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What is my SMSF investment strategy?

What is my SMSF investment strategy?

That’s what Peter Switzer asked me on Wednesday night on the Sky Business Channel. My response? I focus on A1 businesses that I need to focus on the least (just twice a year when half and full year results are released). As for the stocks… you’ll have to watch the interview.

Switzer TV with Peter Switzer was broadcast on 8 September 2010 on the Sky Business Channel.

 Click here to watch other interviews at my YouTube Channel.

Posted by Roger Montgomery, 10 September 2010


Roger 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.

Why every investor should read Roger’s book VALUE.ABLE


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  1. Roger, firstly, loved the book.
    Whilst I was awaiting delivery of the book (a prolonged time Rog), I was thinking that I probably wouldn’t enjoy it as much as I was hoping because it would be packed with complicated (for me) financial analysis. What a pleasant surprise. It was fantastic – very well written I think, and the financial/arithmetic/numerate aspects I found very accessible.

    Now my question: I haven’t seen anywhere in the book or on your blog as to how you classify companies into their A1 to C5 slots – and please, please Roger, don’t tell me I have to wait for Value.able Part II – life is too short to wait for another Montgomery publication.


    • Hi Kim,

      I am delighted to hear you loved the book. I am working out the best way to deliver you the information about quality. In value investing there are two characteristics that make a successful practitioner. The first is being able to understand the numbers and the way the market works. The second is temperament. And patience is one of the most important.

  2. Hi Roger. I’ve been following TFS Corp for a while and it looks pretty good using your Intrinsic Value calcs. Have you looked at this company at all.

  3. Hello Roger,
    Quick question (that will probably require a detailed response :-).
    Is it possible to determine the intrinsic value of investment properties (either residential or commercial). I am assuming many SMSF contain properties assets.

    • To flesh Lloyd’s comment out a bit further.

      Take a house bought for $300,000 with a $200,000 mortgage. Equity = $100,000. Let’s say you own the only house in a town and you find someone who is willing to pay you a rent of 10% of the value of the house, and on your mortgage you are paying 7.5%. That is annual rent of $30,000 minus interest of $15,000 leaving a profit of $15,000.

      Now assume you would like a 12% return on your money, the price of the house goes up at the rate of inflation of 3.5% (which people conveniently ignore is the long term average of house price gains) and all of the earnings are used to pay off the loan.

      By my calculation that gives the house a value of approx $150,000. With a price of $300,000 that leaves you no margin of safety. If you assume an 8% RR then the value is $313,000 but neither of these figures take in to account any rates, bills, moving expenses, insurance or repairs.

      And it assumes you own the only house in the town. If you were receiving a rent that was equal to your interest then the value would be zero, – that is until you could pay some debt off by doing a “capital raising”.

  4. Surprised that you weren’t ask about MQG (as a stock becoming “cheap” ) it is getting alot closer to its intrinsic value but still expensive!

  5. Hi Roger,

    I note you have Data #3 listed as an A1. They certainly have an impressive track record of growth and high ROE. However they seem to operate on wafer thin margins (2.7% for last two years) whereas SMX has margins of 14-15%. Does this concern you at all?

    Many thanks,

    • Hi Martin,

      As has been mentioned by others here on the blog, the flip-side is the operating leverage that high margins can suggest. Have a look at the level of fixed costs as a proportion of all costs for each business. The answer is their. Generally of course, higher NPAT margins are better as they allow more room to cut prices in the face of competition and they reflect possibly better costs management. The flip-side is that companies with higher margins can be enjoying high asset utilisation and high profits can be completely wiped out and indeed reversed if revenue slows and the burden of a high proportion of fixed costs remains. Data 3s low margins are a function of a higher proportion of variable costs that go with the territory. Have a look at the COGS. You may also notice the NPAT margin hasn’t changed for two years.

    • Hello Martin.

      A low margin in itself is not necessarily a problem.

      It is a problem when you have a competitor who offers exactly the same thing as you and has a higher margin. That means they have a lower cost base and will out survive you when the industry cycle moves to oversupply.

      Low margin can be a very effective competitive advantage (low margins – drive volume – which drives purchasing power) – But you must be the lowest cost operator and you have to make up for the low margin by high capital usage to deliver an acceptable return on capital.

      In relation to DTL.

