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Who has time favoured the most?

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Who has time favoured the most?

I was in Melbourne last week filming this year’s The Path Ahead DVD with Alan Kohler and Robert Gottliebsen. This is the third time Alan has asked Monique and I to participate, and in addition to enjoying it immensely, I am incredibly humbled by the invitation.

We sit around the breakfast table, enjoy some wonderful pastries, fruit and cheeses (a welcome break from my Dr Ross Walker breakfast regime) and I get to debate and hear a range of views about markets and the big picture issues for investors. The dialogue becomes quite animated at times, and I have to admit to often forgetting the four or five cameras recording our every utterance.

Tony Hunter from the ASX holds court, and directs questions that have been received by Alan to the panel, and almost always without notice. I thought I would write about this year’s experience only because one of the questions got me thinking about the clichés that investors often have at the back of their mind when making investment decisions.

Relying on investing clichés can be dangerous, if not because they are prevarications, but because they are the domain of the lazy who seek to grab the attention of those whose concentration has been diminished by the constant noise of the markets – much of which is useless and information-free (the noise that is).

Here is a few that came to mind immediately (some are useless but perhaps others aren’t); Sell in May and go away.  Buy the rumour, sell the fact. Don’t catch a falling knife. Feed the ducks while they’re quacking. Buy dips. Buy low and sell high. Only buy stocks that go up. This time its different. The trend is your friend. You can’t go broke taking a profit. Its time in the market not timing the market that counts.

You may have a few too, and I would love to hear them. Let me know if any have helped or hindered and feel free to add them by clicking ‘Leave a Comment’ at the bottom of this post.

There is no doubt you have heard many, if not all, of them before. They have become part of investing lore and yet they lead more to pain and suffering than they do to enlightenment. So why do they survive? Is it because there is truth in them?

I believe it is because there is a steady stream of new investors entering the market for whom the cliché has not yet become one. They run the risk of seeing the investing cliché as a truth – to be memorized and applied – and in doing so, they are guaranteed to repeat the mistakes made by the many that came before them.

Cliché 1:  You can’t go broke taking a profit

Think about the statement, You can’t go broke taking a profit; A new investor is almost certain to go broke doing just that. Why? Because a new investor will inevitably purchase a share only to see the price decline. Buying a low quality company (not one of my A1’s for example) or paying too a high a price (not estimating the intrinsic value of a company) will inevitably lead to a permanent loss of capital. The share price goes down and the investor, not wanting to accept a loss, holds on in the hope that one day the shares will recover. Then suppose the next investment decision leads to a gain; do you think the investor will hold this share for very long? The short answer is no. The fear of repeating the first mistake, resulting in another loss, is just too great. Better to take a small profit now than to see the shares fall again and have another loss.  The end result of repeating this numerous times is that the investor has several large losses and several small profits. The net result, of course, is a loss. You can go broke taking a profit just as surely as you can go broke saving money buying excessively-priced items that are on sale.

A further example refers to inflation, and its effect on the purchasing power of your money. Trading frequently involves substantial frictional costs. Brokerage, slippage and spreads seriously impinge on the returns otherwise available from a buy and hold strategy. Earning 15 per cent from buying and holding is always preferable to 15 per cent from trading, and that’s even before tax is factored into the equation. Suppose however, you don’t even achieve 15 per cent from trading frequently; after 20 years, you merely match the rate of inflation. Arguably, you have not lost purchasing power, but you have not gained any either. You have been taking profits but have not made any.

Similarly, if you sell a stock (using rising or trailing stops, for example) and make a 100 per cent return, but the shares rise 400 per cent, I would argue you have left a great deal of money on the table. You have certainly lost money taking a profit.

Cliché 2:  Its ‘Time in the market’ not ‘Timing the market’ that leads to success.

Another cliché that comes to mind is the idea that time in the market is the key to success rather than timing. At the outset, let me state that I don’t believe that timing the market or share prices works. Nor do I believe that time in the market works always, and if it sometimes does, the time can be so long that the returns are meaningless. Take for example the investor who purchased shares in Macquarie Bank at $90 some years ago; they are still waiting for a positive return. Or what about the investor who bought shares in Great Southern Plantation when the company listed? No chance of a positive return at all. If you purchased shares in Qantas or Telstra ten years ago, you would now have an investment with less value than you what commenced with.

