# My Investment Journey



## KnowThePast

Hi everyone,

As a long time lurker on this forum, I was inspired by Robusta's thread documenting his investment journey. Therefore, I decided to shamelessly steal his idea and do the same. Opening yourself to public ridicule is a great way to make sure you think things through properly.

I've been learning about investing for a few years now, but kept my investing strictly to my super fund. I have had some professional exposure to analysis of financial statements, risk assessment and software development, skills I intend to use and consider my competitive advantage. I'll post more on this at some point later.

Basic rules:
1. Don't lose money.
2. I have up to $50,000 to invest.
3. No leverage.
4. I will make one $2,000 investment a month.
5. Rule number 3 will be broken if there is a special opportunity, or if there's none with sufficient margin of error.
6. No more than 20% of portfolio into a single stock, but I won't necessary sell down what I already own.

What do I want to own? I am generally of an opinion that selecting stocks not to buy is not only more important, but also much easier to do. At the same time, there's often some very special opportunities in places where no one looks. Also, some companies have special characteristics where standard rules don't apply. For instance, I will tolerate higher debt if a company owns premises it operates on, or other quality assets to back it up.

So I will look at (nearly) everything. But generally, I will only buy companies that have at least some of these:
1. I feel have every chance of being around and doing very well 20 years from now.
2. Company founder or long serving management on board, and owning a large stake in the company.
3. Consistently profitable over many years.
4. Acceptable or higher ROC.

Things I generally won't invest in:
1. Things I don't understand, whether it is the business, the industry, or the annual reports.
2. Companies that are generally not profitable.
3. High debt.

I am also cautious with companies that issue lots of new shares and spend a lot on acquisitions, but I feel these need to be analysed individually to form an opinion.

How much? Cheaper than it's worth. We can discuss the finer details.

When will I sell? Standard criteria:
1. When I made a mistake.
2. When circumstances changed.
3. When there's a better investment.
4. In some special cases, when performance objective was complete. Will mainly apply to less than stellar companies trading below NTA.

I should also mention that I am very much of a "value" nature. Stop losses, charts, momentum, etc. do not suit me for multiple reasons.

Going forward I will document all my trades, and provide my reasoning behind them. I will post some random thoughts of mine every now and then. I hope someone will find it as useful as Robusta's thread was for me.

Thank you for reading.


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## VSntchr

I'll be reading your thread!
Judging by the other similar threads to this it will be an invaluable learning experience for you.
The documenting process really makes you accountable for your investing decisions and may prevent you from making silly mistakes.

Good luck!

P.S, Did you mean that rule 4 might be broken (rather than rule 3)?


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## robusta

Good on you. I will be reading with great interest. Good luck, not that I think you will need it with those rules and the right attitude.


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## skc

Welcome and congrats on starting a thread on your investment. I hope you standby your committment and post here for a long time.

Just some quick comments on your rules:



KnowThePast said:


> Basic rules:
> 1. Don't lose money.
> 2. I have up to $50,000 to invest.
> 3. No leverage.
> 4. I will make one $2,000 investment a month.
> 5. Rule number 3 will be broken if there is a special opportunity, or if there's none with sufficient margin of error.
> 6. No more than 20% of portfolio into a single stock, but I won't necessary sell down what I already own.




Rule 1: Really that's your intent, not a rule.
Rule 4: Seems too stringent. Assuming your intent is to stop yourself going all in too early, something like no more than 3 buys per month will do the job while giving you much more flexibility. With $50k and $2k per position you will potentially have 25 different shares which would probably be too many. Not to mention inefficient from a commission point of view. Something like 10% (i.e. 5k) for a low risk play and 5% for a high risk play may be more appropriate. 
Rule 6: You are starting with 4% of portfolio per stock so do you anticipate some stock might rise 5x (to 20%) or are you expecting to add to the same stock over time (i.e. making multiple entries). If so, consider writing the rules for re-entry as well.

Anyhow, best of luck with your investments.


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## KnowThePast

VSntchr said:


> I'll be reading your thread!
> Judging by the other similar threads to this it will be an invaluable learning experience for you.
> The documenting process really makes you accountable for your investing decisions and may prevent you from making silly mistakes.
> 
> Good luck!
> 
> P.S, Did you mean that rule 4 might be broken (rather than rule 3)?




Thanks VSntchr. 

Yes, I did mean 4.


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## KnowThePast

robusta said:


> Good on you. I will be reading with great interest. Good luck, not that I think you will need it with those rules and the right attitude.




Thanks for encouragement Robusta, and for the inspiration to start this thread.


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## KnowThePast

skc said:


> Welcome and congrats on starting a thread on your investment. I hope you standby your committment and post here for a long time.
> 
> Just some quick comments on your rules:
> 
> 
> 
> Rule 1: Really that's your intent, not a rule.
> Rule 4: Seems too stringent. Assuming your intent is to stop yourself going all in too early, something like no more than 3 buys per month will do the job while giving you much more flexibility. With $50k and $2k per position you will potentially have 25 different shares which would probably be too many. Not to mention inefficient from a commission point of view. Something like 10% (i.e. 5k) for a low risk play and 5% for a high risk play may be more appropriate.
> Rule 6: You are starting with 4% of portfolio per stock so do you anticipate some stock might rise 5x (to 20%) or are you expecting to add to the same stock over time (i.e. making multiple entries). If so, consider writing the rules for re-entry as well.
> 
> Anyhow, best of luck with your investments.




Thanks skc, some great advice there.

I'll comment:
Rule 1 - you are right that it is intent, but there's more to it. The expanded rule is that I will try to avoid riskier investments. I will invest in things that I think are safest for preservation of capital. There's a great illustration of Risk/Return I saw in "The Most Important Thing" by Howard Marks:




The rule is that I will stay closer to the left side of the chart. Less potential returns and less potential losses. Risk, of course, has no precise definition, but my hopefully my intentions are now clear.

Rule 4 - Yes, it is very stringent and will cost me more in brokerage. I will start off slowly and review as I go along. Great suggestion for different high/low risk percentages.

Rule 6 - $2,000/month could go into the same stock, I doubt I will ever hold as many as 25 different ones. I don't have any separate rules for re-entry as I don't see them as anything different as my Buy rules. If a stock satisfies my criteria, and I think it is the best use of my money at the time compared to all other stocks, than I will buy more of it. Up to 20%.


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## KnowThePast

The honor of my first purchase goes to CAB @ 4.03.

Thoughts in no particular order:

Ticks most of my boxes for a great company:
- original owner
- good ROC
- moat against competition.

Debt is higher than I like, but their revenues are more dependable compared to an average company.

The new regulations are a blessing in disguise, I think, for two reasons:
1. Make it more difficult for competition.
2. Close this chapter and we should hopefully have no more inquiries for many years now.

There's no longer much uncertainty about the future of the taxi industry - and here's what I like: even assuming all of the missed revenue will come out directly out of profit, company should still make about $50m, or 0.41/share. Plus over $2/share NTA.

Assuming the dividend falls by as much as worst case profit scenario, it will still be over 6%.

It is very rare that you see an industry leader with a competitive advantage at these kind of prices.

With any investment there are risks. Investing is about putting a price on the risk that you are taking. First of all, of course, one has to know what the risks are. I see two with CAB. One is competition. That is a risk with almost any company and I believe CAB is more capable than most in staying ahead.

It's the second one that I am more worried about, though - what is it that I may not know? My assumption was always that I will invest in smaller stocks, as larger companies have too many people following them and they are unlikely to be mispriced or misunderstood. Out of 21 companies that I feel are most undervalued at the moment, only 6 have a valuation of over $300m. 

In this case, the price seems very cheap to me, but I am aware that I am making a judgement that is different from a very large group of people. Time will tell whether I am an idiot or a lucky idiot. Or perhaps someone on this forum will do so much sooner.


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## skc

KnowThePast said:


> The new regulations are a blessing in disguise, I think, for two reasons:
> 1. Make it more difficult for competition.
> 2. Close this chapter and we should hopefully have no more inquiries for many years now.
> 
> There's no longer much uncertainty about the future of the taxi industry - and here's what I like: even assuming all of the missed revenue will come out directly out of profit, company should still make about $50m, or 0.41/share. Plus over $2/share NTA.
> 
> Assuming the dividend falls by as much as worst case profit scenario, it will still be over 6%.
> 
> It is very rare that you see an industry leader with a competitive advantage at these kind of prices.




Very good contrarian analysis - it's well grounded in logic and numbers. This trade may or may not work out but I can see you will do well if you continue to use this kind of intellectual process.

One suggestion: When you enter a position, write down the knowable and measureable conditions which you will accept you are wrong (e.g. EPS <$xm, more inquiry etc).


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## VSntchr

skc said:


> Very good contrarian analysis - it's well grounded in logic and numbers. This trade may or may not work out but* I can see you will do well if you continue to use this kind of intellectual process*.
> 
> One suggestion: When you enter a position, write down the knowable and measureable conditions which you will accept you are wrong (e.g. EPS <$xm, more inquiry etc).




Strongly agree with the bold part, the thought process is evidently good here.

Good suggestion too...investing is a whole lot easier on the mind and the bank account if you can quickly accept situations when you are wrong and take action. Having a set of measurable outcomes to assist this process is a great idea.


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## craft

KnowThePast said:


> "The Most Important Thing" by Howard Marks:




I see you have also taken on his second order thinking.

Nice thread - hope to read more of it 

Cheers.


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## KnowThePast

skc said:


> Very good contrarian analysis - it's well grounded in logic and numbers. This trade may or may not work out but I can see you will do well if you continue to use this kind of intellectual process.
> 
> One suggestion: When you enter a position, write down the knowable and measureable conditions which you will accept you are wrong (e.g. EPS <$xm, more inquiry etc).






VSntchr said:


> Strongly agree with the bold part, the thought process is evidently good here.
> 
> Good suggestion too...investing is a whole lot easier on the mind and the bank account if you can quickly accept situations when you are wrong and take action. Having a set of measurable outcomes to assist this process is a great idea.




Thank you for the kind words guys.

I really like the suggestion of having measurable criteria of when to exit. Had great trouble coming up with one, however.
- Earnings are no good. Plenty of good companies have bad years, which they recover from, as long as business fundamentals are good.
- ROC, ROE and other performance ratios are not good for the same reason.
- Debt growing is a worrying sign, but one that needs be investigated for cause/benefit before being acted on.
- Inquiries are not a loss signal itself - as someone pointed out in CAB thread, what's good for the industry in the long term should also be good for the industry leader.
- market share is a figure that is difficult to obtain, more so for companies that do more than one very specific thing.
- etc.

So I thought I'd look at it another way, inspired by Howard Marks once again. I've only just finished reading it, so it's fresh in my mind. 

- When I invest, I think of what is most likely thing to happen to the company long term, and invest at a price that should give me an appropriate return if that "most likely" scenario happens. 
- Just how likely that "most likely" scenario is determines the risk of that investment. The less likely I feel that scenario is, the more margin of safety I would require on my price.

So, I think it is a good idea to list what my "most likely" scenario is. Even a better idea is to list all my less likely scenarios. In the future, if I feel that one of them is developing, that will be my exit consideration trigger. 

Applying it to CAB:

*Most likely scenario*: After a dip in earnings over the next 2-3 years, company continues to earn money at the same rate. It may grow, but even if it continues at its current level, paying the same dividends, I am content with that. Bus division continues to grow. Company possibly expands into other related areas.

*Less likely possible scenarios*:
- Competition knocks CAB off industry leader position. This will likely look result in steady Revenue & ROC declines over many years.
- Government regulations further reduce takings to a point where it's no longer profitable enough.
- Reginald Kermode retires and new management going on leveraged acquisition spree.

Would love more discussion on possible outcomes, although these would probably belong in a CAB thread.


