have bought into that company. My investment “rule” is that you can go against the market but you don’t go against people that you know that are brighter than you are. I am usually honest to myself.

    What stock do you like the most? Banks, cause so far they were my winners.

    PS: I bought JB Hi Fi when they were $23. That doesn’t mean I hate them now, I just hate myself of not having enough patience.

    • Hi Horea,

      Ahh yes, patience. Rule number one, buy shares at a big discount to the current intrinsic value. Is 10% enough? That depends on your patience. Rising valuation over the next few years should be helpful as will be buying a market leader, with fast declining debt and returns on equity of more than 40%. But expect a bumpy ride and not just because of the changeover in management. Analysts are about to release a raft of reduced expectations (downgrades) for consumer stocks on the back of predictions that interest rates will rise to more than 6%. As interest rates rise, our intrinsic values must decline and while analysts may be unduly pessimistic in their estimates of JB Hi-Fi’s outlook, they can have an impact on the share price. Conversely, the Australian consumer does quieten down, and future returns on equity for retailers like JBH moderate. Only time will tell, having acquired JBH at below $9.00, I am as eager to see how intrinsic value is impacted as everyone else.

      I have deleted the website reference you gave because it leads to a parked site with nothing on it. Is it possible you provided the wrong URL? Also, to remain independent, I cannot promote any third party investment analysis tools so I have deleted those references. I am a big advocate for learning to do it yourself.

  17. I am presently working with a federal department and formerly worked as a healthcare IT consultant and completed a medical research doctorate.

    I am familiar with iSOFT and how its offering compares with its closest competitor, Cerner. I am unable to add anything useful about either company as I don’t know enough about their respective operations. I can say that the technology in this industry is akin to building a very fat, expensive Swiss army knife for as many hospitals and healthcare providers as possible. I recall that the iSOFT sales model for its latest offering Lorenzo had to be revised two years back when field trials revealed that the one-size-fits-all generic bundled package was no longer feasible nor desired by clients. Still a lot of development and implementation risks to manage (and mismanage) in this line of work. Every new site is special in its own way.

    I admire data management/administrative services industry the most, e.g. Computershare, McMillan Shakespeare, SMS Management & Technology, Flight Centre (corporate). Reasons being the not insubstantial costs and risks that customers face in switching providers, typically high returns on capital invested (since most of the work & competitive moat lies in setting up the processes and systems while there are many competitive hardware solutions to choose from), simple to scale with increasing patronage, and less prone to key person risk (a business that can run itself). My personal observation is that one key differentiator between competing providers is customer service/marketing. When evolving client needs drive innovation and not vice versa, the successful provider creates a virtuous “pay you to come up with something for me that makes me depend on you even more”. Even better if one client’s requested solution becomes a “must-have” for the client’s competitors. Happy to expand on this further if you’re interested.

    I don’t receive tips. I find leads through news, blogs like this and investment advisory sites. I run rudimentary P/E, ROE, ROIC and other usual metrics. If I’m interested, I then read one or two annual reports years apart to get a feel for the business, then use my gut to judge a suitable price level. Lacking confidence, this usually means I don’t buy except on specific recommendations by said sites above.

    I like falling share prices in stocks I’d like to purchase, get annoyed when its stocks I already own & unwilling to go overweight in my portfolio. I have about 12-15 businesses in my family’s portfolios.

    I don’t track my portfolio performance per se. I do monitor the individual share performances to figure out which ones may need to be cycled out to free up cash.

    I don’t have a favourite stock yet. Perhaps when I list my own company.

    • Hi John,

      Your thoughts on competitive advantages and the network effect are very valuable to everyone reading this post. Thank you for your insights and be sure to tell us more about the company you may one-day float, when you are able!

  18. One of my favorite stocks is cochlear (COH). however, my opinion is that it is overpriced.

    I find it difficult to sell, I.e. for the purpose of recycling into a more undervalued business. This is mainly due to the fact that quality companies like this are rare indeed. Also selling incurs CGT.

    I have fisher on one shoulder and Graham on the other, for now, Fisher has me convinced. Great companies tend to grow and grow as they are able to keep innovating, a fantastic quality.

    This is just my 2c, but IMHO COH looks expensive taking out the CGT saving of holding on.

