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Where is Value.able?

Companies, Insightful Insights, Investing Education | Comments (39)

Where is Value.able?

Did you receive my email update earlier this month about the complexity of the gold coin on Value.able’s dust jacket?

Take a look to the left. See the One Dollar coin on the cover? I never imagined a little gold coin could cause so many headaches.

Some of you have told me to ‘forget the gold – its what is inside that counts’. I agree with you. However I went to a lot of trouble to get permission from the Royal Australian Mint to use the coin, so I don’t want to give it away.

I have also agreed to a production process with the printer that, at this late stage, I cannot change.

Whilst we are adept at digging gold out of the ground, refining it, looking at it and sticking it back underground again, replicating Australia’s One Dollar coin on the cover of my book has proved to be a far more difficult challenge.

Here is what my printer emailed to me last week…

“The foil on the green case won’t have the black printing over the foil. The coins have been made black and the image will be suitable for foiling. This method is the quickest way of producing the books. [however] Given the complex nature of the gold coin on the jackets and case cover with several runs through the press, we have to allow drying time to achieve the desired result.

If you have a hard back book in your collection take a look and you will see what I am alluding to.”

So I did. I looked at every hard back in my collection and wasn’t able to find one with a picture printed on it. When I briefed the designers I asked for something unconventional. I didn’t realise what they created for me had never been done before!

Your book will arrive in the week commencing 2 August.

Thank you for your patience and understanding. I am confident Value.able will become a valuable addition to your investment education and am looking forward to hearing what you think of it after you have read it.

Posted by Roger Montgomery, 13 July 2010.

INVEST WITH MONTGOMERY

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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39 Comments

  1. Ray TOOHEY
    :

    My apologies – pressed the wrong button yet again.
    Here is my query –
    The final paragraph on page 198 says “The equity remains unchanged…”. Yet the TABLE 11.4 shows the equity increasing each year in line with earnings eventhough it claims the company is paying all earnings as dividends. Furthermore it shows annual dividends at a constant $0.14 while return on the increasing equity is a constant 14%. What is the point I am not grasping?

  2. Ray TOOHEY
    :

    ICongratulations on your excellent book “Valu.able”. It is one of the best texts on investing thst I have read thus far. Notwithstanding that I find speculation more stimulating than value investing but that is my choice. Nevertheless the valuation process you explain is very appropriate to both. I have one query. I don’t understand Table 11.4 snd the final paragraph on page 198. Referring to T

  3. John
    :

    Hi Roger….I have watched your segment last night on WOW. It seemed like you used the net after tax for 2010 and divided it by the total equity for 2010. I am confused because in your book you suggest using the beginning equity to get the ROE which I thought would suggest using the 2009 Equity in the Balance sheet. Depending on which way you go about it will give you a totally different figure so I wanted to try to clear this up as it is confusing. I have also tried just taking an avg from both 2010 equity and 2009 and dividing the after tax profit to get the ROE.
    I look forward to seeing what you have to say because the figure from last night seemed to contradict your book or most likely I am just confused.

    John

    • Roger Montgomery
      :

      No John, The book is the way to go. We decided that in half an hour with ads etc we would have to leave a few steps out and that on first viewing would simply make it too hard to follow. Hopefully those interested will purchase the book and refine the process.

  4. Russell
    :

    Roger I did a further search at E*Trade Here is the result I hope it will be of interest to readers

    A variation of forecast produced a slightly changed table. I guess there in no point in enlarging the search critera there are plenty of prospects in the two tables.
    Time to start digging for gold.
    Regards
    Russ