Time in the market is no good if you buy poorly performing businesses or pay prices that are far above the intrinsic value of a company. For the seventeen years bound by 1964 and 1981 the Dow Jones rose just 1/10th of one percent. Time, it seems, was not the friend of the merely patient investor. I can show you equally long periods of low returns on the Australian market too.

The point however is that time is only the friend of the investor who buys wonderful businesses at large discounts to intrinsic value. Otherwise, time is an enemy that steals returns just as surely as it steals a great day.

Don’t use time then as a band-aid to heal your investing mistakes. Stick to A1 businesses bought at discounts to intrinsic value and time will be your friend. So what are the businesses that time has befriended the most? What businesses have been increasing in intrinsic value the most over the last three, five or ten years?

The following Table should offer the answers.

Remember, these companies may be higher quality (Some are my A1’s), but they might not currently be cheap and I have not discussed the path of their intrinsic values in the future, which arguably is more important for the investor.  Be sure to seek personal professional advice before transacting in any security.

Company ASX Code Annual Gain in Intrinsic Value Company ASX Code Annual Gain in Intrinsic Value
MND (Monadelphous) 30% CAB (Cabcharge) 25%
WOR (Worley Parsons) 61% ANG (Austin Eng) 98%
BTA (Biota) 38% WEB (Webjet) 24%
COH (Cochlear) 18% SUL (Supercheap Auto) 17%
RKN (Reckon) 29% REX (Regional Express Airlines) 47%
CRZ (Car Sales) 124% CPU (Computershare) 36%
REA (Realestate.com) 78% TRS (The Reject Shop) 28%
CSL (CSL) 39% REH (Reece) 21%
NMS (Neptune) 25% IRE (Iress market tech) 19%
ORL (Oroton) 27% ARP (ARB) 19%
JBH (JB Hi-Fi) 85%

The table reveals the companies that have demonstrated the highest growth in intrinsic values over the years and perhaps unsurprisingly, if my method for calculating intrinsic value is any good, you will find a very strong correlation between the increases in values and the increases in share prices.

If you have any questions of course, or would like to contribute a cliche you once thought of as a lore to live and invest by but now see it for what it is, feel free to share by clicking the ‘Leave a Comment’ link below.

Posted by Roger Montgomery, 22 May 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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86 Comments

  1. fred
    :

    Hi Roger, To tell you the truth I am sick to death of reading investing type books but I must say I am looking forward to value able. I hope that it give’s me more confidence in the decision’s I make. I play golf and confidence is the only thing that keep’s you in play and down the middle of the fairway !!!!!! see ya Roger

  2. fred
    :

    Today i am ordering your book Roger. I must admit, I am getting tired off reading books on investing however I do believe I will learn a lot form your book. I am hoping very much that it is only a 1 page book but I don’t think so………….lol

  4. fred
    :

    hi roger,
    I own approx 15000 shares off TAL at a average price off $2.10 . What is a good move in your opion??????????

    • Roger Montgomery
      :

      Hi Fred,

      As you know I cannot advise you on what to do. I am interested to have a look at the numbers though and will report back about my observations in a week or two.

  5. Gerard Carey
    :

    Hi Roger
    One of my favourites;
    “The stock market is not called the great humiliator for nothing”
    Looking fwd to Brisbane

    Regds
    Gerard

  6. Andrew
    :

    Hi Roger, im not sure if the is the correct forum to ask these questions (if not please re direct me).

    I have been watching you on Switzer and Your Money Your Call over the past few months and have recently tried to use your Intrinsic Value formula, however i am struggling to get the basics correct. I have not come across any company examples for the use of your formula, only the bank example which was on Switzer.

    I am using ROE/Required Return x Equity
    I have also seen a variation where the above answer is divided by total shares issued.

    Very simply, finding input numbers varys greatly i have found. I am using Morningstar and Commsec and do notice discrepancies, that is if i can even find the information in the first place.

    To clarify, when you say Equity in your formula, are you referring to share price or total shareholder equity?

    Finally, if it is not to much trouble would you be able to work through the above formula with a real stock example like BHP or WBC etc.

    Thanks for your time and i look forward to the release of your book.

    Cheers

    Andrew

    • Roger Montgomery
      :

      Hi Andrew,

      For a worked through example, you will have to await the books release. Remember the formula you are using is not the full formula. The full formula is derived from the work of several thinkers on intrinsic value, going back to the 1950’s and 1960’s. Fascinating stuff and largely forgotten. Just to clarify, by Equity, I do mean shareholders equity on the balance sheet.