    • Hi Andy,

      I agree cochlear, like CSL is a wonderful business and I also agree that like CSL is a little overpriced. You are in good company if you are being influenced by Fisher and Graham. You’re probably aware Warren Buffett describes himself as 15% Fisher and 85% Graham. Your humble opinion about cochlear reflects my own.

  19. Hi Roger , firstly may I take the opportunity of thanking you for sharing your thoughts amongst readers of your blog.

    I watch your segment on “Your Money Your call” and “Switzer” on the business channel every fortnight and look forward to your segments, Unlike everybody else on the programmes the commentators and guests are effectively promoting there own or organisational business needs unlike yourself whereby you are truly independent, you give logical / concise answers and the greatest quality is your genuine enthusiasm/ desire for people to genuinely research the stock prior to taking the plunge into share investments.

    I’m sure in the longer term if you hang around long enough for which I am sure the vast majority of your current followers on your blog will agree that what you are currently doing and extending your wisdom to the TV medium, more media exposure, I am sure the fruits of your labour will come to bear in good news stories and the Australian community will come to view you as a finance guru/ icon.

    Prior to the lead up with the crash, many businesses (listed and unlisted companies) had overburdened themselves in debt and the general consensus amongst owners/ directors/ CEO’s etc was debt was “good”. How wrong they were.

    It isn’t good on the balance sheet, it isn’t good for the investor, it isn’t good full stop and worst of all everybody lost including retirees , investors etc.

    That’s why I suspect many CEO’s, MD’s, CFO’s and the PR people are watching your blog, as there business or organisation made a loss , and hence there companies should be critically analysed (financially & management capability) and investors should be warned off , which you warn off , if a business makes a loss it is worth 0.00. Last year , 2009, you advised , 50% of listed companies made a loss , hence there shares are worth zip and I suspect had a whole lot of debt to try & extinguish which will take far longer than one year to clear and for the investor to become even remotely interested in again.

    When I personally start to analyse a company the only way I have found is to go to the ASX , download the “glossy” annual report as all annual reports I have downloaded are all so proud of there achievement of there organisation despite 50% making (a) a net loss – and adding to there accumulated losses in the balance sheet , for which I automatically DELETE or (b) have overwhelming DEBT LEVELS for which I may keep until the next time a annual report is produced to check to see whether the business is making inroads to clearing there debt , and clearing the debt only comes from making a profit or issuing more capital to shareholders.

    I am looking forward to receiving a copy of “ Value-Able” , and finding the guide & wisdom to analyse the company in its entirety and hopefully separating the dead end companies from the value-able companies and investing in those quality companies with good returns over the long term.

    • Hi Mark,

      Thank you very much for your kind but undeserved praise. I have no desire to be a guru, but appreciate the sentiment. I am quite simply investing my own funds in answering the question; what am I doing now? As I have the time to discuss investing and as long as my insights are reasonably accurate and useful, I suspect will have to suffer my thoughts for a little while yet. In 2009, less than 700 of almost 2000 companies reported a profit. I suspect this year that number will be higher but you are right, if a company has no prospect of making a profit is worth zero. Thank you much for providing some insights into how you analyse companies and manage your portfolio. I have every confidence of the people reading this blog will benefit from the time you’ve taken to write your post. Thank you again and I look forward to your next contribution.

  20. Hi Roger,

    I work in the Financial services/Financial planning/Accounting sector and apart from the obvious we have no real stars nor real up and comers.

    I love industries like consumer stables and healthcare due to their durable maintainable and estimatable earnings.

    The only tips I like are when I go to the races but these turn out only slightly better than share tips. Most tips come from someone inside the company which is usually tainted with irrational exuberance. My brother is high up in a fairly large REIT and I have learned the analysts give a much more balanced view of a company than an insider.

    Falling share prices gets my heart racing with excitement as we can buy a peice of Australia at a more reasonable price.

    My portfolio at the moment has 6 stocks down from 15 12 months ago as some companies were being traded on their 2013 price. It always makes me laugh when analysts say we are trading on a forward pe of 12 on 2012 numbers so we are not expensive.

    I don’t really track my portfolio performance as I am confident in my valuations, but if someone is willing to pay a silly price for a business that I own then I will sell.

    I was converted to the fat equity, fat return on equity, investment method some time ago and it has servered me well. You can value a company to the cent if you know their future return on equity over the next 10 year. However, unless we have a crystall ball this is impossible, I do think that using analyst figures for the next few years for return on equity may be a bit short sighted for really long term investors.