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## Ves

KnowThePast said:


> The rule is that I will stay closer to the left side of the chart. Less potential returns and less potential losses. Risk, of course, has no precise definition, but my hopefully my intentions are now clear.



Thank you for the posts so far.   I have enjoyed reading them and look forward to seeing how you progress.   I also stick to the left side of the chart you posted as much as possible.   My goal is always to buy and hold companies with strong competitive positions at the right price, for as long as possible (until their economics deteriorate).

The mental process is the most important element to me... you seem to have your own in very good shape.


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## tech/a

Can I ask what plans you have for Risk mitigation?


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## galumay

Good thread, Knowthepast, i too have started a similar journey as documented in my thread, I also have decided to document my investments for similar reasons.

Interestingly CAB was also my first investment and my analysis was very similar!

I reckon documenting your reasons for buying a stock, your reasons for entry, possible exit strategies and an understanding of risk is a very good tool.

One thing this forum has really stressed for me is developing a strategy and having a system that is consistent with your personality and appetite for risk is imperative.

There are a number of really helpful and switched on members of ASF that are following similar strategies to ours and they are a great resource to learning the game.

Good luck!


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## skc

KnowThePast said:


> Thank you for the kind words guys.
> 
> I really like the suggestion of having measurable criteria of when to exit. Had great trouble coming up with one, however.
> - Earnings are no good. Plenty of good companies have bad years, which they recover from, as long as business fundamentals are good.
> - ROC, ROE and other performance ratios are not good for the same reason.
> - Debt growing is a worrying sign, but one that needs be investigated for cause/benefit before being acted on.
> - Inquiries are not a loss signal itself - as someone pointed out in CAB thread, what's good for the industry in the long term should also be good for the industry leader.
> - market share is a figure that is difficult to obtain, more so for companies that do more than one very specific thing.
> - etc.




All true. But the point of a hard, measurable exit is to prevent further losses from you being wrong with your initial investment. Yes over the years you will get plenty of false negatives - but that's the price you pay for risk management.



KnowThePast said:


> In the future, if *I feel that one of them is developing*, that will be my exit consideration trigger.




This is going to be trick... feeling is by definition subjective, especially with money on the line (and possible already in loss). You need hard objective measures to action, and you plan that ahead before you committ. That's one way to take the emotional variables out of your investing.


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## odds-on

skc said:


> This is going to be trick... feeling is by definition subjective, especially with money on the line (and possible already in loss). You need hard objective measures to action, and you plan that ahead before you committ. That's one way to take the emotional variables out of your investing.




Keep it simple. Sell criteria:

1.	Dividend cut 
2.	Dividends do not grow at a minimum rate over a suitable rolling review period (e.g. 10% over rolling 3 year period).

Cheers


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## tech/a

odds-on said:


> Keep it simple. Sell criteria:
> 
> 1.	Dividend cut
> 2.	Dividends do not grow at a minimum rate over a suitable rolling review period (e.g. 10% over rolling 3 year period).
> 
> Cheers




So you will wait 3 yrs to determine if there is a sell criteria.
Would you sell if the stock had decline 50% in that time or would you see this as a further buy opportunity?


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## KnowThePast

galumay said:


> Good thread, Knowthepast, i too have started a similar journey as documented in my thread, I also have decided to document my investments for similar reasons.
> 
> Interestingly CAB was also my first investment and my analysis was very similar!
> 
> I reckon documenting your reasons for buying a stock, your reasons for entry, possible exit strategies and an understanding of risk is a very good tool.
> 
> One thing this forum has really stressed for me is developing a strategy and having a system that is consistent with your personality and appetite for risk is imperative.
> 
> There are a number of really helpful and switched on members of ASF that are following similar strategies to ours and they are a great resource to learning the game.
> 
> Good luck!




Thanks galumay,

Great minds think alike, obviously.


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## KnowThePast

tech/a said:


> Can I ask what plans you have for Risk mitigation?




On a portfolio level:
- diversify into multiple stocks in different industries.
- invest my capital over 2+ years
- possibly diversify into another market, as I reside overseas at the moment.

On an individual stock level, none whatsoever. 



skc said:


> All true. But the point of a hard, measurable exit is to prevent further losses from you being wrong with your initial investment. Yes over the years you will get plenty of false negatives - but that's the price you pay for risk management.
> 
> 
> 
> This is going to be trick... feeling is by definition subjective, especially with money on the line (and possible already in loss). You need hard objective measures to action, and you plan that ahead before you committ. That's one way to take the emotional variables out of your investing.




I agree that having a hard, measurable exit trigger would be a very nice thing to have. It's just that I can't logically come up with one that makes sense.

Keep in mind that my objective is to buy shares that will pay me consistent dividends and that I will be able to pass on to my kids in many years time. 

Selling if earnings or other performance criteria decline sounds like a great idea, except that when it happens, the share price would be smashed by that point already. And the more "wrong" I was, the harder it will be hit. Unless the company has no prospects of ever recovering (or even temporarily arresting the decline), it is likely that this will be the worst possible time to sell!

Plenty of quality companies have a decline in earnings or share price that they recover from (long term). I would have sold most of my portfolio during GFC, had I followed this. So, with that in mind, I did a quick test. I look at my notes from 2008 and got a list of companies that I thought were top companies at the time. Not now, back then. Not necessarily best investments at the time, just best companies. 16 companies at the time, which met all/most of this criteria:
- Original founder or long serving directors. Preferable with large ownership.
- Consistent profitability over many years
- Acceptable or higher ROC
- Low debt
- Business I understood

I then had a look at the result I would have gotten if I bought exactly 6 years ago, at just about the market peak:
With dividends: +36.32%
Without dividends: 10.37%.
XAO: -23.8%.
11 companies made money, 5 lost, none bankrupt or anywhere near it. Biggest loser, funnily enough, was CAB at -57%. Second biggest: -39%. Two top winners: 209% and 179%.

Not bad for a worst case scenario and no stop losses. What if I didn't just dump all my money into stocks on one day and bought over a number of years, with an average price being 7 years ago:
With dividends: +107.85%
Without dividends: 68.21%.
XAO: -3.2%.
13 companies made money, 3 lost. Biggest loser - 32%. Biggest winner: 323%

What about at 10 years ago? 2 companies did not exist yet, so only 14:
With dividends: 229.64%
Without dividends: 165.79%
XAO: 56.2%
13 companies made money, 1 lost (-22%). *CAB made 92.7%*

Here's another interesting take on stop losses: I bought CAB now because I think it's great value at the current price. But I own it in my super, having bought it years ago at $5.13. Should I sell it now in my super, even though I am buying it outside of it?


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## KnowThePast

Just a week in, and I am already breaking a rule about once a month investing.

A good opportunity is knocking on the door, and I felt that I need to act quicker, rather than wait for next month.

Therefore, I bought 4000 shares of SDI @ 0.50.

How's this for value:
PE: 29.70
ROC: 5

I guess this needs an explanation. PE is based on last years earnings of 1.7/share. This year, as at half year report, management expects earnings between 4-5/share, which would make the PE roughly 10.

The company manufactures its products in Australia and sells them overseas, so they've been hurt badly by the Australian dollar rise over the last few years. Their revenues appear quite flat over the last few years, but taking AUD rise out of the equation, they've almost doubled.

But wait, there's more. While Australia dollar has risen spectacularly, it is nothing compared to what has happened to silver price, which is their main cost of goods expense. Silver price has gone from $9/oz in 2009 to over $40/oz in 2012.

Few companies would be able to weather a storm on two fronts like that, but SDI remained profitable, although a lot less so than previously.

Now the fun bit, everyone knows that AUD is taking a beating, more importantly, Silver has now fallen to $21.74/oz, mainly in the last 4-6 months. There's been no announcement from the company on this front, but my guess would be that this is good thing. It may even improve their earnings.

Safety of capital is very important to me, and I do not like to speculate on short term movement. So what am I getting for this money, should be silver/AUD gamble does not work out:

- company with proven profitability over many years in the most difficult of times.
- original founder still in place and owns almost half the shares.
- Low debt.
- variety of products and markets for diversification.
- some of the manufacturing facilities are being offshored at the moment, which should further reduce costs, although I suspect this may cause some pain at first.
- profit was reduced by $2.2m due to losses in Brazilian operations. Things seem to be improving there, even without the recent help of silver price. Stopping the bleeding there will help a lot.

At the current market capital of $58m, I am getting a company that is earning $5m/year with plenty of potential for more, and $25m NTA. Works for me.



Current status:
Code    Qty    Buy    Current    Profit
CAB    500     4.03    3.82        -$105
SDI     4000    0.5      0.5         $0
Total                                    -$105

Brokerage: $63.80.

Total invested: $4078.80.
Total P/L: *-$168.80.*
              : *-4.14%*
XAO:       : -0.97%


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## KnowThePast

A monthly update:


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## skc

KnowThePast said:


> A monthly update:
> 
> View attachment 53089




British Pounds?


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## KnowThePast

skc said:


> British Pounds?




Yes should be AUD, of course. Well spotted skc.

I am in UK at the moment and Excel formatted it in GBP automatically. My brain, being used to seeing the pound for 3 years didn't think anything of it.

Will correct it for the next update.


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## Sir Osisofliver

Hi KTP - I thought I might see if I can help you by providing some commentary and by asking a few questions. These questions aren't because I want to know, just that I want to see if you know and the level of rigor in your investment plan.

Here we go.....



> Basic rules:
> 1. Don't lose money.
> 2. I have up to $50,000 to invest.
> 3. No leverage.
> 4. I will make one $2,000 investment a month.
> 5. Rule number 3 will be broken if there is a special opportunity, or if there's none with sufficient margin of error.
> 6. No more than 20% of portfolio into a single stock, but I won't necessary sell down what I already own.




1. You are going to fail at number 1 at some point in your investing journey. We all have and do lose money occasionally, but the most important thing is how you react to this event. This is after all what *financial risk* is - an outcome that is different from the *expected* outcome. I've yet to meet anyone who has ever achieved a 100% win/loss ratio, or who had everything they expect happen exactly right.

3. At it's core leverage is using other people's money to make money...if you have the skill and a system or methodology that gives you a positive expectancy. Appropriate use of leverage allows you to create a significantly faster compounding equity curve and it has methods that allow you to manage the risks involved.  May I ask why this rule is in place? (IE Do you understand the difference between a *debt* and a *liability?*)

5. I define my investing methods into Hard rules and Soft rules. Hard rules cannot be broken, soft rules have flexibility. For me I have criteria so ensure that my decision to vary a soft rule is detailed...and then the outcome is evaluated. I cannot state the importance of evaluation enough. Without evaluation we do not learn from our mistakes. Do you have a clear understanding about what your rules are and the circumstances in which you will treat them as guidelines? How do you intend to evaluate your investment decisions?



> When will I sell? Standard criteria:
> 1. When I made a mistake.
> 2. When circumstances changed.
> 3. When there's a better investment.
> 4. In some special cases, when performance objective was complete. Will mainly apply to less than stellar companies trading below NTA.




I agree with SKC that you need to identify a methodology for a Hard exit rule - despite the difficulties of doing so in a methodology geared towards fundamental analysis. What FA ratio's do you employ in your selection criteria? Perhaps you could look at some of the cash flow ratio's for a hard exit trigger, but even this will potentially mean that you suffer significant time delay between review periods.

1. How do you know you've made a mistake?
2. Which circumstances need to change before you exit?
3. Have you considered the taxation and Cost base implications of churning your funds? 


That's all for now - nice to see a thoughtful process at work.  Will read the thread with interest.

Cheers
Sir O


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## KnowThePast

Bought LYL 500 @ 4.31
As with other posts, I will mainly describe my reasons for buying this company at this point in time, rather than a general overview of the company’s business.