  7. Ben
    :

    Hi Roger,

    Just a question on intrinsic values in general – you say that prices over the long term generally track your intrinsic values. Is this true for most of the large cap stocks on the ASX? What has been your experience over the long term with this?

    The reason I ask is that whilst I have no doubt the methodology is sound and correct, the market price is a completely different thing altogether (which you have mentioned many times).

    Are there exceptions out there? Do certain stocks or sectors consistently trade above their intrinsic value for some reason or another? If so, how do you approcah such a situation? I know you mentioned some time ago that with so few liquid large caps and so many fund managers there can be a tendency for prices to trade at a consistent premium to the true intrinsic value.

    I’m sure this is probably in the book, but just in case it isnt I think its a worthwhile question!

    Thanks, and looking forward to your book a lot.

    • Roger Montgomery
      :

      Hi Ben,

      Your question about what to do when certain stocks perpetually trade above intrinsic value, for example. The answer is simple. Move on to something else and be prepared to miss that opportunity. There are a sufficient number of great businesses that trade at a discount during any year, not to have to worry about the ones that don’t

  8. Irek
    :

    Hi Roger,

    I do sometimes comment on your blog and I have said that before, but will repeat it again, you are doing great job and we all appreciate it so much.

    This time I would like to share my concerns about the way you report the intrinsic values. Being an engineer and scientist I look at numbers and judge them by the number of significant digits that are provided. What I am trying to say is if you write, for example, a number of 1.26 it suggest to me that this is very accurate (up to 2 digits) reading or description of some kind of phenomena. It kind of tells me that by providing this many digits only the last one is less certain that the previous one.

    Since you are relaying on forecasted figures eg. ROE why do you use that many significant digits in description of the intrinsic value? We all know that forecasts are not accurate and if you relay on them your intrinsic values are going to be as good as them. I believe that your valuations would sound more credible if you round them accordingly. Please do not take this as criticism. However, as Warren Buffett said it is better to be approximately right that precisely wrong.

    Of course you may disagree with me and this is fine too. I will still come back and read your blog, listen to what you have to say and read your long awaiting book.

    Thank you for your great job.

    Best Regards

    Irek Baran

    • admin
      :

      Hi Irek,

      Thank you for sharing that insight. You raise an excellent point. The apparent precision can be misleading. In response can I say, that if the value is $1.26 or $1.27 it shouldn’t matter. You are trying to buy at $1.00 or less (assuming you have done your research and sought personal professional advice). Thats how I try to be approximately right!

  9. Greg_M
    :

    A variation on a previous cliches but I like it a lot.

    Up the stairs and out the window.

    Thanks again Roger

  10. Pat
    :

    Hi Roger, just watching ‘your money your call’ from last night and the panel talked about AGO Atlas Iron but we didn’t get to hear your thoughts. I have traded it and taken profits but I have a feeling your valuation will be a lot lower than its current price around $2.05. (please could you look at my little darling RFE and give me your intrinsic value (hopefully) 10 times higher than its current price).

    Great show mate and looking forward to the book

    • admin
      :

      Hi pat,

      I don’t even need to have a look. I was quite serious when I said I could find only four companies that are A1’s and cheap. It was in September that I started work on separating winners from losers using financial statement data and if you are interested in A1 type businesses, then there are very few available right now at attractive prices and Atlas and Red Fork don’t make the grade at present. of course that is not an invitation to do anything. Be sure to seek advice.

  11. Steve
    :

    Hi Roger

    Actually, it would be great to “let the cat out of the bag”.

    Are you planning any spruiking engagements for your book?

    If so, it would be great to have an opportunity to be in the audience (if the occasion is appropriate).

    Rgds

    Steve

  12. Tom
    :

    I’d like to add a cliche:

    “There is a difference between the stock market and the market for stocks.”

  13. Gordon Lucas
    :

    If you got on a train to go to north & you discovered it was heading south, would you stay on the train?

    • admin
      :

      Thanks Gordon,

      A handy reminder to exit if you discover a mistake. There’s a chapter about exiting in my book.