    Currently I love CSL but I am not buying at these prices.(starting to get close though) This is one of the best run companies in the world with durable long term eanings and no matter what happens in china europe or america people will still get sick.

    These are my thoughts and I hope it helps others

    • Hi Ashley,

      A fantastic post. I have absolutely nothing further to add. Well done. I really look forward to your next post!

  21. Hi Roger,

    Thank you for the invitation to ask some general questions. I have always found you to be quite the guru and thus have helped me to open my eyes to some very basic questions and congratulations with your successful popularity; you are certainly making quite an impression.

    Where are you going with this whole media/blog thing? Ok I get it, you are trying to sell your book, but what is your medium to long term goals?

    Are you going to put “How to calculate intrinsic value” and “How to find quality value in a business” right on the front page of your web site/blog/face book as a link explaining how to find and calculate these facts (you must be tired of repeating yourself)?

    Is there chance that you will publish and keep up to date the top ASX50, 100 or even 200 intrinsic value / quality value of a business (using a rating system)?

    How would you value “rogermontgomery.com”? Personally, over the short term your insights have been informative and a great help making your blog valuable to me. I look forward to following your medium/long term opportunities that you have created to develop into something much more.

    Thank you.

    • Hi Phil,

      Thank you for your very kind, encouraging, and supportive words. I’m happy to be able to help and yes I do hope that my book will 1) make value investing within reach of every investor and 2) be equally popular. Having sold my funds management and financial services businesses, I’m enjoying investing my own portfolio (as I always have) and writing about my thoughts and deliberations. As you can imagine, I am entertaining all sorts of different proposals that will determine the next step and while there’s no great rush, I will let you know when I settle on something. Stay tuned and feel free to post any questions that you have about companies or the stock market in general, or even investing in general.

  22. Hey Roger,

    Since no one else has posted a comment i think i will answer some of your questions in the hope of kicking it off.

    I work in the printing industry (manufacturing) as an accountant. I believe the overall industry is a very tough one to compete in with very few opportunities. With the move to online publishing, advanced technology allowing printing to be done at home or the office and the ability to produce overseas resulting in a dimishing market.

    When you have organisations like GEON reporting significant losses along with a number of medium sized private enterprises falling over recently the industry looks very glum. Of the companies on the ASX paperlinx comes to mind as the most prominent. Due to past performance and my experiecne in the industry alone, i could not reccomend them as a buying opportunity.

    My portfolio is relatively small (4 companies) and is mostly filled with blue chip headline grabbing sort of stocks. In my current situation, safety, profitability and predictability are some of my determinants in buying stocks.

    • Hi Joel,

      Really useful post, it confirms my own experience as a child observing printing businesses from the inside. Thank you also for offering to kick things off. I look forward to your next post.

  23. Gday Roger,

    Was researching a company i’ve never hear of last night – ONT, seems like a buffet style business with consistent high ROEs, and good corporate stewardship over the last few years (No capital raising through the GFC plus lowish payout ratio on high ROE) – and appears to be trading at a heavy discount to intrinsic value…perhaps as it’s small it’s been overlooked by the rest of the market. Could you have a look and tell me your initial impressions?

    • Hi Adam,

      One300 smiles is an interesting company. When I run my numbers, I get very close to A1. It also appears to be cheap, however its history is rather short. It’s difficult to say anything about its future because there’s not enough of a demonstrated track record. If however the recent past is repeated in the future, on higher amounts of equity, and intrinsic value should rise even further. You have to ask yourself whether this could be a significantly larger business. You also have to ask, if this business grows substantially, will it be able to maintain high rates of return on equity. This last point will be dependent on whether the company has any sustainable and valuable competitive advantages.

      • I have a small holding in ONT. This is a dental corporate, based in QLD. Business is growing; (from annual report:)
        “opportunistic acquisitions, where we can acquire substantial existing practices on favourable terms
        “in filling by attracting more dentists to our existing facilities and expanding those which are already at or
        approaching full capacity
        “providing management and consulting services to large dental facilities owned by others
        “establishing newpractices in existing and newregions (Greenfield sites).”