I do not agree with the current gloomy outlook for the resource sector.
Regardless of what happens in the next few years, demand for resources will grow over the long term. That said, no doubt that due to cautiousness, and difficulties in obtaining funding, there will be fewer projects available and the next couple of years may be rough.
So, what would one look for to buy in this environment? I would look for something that:
1. Has a very strong financial position, few years of lower activity should not place the business at risk.
2. Low capital requirements, or the ability to easily scale down the business to reflect lower demand.
3. Has good reputation, and is therefore more likely to increase market share during difficult times while less efficient competitors may go out of business.
4. Trades at a sufficient discount to allow for a few difficult years.

Which brings me to LYL.
1. No debt, $30m cash.
2. Low capital requirements, scaling up/down should not be a problem.
3. It is sad in some ways, but in Engineering/Construction/IT, phrases such as "delivered to client ahead of time and budget" is such a rarity, that it catches the eye immediately.
As for the price, I looked at it this way. What if there were no concern for the outlook of the sector, what would this company be worth? Looking at financials, it was growth very quickly, both revenue and profit and would therefore deserve a PE which is well above average. Buying it at a PE of 7.5 now is the price I pay for having to wait 3-5 years (although I don't think it will take that long for the sector to turn around). 

Concerns/risks/other:
- Being a small company, it is more reliant on a few large projects, so a single client loss may have a big effect.
- For this company, I would have preferred for directors to have lower salaries. Their large share holdings and big cash reserves give me hope that good dividends will be paid even in difficult times.
- If times truly will be difficult in the next few years, there’ll be plenty more bad news, and share price could well go lower, even with no changes in this particular business.
- Founders leaving or selling most of their holdings would be a bad warning sign for me.

At the current price, it is acceptable to me for the profits to half and growth to resume in full after 3-5 years. Until then, I will have to weather the storm, I suspect.


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## KnowThePast

Thanks Sir O for the thought provoking post. I've also just read your thread with great interest. Thank you for making me waste half a day.



Sir Osisofliver said:


> Hi KTP - I thought I might see if I can help you by providing some commentary and by asking a few questions. These questions aren't because I want to know, just that I want to see if you know and the level of rigor in your investment plan.
> 
> Here we go.....
> 
> 
> 
> 1. You are going to fail at number 1 at some point in your investing journey. We all have and do lose money occasionally, but the most important thing is how you react to this event. This is after all what *financial risk* is - an outcome that is different from the *expected* outcome. I've yet to meet anyone who has ever achieved a 100% win/loss ratio, or who had everything they expect happen exactly right.




My rule about not losing money has copped some criticism and rightly so. It is not really a rule but an investment "philosophy". It was meant to be a rule about sticking to safer stocks as much as possible, but I couldn't think of any hard measure to stick to.

In general, I think it is relatively easy to pick a "good" company with a somewhat high degree of accuracy, even easier to pick a bad one. Based on this philosophy, I spend most of my time thinking about potential risks and certainty of an investment (as much as it is possible).

There's some great companies that I would love to buy, but risk aversion means that won't in many cases. For instance, the price might be sky high, or the debt too high, or the founders left the business recently, etc. In most cases, these examples will not be a concern (for a good company), but not often enough for my risk tolerance.



Sir Osisofliver said:


> 3. At it's core leverage is using other people's money to make money...if you have the skill and a system or methodology that gives you a positive expectancy. Appropriate use of leverage allows you to create a significantly faster compounding equity curve and it has methods that allow you to manage the risks involved.  May I ask why this rule is in place? (IE Do you understand the difference between a *debt* and a *liability?*)




I fully agree. But I do not yet have enough confidence in my skill. I will certainly revisit this rule at some point in the future.



Sir Osisofliver said:


> 5. I define my investing methods into Hard rules and Soft rules. Hard rules cannot be broken, soft rules have flexibility. For me I have criteria so ensure that my decision to vary a soft rule is detailed...and then the outcome is evaluated. I cannot state the importance of evaluation enough. Without evaluation we do not learn from our mistakes. Do you have a clear understanding about what your rules are and the circumstances in which you will treat them as guidelines? How do you intend to evaluate your investment decisions?




I evaluate all my purchases on a regular basis. Even more important, I think, is to evaluate many others that you haven't bought. 

With most stocks that I start to research, I know that I wouldn't be interested within the first 5 minutes. However, I do still enter all the data into my system, take notes, make projections and valuations. It's not as deep of analysis as the stocks that I do buy.

This has been extremely educational for me and I plan to continue doing this for as long as I invest.

In addition to testing my analysis/conclusions ability, it also allows me to get all the data into my software, including some manual adjustments and intangible measures, which than gives me the ability to do some back testing of my researched stocks.



Sir Osisofliver said:


> I agree with SKC that you need to identify a methodology for a Hard exit rule - despite the difficulties of doing so in a methodology geared towards fundamental analysis. What FA ratio's do you employ in your selection criteria? Perhaps you could look at some of the cash flow ratio's for a hard exit trigger, but even this will potentially mean that you suffer significant time delay between review periods.
> 
> 1. How do you know you've made a mistake?
> 2. Which circumstances need to change before you exit?
> 3. Have you considered the taxation and Cost base implications of churning your funds?
> Sir O




To get the easy things out of the way:
1. Yes, I do consider taxation. I do not have any strategy, it is an individual stock decision that is considered at that point in time. I can't imagine I will ever make an stock buy/sell based on tax alone.
2. What FA ratios do I employ? None, really. I try to be as thorough as possible to analyze a company as a potential owner. Lots of ratios help me with that, but I don't use any one of them as a trigger. I use different valuations depending on the situation. Usually, a kind of DCF or even a simple earnings multiple. 
I fully agree with the fact that cash flow is what matters; I also find that in majority of cases (especially with "good" companies), difference between cash flow and reported profit is minimal. I always check it, but usually than just use EPS, as the difference is not worth bothering about. 

The difficult question is about having a hard sell trigger. As I said in my previous posts, I fully agree with the concept, but can't think of anything that makes sense. In the majority of cases, any hard sell criteria will be linked to a decrease in share price. Most ratios will be linked/related to earnings. And earnings will be linked to share price. Not always, of course, but usually. So, a hard sell criteria = a stop loss order.

Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.

Having a hard sell when the underlying business changes would be much nicer, but I can't think of any hard criteria for it. The only one that comes close is the resignation of founding directors. That would be a sell criteria in many cases for me, but not always.

With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?




Sir Osisofliver said:


> That's all for now - nice to see a thoughtful process at work.  Will read the thread with interest.
> 
> Cheers
> Sir O




Thanks Sir O, would love for you to continue to contribute to my thread.


----------



## skc

KnowThePast said:


> The difficult question is about having a hard sell trigger. As I said in my previous posts, I fully agree with the concept, but can't think of anything that makes sense. In the majority of cases, any hard sell criteria will be linked to a decrease in share price. Most ratios will be linked/related to earnings. And earnings will be linked to share price. Not always, of course, but usually. So, a hard sell criteria = a stop loss order.
> 
> Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. *At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? *If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.




So what criteria would you use to identify if the business has changed? Or you plan to make it up after if happens? Fair enough for an investor not to use a price-based stop loss... but you must have an event based stop loss. If you don't sell when price falls, and you don't sell when earnings falls... when the heck do you sell? 

Yes when the share price falls after bad news, chances are the share price has moved lower than what your "value" would suggest - but this is the exact scenario where "investors" follow their stock to the graveyard. After the first profit downgrade in Billabong, you could have sold at 20x higher than recent share prices. At the time the stock was cheap if you look at the company's forecast EPS to then preveiling share price... but what you end up realising is that the share price usually leads the company's performance down. The share was always "cheap" relative to the last profit guidance... and 6 profit warnings later BBG shareholders are down ~90%. BLY is another good example. 

Sometimes, in order to prevent a 90% loss, you take a 25% loss. Every now and then you'd take a false positive (or is it false negative) and sold on a temporary earning dip. But it happens and you move on. There will always be other opportunities to deploy your capital.



KnowThePast said:


> Having a hard sell when the underlying business changes would be much nicer, but I can't think of any hard criteria for it. The only one that comes close is the resignation of founding directors. That would be a sell criteria in many cases for me, but not always.
> 
> With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?




The simplest and most rational hard sell criteria is one that's based on your investment thesis being invalidated. If your investment in CAB is based on CAB making 10cps and growing every year, you exit when the earning stop growing regardless of how price has been savaged on such news. If your criteria is that CAB makes 10cps and growing over a 2 year period, you then wait for 2 years worth of report. 

Not using a hard sell because it's too hard to think of one is not a very good excuse, nor very good risk management.


----------



## Sir Osisofliver

KnowThePast said:


> Thanks Sir O for the thought provoking post. I've also just read your thread with great interest. Thank you for making me waste half a day.




It's not a waste if you learnt something. 



> My rule about not losing money has copped some criticism and rightly so. It is not really a rule but an investment "philosophy". It was meant to be a rule about sticking to safer stocks as much as possible, but I couldn't think of any hard measure to stick to.




Define "safe" - you are of course talking about risk, so how you decide that a stock is "risky"? Do you know how Asset Managers attempt to compare a stock's correlation to the broader market to assign a value to risk?



> In general, I think it is relatively easy to pick a "good" company with a somewhat high degree of accuracy, even easier to pick a bad one. Based on this philosophy, I spend most of my time thinking about potential risks and certainty of an investment (as much as it is possible).




But financial risk is not about *predictable* scenario's, but unpredictable scenario's, IE the difference between the *actual* versus our expected return. If I back-test a system against a set of data, and it runs perfectly accurately for 11 and a half months, but currency moves down, causing International investors to pull out of Australia rapidly against a background of end of financial year profit taking and Kevin Rudd gaining control of the Labor Party all in the last two weeks which impacts my performance...that is financial risk.

In your simple plan so far aside from a lack on a hard exit, I also don't see a hard *target*. Something to measure against.  This might be as simple as a 1% alpha of the market level of return, or an 11% TSR in twelve months or just a number, but without a benchmark how are you meant to measure your performance after 3,6,9 and 12 months?







> In addition to testing my analysis/conclusions ability, it also allows me to get all the data into my software, including some manual adjustments and intangible measures, which than gives me the ability to do some back testing of my researched stocks.
> 
> To get the easy things out of the way:
> 1. Yes, I do consider taxation. I do not have any strategy, it is an individual stock decision that is considered at that point in time. I can't imagine I will ever make an stock buy/sell based on tax alone.



 I asked the question because you are trading within a SMSF right?  Have you considered what other advantages a SMSF may bestow on your goals and objectives?







> 2. What FA ratios do I employ? *None*, really. I try to be as thorough as possible to analyze a company as a potential owner. Lots of ratios help me with that, but I don't use any one of them as a trigger. I use different valuations depending on the situation. Usually, a kind of DCF or even a simple earnings multiple.
> I fully agree with the fact that cash flow is what matters; I also find that in majority of cases (especially with "good" companies), difference between cash flow and reported profit is minimal. I always check it, but usually than just use EPS, as the difference is not worth bothering about.
> 
> 
> 
> 
> Until it is worth bothering about (financial risk = unexpected).
> 
> 
> 
> 
> 
> The difficult question is about having a hard sell trigger. As I said in my previous posts, I fully agree with the concept, but can't think of anything that makes sense. In the majority of cases, any hard sell criteria will be linked to a decrease in share price. Most ratios will be linked/related to earnings. And earnings will be linked to share price. Not always, of course, but usually. So, a hard sell criteria = a stop loss order.
> 
> Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.
> 
> Having a hard sell when the underlying business changes would be much nicer, but I can't think of any hard criteria for it. The only one that comes close is the resignation of founding directors. That would be a sell criteria in many cases for me, but not always.
Click to expand...