  15. Lloyd Taylor
    :

    Roger,

    Looking through the twenty one companies you have listed I am struck by the fact that the growth in intrinsic value of each has been driven by increased demand for the product of each company that can in large part be explained by one, or a combination of, three factors:

    1. Innovation in product, or product delivery, demand growth: Innovative Product (IP) Demand Growth
    2. Increased demand for professional services associated with the resources/commodity boom : Commodity Boom (CB) Demand Pull Growth
    3. Increased demand for the product underpinned by increased private sector sector borrowings: Debt Facilitated (DF) Demand Growth

    Breaking the companies into the dominant category of the dependency of growth on each of these factors:
    1. The growth of 6 companies is innovative product/delivery dependent (IP growth).
    2. The growth of 4 companies is heavily dependent on the demand pull arising from an ongoing commodity boom (CB growth).
    3. The growth of 11 companies is strongly dependent on ongoing easy credit driving demand (DF growth).

    I know you are not one for the macro view of things, but clearly the projection of historical growth forward into the future carries widely differing risk and uncertainty for each of the companies, depending on the degree of reliance for growth on growing private sector debt, or commodity price, or continuing innovation in product or product delivery. On the last factor is truly within the control of company leadership and thus a source of potential competitive advantage, sufficient to sustain growth.

    To my mind, this highlights that the fact that the past growth of these twenty one companies is unlikely to be a reliable guide to the future, in all but a handful of examples.

    Regards
    Lloyd.

    • tim clare
      :

      Hi Lloyd.

      An interesting dissection. I am wondering in which category you placed RKN, CAB, CPU, TRS and IRE? The others are (seemingly) self-explanatory.

      Tim.

      • Lloyd Taylor
        :

        Tim,

        The companies that you highlight have intrinsic value growth driven by a varying combination of IP and DF factors and of course opinions will vary as to which of the two is dominant in the growth story. For what its worth, following is my opinion of the growth factor driving each company’s value in the long run.

        I think the long run growth of IRE is driven by its capacity to innovate and provide new services, although the growth and health of the financial sector on which it also depends in the short run is a function of easy credit and liquidity. As a result, I classified IRE in the above noted distribution of types as an IP driven growth company based on a long term view (but it certainly carries short term risks if the growth of debt in the economy goes into reverse).

        At the other end of the combination of factors is CAB, which in my view has saturated the market that has underpinned its growth and in future depends. Its initial growth was driven by penetration of an innovative product, but is now dependent for growth (in Australia at least) on the ongoing health of the economy, particularly business patronage, and thus under the influence of easy available debt in the broader economy. CAB is thus in my view a DF category in terms of the future.

        CPU, despite some innovative services delivery which has led to its penetration (perhaps even saturation) as a services provider in the most lucrative markets, has its long term growth prospects hitched to the future buoyancy of equity markets and thus easy and available debt to lubricate the broader economy.

        RKN and TRS are tough ones and in my view fall in the 50/50 combination IP/DF. Too hard for me to come to grips with as to which is the dominant factor, I bundled them in the DF growth category because any drying up of easy credit in the broader economy will certainly impact them, although the argument can be run that with TRS the effect will be positive. However, personally I doubt this as a long run proposition, but I’d need to do a lot more work to understand whether it is the case or not. In my approach these two have really gone into the “too hard basket” of Buffett and Munger.

        Hope this helps rather than hinders the process.

        Regards
        Lloyd

  16. rog
    :

    And dont forget “don’t kill the goose that laid the golden egg!”

    Despite this saying being entirely dependent on a fairy story it has attracted some political reality

  17. James
    :

    Hi Roger, I was wondering your opinion regarding Funtastic Holdings (FUN). I read this on the Eureka Report:

    * Funtastic non-executive director Craig Mathieson has continued to build his stake in the company at levels well off the 80¢ a share he offered for the company some time ago. Just two weeks ago we reported that Mathieson had acquired another 1.2 million shares. Today it’s another 600,000 shares that were acquired for 23.5¢ each on May 18. The shares were immediately squirrelled away into the family trust with another 83 million, leaving the Mathieson family with control of a little more than 25% of the company.

    Surely this is a sign of the long term economics of the company (even if your value doesn’t match the current share price.)

    • Roger Montgomery
      :

      Hi James,

      It might be. Remember the founder and CEO of ABC Learning was buying shares too. Just because the manager or major shareholder buys more shares doesn’t automatically mean the company is great. Its a sign to go and have a look, thats all.