        Management hold significant % of the stock (>75%)
        Quality of management and apparent financial conservatism can be seen from the many sensible things said over several years in reports (eg refusal to use scrip to pay for acquisitions, although it should be noted that recently the company has started paying incentives to management in shares…)
        Focus on profit MARGIN increasing (not just net profit or EPS)
        High and increasing ROE
        Earnings apparently immune to economy up or down

        Management hold significant % of stock: only 20 million on issue, and managers, related parties or long term holders have close to 80% of those, leaving only 2-3 million available (means that it’s v diff to build a substantial position, and getting in/out can shift price very far).

        Several other competitors are vying to buy successful dental practices and apparently willing to pay more than ONT (see http://www.townsvillebulletin.com.au/article/2009/11/27/96771_business.html)

        Time until the partners in acquired businesses retire unknown so earning potential of replacement dentists unknown in medium-long term (but purchase price is not paid in full upfornt, so at least there is some incentivisation of acquirees).

        As Roger mentioned, potential for growth may be limited over long term, particularly if new entrants to consolidations buy all practices at prices ONT not prepared to pay. Whether building new practices can overcome this is unclear. There are also suggestions that a previous deficit of dentists has turned into a surplus with many new graduates and immigrrant dentists increasing competition: are the practises owned/run by ONT staffed by the best dentists to retain/get more clients?
        (NB of $10.5m in Equity, approx $8.8m is goodwill, so this needs to be watched).

        Changes in govt policy is unclear for dental services, and whetehr a universal dental service (denticare) would be good for dentists is again not clear.

        My overall view is that the quality of management (financial conservatism) is such that the ROE will at the very least be maintained for 2-5 years, with several opportunities still available for greenfieldsites and management, partic in SE QLD with its rapidly growing population. Although I haven’t yet spoken with them in depth, I believe that if growth opportunities do not arise, then management would be sensible enough to return funds to investors ratehr than accumulate a war chest for silly pourchases or branching out (ie won’t seek growth for growth’s sake). OF course if the competitors do implode due to overleveraging, this management team should remain well placed. It will be intersting to see

        For an alternate view, there are some interesting insights that are critical of dental/other professional consolidations can be found at the following website: (I have no affiliation to this site, but it should be noted that Synstrat are “…financial advisers, valuers and accountants specialising in assistance to dental and veterinary practices” )


        http://www.synstrat.com.au/PDFs/dentistnews/1300Smiles Critical of Other Dental Consolidators January 2010.pdf



        Posted by admin on May 3, 2010 at 11:02 pm
        Hi Ian,

        Good thoughts. The High level of intangibles is an issue if associated with debt and/or low rates of return on equity. I think the articles you have directed everyone towards are very useful for any investor researching ONT. The newsletter I retrieved by copy and pasting the following address “www.synstrat.com.au/PDFs/dentistnews/1300Smiles Critical of Other Dental Consolidators January 2010.pdf” into my web browser provided some insights into the thinking of ONT’s management. Thank you for very much for sending them through.

  24. Hi Roger,

    First, thanks for making investing easier.

    I work for a company which rely on the metal fabrication industry heavily (painting applicator).
    It is difficult to say who is the best in this industry (I would like to think that I am working in the best one but that will be biais).
    What I know is that it is very quiet and the metal fabrication has slow right down.

    I also like aviation as a hobby where I work as a flight instructor only part time, because it is an industry where the dollars flow in the wrong direction .



    • Hi Fabrice,

      Thanks for making your first post here. Can you tell us a little bit more about metal fabrication. I’m interested in who the major players are, who the main customers are and perhaps you could give me an outline of the product cycle. Thank you for letting me know that things are quiet at the moment. You are right about aviation. I look forward to your next post.

  25. Hi Roger, alex here a frequent emailer of yours :) hope this helps!

    * What industry do you work in?
    Racing and Wagering

    * Who do you regard as the best company in that industry?

    * What do you think makes them the best?
    Best betting odds, fairest rules, no middle man and quality service!