OK Do you understand the concept of a free carried investment? Because what I see in the above is a buy and hope. If you cannot think of a method to give yourself an exit, what mechanism will you use to take profit? Perhaps something you could consider (which requires you to be *very* successful in your stock selection) is to aim to take out of your investment your original funds (or a percentage of your original funds). You have effectively taken back the principle and the remaining holding is "free carried". IE fluctuations in capital value and dividend stream have less impact and risk on your portfolio over the longer term.







> With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?
> 
> Thanks Sir O, would love for you to continue to contribute to my thread.




It's difficult (if not impossible) to find a hard sell exit if you don't use FA ratio's, and won't consider a stop loss mechanism.


Cheers

Sir O


----------



## craft

KnowThePast said:


> With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?





I don't use hard exit rules with my FA strategy.

My reason is much along the lines that it’s incredibly hard to define beauty but you know it when you see it.

The trick is temperament. Because even though you don’t have hard exits to reinforce discipline – you must not miss an exit when your judgement tells you the situation is turning ugly.

Obviously my suggestion regarding no hard stops means no safety – you are free climbing!  Everything comes down to judgement and temperament.

Diversifying, averaging, buying quality, MOS, keeping to the left of Marks' chart etc all keep your route grade down so with the requisite skill and experience and of course suitable judgement and temperament, free climbing easy routes may be the best risk reward for your personality.

If not, and it appears you need to accommodate 







> I still really like the idea of a hard sell exit



 then make some tweaks to the strategy before you get too committed.



Enjoy *your* journey.


----------



## craft

Sir Osisofliver said:


> OK Do you understand the concept of a free carried investment? Because what I see in the above is a buy and hope. If you cannot think of a method to give yourself an exit, what mechanism will you use to take profit? Perhaps something you could consider (which requires you to be *very* successful in your stock selection) is to aim to take out of your investment your original funds (or a percentage of your original funds). You have effectively taken back the principle and the remaining holding is "free carried". IE fluctuations in capital value and dividend stream have less impact and risk on your portfolio over the longer term.
> Sir O




Never understood this "Free” carried concept seems like some sort of psychological crutch to me. But then I’ve never made a distinction between original capital and open profit either.  At risk – Not at risk end of story.


----------



## galumay

craft said:


> keeping to the left of Marks' chart




You have got me intrigued! My google fu only threw up some astrology charts when i searched for Mark's chart,

As Pauline Pants Down would say, "Please explain??"


----------



## Ves

galumay said:


> You have got me intrigued! My google fu only threw up some astrology charts when i searched for Mark's chart,
> 
> As Pauline Pants Down would say, "Please explain??"



Check the first page of the thread.  You are looking for Howard Marks' chart.


----------



## galumay

Ves said:


> Check the first page of the thread.  You are looking for Howard Marks' chart.




Aghh,...now i feel silly


----------



## KnowThePast

Apologies to all for neglecting to reply to the thread for a couple of weeks, have been travelling and just flat out busy with work.

Sir O and skc, thank you very much for challenging my views.

Craft, your approach is more similar to mine, but I think it needs to be expanded upon.

Having not being able to respond on this topic for a while gave me an opportunity to think about it and I think I can now define it better.

I am now of opinion that, for an active investor like myself, hard exit points, targets, etc. are not only unnecessary, but downright harmful. I must stress that, for a more passive investor, they are probably an absolute must.

So why do I think so? Becase buy, sell, hold, diversify, etc. are no different to one another. One is simply reviewing all options available and based on the best of his ability/experience, makes the best possible capital allocation decision. Both buy and sell are capital allocation decisions and it would silly (IMHO of course), to spend months researching a buy decision, only to sell it later with no thought whatsoever simple because some indicator tells you to. 

Sir O quite rightly pointed out that risk lies in what is unexpected. So why use a known criteria for an unknown event? When the event happens, one needs to weigh the options and decide whether selling is the best use of capital at this point in time. 

The key may be temperament, but I also think that temperament usually comes in to play when there's a lack of knowledge. The less skill & knowledge one has, the more emotions are on display, and the more a person is driven by it. 

One of the biggest lightbulb moments in investment for me was when I realized that I do not need to value a specific company - I just need to compare it to other options and decide where to best put my money. Making sure that "other" options include a cash account takes care of when to sell bit. I find that my emotional attachment to specific companies usually disappears once I look at it in the light of comparable options.

So, going forward, I will revaluate my holdings once a months, and decide whether they are still the best use of my capital, based on individual company's circumstances, tax, and whatever else may be relevant. I will apply the same vigour to this evaluation as I do to my Buy decisions, but I don't expect it to take much of my time, most companies have noteworthy news out juts twice a year.

I will not use sell triggers, because I don't use buy triggers. And if I ever start to think along those lines, I will just put it all into an Index fund, or have a mid life crisis and buy a nicer car.

A big thank you to all, while I didn't necessarily agree with your recommendations, this has been extremely useful for me.


----------



## brty

How does your very first rule of ......



> Don't lose money.




...possibly correlate with 



> I am now of opinion that, for an active investor like myself, hard exit points, targets, etc. are not only unnecessary, but downright harmful.




The problem is that the market is a teacher of bad habits. When something is judged as a good company by any metrics, and the price falls, the temptation is to buy more as it is now at a better price. A lot of the time the stock will turn around and get back to the original price or better. This teaches that buying more 'cheap' is a good strategy. 

Of course eventually too much gets put into a good stock as the price gets cheaper and cheaper until it does a BBG or something similar.

Having a hard exit rule, is very had to do as it is a point where you are admitting that you were wrong in the initial investment. 
The entire trick to investment by any methodology is to cut your losses so that any one investment cannot hurt you financially or psychologically. 

Most people seem to devote their entire investment strategy on entry instead of the equally important exit. You appear to be going down the same path. Most people in the market tend to be losers. There is a correlation there.

Earlier in this thread you mentioned the performance of somestocks since 2008, you did not mention when in 2008. It makes a huge difference as to performance since then. Do not make the mistake that performance in the future from 2013 can be correlated with the performance out of the GFC low.


----------



## galumay

brty said:


> The entire trick to investment by any methodology is to cut your losses so that any one investment cannot hurt you financially or psychologically.




Knowing when to sell a falling stock is nearly as tricky as knowing when to sell a rising stock though, and I think the point KnowThePast was trying to make is that the decision making process should be similar in both cases for a fundamental investor.

I bought a share recently that then fell a further 20%, i re-assessed my initial reasons for purchasing and decided that I still believed they represented good value at the price I bought, despite the subsequent fall. Now they are back up to what I paid for them, a stop loss or other hard exit trigger would have been a poor move in this case.

Perhaps I should have bought more and averaged down, but on my re-assessment I was happy with the position size and so chose not to.


----------



## brty

galumay,



> I bought a share recently that then fell a further 20%, i re-assessed my initial reasons for purchasing and decided that I still believed they represented good value at the price I bought, despite the subsequent fall. Now they are back up to what I paid for them, a stop loss or other hard exit trigger would have been a poor move in this case.
> 
> Perhaps I should have bought more and averaged down




That is precisely what I meant by the market teaching bad habits. It works 'til it doesn't, then it costs you big time.

It seems to be a lesson that all new market participants have to learn the hard way.


----------



## So_Cynical

brty said:


> When something is judged as a good company by any metrics, and the price falls, the temptation is to buy more as it is now at a better price. A lot of the time the stock will turn around and get back to the original price or better. This teaches that buying more 'cheap' is a good strategy.




This is what i have learnt, and found to be "mostly" true.



brty said:


> Of course eventually too much gets put into a good stock as the price gets cheaper and cheaper until it does a BBG or something similar.




This i have also found to be true although a rare event.



brty said:


> Having a hard exit rule, is very had to do as it is a point where you are admitting that you were wrong in the initial investment.
> *The entire trick to investment by any methodology is to cut your losses* so that any one investment cannot hurt you financially or psychologically.




I think i have found a way around that, using a methodology involving the use of a very small position size, low cost brokerage, no leverage and the acceptance of the rare total loss of a position or 3 over time. This would allow the investor to be "wrong" and only suffer a small $ loss, so that any one investment cannot hurt you financially or psychologically.

While leaving the investor open to the potential SP recovery and opportunities that may arise from holding the (loser) stock...im going to try this with my new IB account, recycling capital from the winners as per usual and avoiding the more speculative prospectors and bio techs etc.


----------



## KnowThePast

Hi brty,



brty said:


> How does your very first rule of ......
> 
> 
> ...possibly correlate with




There's no relation between the two. That first rule of mine copped plenty of beating already and I agree I should have never named it as one. 

It is simply a philosophy that I will attempt to invest in things that have a higher certainty or safety of capital, such as dependable revenue streams or asset backing. The market price is irrelevant here. I do not believe that market price is the correct definition of value (although it is more often than not). Therefore, I do not change my valuations or opinions if share price is the only change. I also don't pay too much attention to last year's performance, unless there's an underlying reason that changes the long term prospects of the company.




brty said:


> The problem is that the market is a teacher of bad habits. When something is judged as a good company by any metrics, and the price falls, the temptation is to buy more as it is now at a better price. A lot of the time the stock will turn around and get back to the original price or better. This teaches that buying more 'cheap' is a good strategy.




Very true. However, that is also the way that money is made if you are a long term, fundamental investor. The trick of course, is to be able to pick which companies will turn around and which ones won't. That is a skill, and one that can be learned if you are prepared to put the time into it. If this strategy is not working, that I would think that either I should learn more, or give up and put my money into an index fund.

Now, most of the time that the price drops substantially, there is a very real reason for it. The point I am trying to make is that once that "reason" happened and the price dropped, it's too late to sell. It would now be the time to re-evaluate that investment and decide whether it is still the best use of my money. 




brty said:


> Of course eventually too much gets put into a good stock as the price gets cheaper and cheaper until it does a BBG or something similar.




BBG was brought up a few times already as an example of terrible things that can happen, but I don't think it is an appropriate example, it was not a "great" company by any measure in my opinion.

While bad things certainly do happen to great companies, I don't think it happens often enough to warrant a strategy of selling at a first sign of trouble. Most great companies go on to recover and grow over long term. 



brty said:


> Having a hard exit rule, is very had to do as it is a point where you are admitting that you were wrong in the initial investment.
> The entire trick to investment *by any methodology* is to cut your losses so that any one investment cannot hurt you financially or psychologically.




Ben Graham, Warrem Buffet and Phil Fisher might disagree with you, just to name a few.



brty said:


> Most people seem to devote their entire investment strategy on entry instead of the equally important exit. You appear to be going down the same path. Most people in the market tend to be losers. There is a correlation there.




Having an automatic sell trigger, in my opinion, is the exact definition of not paying enough attention to this vital part of investing. I fully agree that sell decisions are just as important as buy decisions, and therefore just as much thought and analysis should go into them. Selling a company just because the price has dropped is just plain lazy (IMHO).



brty said:


> Earlier in this thread you mentioned the performance of somestocks since 2008, you did not mention when in 2008. It makes a huge difference as to performance since then. Do not make the mistake that performance in the future from 2013 can be correlated with the performance out of the GFC low.




It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards. I certainly don't expect this to repeat too often, I would certainly expect most years to be substantially better!

If I had stop losses or other auto-sell criteria, I would have not only sold most of those stocks, but I would have sold them at the worst possible time.

Holding on to them until now proved to be a substantially better investment than an index fund. 

What's even more important, is that most stocks made money, none anywhere near bankruptcy. But even if one or two companies did go down, it still would have been a superior strategy. If you look at my earlier post, it also mentions that extending time period to 10 years improved accuracy to almost 100%, and provided an even better return as compared to XAO.

If you look at my buy criteria (little debt, good ROC, management with large share ownership, few acquisitions), I reckon you will struggle to find a 10 year period at any time, where 10 stocks meeting this criteria failed to make money. 