  18. Greg
    :

    Hi Roger
    Following from your comment about selling with a 100% profit but the stock subsequently rising 400%, I’m interested in your views about selling. As you have highlighted many times, the market regularly under and over prices certain stocks. When a company is trading at a discount to its intrinsic value this provides an opportunities to buy. The other side to this is to sell when the company is trading at a premium to intrinsic value, as this is when the investor ultimately receives the cash profits from the investment. At what point above t+3 years intrinsic value (ie. +15%, +25%, +100% etc) should the investor sell and take the cash profit?

    AMP trading above $30 post-float still resonantes as great example of the market providing a significant premium above intrinsic value then subsequently falling sharply. It is very easy to get greedy and ride the price up and then ride it down as well, so some “sell” guidance would be useful.

    regards
    Greg

    • admin
      :

      Hi Greg,

      There’s a entire chapter devoted to that question with five very clear suggested steps for what to do and when. Its at the printers now so you should be able to place your order and secure the copy you pre-registered for by early next week.

    • tim clare
      :

      From experience, a company that is bought at a discount to intrinsic value and sold at a premium, has not always produced profits for the investor.

      I have had two situations where intrinsic value dropped sharply after purchase, requiring me (based on my rules) to sell at a loss – not A1 businesses in hindsight.

      My biggest dilemma though, is when a truly A1 company (eg. RKN, COH etc) becomes substantially overvalued and I am torn between selling (making me liable for CGT, having to find a better investment opportunity to replace it and maybe never having the opportunity to buy back in at a discount) or holding “forever” (with the distinct possibility of the price falling sharply or waiting several years for value to catch up).

      In my opinion, the % above IV is not so important as the estimate of future IV ie. how many years will it be before the IV will catch up with the current price? This makes my sell (or hold) decision easier than just the current premium figure. I’d rather hold an A1 business whose price is 50% above IV but whose IV is expected to rise 50% in 1-2 years than a business whose price is 25% above IV and IV is expected to rise only 10% in that time.

      • Roger Montgomery
        :

        Really good stuff Tim,

        You are on the right track. Remember, when Buffett sold PetroChina and paid the $1.2 billion tax, he funded the US government’s total expenses for 4 hours.

  19. Niel H.
    :

    Roger,
    Just read your May 21 blog and was disturbed to see you mention “Don’t catch a falling knife” as a dangerous cliche.

    Some years ago I put a decent sum into Record Investments which grew and grew and morphed into Allco Finance. I used to think Allco was a good company as it continued to grow profits and paid rising dividends and so I topped up on Allco from time to time. When its price was sliding, I bought more and when it dropped more, I bought some more, expecting the thing to turn around.

    This was a classic falling knife, and I lost a serious hunk of my portfolio.

    The lesson is to be able to discern a “falling knife” from a sound company at an attractive price. This I am beginning to do, but investors must be wary of “falling knives”!

    • admin
      :

      Hi Niel,

      I was reading your email and very quickly had formed my response. As I read to the end, I realised you offered my answer. Know a knife from a great business. One involves a permanent loss of capital and one is a diamond in the rough or a baby that was thrown out with the bathwater. A few more cliches right there!

  20. Chris
    :

    Hi Roger,

    NMS is a company I’m very wary of, given their unpredictable earnings. However, even despite their debt and low return on equity, their 2009A data seems to indicate that their current price of 28 cents may be well below value. Any thoughts?

    • admin
      :

      Hi Chris,

      I cannot tell you what the share price will do, but low ROE’s is something I avoid as an investment even when it can be purchased at discounts to book value. As a trading opportunity there may be something in those scenarios but mitigating risk is the name of the game.

  21. Michael
    :

    There is a phrase going around called the “Supermodel Indicator”. This started when a super model (I can’t remember her name) wanted to start getting paid in Euros. This was at a time where more and more ppl in the forex community were putting arguements forward to short the Euro. The idea being that once an investment idea takes hold in the public mind, there is no longer an edge and that a reversal is due.

    • admin
      :

      Hi Michael,

      I like it. Also known as Magazine Cover trading. Once it has made it to the cover of a magazine (long lead times), the opportunity has passed.

    • Steve
      :

      And along similar lines… “be greedy when others are fearful and fearful when others are greedy”.

      • admin
        :

        Thank you Steve. Or is it Warren? Much harder to do than it is to say, don’t you agree? To buy aggressively when all around you looks like armageddon, requires a depth conviction that can be learned but for many remains elusive.