    There are 29 companies. N/R = Not Ranked

    ASX Code Company Name EPS 2 yr. avg. forecast growth EPS 5 yr. avg. growth First Year EPS Fcst
    FMG Fortescue Metals Group Ltd 215.2% 143.2% 19.1
    MML Medusa Mining Ltd 35.9% 84.2% 44.4
    RIV Riversdale Mining Limited 630.3% 82.1% 2.9
    AUN Austar United Communications Limited 67.0% 80.2% 3.9
    MAQ Macquarie Telecom Group Limited 27.2% 62.6% 48.8
    IMF IMF (Australia) Ltd 32.6% 60.2% 11.3
    MCC Macarthur Coal Limited 26.6% 56.0% 50.8
    PAN Panoramic Resources Limited 39.9% 53.4% 27.6
    OZL Oz Minerals Limited 43.1% 51.4% 11.0
    JBH JB Hi-Fi Limited 20.5% 40.4% 133.8
    CNA Coal & Allied Industries Limited 24.9% 39.4% 1,047.1
    PNA PanAust Limited 170.7% 38.9% 4.6
    EQN Equinox Minerals Limited 89.8% 37.6% 32.3
    AMM Amcom Telecommunications Limited 38.9% 32.0% 2.5
    SEK Seek Limited 33.9% 30.5% 24.0
    IMD Imdex Limited 24.1% 27.6% 7.3
    TOX Tox Free Solutions Limited 31.5% 26.7% 10.3
    IIN iiNET Limited 25.4% 26.6% 23.0
    TRS The Reject Shop Limited 20.8% 26.6% 86.8
    BHP BHP Billiton Limited 21.4% 25.9% 233.1
    NCM Newcrest Mining Limited 37.6% 25.8% 134.8
    IDL Industrea Limited 75.1% 24.0% 5.1
    CPB Campbell Brothers Limited 26.6% 21.5% 186.2
    RIO Rio Tinto Limited 37.6% 21.0% 681.3
    CUS Customers Limited 118.8% 19.2% 17.5
    FFF Firstfolio Limited 37.6% 19.1% 1.4
    SKT Sky Network Television Limited 27.1% 17.2% 25.2
    KKT Konekt Limited 46.8% 16.8% 3.0
    IRE Iress Market Technology Limited 22.0% 16.6% 46.3

  5. Russell
    :

    Roger,
    I did a search on E*Trade’s data base with a view to finding stocks that might have an attractive Intrinsic Value that is worth further study.
    I see some companies already studied by you and listed in your book.
    I am not sure if you want to paste this data into your blog.
    I think it will be of interest to your readers.
    Regards

    There are 26 companies. N/R = Not Ranked

    ASX Code Company Name EPS 2 yr. avg. forecast growth EPS 5 yr. avg. growth Value Rank
    AUN Austar United Communications Limited 67.0% 80.2% N/R
    MML Medusa Mining Ltd 35.9% 84.2% 1
    MAQ Macquarie Telecom Group Limited 27.2% 62.6% 1
    IMF IMF (Australia) Ltd 32.6% 60.2% 1
    PNA PanAust Limited 170.7% 38.9% 1
    AMM Amcom Telecommunications Limited 38.9% 32.0% 1
    IIN iiNET Limited 25.4% 26.6% 1
    FMG Fortescue Metals Group Ltd 215.2% 143.2% 2
    MCC Macarthur Coal Limited 26.6% 56.0% 2
    PAN Panoramic Resources Limited 39.9% 53.4% 2
    JBH JB Hi-Fi Limited 20.5% 40.4% 2
    TOX Tox Free Solutions Limited 31.5% 26.7% 2
    IDL Industrea Limited 75.1% 24.0% 2
    CUS Customers Limited 118.8% 19.2% 2
    FFF Firstfolio Limited 37.6% 19.1% 2
    SKT Sky Network Television Limited 27.1% 17.2% 2
    OZL Oz Minerals Limited 43.1% 51.4% 3
    CNA Coal & Allied Industries Limited 24.9% 39.4% 3
    EQN Equinox Minerals Limited 89.8% 37.6% 3
    SEK Seek Limited 33.9% 30.5% 3
    IMD Imdex Limited 24.1% 27.6% 3
    TRS The Reject Shop Limited 20.8% 26.6% 3
    CPB Campbell Brothers Limited 26.6% 21.5% 3
    RIO Rio Tinto Limited 37.6% 21.0% 3
    KKT Konekt Limited 46.8% 16.8% 3
    IRE Iress Market Technology Limited 22.0% 16.6% 3