The past, of course, is not an indication of the future. But that can be said of any share market strategy. So, I think we'll need to agree to disagree on this one.


----------



## KnowThePast

So_Cynical said:


> This is what i have learnt, and found to be "mostly" true.
> 
> 
> 
> This i have also found to be true although a rare event.
> 
> 
> 
> I think i have found a way around that, using a methodology involving the use of a very small position size, low cost brokerage, no leverage and the acceptance of the rare total loss of a position or 3 over time. This would allow the investor to be "wrong" and only suffer a small $ loss, so that any one investment cannot hurt you financially or psychologically.
> 
> While leaving the investor open to the potential SP recovery and opportunities that may arise from holding the (loser) stock...im going to try this with my new IB account, recycling capital from the winners as per usual and avoiding the more speculative prospectors and bio techs etc.




Hi So_Cynical and galumay,

I think we are mostly in agreement here.

Buying on the downturn (or not selling) may result in large losses sometimes, but by picking good companies with enough margin of safety, it is a very rare event. The potential of the upside, however, is much greater. With minimum diversification, this is the right thing to be doing.


----------



## cynic

KnowThePast said:


> Hi So_Cynical and galumay,
> 
> I think we are mostly in agreement here.
> 
> Buying on the downturn (or not selling) may result in large losses sometimes, but by picking good companies with enough margin of safety, it is a very rare event. The potential of the upside, however, is much greater. With minimum diversification, this is the right thing to be doing.




So good companies and minimum diversification are the ticket to investment success, eh!

When considering "event rarity" and "safety margin" one might benefit from reflection on the outcomes achieved by former, minimally diversified, investors in "good companies" like HIH, Davnet, ABC Learning, Babcock Brown etc.


----------



## keithj

KnowThePast said:


> Selling a company just because the price has dropped is just plain lazy (IMHO).



This made me smile.... my philosophy the exact opposite .

If you really believe that you're smarter than the market and that the cpy really is worth more than it thinks it is today, it's likely you can take advantage of an even better price tomorrow.  The market frequently has a different time frame from me which stop losses help take advantage of. Of course, you can hedge your bets by selling half at the stop loss, just in case you're the unluckiest guy in Australia who happens to sell at the exact bottom.


----------



## robusta

cynic said:


> So good companies and minimum diversification are the ticket to investment success, eh!
> 
> When considering "event rarity" and "safety margin" one might benefit from reflection on the outcomes achieved by former, minimally diversified, investors in "good companies" like HIH, Davnet, ABC Learning, Babcock Brown etc.




Hmmmm they were not good.businesses, too much debt, low ROE and poor cash flow.


----------



## KnowThePast

cynic said:


> So good companies and minimum diversification are the ticket to investment success, eh!
> 
> When considering "event rarity" and "safety margin" one might benefit from reflection on the outcomes achieved by former, minimally diversified, investors in "good companies" like HIH, Davnet, ABC Learning, Babcock Brown etc.




But do note some of my criteria for "good" companies:
- low or no debt.
- management with large ownership of the business.
- good ROC
- few acquisitions.
- simple to understand (for me, and yes, this is subjective).

How many of the listed companies above met all of these? None, I think.

How about coming up with a list of companies that match my criteria that have gone under? I am not saying that there are none, just that the chance of it happening it is so low, that diversification already takes care of that risk, there is no need for further risk mitigation (for this) with stop losses.

You are also putting words into my mouth that I never said. I never advised for minimum diversification, I stated that to take away the risk of losing all/most of your money, only minimum diversification is required. 5+ to be precise. 

But I never said you should aim for as few as possible, in fact, I think there are some good arguments that potential returns may be higher with greater than minimum diversification, but that's another topic.

- - - Updated - - -



keithj said:


> This made me smile.... my philosophy the exact opposite .
> 
> If you really believe that you're smarter than the market and that the cpy really is worth more than it thinks it is today, it's likely you can take advantage of an even better price tomorrow.  The market frequently has a different time frame from me which stop losses help take advantage of. Of course, you can hedge your bets by selling half at the stop loss, just in case you're the unluckiest guy in Australia who happens to sell at the exact bottom.




I think the market is correct most of the time, but sometimes there are opportunities. Usually in places no one wants to look.

But by this logic, once the price has gone down, why sell? The market has already priced it correctly


----------



## KnowThePast

robusta said:


> Hmmmm they were not good.businesses, too much debt, low ROE and poor cash flow.




Thanks Robusta, glad someone else spotted this.

My dad lost heaps of money in HIH. The only reason he had for buying the company was that his "broker!" friend told him it is a good company that is guaranteed to go up.

He's never read a single annual report of theirs or did any research. But he knew, without a shadow of a doubt, that it was a good company. Up until it wasn't.

I spend just as much time reading annual reports of "bad" companies as I do of "good" companies. They are a lot more interesting. With good companies, things just keep ticking and major news or change of directions are rare.

But with some other companies, it is a constant soap opera, new 3 year plans, excuses, extra focus on unlocking shareholder value. Really fascinating.


----------



## keithj

keithj]
This made me smile.... my philosophy the exact opposite .

If you really believe that you're smarter than the market and that the cpy really is worth more than it thinks it is today said:


> I think the market is correct most of the time, .....
> 
> But by this logic, once the price has gone down, why sell? The market has already priced it correctly




Because the price will to continue to go down, unless you are the unluckiest guy in Oz & sell at the exact bottom.  I disagree that the market always prices correctly. The market only tends towards pricing correctly in the long term, it is only sometimes correct in the short term.   If the price has gone down (& presumably is trending down) the market is giving you an opportunity to sell today & buy cheaper tomorrow... that's why I consider it lazy to not accept that you were wrong & grasp the opportunity the market is giving you.

Back in the old days it would have been easier to have agreed with you, but with todays good data feeds and v. low txn costs it's more profitable to acknowledge poor timing/bad analysis/change of circumstances/bad luck/etc even for a fundamentals based investor.


----------



## galumay

keithj said:


> Because the price will to continue to go down,




Unless it goes up again, or stays the same!



> If the price has gone down (& presumably is trending down) the market is giving you an opportunity to sell today & buy cheaper tomorrow... that's why I consider it lazy to not accept that you were wrong & grasp the opportunity the market its giving you.




There is no certainty though, as above, it may go down more, it may go up, it may stay the same. Personally I believe that as a fundamental investor I have to assess the reason for the drop in price and make an informed decision about the best action consistent with the facts I have at hand. On that basis I may sell, I may buy more or I may do nothing - exactly the same process as I would take with a rising share price!




> Back in the old days it would have been easier to have agreed with you, but with todays good data feeds and v. low txn costs it's more profitable to acknowledge poor timing/bad analysis/change of circumstances/bad luck/etc even for a fundamentals based investor.




Thats fine, but a hard trigger like a stop loss is counter intuitive because it will prevent me from carrying out any analysis about the reasons for the fall in price - "poor timing/bad analysis/change of circumstances/bad luck" - or an irrational market mis-pricing the share.

I totally get stop losses and other hard triggers for technical investors, the issues and interests are entirely different.


----------



## skc

This is just going around in circles, isn't it?

If you buy "great" companies of course you are going to be fine in the long run. That's the definition of "great'.

By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves. 

If the odd position becoming a total loss is acceptable within your risk appetite, who's to say you can't do it this way? What gets some investors however is when they average down until a large chunk of their net worth is locked in a company that is deteriorating in fundamentals, yet they bury their head in the sand ignoring such changes, or talk themselves into believing that things will improve next quarter / half / decade... 

The trick in that isn't just diversification, it's position sizing for risk.


----------



## keithj

galumay said:


> There is no certainty though, as above, it may go down more, it may go up, it may stay the same.



Of course there are no certainties regarding tomorrow, only balance of probabilities. One certainty is that the timing of the entry could have been better.



galumay said:


> Personally I believe that as a fundamental investor I have to assess the reason for the drop in price and make an informed decision about the best action consistent with the facts I have at hand.



Absolutely. Combining a falling SP, bearing in mind that round trip txn costs are ~0.2% (far less than the daily range of most stocks), and that  FA is more likely to be objective with no existing position, my contention is that it's close to a 'free lunch' to be able to take advantage of irrational market mis-pricing and sell today with the likelihood of being able to buy back at a better entry price tomorrow, while still maintaining FA principles.


----------



## craft

skc said:


> This is just going around in circles, isn't it?
> 
> If you buy "great" companies of course you are going to be fine in the long run. That's the definition of "great'.
> 
> By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves.
> 
> If the odd position becoming a total loss is acceptable within your risk appetite, who's to say you can't do it this way? What gets some investors however is when they average down until a large chunk of their net worth is locked in a company that is deteriorating in fundamentals, yet they bury their head in the sand ignoring such changes, or talk themselves into believing that things will improve next quarter / half / decade...
> 
> *The trick in that isn't just diversification, it's position sizing for risk*.



Nice post – especially the bolded bit. 

I Just want to expand on this a bit. 







> By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves.



It’s very easy to label longer term fundamental strategies as buy and hold and make the wrong assumptions about the “hold”

To me not having a plan to sell does not mean that an investment won’t be sold – It just means the information to trigger a sale does not yet exist.  Not having a price based stop means you are backing yourself to interpret future developments correctly.  After a decade or so of no adverse information flow negating your early assumptions about the potential quality of a company and you might just have found yourself riding a life changing  “great” company trend.

We are just trend followers - But the trend is defined by the business performance. The last thing you want *if you have an analysis edge *is to allow yourself to be continuously called offside on a great business by the price action noise - hence no price based stop.


----------



## skc

craft said:


> We are just trend followers - But the trend is defined by the business performance. The last thing you want *if you have an analysis edge *is to allow yourself to be continuously called offside on a great business by the price action noise - hence no price based stop.




Agree and I certainly don't adovate a price-based stop on fundamental positions.



craft said:


> To me not having a plan to sell does not mean that an investment won’t be sold – It just means the information to trigger a sale does not yet exist.




Also agree and a nice way to describe perhaps what KTP is saying. 

Again, it's a trade-off between having a pre-defined trigger that's probably less than perfect and bound to create false negatives, vs the chance of inaction (due to emotions, denial etc) when the "trigger event" does present itself.


----------



## galumay

skc said:


> The trick in that isn't just diversification, it's position sizing for risk.




Agreed, and that was the case with my earlier example of a share that dropped 20% after i bought it, I did revisit my research and consider averaging down, and while the fundamentals were unchanged for me, I was very reluctant to increase the position sizing.

I was happy with the original investment but considered the risk of doubling my position was unnecessary and chose to wait for other opportunity to invest elsewhere.

For me part of the risk assessment is its impact on my ability to sleep well at night - that may not sound very logical or objective but its part of my psychology of investment.


----------



## cynic

robusta said:


> Hmmmm they were not good.businesses, too much debt, low ROE and poor cash flow.




Yes everybody knows that now that they've gone under! 
I've no doubt that some of the more astute investors here at ASF (several of whom are contributors to this thread, including yourself) would have recognised the dangers and mitigated any perceived risks. It is important to note, however, that many analysts and investors failed to recognise the early warning signs!



KnowThePast said:


> But do note some of my criteria for "good" companies:
> - low or no debt.
> - management with large ownership of the business.
> - good ROC
> - few acquisitions.
> - simple to understand (for me, and yes, this is subjective).
> 
> How many of the listed companies above met all of these? None, I think.
> 
> How about coming up with a list of companies that match my criteria that have gone under? I am not saying that there are none, just that the chance of it happening it is so low, that diversification already takes care of that risk, there is no need for further risk mitigation (for this) with stop losses.




That's an excellent suggestion! By examining the historical performance of a larger sample of companies meeting your criteria, you'll be better equipped to quantify the risks rather than simply declaring "that the chance of it happening it is so low, that..."