    * Could anyone eventually knock them off the perch? Who do you think is the most likely to?
    no unfortunetly

    And use any of these to get our conversation going:

    * Do you receive tips?
    yes weekly! mostly speculative and have had some luck

    * How do you test them?
    checking company backround, shares on issue, volume its traiding at and i always look to see if the company managment look like good people. i check this via the websites if possible :), this is no joke. some peoples looks carry a certain vibe

    * Do falling shares prices make you freeze?
    no i buy more if i believe in the company and their goals

    * Does your share portfolio have so many shares that it looks more like a museum? How did that happen?
    no have 1 stock currently and looking to build, have only small money im 24 and an admin guy on 40k… so need a tip :)

    * How do you track your portfolio’s performance?
    commsec helps by checking charts and announcments, its %’s give me a clear insight

    * How do you go about analysing a company?
    as previously mentioned i look at their overview, shares on issue… prijects, company history and current trading volumes

    * What’s has been your process for investing?
    invest in stocks on the long term, so i mainly focus on small to mid tier stocks with the view of them becoming a1 standard

    * What stock do you like the most? Why?
    cochlear, if i was a rich man i would be in them but with my limited capital will only take me so far. but love DML my only stock, believe in the managment and trust them on performance thus far.

    ps, please do a seminar in perth on investments :)!!!

  26. Do you receive tips? Yes.
    How do you test them? My normal processing
    Do falling shares prices make you freeze? Once a time, in 2008
    Does your share portfolio have so many shares that it looks more like a museum? How did that happen? No.
    How do you track your portfolio’s performance? I don’t track, it is mine.
    How do you go about analysing a company? Want to learn from you
    What’s has been your process for investing? Want to learn from you
    What stock do you like the most? Trg
    Why? Few down side, huge up side

  27. What industry do you work in?
    Who do you regard as the best company in that industry?
    What do you think makes them the best?
    50% of wine we drink are $10.00 under or bulk wine. AVG is the most efficient bulk wine maker of the world. Yes, as you said,Roger, we are swimming in a wine lake at moment, we have also drunk of wine for thousands years. We are in 50 years a time crises and also we are opportunity which is once every 50 years. Experts said wine industry will be ok in three or four years time ( 2014 ), but 2010 is the year we should buy. AVG has showed us it will survive from this crises and you cannot find another has done better then them in asx at moment. At today’s price $0.24, NTA as 0.98 (25%!) or $1.78 (13%) for book value.
    Could anyone eventually knock them off the perch?
    I cannot think of one, Media said Chile can provide cheap wine, but in Asia, Australia wine is Australia, Chile wine is Chile wine.
    Who do you think is the most likely to?
    If he can build much more efficient bulk wine factory, which does not exist ( why should you spend a dollar to build when you can buy avg with $0.13? ). I hold and my valuation is book value $1.78 at 2015.

    • Hi Nan,

      Thank you for all the wonderful posts you’ve contributed and this is one full of insights. You were my appetite to go on research AVG. I’m sure many others will have a look at it to. Why has become something of a commodity which means, that low prices today should result in a reduction of supply. In turn, the reduction in supply should eventually push prices higher and companies that have survived the low prices may prosper. The barriers to entry in the wine industry are relatively low so one might expect rising supply as a response to higher prices in the future. Having said all that, I will be taking a look at this company. It does not mean I will buy it. Thank you again Nan.

  28. Edward Vesely

    Hi Roger,

    Please ignore the last post !

    Great article. To answer your questions:

    – Superannuation regulation (Government)
    – n/a to the following three questions
    – Health related industries would be a good target for allocation of cash over the decades ahead (dependent of course on the particular business chosen)

    No, I don’t receive tips. I actually read annual reports, independent research and general news items on the business/industry. I read as much as I can on the industry and the company’s history before using ratio analysis on companies of interest and then compare these figures to its peers and itself going back ten or more years, if possible.

    Of course, the whole process of investing is enjoyable (right?) otherwise we wouldn’t be writing on this blog and sharing our thoughts. Understanding the business and the industry it operates in is one thing, but then it’s another to ensure that there’s value there, and is likely to prove itself to be a good investment over time (strong EPS and ROE/ROA growth should do the trick).

    A dramatically falling price doesn’t phase me as long as I understand the business, its history and its ability to continue to generate strong EPS growth over time. It is daunting though, and scary at times, but it’s essential to separate intellect from emotion in times of plunging prices. Does value also fall as dramatically as its price? Conversely, does value rise as dramatically as the company’s price in rising markets? In most cases, no. If I’m comfortable with the company’s prospects, then a falling price will be simply an opportunity to buy. I can understand though why some people would panic when they watch their stock price fall 25% (for example) but have no idea what they’re invested in apart from its stock code! I’d panic too, but then I wouldn’t place my money into something I don’t understand in the first place, so my belief is that there’s a lot of study and reading involved before coming to an investment decision (but that’s fun right?).