  23. Craig
    :

    Hi Roger,
    Thanks for posting your table.
    Austin Engineering has grown largely through acquiring bolt on businesses (specific, value enhancing ones in their niche) and their future growth plans include more of the same. It’s also quite a capital intensive business – I remember Buffet prefers businesses with low capex. Qualitatively, do these facts make it a weaker business in your opinion?
    THanks kindly for your thoughts,
    With regards,
    Craig

    • admin
      :

      Hi Craig,

      The short answer and I suspect the one you need is, Yes! I prefer businesses with low capex and those that grow organically rather than by acquisition.

  24. les field
    :

    HI ROGER,, MY FAVORITES WERE TOLD TO ME MANY YEARS AGO BUY AN OLD JOURNALIST. 1) BULLS#!T RULES THE WORLD. AND 2) THERE IS NOTHING NEW UNDER THE SUN. ITS THE SAME THING HAPPENING TO DIFFERENT PEOPLE. ALWAYS STUCK IN MY MIND. CHEERS YOUNG LES.

    • admin
      :

      Hi Les,

      Thanks for the cliches! “Nothing new under the sun” is an interesting one. I believe teh ancient Greeks for example had worked out that there are only six plots for a play.

  25. Lloyd Taylor
    :

    Roger,

    A carry over thought from my earlier post on the financial sector: It occurs to me that no A1 company (at least on my A1 list) and I think none of the intrinsic value growth companies that you have highlighted found it necessary to issue equity to re-capitalize the business in the two year 2007-2009.

    Conservative debt to equity and high ROE enabled them to sail through the GFC and meet their capital servicing obligations and debt covenants without any concern whatever.

    I suggest that this is another potential screen that sorts the A grade business from the chaff: Was the company compelled to re-capitalize the business in the wake of the GFC?

    A corollary of this is that the businesses that undertook GFC associated equity raising diluted their existing shareholders to the extent of 30-50% on average. Return on equity dramatically reduced, often more than is apparent in the latest financial statements by virtue of the fact that massive asset write downs frequently accompanied the re-capitalizations.

    Despite this, many sell side analysts and brokers point to pre-GFC share price highs as a reason to believe that a stock is currently underpriced with lots of upside potential. Clearly this is false when there are more often than not up to 30%-50% more shares on issue that pre-GFC.

    The message in the context of this blog is that the old aphorism that “the past is no guide to the future ” is truer than ever when it comes to share price and “never ever equate share price with share value”.

    Regards
    Lloyd

    • admin
      :

      Thanks Lloyd,

      I have written extensively and been published and quoted on this very subject. My scoring does take many of those elements in account and of course quite a few more!

  26. Lloyd Taylor
    :

    Hi Roger,

    I find it interesting that none of the financial services sector make your intrinsic value growth list. I am thinking of the likes of PTM, PPT and TRG. I think the first of these (PTM) would qualify as A1 grade with the other two of lower ranking. I have doubts over PPT’s international growth push and risk management and the TRG business model leaves me a bit bewildered. (Disclaimer: I own equity in PTM and PPT and have owned all three at some point in the last five years.)

    With 9% of the country’s payroll directed into super one would expect to see a pretty strong underpinning for growth in the financial services sector. Unless of course the fees are so egregious and the investment performance so poor that even the government mandated inflows are insufficient to generate growth. Hence my surprise at the absence of a single financial services player from your list.

    In the pure banking financial sector space, with the oligopoly of the big four banks I was surprised not to see at least one of these on growth list, although the massive GFC related re-capitalization by discounted equity issue probably have destroyed intrinsic value, with the exception of CBA which actually used the funds to purchase a business (BankWest) at a distress sale price. Why the banks aren’t growing very steadily and consistently in the absence of competition intrigues me. I suspect it has something to do with the quality of leadership and the lack of competition induced productivity improvement pressure, but I cannot put my finger on it in a collective sense.

    And then we come to the beast that is MQG. I’ve made (and lost) good money on this company, although the very ethos of an investment bank, which is run first and foremost for the benefit of its management, rather than shareholders runs counter to any high end (A grade) investment grading. Despite the positive sentiment amongst analysts, this company seems to have had its growth legs cut out from beneath it with the removal of access to easy and cheap money (the basis of its growth model for the decade before 2007) and the unnecessary re-capitalization of the business by a massively dilutionary equity issue. The “new business model” is anything but new and brings them into competition with international behemoths who do not hesitate to leverage on risk, backed by the too big to fail guarantee of the US government (the Obama put ?). I struggle to see any competitive advantage for MQG in its “new” business model.