So what's stopping you? This is your strategy remember! Hop to it!



> You are also putting words into my mouth that I never said. I never advised for minimum diversification, I stated that to take away the risk of losing all/most of your money, only minimum diversification is required. 5+ to be precise.




So exactly which part of "With minimum diversification this is the right thing to be doing." didn't you say in the post to which I was responding? 



galumay said:


> For me part of the risk assessment is its impact on my ability to sleep well at night - that may not sound very logical or objective but its part of my psychology of investment.




Although I do not share your overall investment philosophy, on this point I am largely in agreement. The ability to recognise and accommodate the needs of one's comfort zones is an important (possibly essential) consideration.


----------



## So_Cynical

cynic said:


> By examining the historical performance of a larger sample of companies meeting your criteria, you'll be better equipped to quantify the risks rather than simply declaring "that the chance of it happening it is so low, that...




Using my own experience.


 All Data: June 2007 to July 2013
 Total Stocks held = 50 (often multiple positions)
 Total stocks to go under = 4 

Of those 4 i was holding 1 at the time it went under (100% loss), the other 3 were exited at 66% loss, 5.8% Gain and 0.9% gain.

And i buy stocks that are falling thus pre disposing myself to disastrous stocks and potential wipe outs and yet just 2% of my stock selections have proven 100% disastrous (to Me) over the last 6 years, a period of time covering the GFC.


----------



## KnowThePast

Thanks everyone for the informative discussion.




keithj said:


> Because the price will to continue to go down, unless you are the unluckiest guy in Oz & sell at the exact bottom.  I disagree that the market always prices correctly. The market only tends towards pricing correctly in the long term, it is only sometimes correct in the short term.   If the price has gone down (& presumably is trending down) the market is giving you an opportunity to sell today & buy cheaper tomorrow... that's why I consider it lazy to not accept that you were wrong & grasp the opportunity the market is giving you.




What I am yet to see anywhere is any conclusive evidence that this can be relied on with any high degree of certainty. I am sure some may be able to do it, but I certainly can't. Market timing is something I generally don't get into. I either think the company is cheap, or it is not.



skc said:


> This is just going around in circles, isn't it?
> 
> If you buy "great" companies of course you are going to be fine in the long run. That's the definition of "great'.
> 
> By not planning to sell your investment, you are backing your ability to pick great companies. By having a plan to sell your investment, you are preparing for the probability that you will pick some duds. It's up to the investor to decide which one is more realistic for themselves.
> 
> If the odd position becoming a total loss is acceptable within your risk appetite, who's to say you can't do it this way? What gets some investors however is when they average down until a large chunk of their net worth is locked in a company that is deteriorating in fundamentals, yet they bury their head in the sand ignoring such changes, or talk themselves into believing that things will improve next quarter / half / decade...
> 
> The trick in that isn't just diversification, it's position sizing for risk.




Agreed.

As an aside, I never argued that one should buy more and more as the share price is falling. I was simply against automatic selling with no analysis.



craft said:


> Nice post – especially the bolded bit.
> 
> I Just want to expand on this a bit. It’s very easy to label longer term fundamental strategies as buy and hold and make the wrong assumptions about the “hold”
> 
> To me not having a plan to sell does not mean that an investment won’t be sold – It just means the information to trigger a sale does not yet exist.  Not having a price based stop means you are backing yourself to interpret future developments correctly.  After a decade or so of no adverse information flow negating your early assumptions about the potential quality of a company and you might just have found yourself riding a life changing  “great” company trend.
> 
> We are just trend followers - But the trend is defined by the business performance. The last thing you want *if you have an analysis edge *is to allow yourself to be continuously called offside on a great business by the price action noise - hence no price based stop.




Fully agreed. Hold does not mean no sell.

I see myself making many sell decisions for many different reasons, I just object to an automatic trigger.



skc said:


> Agree and I certainly don't adovate a price-based stop on fundamental positions.
> 
> To me not having a plan to sell does not mean that an investment won’t be sold
> 
> Also agree and a nice way to describe perhaps what KTP is saying.




Yes, summed up nicely in one sentence. I do tend to rant on too much sometimes. Probably should work more on writing things short and to the point.



cynic said:


> Yes everybody knows that now that they've gone under!
> I've no doubt that some of the more astute investors here at ASF (several of whom are contributors to this thread, including yourself) would have recognised the dangers and mitigated any perceived risks. It is important to note, however, that many analysts and investors failed to recognise the early warning signs!




But you are replying to my investment strategy. Most of the rules I have provided are generally not too subjective, can be easily applied, and would have prevented me from investing in any one of the failed companies you mentioned. 

If I followed a different strategy, than it would make sense.

But, yes, a good warning that I should stick to my investment principles and not venture outside of them.




cynic said:


> That's an excellent suggestion! By examining the historical performance of a larger sample of companies meeting your criteria, you'll be better equipped to quantify the risks rather than simply declaring "that the chance of it happening it is so low, that..."
> 
> So what's stopping you? This is your strategy remember! Hop to it!




I did, hop to it, as you say. Back on page 1, I've provided a 10 year analysis showing that stop losses would have clearly been an inferior strategy to Buy and Hold. 

I've done plenty more back testing on my investment approach and haven't seen anything yet that would make want to implement stop losses.

I agree that they are a necessary part of TA, but I can't recall a single authority on FA recommending them.



cynic said:


> So exactly which part of "With minimum diversification this is the right thing to be doing." didn't you say in the post to which I was responding?




You nitpick one sentence out of my post.

The overall message of my post was that risk of (near)total loss can be reduced with minimum diversification, not that minimum diversification is the right strategy.


----------



## KnowThePast

So_Cynical said:


> Using my own experience.
> 
> 
> All Data: June 2007 to July 2013
> Total Stocks held = 50 (often multiple positions)
> Total stocks to go under = 4
> 
> Of those 4 i was holding 1 at the time it went under (100% loss), the other 3 were exited at 66% loss, 5.8% Gain and 0.9% gain.
> 
> And i buy stocks that are falling thus pre disposing myself to disastrous stocks and potential wipe outs and yet just 2% of my stock selections have proven 100% disastrous (to Me) over the last 6 years, a period of time covering the GFC.





Hi So_Cynical,

That's not too far off my experience. 

My first stock experience goes back to 1997, although I didn't put serious effort (or money) into it until about 2007.

I've had 3 companies go under, out of about 100 that I invested into.

Looking back, most of the damages to my account were self inflicted. Tried many different things in the first 10 years, even day trading. Somehow ended not losing money, even made some, still surprised at that, considering all the silly things I was doing.

Started managing my super share investments around 2007, did pretty well through it, despite starting at the worst possible time. Mainly through buy and hold (sometimes sell).

After years of practicing this strategy in my super, I thought I'd start investing outside of it as well.

I now have a large dataset to backtest against, and from that I concluded that avoiding total failures is not guaranteed, but can be substantially reduced with proper due diligence.

I also find that long term (10+ years), it is near impossible to predict which good companies will appreciate 50% vs 1000%+. So it makes sense to invest in a few good companies, beyond what minimal diversification calls for. Not scattering your shot, as Buffet says, makes a lot of sense, but I don't think I ever had that much confidence about long term prospects of any company, that I thought it would clearly outperform all others.


----------



## So_Cynical

KnowThePast said:


> I also find that long term (10+ years), it is near impossible to predict which good companies will appreciate 50% vs 1000%+. So it makes sense to invest in a few good companies, beyond what minimal diversification calls for.




I have also found that to be true (above) and that goes for stocks that go straight up, sideways or straight down after entry...you just don't know and not knowing can work for you or against you depending on how you deal with that. I often think some people like the certainty that comes with locking in a loss, perhaps its the closure or finality of it, or perhaps they feel better 'doing something'.


----------



## Julia

KnowThePast said:


> It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards. I certainly don't expect this to repeat too often, I would certainly expect most years to be substantially better!
> 
> If I had stop losses or other auto-sell criteria, I would have not only sold most of those stocks, but I would have sold them at the worst possible time.



I might be misunderstanding you but the above reads as though you are saying to have sold at close to the  highest point in 2008 would have been the worst possible time.  If you had had a moving stop loss in place to protect your profits how could you have 'sold at the worst possible time'?

To have done so would have preserved your profits and allowed you to wait the downturn out before buying back in at considerable advantage.
Perhaps you could clarify what you actually mean here.



> Holding on to them until now proved to be a substantially better investment than an index fund.



Perhaps so.  But is an index fund what you should be comparing your outcome with?  Rather you should imo be thinking how you could have maximised your profit, and you could have done this by (as above) preserving not only your profits but your capital, then when an uptrend returned taking the opportunity to buy back in.
Given the market approximately halved during the downturn you'd have been able to buy about twice as many stocks at or near the bottom, plus of course as a further result, enjoy about twice the yield.



cynic said:


> Yes everybody knows that now that they've gone under!



Exactly.  They were all market darlings for some time.


> I've no doubt that some of the more astute investors here at ASF (several of whom are contributors to this thread, including yourself) would have recognised the dangers and mitigated any perceived risks. It is important to note, however, that many analysts and investors failed to recognise the early warning signs!



As they also failed to even recognise the signs of the impending GFC itself.  Why, otherwise, did so many investors lose half their asset base during the GFC as the learned advisers continued to admonish them to "just hold on, it will all be fine"?


----------



## KnowThePast

Hi Julia,



Julia said:


> I might be misunderstanding you but the above reads as though you are saying to have sold at close to the  highest point in 2008 would have been the worst possible time.  If you had had a moving stop loss in place to protect your profits how could you have 'sold at the worst possible time'?




I bought those 16 stock in June 2008, when XAO was at around 6,000.
XAO subsequent declined all the way down to 3,200, now up to 4,900, change of -35%.
By holding on to those stocks until now I would have a profit of +36%.




Julia said:


> To have done so would have preserved your profits and allowed you to wait the downturn out before buying back in at considerable advantage.




I would love to be able to do this, but I haven't seen anything to me convince me that I can time the market with a high enough degree of accuracy.




Julia said:


> Perhaps so.  But is an index fund what you should be comparing your outcome with?  Rather you should imo be thinking how you could have maximised your profit, and you could have done this by (as above) preserving not only your profits but your capital, then when an uptrend returned taking the opportunity to buy back in.
> Given the market approximately halved during the downturn you'd have been able to buy about twice as many stocks at or near the bottom, plus of course as a further result, enjoy about twice the yield.




I thought that comparing to an index was pretty much a universally accepted way of measuring performance?
This is not what I aim for, juts a measure of whether I should continue spending time on this, rather than putting my money in an index fund.



Julia said:


> Exactly.  They were all market darlings for some time.
> 
> As they also failed to even recognise the signs of the impending GFC itself.  Why, otherwise, did so many investors lose half their asset base during the GFC as the learned advisers continued to admonish them to "just hold on, it will all be fine"?




But it is irrelant what people thought of them, or what their share prices were.

My investment strategy is based on assumption that corporate graveyard is a rare destination for companies meeting the following criteria:
- low or no debt.
- management with large ownership of the business.
- good ROC
- few acquisitions.
- a few other, less tangible criteria.

I am yet to see any examples that prove otherwise. All this is hard criteria that doesn't really need much human judgement. It should be easy to shut me up by providing sample of a 10 or so companies meeting this criteria where holding on to them for 10 years would prove to be a terrible investment....


----------



## Julia

KnowThePast said:


> Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.



You are limiting your focus to just the health of your chosen company, ignoring external macro factors.
If the whole market takes a substantial hit, not too many companies are going to escape.

You say above "share price falls after something has happened".  OK.  But at the beginning of a sustained event you still have the chance to protect your profits if you bought into an uptrend, or if you unfortunately bought at the top, to keep your loss minimal.  To just shrug your shoulders at a fall of, say, 5% and say "too late to do anything now, it has already happened" makes no sense if you are properly aware of the surrounding conditions.