    We have a total 11 businesses in our portfolio, but can’t see ourselves owning more than 15 in the years/decades ahead.

    To track my and my wife’s portfolio, we simply use an Excel spreadsheet, and monitor the businesses on a quarterly and yearly basis, including dividends received. This is simple, but effective for us.

    To analyse a company, I read the most recent annual report and then make an attempt to understand the business. I usually choose a business based on other independent research which then leads me to me researching its economic history. I also like to use 10 years historical data provided by E-Trade and then compare these figures with my own.

    I could go on, but I’ll finish with my favourite business:

    ARB Coporation

    I love this business. It’s got a good competitive position, no or very little debt, it’s simply to understand, growing EPS and DPS over many many years, and the management has a very high shareholding in the business. Its products are of a very high quality and seems to have a strong brand following. The future, of course, always remains an ‘unknown’ but I have great confidence that their track record will continue. You only need to look at their results for each year going back to 1987. The only downside, at the moment, is that they’re probably trading at above intrinsic value. I’ve held them for almost a decade now, and will continue to hold them.

    I’ll stop here and let others add their thoughts !

    • Hi Edward,

      Warren Buffett once said; your job as an investor is to purchase a rational price a part share of an easy to understand business whose earnings you are virtually certain will be materially higher five, 10, 20 years from now. Your focus on earnings growth is well grounded whoever it is also important that growing earnings is a company by rising or stable return on equity. ARB Corporation is one of my A1 companies. It looks like all your hard work is leading you in the right direction. Thanks to a terrific contribution look forward to receiving many more posts from you.

    • Totally agree on the ARB front. Its one of my favourites too. Take a look at annual salary the Directors get paid and compare them to other companies of similar NPAT size… you will see a huge difference.

  29. Dexter Jambles

    Although I’m well aware of your views on Telstra Roger, perhaps I can add further fuel for the fire…or maybe not!?!

    I work in the government sector. My department (which is one of the largest) has recently tendered its telecommunications contracts. I’m also aware that like departments are also reviewing or switching providers. The most lucrative aspect of the telecom contract is the hardline services – which Telstra used to manage via a long standing contract. However, this has now switched to Optus after a rigorous tendering process. Similarly, all mobile communications are also bundled up in this contact – so there is a single telecommunications provider.

    Although the hardline network appears to be functioning soundly, the mobile network is already exhibiting flaws. As work is conducted in areas outside metropolitan centres, in either regionals or remote localities, there are often difficulties or inabilities to connect to the mobile network in these areas. This was not a problem to the same extent when with Telstra (although it wasn’t without issues). This was mostly due to Telstra’s 3G network providing much wider coverage than its competitors. Moves are now being made (at least in my dept – but I’m unaware of what is happening in others) to vary the contract to either rectify the current Optus contract or to split the contract due to being unable to meet the terms of the contract and source other providers specifically for its mobile network.

    This is not so much a commentary of a direct guidance regarding associated companies, but more an awareness of the environment in which these telecoms operate. Although Telstra has its issues, it has the monopoly on regional coverage of mobile services (& data services – which is an ever growing market) in which it continues to dominate. This makes this sector extremely volatile and constrained for companies competing against Telstra’s monopoly in regional areas. But it also reveals that although a company’s inability to service regional areas may, on the surface, appear to be insignificant, it starts affecting the capacity to win multi-million $ contracts (which don’t discriminate between metro & regional service) from not only public but private organisations whose services extend beyond the metro borders of our large continent.

    Could it be that although competition is increasing in metro areas, Telstra’s monopoly in regionals will remain? & with the impending introduction of ‘4G’, will competitors be increasingly marginalised in regional areas – perhaps influencing their capacity on the upside to compete with other companies who to try to supply organisations that services both metro & regional?

    Perhaps a key indicator from this is that any company highly leveraged to regional telecom or data services business will face stiff competition without significant deregulation or partnership with a large company that can establish a competing network to rival Telstra. However – the regional stake is only a small chunk of the mobile & data services pie…

    • Hi Dexter,

      The wonderful contribution you have posted has raised some interesting points. Firstly, you have raised the issue of capital intensity. In the fast changing world of technology is a huge expenses associated with just keeping up. Secondly, you mentioned Telstra’s monopoly in regional areas. Whether Telstra can charge enough offering its services in these areas to make investing in the company rational is a question whose answer I’m pretty sure is no. Thanks again Dexter for a wonderful contribution, I’m sure it will get many Telstra shareholders thinking.