    Can you share your views on the intrinsic value growth prospects of the financial sector?

    Who are the A1 players we should be considering and more importantly who should we be avoiding in the interest of our financial health?.

    Best Regards
    Lloyd

    • admin
      :

      Hi Lloyd,

      You have given me a few really good ideas for future posts, not to mention a bit of work to do. So I will get cracking. In the meantime, taking CBA as an example, its intrinsic value grew strongly between 2004 and 2007 but flatlined for the four years prior. In fact the intrinsic value fell in 2001 and so the net result is an annul increase in intrinsic value over the entire window of only 7%. Having said that I bought CBA last year (highest ROE etc, and you will find something on the blog about it if you type CBA into the search box) so I agree entirely with your points. Its value is the highest and for at least the next 18 months it should remain the best business performer. TRG has had a solid 35%p.a. increase in intrinsic value, even after severe declines in 2007,2008 and 2009 however its not an A1. PTM is almost an A1 but using data for its intrinsic value since 2000 (well before its listing), the intrinsic value has only risen by 7%. Using data since the float, you will find a better rate but still only to 10-15%. PPT, I regard as a B class company rather than A class (but thats a subject for another time) and because of substantial declines in intrinsic value in 2007, 2008 and 2009 (intrinsic value fell from over $85 to less than $20) the net result over ten years is an increase in intrinsic value of 8% p.a.

  27. Robert
    :

    Hi Roger
    Thanks, this information is very useful. Would you be able to also include the current IVs so we could calculate a personalised margin of safety and purchase level?
    Looking forward to your book, it and this blog has inspired me to researching other methods of IV calculation until then.
    There seems to be a lot of work in these calculations however so a software system bringing together all the data seems essential. Will take for now your previous suggestions to setup a smaller watchlist.

    • admin
      :

      Hi Robert,

      I look forward to seeing what you come up with for your watchlist. Perhaps, if you supply the watchlist (after you have done the work), I will post the valuations!

  28. Peter
    :

    Roger

    Buffett is a great one for quotes. Amongst some of my favourites:

    1) On who knows what they are doing in the stock market – and that annoying situation where you talk to people and they always remember their investment successes and forget their learning experiences (investment failures)

    “It’s only when the tide goes out that you learn who’s been swimming naked.”

    I think when he said it he was talking about the insurance business but it applies in general to the stock market. In a rising market, everyone can think they are an investment genius, but in a flat market or a market under pressure, you can see who knew what they were doing.

    2) And on selecting your company (in addition to all that you teach us !)

    “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

    “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

    “If a business does well, the stock eventually follows.”

    And from Charlie Munger

    “When you mix raisins with turds, they are still turds.”

    3) On portfolio selection.. …I know this is controversial and many would disagree but you have to remember how well Buffett understood his companies and those that ran them. I think that applies to any investor.

    “Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful”.”

    “Wide diversification is only required when investors do not understand what they are doing.”

    Buffett has an incredible number of thought provoking quotes that are worth reading and thinking about.

    Thanks for the great blog – and looking forward to the book.

    Peter

    • admin
      :

      Thanks Peter,

      They’re hard to beat! One could write a thesis on each quote. Too true and enduring perhaps to be cliches though, don’t you think?

  29. Mick L
    :

    Great blog Roger as always. Still patiently waiting for your book release. I respect your views but don’t always agree – In rebuttal to cliche 1 – I religiously use stop loss orders on any share trades. If you stop the loss and let the profits run you’ll never go broke (pardon the cliche). Keep up the great work.

    • admin
      :

      Hi Mick,

      Thanks for the thoughts. The great thing about the markets is that without different opinions we would never have any trades. I am only able to buy shares because someone disagrees (the seller). Keep up the ideas and posts even when they disagree. I believe when you are ‘trading’, stops are vital. I am not so sure for investing.

      • Nick
        :

        ‘Investing’ not ‘speculating’

        If you know the ‘business’ rather than the ‘stock’, if its falling you should backing your business analysis and value and buying more not stop-loss trading.

        Mick read Warren’s Essay to CU.

  30. Greg
    :

    Roger,

    Yet another great piece of writing, incisively nailing the type of cliche bound to leave the lazy investor also much poorer. By the way; You may be interested to know what would have been my first thought in such a gathering.