  6. Monica Beran
    :

    Hi Roger, I am 1/2 way thru’ your book and find it very interesting and enlightening. One criticism I have is the layout of the pages. Very hard to read in bed because the writing goes too far into the center yet you have so much margin space. The footnotes could have been written at the bottom (as is usual) and the text moved out.
    I only just got to read your blogs because for some reason or other your 2 emails with blogs went into my “Junk”folder and I hardly ever check it but will do so from now on. Just thought to let you know that in June I took some profit off the table in my SMSF (BHP, CBA, STO and UXC) but repurchased them in different quantities a couple weeks later albeit too soon, but while they were left off the Comsec listing I realised what a lot of “Dogs”showing a loss I have in my Portfolio. I will be culling a lot of them and using your method of stock picking a bit more so hopefully things will change. I would be pleased to join your blog as I find everybody’s opinion very helpful. I am a self funded retiree drawing on my SMSF. Regards Monica

    • Roger Montgomery
      :

      Welcome Monica,

      Thank you for your feedback. I have already had words with the designers and the printers about the margins with of course each of them blaming the other. I am pleased to hear that the book however is having a positive impact on your investing. Welcome again.

  8. Terry Harvey
    :

    Hey Roger,

    I got your book today. The bad thing is I now have to work for eight hours before I get to read it!!!!! Thankyou so much.

    Terry.

  9. Neil
    :

    I mentioned my recent return from China in an email to Roger and he suggested some insights on his blog … A couple of things that stand out from my time in Beijing, Shanghai, Suzhou and Hangzhou:

    1. China presses on regardless of what is happening in the west and the rest of Asia – they have their own timelines and have plenty of highly skilled people who know how to do business.
    2. Quality is recognised at all levels of business and price is measured clearly against quality, but if you are silly enough to pay more than fair value businesses are happy to take your money (same lessons Roger teachers us with shares: before you buy look at market value vs intrinsic value!!)
    3. You are invisible in China unless you offer something new or unique .. don’t just be another face in th crowd that doesn’t even get a look.
    4. Education is recognised as your number one asset in China and is not taken for granted as uch as it is in the West.
    5. Customer service and the common good seem to be intrinsic in the nature of the nearly all … maybe not all the taxi drivers though!!

    Love your work Roger

  10. Mick
    :

    Hi Roger,

    Your printing crew have nothing on Edward De Bono and me.

    Just sticky-tape (or Blu-tack) a $1 coin to my book cover and pop it in the post please!

    (How “unconventional” and uniquely memorable can you get – sheer marketing genius?!)

    Is $2 more enough to cover costs?

    Thanks,

    Mick the Problem Solver

      • Mick
        :

        Thought of that too Roger… children – yours or someone else’s!

        Class working bee, proceeds to school; good cause and great learning.

        Too late for that now, I know, but maybe for the next edition…

        I’ll look forward to the mail soon and take extra note of the coin on the cover :)

  11. Luke
    :

    It’s all good Roger, just as with investing, patience is the key!

    Looks like Value.able will arrive just after I am back from my work trip to Hawaii. Perfect timing for me.

  12. Craig
    :

    Thanks I am looking forward to it’s arrival but as we all know patience is the friend of the value investor and I am conditioned to waiting for great opportunities.

  13. Nan
    :

    Hi Roger

    Just as an investor trust their fund manager, we trust your decision of our book

  16. Jo-Anne Hildebrand
    :

    Hi Roger,
    Thanks once again for the updates. I wish some of my business associates were as honest and forthcoming with what’s happening in their business day. Your approach always makes my husband and I simply want to wait patiently for your book ….even more…perfection cannot be hurried! I guess by now you’ll be wondering if you will ever live up to most peoples expectations but we watch and invest in your A1 shares and we gain and we have no doubt we will gain substantially from what you share when we are able to build those methods into our own analyses. Jo H WA

    • Roger Montgomery
      :

      Hi Jo,

      Thank you for those extraordinarily encouraging words. Thank you indeed. Please make sure you seek and take personal professional advice before trading and remember I don’t know what the price of any share is going to do next. It could double but it could halve and I have no idea of knowing ex ante.