  30. Hi Roger,
    I have only just discovered your blog, but intend to be a regular visitor from now on.
    You refer to some portfolios being like museums and I fear ours is like that in parts.
    For instance, one such “artefact” is our holding in REX if you have time, I’d be interested in your views on its prospects.

    • Hi Gale,

      Thanks for your email and welcome to our value investing community. REX being an airline doesn’t get me excited – you have probably already read my published work on airlines. I am aware however that REX have monopoly status on some of the routes to 35 destinations throughout New South Wales, Victoria, Tasmania, South Australia and Queensland. Of course this may not be enough to unfasten the chains associated with fuel and other uncontrollable costs.

      Here’s a little fact I didn’t previously know: Rex operates more than 40 SAAB 340 aircraft and in the last 18 months commenced phased introductions of the latest generation SAAB 340B-Plus whilst phasing out the first-generation SAAB 340A aircraft for regular public transport services. One issue with the SAAB aircraft was the lack of inbuilt “Flight Bags” – an in-cabin computer and printer wirelessly linked to the airport terminal program that calculates the load weight and balance of the aircraft prior to lift-off, as well as other assorted information including expected flight weather and passenger seating. Without this system, the First Officer is required to leave the plane during a flight turnaround, go to the airport terminal, run the program on the computer system and return with a printout of the information for the next flight. This procedure meant less efficiency during turnarounds.

      Well happily all thats about to change…

      I ran the numbers and was surprised to discover that since 2006 the company has never been anything other than one of A1’s or very close to it. Since 2004, REX’s profits have increased 20-fold to $20.4 million but a bit of capital has been raised to achieve it. Between 2005 and 2009, 35 million shares have been issued to raise $39 million and when added to the $35 million of retained earnings, the total additional equity has produced an incremental return of 19%. This is about the same as the rate of return on equity expected over the next three years and my valuation is quite a bit higher than the current price. But I have to pinch myself – this is an airline and airlines are beholden to many competitive pressures and costs that are out of their control. And don’t forget the impact of rising fuel costs. Perhaps REX’s monopoly status on some of routes is the reason for the pleasant state of affairs. More digging is required, because on the surface this looks like something close to an A1 business with a discount to intrinsic value…Better go and check the cash flows next…see if depreciation is understating costs.

  31. Hi Roger, I have been a watcher for CSL for sometime because I do agree with you it’s one of the best A1 companies in this country based on their fanancials. The price actions from the last two days (today and last Friday) is however somewhat disheartening on the back of a negative news about CSL’s major competitor Baxter. It makes you think someone out there knew something you don’t (although I do understand in the long term the market is a weighing machine so this type of dip could well prove to be a buying opportunity but you just can’t help wondering why the massive selldown – which leads to my question). How far back do you look at a company’s financials to value them? 5 years, 10 years? and how past numbers weight into future forecast (further back = less weight/importance?). Do you revalue a company in the event of this type of massive selldown/price falls to determine whether there is something fundamentally wrong with the company’s future business or it’s a good buying opportunity. If yes how do you revalue it if the numbers are yet to be published. Thanks, David. Also wondering if the allegation of price-fixing has any substances in it (really hate to think CSL’s fantastic past growth had anything to do with this allegation)

    • Hi david,

      Given the drop in price occurred after the Baxter release, it suggests a sympathy-type move rather than any knowledge ahead of time. You are right, provided the long term fundamentals don’t change, the fall could prove opportune, but its not below intrinsic value yet. I don’t look only at the past. I look up to five years ahead. Arguably more relevant. As Munger once said, if the past were the key, the Forbes 400 would be filled with librarians. I run various calculations on the past and make projections of ranges into the future and where forecasts are available, I factor these in too. A change in price does not affect intrinsic value. The value is calculated in independently of price.

  32. Do you receive tips?
    Yes, lots of them.

    How do you test them?
    Yes of course, if you just buy on a tip, you cant have conviction as to the ‘value’ of the share, only the price at the time of the tip.
    Without conviction you cant make ‘business like’ decisions when the price moves either up or down, and most likely you leave yourself pyschologically at the whims of Mr Market.