    • admin
      :

      Thanks Greg,

      As a professional investor, I keep myself open to hearing as many views as possible and I am always, always learning. I have a mental framework for categorising the things I hear and they all feed up to two boxes. One is ‘businesses’ the other is ‘prices’.

  31. Collin
    :

    …..The end result of repeating this numerous times is that the investor has several large L O S S E S (gains?) and several small profits. The net result, of course, is a loss. You can go broke taking a profit just as ……

  32. tim clare
    :

    Hi Roger – thanks for your myth-shattering post. What time period were your “annual gain in intrinsic values” calculated over? Obviously they are not all over the same period as some stocks mentioned have only been listed for a short time.

    • admin
      :

      Hi Tim,

      You are right. I will try and update the tables with the time frames for each. Some are calculated over three years (relatively new companies) and some are over 12-15 years.

  33. Collin
    :

    Thank you for wisdom.

    Please check your text below

    Cliché 1: You can’t go broke taking a profit

    Think about the statement, You can’t go broke taking a profit; A new investor is almost certain to go broke doing just that. Why? Because a new investor will inevitably purchase a share only to see the price decline. Buying a low quality company (not one of my A1’s for example) or paying too a high a price (not estimating the intrinsic value of a company) will inevitably lead to a permanent loss of capital. The share price goes down and the investor, not wanting to accept a loss, holds on in the hope that one day the shares will recover. Then suppose the next investment decision leads to a gain; do you think the investor will hold this share for very long? The short answer is no. The fear of repeating the first mistake, resulting in another loss, is just too great. Better to take a small profit now than to see the shares fall again and have another loss. The end result of repeating this numerous times is that the investor has several large L O S S E S (gains?) and several small profits. The net result, of course, is a loss. You can go broke taking a profit just as surely as you can go broke saving money buying excessively-priced items that are on sale.

    A further example refers to inflation, and its effect on the purchasing power of your money. Trading frequently involves

    • admin
      :

      Hi Paul,

      Interesting isn’t it? Good cash flow and high rates of return on equity. SOmething to do with monopoly routes I suspect. Further investigation required. generally however the economics should catch up.

  35. geoff blake
    :

    Roger,
    I cannot see anywhere where you have discussed Newcrest Mining, is there any reason for this?

  36. Sara
    :

    Hi, Roger,

    One of the cliches I think even you can’t argue with it after what we’ve experienced: “It goes up by the steps and goes down by the lift.”

    Many years ago I went to one of your talks in the stock exchange and bought one of your Intrinsic Value excel spreadsheets. I noticed that some of your recent valuations are higher than what the spreadsheet calculates, CBA for example. Have you moved away a lot from it now? Is it still good to use the spreadsheets any more? Is it possible for you to point out some of the variations you’ve made from it so that people like myself know what to be mindful of when using it as a reference? Many thanks.

    Best Regards,
    Sara

    • admin
      :

      Hi Sara,

      In the pursuit of complete and total independence I have spent the best part of 3/4’s of a year developing a completely new, unique and original approach to valuing companies. The result of course will be that the valuations are different. Some will be higher and some will be lower. I am very very happy with my new formula. My forthcoming book will give you all the steps to value a company and (rather than repeat them here and take the wind out of the book’s sails) you should be able to conduct a comparisons yourself between my approach and that used by anything or anyone else, once you have read it.

      • Lloyd Taylor
        :

        Hi Rodger,

        “My forthcoming book will give you all the steps to value a company and (rather than repeat them here and take the wind out of the book’s sails) ………..”

        You’re a consummate marketer as well as the most insightful investor and analyst of stocks on the Australian investment landscape.

        I think you mean sales rather than sails?

        LOL!

        Regards
        Lloyd

      • admin
        :

        Hi Lloyd,

        Thanks I think! Sales/Sails – a play on words like Value.able! I have just spent 9 months or so writing a book that will knock your socks off. Seems silly to let the cat out of the bag just a week or two before its release.

  37. Craig
    :

    Hi Roger,

    Here’s two for the price of one. And it covers all bases.

    “There are certainly green shoots, or maybe it’s a dead cat bounce”.

    Regards,
    Craig.

  38. Neil
    :

    Hi Roger

    I like the following cliches:

    1. Even turkeys fly in a gale
    2. A rising tide lifts all boats
    3. Shares rise by the stairs and fall via the lifts

    enjoy yor insights

    all the best
    Neil

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