  17. Lloyd Taylor
    :

    Roger,

    Is there a risk that in disclosing the basis of your IV calculation and approach, a lot more people start taking notice of the mispricing of A1 businesses and compete for entry at a price below a similarly calculated IV, to the extent that the likelihood of achieving a substantial margin of safety effectively disappears? In effect, a widely accepted IV amongst a significant pool of investors, could become a “floor” under short-term share price movement, more so than in the past.

    Or is it that there is a further “magic” ingredient that is being withheld in publication? Certainly you cannot publish “real-time” wisdom and intelligence in a book, but it seems to me that in educating the public at large, you risk reducing the number of opportunities for a large margin of safety in the future. However, my assumption in this is that a significantly large number of investors listen to you and your approach. Judging by the calls you consistently receive on “Your Money Your Call”, my guess is that my underlying assumption regarding widespread listening and acceptance is perhaps naïve.

    So how many takers for the book am I competing against in the market place when it comes to chasing A1 business at a significant discount to an IV calculated using your method?

    Good investment ideas are a source of competitive advantage and broad disclosure before the event can work to investor disadvantage. Of course disclosure after taking a position, as Mr Buffett is want to do, can work very strongly the other way (e.g. the massive uplift in the stock price of Petrochina and BYD immediately after he disclosed his preferentially obtained major positions several years ago).

    I look forward to your thoughts on the subject.

    Regards
    Lloyd

    • Roger Montgomery
      :

      Buffett has been asked to address the very same question as Lloyd’s many times of the last half century and his response is telling; there has been no migration to his method of investing in that time. Why? Because the machine is geared to more activity, not less. I am advocating less activity, that means less brokerage and much lower fees from capital raisings. How does that help anyone put food on the plate? In all seriousness Lloyd, I don’t believe that my valuations will prove to be any kind of beacon that can make people act rationally in the event of GFC or Greek default.

      I met yesterday with a mate who now works for arguably the worlds most successful hedge fund. They use the same metrics I do but he only found that out in the interview process. We chatted about when I first talked to him about it, but he said that he had to consider it for a long time and it wasn’t until it was mentioned in his graduate school lecture in New York that he “just got it”. He told his class mates; “This is it, this is the ONLY thing that you need to know”. Their response; Nah, its just one of a bunch of different things you should look at.” You see Lloyd, YOU get it and most people reading here get IT. But a lot of people don’t. They will dismiss it and move on to the next thing. I know it works. Buffett knows it works, Charlie Munger knows, Jim Chanos at Kynikos knows. Kerr Nielsen knows as does Hamish Douglass & Chris Mckay at Magellan and Chris Prunty at Ausbil Dexia. But not everyone cares. Its not my job or yours to convince anyone. I am more than happy to teach it, because that is how I continue to reinforce it in my own thinking and I am very comfortable that there won’t be too many takers.

      • Lloyd
        :

        Roger,

        Your statement that “I am more than happy to teach it, because that is how I continue to reinforce it in my own thinking and I am very comfortable that there won’t be too many takers.” is quite an insight for me.

        Reinforcement of thinking is paramount in this day and age of “incessant noise”. The latter can cause any sane individual to question their rationality, even sanity. It is easy to forget that by and large, the inmates are running the asylum that is the investment world and associated financial advice. The concept of “Mr Market” captures this quite eloquently, yet it is easily overlooked in the “noise” generated by Sky Business, CNBC, the AFR and the like.

        For my part, I find the rigor of committing my thoughts and rationale to the discipline of a written A4 page and the occasional Excel sheet leads to greater focus and understanding.

        Now I think I understand your intent in the book. It is as much about the discipline of the logic and its reinforcement as it is about education of the investment community at large.

        I anticipate a thought provoking read and eagerly await the week commencing 2 August.