> Having an automatic sell trigger, in my opinion, is the exact definition of not paying enough attention to this vital part of investing. I fully agree that sell decisions are just as important as buy decisions, and therefore just as much thought and analysis should go into them. Selling a company just because the price has dropped is just plain lazy (IMHO).



If you're going to use a pejorative like 'lazy' it seems to me more lazy to refuse to consider protecting your profits and your capital base.



> It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards.!






> I bought those 16 stock in June 2008, when XAO was at around 6,000.




You have made two different statements above about your timing.  The highest point was around 6800 from memory, so you bought into what was already a pretty clear downtrend.
What I don't understand is not only buying into that sharp downtrend, but doing so in the face of the widespread bad news globally which was giving every indication we were in for a quite rapid and sustained loss from which few companies would be spared.

If you describe yourself as a fundamental investor, surely this should encompass inclusion of the macro and external fundamentals that drive markets.  Ignoring this was what lost so many people so much money.



> If I had stop losses or other auto-sell criteria, I would have not only sold most of those stocks, but I would have sold them at the worst possible time.



If you'd had an appropriately placed stop loss your capital loss would have been minimal.  By holding on through that huge downtrend you had a much longer distance to climb back up.



KnowThePast said:


> I would love to be able to do this, but I haven't seen anything to me convince me that I can time the market with a high enough degree of accuracy.



Perhaps because you have mentally resolved that you have evolved the perfect way to invest and are unprepared to consider ways to further improve your capacity to maximise profit.
I've never met anyone who consistently picks the exact bottom or exact top.  It's not about that.  It's about protecting your capital (and your profits, obviously) and keeping your losses small.



> I am yet to see any examples that prove otherwise. All this is hard criteria that doesn't really need much human judgement. It should be easy to shut me up by providing sample of a 10 or so companies meeting this criteria where holding on to them for 10 years would prove to be a terrible investment....



No one has suggested holding any ten companies for any ten years would prove to be a terrible investment.
There are simply some suggestions being made in the spirit of explaining how you could be more profitable.
Up to you entirely whether you persist in the dogged belief that there is nothing more to learn or no ways to adapt the current approach to your advantage.

I'm completely puzzled by your apparently determined refusal to accept the idea of a stop loss.  Can you explain the basis of this?



skc said:


> Yes when the share price falls after bad news, chances are the share price has moved lower than what your "value" would suggest - but this is the exact scenario where "investors" follow their stock to the graveyard.
> 
> Sometimes, in order to prevent a 90% loss, you take a 25% loss. Every now and then you'd take a false positive (or is it false negative) and sold on a temporary earning dip. But it happens and you move on. There will always be other opportunities to deploy your capital.
> 
> Not using a hard sell because it's too hard to think of one is not a very good excuse, nor very good risk management



+1.


----------



## KnowThePast

Julia said:


> You are limiting your focus to just the health of your chosen company, ignoring external macro factors.
> If the whole market takes a substantial hit, not too many companies are going to escape.
> 
> You say above "share price falls after something has happened".  OK.  But at the beginning of a sustained event you still have the chance to protect your profits if you bought into an uptrend, or if you unfortunately bought at the top, to keep your loss minimal.  To just shrug your shoulders at a fall of, say, 5% and say "too late to do anything now, it has already happened" makes no sense if you are properly aware of the surrounding conditions.
> 
> 
> If you're going to use a pejorative like 'lazy' it seems to me more lazy to refuse to consider protecting your profits and your capital base.




I agree. I have absolutely nothing against a theory of selling losers. I just disagree on doing it automatically. The same amount of analysis should go into sell/hold decision as into the buy decision.




Julia said:


> You have made two different statements above about your timing.  The highest point was around 6800 from memory, so you bought into what was already a pretty clear downtrend.
> What I don't understand is not only buying into that sharp downtrend, but doing so in the face of the widespread bad news globally which was giving every indication we were in for a quite rapid and sustained loss from which few companies would be spared.
> 
> If you describe yourself as a fundamental investor, surely this should encompass inclusion of the macro and external fundamentals that drive markets.  Ignoring this was what lost so many people so much money.
> 
> If you'd had an appropriately placed stop loss your capital loss would have been minimal.  By holding on through that huge downtrend you had a much longer distance to climb back up.




Julia, this was a hypothetical scenario I ran to see what would happen to a "Buy and Hold great companies" strategies implemented with the worst possible timing. You'd have to be extremely unlucky, or dumb, to have invested all your money at once just weeks before a crash.



Julia said:


> Perhaps because you have mentally resolved that you have evolved the perfect way to invest and are unprepared to consider ways to further improve your capacity to maximise profit.
> 
> I'm completely puzzled by your apparently determined refusal to accept the idea of a stop loss.  Can you explain the basis of this?




There's definitely some truth to that. I've found what works for me, which is:
- as little "market watching" as possible.
- lots of searching, researching and learning.
- few decisions.

While I may be set in my ways, decision on stop losses is different. Really. I promise.

It is based on my experience, reading and running various long term back testing scenarios via my software.

I don't want to go and cite authority, but I will. Almost all value, long term oriented investors advise holding on to companies as long as their fundamentals meet their criteria, no matter what the market price is doing. All of them warn that large swings in share price are expected over time.

TA oriented investors, on the other hand, consider stop losses a must.

To me, a falling share price means that I need to strongly consider the possibility of being wrong, and quite possibly sell, but I am against *automatic* stop losses.

For a long term, fundamental investor, stop losses go against all the available knowledge and data. Doing back testing over any long term period on fundamentally sound companies, shows that they recover from price decrease a lot more often than not. And overall, stop losses will stop a lot more eventual winners than losers.

Now, if you are not any good at picking fundamentally sound companies, than stop losses may prevent a lot of self inflicted damage. But I think it is a band aid that does not fix the actual problem.

Do I think that I am great at picking these companies? No. But my solution is not stop losses. It is diversification and making sure I spend 2+ years entering the market rather than investing all my cash at once.

I feel this argument is going to a FA vs TA, which is something that never is going to be resolved. I think we'll need to agree to disagree on this one.


----------



## galumay

+1 to all of that KTP, I had drafted a reply earlier in the day but deleted it because I get the sense of this thread turning into a 'religious' debate of FA v TA. I am glad I deleted because your post is more eloquent!


----------



## Julia

> Julia, this was a hypothetical scenario I ran to see what would happen to a "Buy and Hold great companies" strategies implemented with the worst possible timing.



You said 







> I bought those 16 stock in June 2008, when XAO was at around 6,000.



That doesn't sound like a hypothetical situation.  You clearly say you bought 16 stocks in June 2008.

Earlier you said your point of entry was at the peak of the market which was some 800 points above.
I am simply commenting on some of your inconsistencies.



> You'd have to be extremely unlucky, or dumb, to have invested all your money at once just weeks before a crash.



Yet that is what you clearly say above is what you did.  In June 2008  you say you bought 16 stocks, right in the throes of a strong downtrend.  If you clearly say this, it's reasonable to expect people to comment on that being what happened.  



> To me, a falling share price means that I need to strongly consider the possibility of being wrong, and quite possibly sell, but I am against *automatic* stop losses.



Fine, but also consider that by the time you (since you concede you rarely look at price action) realise the price has fallen dramatically, you have already incurred a considerable loss.



> I feel this argument is going to a FA vs TA, which is something that never is going to be resolved. I think we'll need to agree to disagree on this one.



And there you have the classic end of discussion.  There is no reason for there to be this artificial FA v TA divide.  I'm about as far as you could get from clever understanding of TA.  I believe in buying solid, fundamentally sound companies.  I simply acknowledge that it's possible to combine something of both approaches in terms of timing which will protect your profits and your capital.

I imagine most of you engaging in this discussion have your share p/fs as a hobby, a side interest, while you generate a basic living from a salary.  You would find it's an entirely different proposition if you had to generate a living from your capital.  Then there's no room for such a cavalier attitude to accepting diminution of your asset base.

But again, I'll withdraw from this 'discussion'.  When attitudes are so entrenched and there is the banal belief that there has to be an either/or approach re FA or TA, it's a waste of time and thought to try to extend the context in any way.

I wish you lots of luck.


----------



## KnowThePast

Julia said:


> You said
> That doesn't sound like a hypothetical situation.  You clearly say you bought 16 stocks in June 2008.




Here is my exact quote: "I then had a look at the result I would have gotten *if* I bought exactly 6 years ago, at just about the market peak:". As well as a full paragraph before that clearly stating that I was running some simulated scenarios.




Julia said:


> Earlier you said your point of entry was at the peak of the market which was some 800 points above.
> I am simply commenting on some of your inconsistencies.




Yes, apologies - it was June 2008 and XAO at around 6000 in my original test. Doesn't really change the results or conclusions.



Julia said:


> But again, I'll withdraw from this 'discussion'.  When attitudes are so entrenched and there is the banal belief that there has to be an either/or approach re FA or TA, it's a waste of time and thought to try to extend the context in any way.




I agree Julia. But that's exactly what I am after, not a religious discussion that "one must use stop losses, because".

Theory is nice and I am sure we both can both cite plenty of authority figures arguing both ways.

What would be nice to see is discussion involving real life situations, or back testing to show that it actually works.

On my end, I have provided my investment selection criteria and have given data to show why I don't consider stop losses necessary for me. I haven't seen anything posted that disproves it, other than a list of companies that have gone under and which clearly didn't fit my investment criteria. 

I agree that this conversation hit a dead end, so unless someones has some interesting data/anecdotes to share, that was probably enough of that.



Julia said:


> I wish you lots of luck.




Thank you.


----------



## brty

For reference and accuracy, the all ords reached 6875 on 1st Nov 2007. On the 1st trading day in Jan 2008 the all ords closed at 6434. This was the worst day in 2008 to invest. On the 1st June 2008, the all ords highest price for the day and month was 5800.  The lowest price in June 2008 occurred on 27th at 5265. It closed at 5335 for the month.

The all ords was between 1075 and 1610 points off the high point in June 2008.



> I then had a look at the result I would have gotten if I bought exactly 6 years ago, at just about the market peak:





> I look at my notes from 2008 and got a list of companies that I thought were top companies at the time.



If the reference is to 2008 as you indicate it is, then perhaps we need to look at 5 years ago not 6, or did you mean 2007? 

The OP made that comment on 6th June 2013. The opening price of the all ords was 5635 and the closing price 5690 on 6th June 2008, over 1180 points below the peak.



> it was June 2008 and XAO at around 6000 in my original test




This is not accurate. You are all over the shop on these dates and points. How on earth could you expect to get a whole lot of value analysis correct if points from your own history are that hard to get right?



> I feel this argument is going to a FA vs TA,




No it is not. It always seems to be those from the FA background that bring this up when stopping your losses is concerned.  There are others who buy and sell using FA, yet have clear exit or sell criteria. They are prepared to admit they made a mistake in buying something and sell at a small loss, instead of turning a small loss into a large one. 

I do it all the time. I have the mindset that I might not know everything I should about a stock and therefore my analysis could be incorrect. It is far more logical than thinking that the market is wrong!!

TA can be used in any number of ways just like FA. The simplest form of TA is just noticing how the highs are getting lower and the lows are getting lower for a downtrending stock. When the cycle finishes and the highs start getting higher and the lows are getting higher, is a very easy signal to follow.

There is nothing wrong with buying on fundamental grounds, yet the signal is far easier to follow if the market is starting to agree with you when you purchase, ie the price is STARTING to go up. Why should the market turn around on a value stock, just because you bought it?? Why buy a "good" (your value criteria) stock now, that the market is rating as going down when you can, most of the time, wait for a much lower price AND the market to agree with you??