    Do falling shares prices make you freeze?
    Yes and no. When the overall market is declining, then fear of the market will often provide pricing distortions.
    When the overall market is steady or rising, due consideration must be given to a significant decline in an individual share price (what does the market know that i dont). Given that the overall market is not fearful, there is a good chance that some factor specifically related to the company is in play. This provides ground for further research.

    Does your share portfolio have so many shares that it looks more like a museum?
    Yes but this is out of personal choice. I do not like running concentrated portfolios. I know Warren Buffett does, but one also has to recognise ones true ability to evaluate intrinsic value.
    Operating a non-concentrated portfolio envolves a lot more work, but it also provides diversification against a incorrect assessment of intrinsic value.

    How do you track your portfolio’s performance?
    Against that of the overall index.
    But more importantly i track the movements of individual stocks against their intrinsic value and buy and sell accordingly.

    How do you go about analysing a company? What’s has been your process for investing?
    Step 1:
    Look at its history, preferably over 10 years. Look at long term EPS growth.
    Step 2: look at ROIC, ROE, to see if it has the overview of a company that is ‘fair’ or better.
    Step 3: look at movements in long term debt, is debt being used to fuel ROE
    Step 4: look at long term movements in shares on issue. Does this company add value when issuing shares, is the company ‘growing’ by just issuing shares.
    Step 5: look at directors shareholdings. Does this company have significant owner management. Following on from this what are recent directors transactions. Are they buying or selling.
    Step 6: look at the current fundamentals of the company. Is there value at the current price.

    What stock do you like the most? Why?
    AHD,FXL, SIV, TRG, GXL (although i am worried about debt on this one, and the potential for it to be a future ABC learning type of company) on price against value.
    A1 companies: i am slowly building a data base from your comments in this blog (and trawling through other comments you have made in the past), but with the market being relatively strong, patience is required.

    I hope you will take up my invitation to share your thoughts here and eagerly await commencing our dialogue. Start by clicking the LEAVE A COMMENT link just to the lower right of this post.

  33. marjorie roche

    Thankou for helping me choose to buy /sell some of my holdings.
    As an SFSM retiree every thing can help.

    I watch Your Money when I can and then realise tha it is sometimes a replay.. might be too late.

    Did I hear you say you liked CCvir was that Wise Owl just before you,
    May I hae your comments please?

    ANd I see the director selling GBT. I have been dispointed with this stock lately and think I should get out if it reaches my buy price of 1$

    • Hi Marjorie,

      I am happy that my general comments give you a useful additional view to include in your research. If you type CCV into the search box at the right hand side of the hame page of this site, you should find my comments about CCV. I haven’t looked at GBT recently but will do so.

    • Marjorie, if I may comment on your plans with GBT and I hope Rog doesn’t mind be butting in on his forum. But what are you going to do if doesn’t reach your buy price of 100c? What if it goes through 80, 60, 40? I believe in having an exit plan on any stock *before* I purchase it and that exit plan is completely distinct from what I paid for it. It may be related to what the company is worth, it may even be a stop-loss if it’s not an A-grade opportunity. The exit plan can be changed, it’s not rigid, but it exists. The market doesn’t know or care how much one pays for a company, so one must be careful in putting too much (even any) emphasis on the purchase price. What you should be thinking about is what the company is worth and what, if anything, has changed since your purchase.

  34. Good morning Roger,
    Have you changed your viewpoint on the A1 grading of CSL or the intrinsic valuation based on Baxter’s release of their belief of a downturn in demand for plasma products or do you believe that it possibly has more to do with the anti duopoly case in the US?
    Also in your recent overview of the Health sector there was no mention of Resmed a company that have had record profits for the last 30 quarters in a row, what is your grading / intrinsic valuation for this company?
    Thanks for your time and your integrity.

    • Hi Chris,

      Thanks for your email. It takes a downgrade to the future rates of return on equity, to determine whether the intrinsic value has changed. Quality can change but once again, there has to be a material deterioration in the balance sheet and the measures that I use to determine the predictability of performance to result in a valuation other than A1.

      I thank you for pointing out that I didn’t include Resmed in my review. I will get onto it in coming weeks.

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