        Regards
        Lloyd

      • Roger Montgomery
        :

        Hi Lloyd,

        I am no pioneer in using the penning of a book, a PHD paper or a journal article to arrange and cement one’s thinking. I should point out that many investors that visit and read this blog also benefit Lloyd if you continue to use it as your ‘sheet of A4’. Your pointed missives about the resources, materials and energy sectors from the inside add enormous value. Thank you. I hope you don’t mind my ‘diplomatically motivated’ edits!

    • Chris
      :

      Hi Lloyd,

      I’ve often wondered about this. But I believe that in our current system, there can’t be a widespread shift to Roger’s value investing. It comes down to pragmatics.

      If you go to your broker or advisor with $100,000 that you’d like to put into the market, the first thing they will probably discuss is diversification. A common rule of thumb is $100,000 = a minimum of ten different companies. By some strange miracle it always seems as though the day you go to see them, they have ten companies that are “good buys”! Then they’ll move on to discuss diversifying over different sectors; this year Energy companies are all the rage. The client will also likely want to recognise and understand the companies. This means at least some blue chips; pick your BHP’s and RIO’s for mining exposure, your Woolworths and Wesfarmers for defensives So you will probably leave with a minimum of ten companies, most of which are blue chip or household names. The reasons are obvious enough; diversification by number and type, and sticking to big names, means that if your ten companies go down it is likely that the whole market is down. Also in terms of Super funds, there are again the typical rules of thumb, such as picking companies for their predictable dividends.

      Now, none of this has anything to do with value investing.

      If you had $100,000 and wanted to be a value investor, the question of how many companies you invest in would be answered by how many companies are trading at a margin of safety below their intrinsic value. You’d hold the rest in cash. But this wouldn’t work for the typical investor consulting their broker, as if no companies were good value, the broker would get no commission. You wouldn’t really care about diversifying across sectors or sticking to big names, because your focus is on individual companies. You wouldn’t care that most people have never heard of FGE or that ORL faces the headwinds of a slow retail sector, whereas the typical investor is likely to pick a well known company in a sector they think will outperform.

      In summary, working out a fair value for a company and investing in it below this price is (peversely) seen as riskier than picking ten blue chips across the main sectors. People often say they want predictable returns, not fantastic ones, and often blue chips can give you predictability. Maybe this is why this strategy continues to dominate?

  18. Orlando
    :

    I am happy to wait patiently for quality to arrive. That is one of the things that I have learnt from you Roger in patiently waiting for value to arrive in quality companies. Looking forward to reading the book. Cheers

  19. Rezak
    :

    Hi Roger

    August 2nd ! I can wait.

    However, I agree with the idea of forgetting the “Gold Coin”. All we want is to read your book and extract any gold in the message NOT the gold on the cover…. As we all know, you can’t judge a book by its cover.

    Regards

    Rezak

  20. Lloyd Taylor
    :

    Roger,

    I was looking forward to what was between the covers. Now I’ll have to pay attention to the cover as well – well done!

    In the absence of competition for your quality of investment wisdom (of which there is little on the Australian investment landscape) I might have expected something of a “cost plus” mentality in the pricing to account for the production difficulty and the monopoly situation. Thankfully not. It is easy to see that you background is anything but Government!

    Regards
    Lloyd

  21. Steve Moriarty
    :

    Hi Roger,

    Patience is a virtue!

    I thought you may be interested in an article I read today regarding the airlines. In addition to not being able to make any profit for their shareholders, it appears as though they cant even make a profit when they make less flights to less destinations.

    I have attached the link if you can find your way to it. It is an article by James Fallows in The Atlantic.

    regards
    Steve

    http://www.theatlantic.com/science/archive/2010/07/why-your-plane-is-always-full/59791/

    • Roger Montgomery
      :

      Hi Steve,

      I read it with intense interest. Thank you for posting it Steve! I hope you don’t mind that I have chosen to share it because I really do believe anyone thinking about owning shares in an airline or being recommended to do such by their adviser should be fully informed. Thank you Steve.

  22. Craig
    :

    As you say Roger, patience is a virtue of the value investor. I consider this small delay part of my training! It will arrive when it arrives. And when it does, I won’t be judging it by it’s cover.

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