      Year Trading Revenue EBIT Mar ROE
      Jun-98 68,789,776.00 4.77% 67.26%
      Jun-99 132,348,000.00 3.00% 36.65%
      Jun-00 130,353,000.00 0.92% 5.03%
      Jun-01 126,349,000.00 -1.19% -49.30%
      Jun-02 171,532,000.00 2.49% 40.29%
      Jun-03 192,609,000.00 2.97% 42.90%
      Jun-04 175,497,000.00 2.87% 32.63%
      Jun-05 196,495,000.00 2.80% 28.39%
      Jun-06 238,968,000.00 3.25% 33.81%
      Jun-07 284,659,000.00 3.48% 37.73%
      Jun-08 362,858,000.00 3.34% 42.66%
      Jun-09 529,665,000.00 2.53% 42.14%
      Jun-10 598,600,000.00 2.55% 41.84%

      To my eyes trading revenue growth is a picture of perfection. I have done a peer analysis and DTLs EBIT margin volatility is the lowest I could find. This confirms my qualitative research that DTL is high variable cost business and that no customer has a lower cost base to win away DTL’s business or destroy their margins. The top line growth achieved during the GFC sets things up beautifully for a margin recovery when the industry cycle improves.

      The important thing to note about the Revenue Growth is that it has been achieved whilst total capital invested has only moved from 7.13 million (Revenue/Capital = 9.6 times) to 26.73 million (Revenue/Capital = 22.4 times) and shares outstanding has only increased from 14.6 – 15.4 million.

      Operating + Investing cash flow reported this year were 44.54 Million, simply amazing in light of only 26.73 million being employed in the business.

      In Short – I think the low margin is not a concern but a competitive advantage, demonstrated by the historical record. My question for the future is how big is the market? How long before DTL runs into saturation issues. This is a wonderful company, but you’ll most likely have to redeploy the capital it throws off yourself – they just don’t need much to fund their growth and have shown no inclination for acquisitions.

      Please take my views with a grain of salt – I hold and have done for a long time. (An accusation of falling in love with a stock could have merit!) Whilst I have not included risks in this posts they are there, not least of which would be customer bad debts with such a large accounts receivable balance.

      • I like your analysis Gavin, you summed it up nicely.

        The following is my own research and may be a load of “twaddle”. Take it with a grain of salt please! Perhaps there may be someone else who has a better understanding of the two businesses. Feel free to post comments guys, as I am keen to learn more.

        My understanding is the two businesses are not identical in the way they generate their profits. SMX have higher margins because they do a great deal of consulting and project work (particularly software development). DTL sell a lot of third party products/solutions to clients. This has lower margins however they are able to generate far higher revenues and the company can do this without needing to employ as many staff! Look at the headcount and compare the two. The problem with services based industries is that in order to grow, companies need to hire staff to do the work! Plus there are only so many hours in a week so staff can only make so much money for the company (esp once productivity is maxed out). Another issue with consulting and software development is if projects are not managed properly costs can blow out and margins can be wiped out. The correct processes and metrics must be in place to ensure that projects are costed correctly according to the scope of the work.

        DTL are really improving their supply chain processes in order to lower costs and drive profits. This is something they are going to push further in 2011. They will be integrating with their suppliers online and have already have a new customer portal. This means customers can then order products via this online portal and the company can tap into their suppliers to order stock. Woolworths have similar systems in place with their suppliers. DTL don’t have to order stock and have it sitting in a warehouse-they only order stock that customers have requested. This reduces inventory costs.

        The beauty of this is you don’t need staff to do billable work. Let you customers come to you and order products because you offer solutions for a good price (thanks to the EDI http://en.wikipedia.org/wiki/Electronic_Data_Interchange). This seems to be the case at Data#3.

        Just my 2c worth

        PS: I am a shareholder of DTL so maybe I am a bit biased? Both are strong companies nonetheless.

  6. Hi Roger

    I enjoy your segments on Foxtel’s Business channel. The Your Money Your Call program can be excellent but what perplexes me is when callers ask for advice about shares worth a few cents. This week one caller asked about a share trading as low as 0.005c! Surely that’s more gambling than investing? I realise you are a guest on the show but can’t the producers consider limiting queries to shares in the Top 300? Maybe the last Thursday of the month can be dedicated to the “penny dreadfuls.” That way we would get more questions about investing in shares rather than treating the ASX as a sort of casino.

    • Hi Iain,

      Your not the first who has made that observation but I have noticed that recently, when I am on the program, there is a growing proportion of calls for larger and profitable companies. Nobody can control the questions the callers have and to be fair, the alternative guest usually has something to say in these cases (other than my rather predictable “it makes no money, never has, therefore…”)

  7. Hi Roger,

    I have noticed that all your stock picks financial’s look very similar except NWS, NWS has payed off some debt has more cash paying more dividend has more bookvalue but ROE is down, eps is down and p/e is up…..?????

    Thank’s for all your kind advice!

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