If the holding time is going to be years, then it is only logical to wait for the market to turn.

You bring up the topic of your first buy as CAB, state how it is the worst performer of your good companies over the last 6 years, but add how it has shown a return of 92.7% from 10 years ago with buy and hold strategy. Just by using a simple strategy of higher highs and higher lows on a weekly time frame, and the opposite for exit of the "good" company would have had you buying at $3 in 2003 and selling at $9 in 2008, plus keeping your money in cash ever since. That is a return of 200%. It is still making lower highs and lower lows as it has done since 2008. Perhaps your understanding of CAB is better than mine.


----------



## craft

Julia said:


> And there you have the classic end of discussion.








Julia said:


> I imagine most of you engaging in this discussion have your share p/fs as a hobby, a side interest, while you generate a basic living from a salary.




Do you really expect/want meaningful discussion to continue with this sort of comment?


----------



## Julia

craft said:


> Do you really expect/want meaningful discussion to continue with this sort of comment?



I stand by both comments.  See Brty's remarks.  The dogged insistence by many disciples of FA that anything to do with ensuring protection of capital by using stop losses means the person so suggesting is unmindful of the usefulness of FA and totally committed to a technical approach is as irritating as it is fallacious.

I usually stay out of these 'investment journey' threads where people with many aspirations but minimal experience describe their Holy Grail.  I was, however, sufficiently irked by the OP's suggestion earlier that 







> Selling a company just because the price has dropped is just plain lazy (IMHO).



 to challenge this.


----------



## qldfrog

brty said:


> galumay,
> 
> 
> 
> That is precisely what I meant by the market teaching bad habits. It works 'til it doesn't, then it costs you big time.
> 
> It seems to be a lesson that all new market participants have to learn the hard way.




and I agree fully with you, I do not enter without a very narrow stop loss
today 5 of my buy got out in the same day small loss but from previous experience not too bad a deal ...
now i need to not even enter these trades but based on my experience: stop loss is a MUST have
DYOR obviously


----------



## So_Cynical

qldfrog said:


> and I agree fully with you, I do not enter without a very narrow stop loss
> today 5 of my buy got out in the same day small loss but from previous experience not too bad a deal ...
> now i need to not even enter these trades but based on my experience: stop loss is a MUST have
> DYOR obviously




Hypothetically

If you were a long term trader/investor not using leverage, with round trip brokerage of $12 using a fixed position size of $1300 and a portfolio of 50 Aussie stocks and the $1300 position size was about 0.3% of your net worth...would you still say a "stop loss is a MUST have"?

Just wondering.


----------



## peter2

If you haven't already read this book, I think you might enjoy it. 
Mathew Kidman: "Bulls, Bears and a croupier."

I'm not interested in FA but I enjoyed the commonsense analytical approach to identify investment stocks and reading what can go wrong.

(ps: Your PM is full.)


----------



## KnowThePast

Hi brty,



brty said:


> If the reference is to 2008 as you indicate it is, then perhaps we need to look at 5 years ago not 6, or did you mean 2007?




My wrong, well spotted. Yes, all tests are from June 2007:
XAO at 09/06/2007:               6258
XAO at 09/06/2013:               4776
Change:                               -23.7%
16 companies (same dates):    +36.32% with dividends, 10.37% without.



brty said:


> No it is not. It always seems to be those from the FA background that bring this up when stopping your losses is concerned.  There are others who buy and sell using FA, yet have clear exit or sell criteria. They are prepared to admit they made a mistake in buying something and sell at a small loss, instead of turning a small loss into a large one.
> 
> I do it all the time. I have the mindset that I might not know everything I should about a stock and therefore my analysis could be incorrect. It is far more logical than thinking that the market is wrong!!
> 
> TA can be used in any number of ways just like FA. The simplest form of TA is just noticing how the highs are getting lower and the lows are getting lower for a downtrending stock. When the cycle finishes and the highs start getting higher and the lows are getting higher, is a very easy signal to follow.
> 
> There is nothing wrong with buying on fundamental grounds, yet the signal is far easier to follow if the market is starting to agree with you when you purchase, ie the price is STARTING to go up. Why should the market turn around on a value stock, just because you bought it?? Why buy a "good" (your value criteria) stock now, that the market is rating as going down when you can, most of the time, wait for a much lower price AND the market to agree with you??
> 
> If the holding time is going to be years, then it is only logical to wait for the market to turn.




So, I should buy when there is a buy signal and sell when there is a sell signal. Have stop losses to prevent further losses.

Got it.

The only thing I am missing is where is FA in all this? To decide which which companies to trade in and out of?

The key part of FA is the assumption that there are sometimes discrepancies between market price and value. If I am going to be trading in and out on a signal, than what's the point of me doing all the FA analysis if I will ignore it anyway in case market changes price again in the future?

And that's what I meant by this conversation going into TA vs FA debate. The only argument I hear so far in favour of stop losses is that it will give me better opportunity to time the market and follow signals. 

I won't argue which approach is better, I stick to FA because that's what I spent years learning and that's what has been working for me. Given the opposite nature of one another, I doubt I will ever invest the time required to learn TA properly.

What I am arguing, again, is that for an FA, long term investor such as myself, what's the point of stop losses? Considering that I do not trade on signals and have appropriate diversification?

Risk mitigation techniques usually have a cost, or limit upside. I consider myself sufficiently protected from a large loss with diversification and extended time to enter market. There's no reason for me to limit potential even further by using stop losses.



brty said:


> You bring up the topic of your first buy as CAB, state how it is the worst performer of your good companies over the last 6 years, but add how it has shown a return of 92.7% from 10 years ago with buy and hold strategy. Just by using a simple strategy of higher highs and higher lows on a weekly time frame, and the opposite for exit of the "good" company would have had you buying at $3 in 2003 and selling at $9 in 2008, plus keeping your money in cash ever since. That is a return of 200%. It is still making lower highs and lower lows as it has done since 2008. Perhaps your understanding of CAB is better than mine.




That analysis was to show how there's little risk as long as you invest in "good" companies, even if you buy them at any price at the worst possible time. As long as you buy enough to diversify and hold them.

The next key part is what price you pay for those "good" companies. That's why I bought CAB at $4 and didn't buy it at $9. Nothing to do with signals, it simply reached a point where I thought that I can buy future earnings of this business cheaper than anything else available. Or something like that.


Thanks for your advice brty, I really enjoyed reading some of your posts in other threads. I disagree with you on stop losses, for me, but hope you can continue reading and posting in my thread.

- - - Updated - - -



peter2 said:


> If you haven't already read this book, I think you might enjoy it.
> Mathew Kidman: "Bulls, Bears and a croupier."
> 
> I'm not interested in FA but I enjoyed the commonsense analytical approach to identify investment stocks and reading what can go wrong.
> 
> (ps: Your PM is full.)




Thanks Peter, looks interesting. Just ordered it.


----------



## KnowThePast

Julia said:


> I was, however, sufficiently irked by the OP's suggestion earlier that  to challenge this.




Hi Julia,

Apologies if my comment about being lazy with stop losses offended you.

I agree stop losses are useful and are a must for some styles of investing.

But for me, for my strategy, I would consider myself lazy.

I try to learn about potential investments as much as possible, so that the decision of which companies to invest in should be almost mechanical, with little emotion. I feel I need to put in just as much effort into my sell decisions.


----------



## Julia

Know the Past:  I congratulate you on your capacity to respond to some fairly robust criticism with civility.


----------



## skc

Julia said:


> Know the Past:  I congratulate you on your capacity to respond to some fairly robust criticism with civility.




+1.

Keep an open mind about how to approach the market. Not one approach is universally correct or most profitable...


----------



## galumay

Julia said:


> Know the Past:  I congratulate you on your capacity to respond to some fairly robust criticism with civility.




Agreed, I saw his response last night and nodded my head thinking it was a very mature response and one we see all to rarely online.


----------



## tech/a

So_Cynical said:


> Hypothetically
> 
> If you were a long term trader/investor not using leverage, with round trip brokerage of $12 using a fixed position size of $1300 and a portfolio of 50 Aussie stocks and the $1300 position size was about 0.3% of your net worth...would you still say a "stop loss is a MUST have"?
> 
> Just wondering.




Surely your simply going to mirror the index?
Your not going to out perform.


----------



## So_Cynical

tech/a said:


> Surely your simply going to mirror the index?
> Your not going to out perform.




We really shouldn't derail this thread but, the out/under perform would come from the stock selection and entry/exit timing...while there would be a strong correlation to the index its easy to see how 2 or 3 good/bad selections could swing the portfolio either way.


----------



## brty

KTP,

I would firstly like to apologise for my over rigorous post earlier, 

My confusion and terse comment stems from the following inconsistencies and those already mentioned.
By revising this thread I noticed that on 3 separate occasions you mentioned 2008, you now say it was 2007. I also came across the following from 2 separate posts.....



> I then had a look at the result I would have gotten if I bought exactly 6 years ago






> I bought those 16 stock in June 2008, when XAO was at around 6,000




hmmm....

Moving on..


----------



## tech/a

So_Cynical said:


> We really shouldn't derail this thread but, the out/under perform would come from the stock selection and entry/exit timing...while there would be a strong correlation to the index its easy to see how 2 or 3 good/bad selections could swing the portfolio either way.





Agree
But suffice to say even a 200% move up and 3 or so being delisted from 50 stocks  and .3% of your net worth each trade.
Its going to be like watching paint dry.
Sure you can cut out stops and associated risk but at what cost?
If your happy with index performance fine.
But its not trading in my view.
Not really strategic investing either.


----------



## Julia

Brty]By revising this thread I noticed that on 3 separate occasions you mentioned 2008 said:


> It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards.!
> 
> I bought those 16 stock in June 2008, when XAO was at around 6,000.





			
				Julia said:
			
		

> You have made two different statements above about your timing.  The highest point was around 6800 from memory, so you bought into what was already a pretty clear downtrend.
> What I don't understand is not only buying into that sharp downtrend, but doing so in the face of the widespread bad news globally which was giving every indication we were in for a quite rapid and sustained loss from which few companies would be spared.



If indeed you did buy into this by then strong downtrend (though perhaps you didn't after all), I'd be interested to know your rationale for so doing.  Did you do it because you gave no credence to the gathering global storm clouds?  Believed all the genius advisers who assured investors it would all be nothing much, that Australia was deliciously uncoupled from the rest of the world?  etc etc.  Or because you considered all that irrelevant as long as you were happy with your own valuation of all those sixteen companies?

I'm not setting out to be provocative or unreasonably persistent.  All the time we have people telling us how they believe in averaging down.  It's something I find hard to understand but accept the assurances that it works for some.  If you have not 'averaged down' on already held familiar stocks, but bought 16 new companies in the circumstances described above, I'd really like to try to understand why anyone would do that.  There must be something I'm missing.

I'd be equally appreciative of anyone else who is in favour of such an entry point explaining why it's a good idea.

No obligation to respond, of course.


----------



## KnowThePast

Julia said:


> Know the Past:  I congratulate you on your capacity to respond to some fairly robust criticism with civility.






galumay said:


> Agreed, I saw his response last night and nodded my head thinking it was a very mature response and one we see all to rarely online.




Thanks guys.

Criticism, or even just fear of it, is the reason I started this thread. Thanks for all your input and keep it up please. A few days of responding about stop losses + FA made the subject clearer in my head than it's ever been. Event if it's wrong 



brty said:


> KTP,
> 
> I would firstly like to apologise for my over rigorous post earlier,
> 
> My confusion and terse comment stems from the following inconsistencies and those already mentioned.
> By revising this thread I noticed that on 3 separate occasions you mentioned 2008, you now say it was 2007. I also came across the following from 2 separate posts.....
> 
> hmmm....
> 
> Moving on..




Thanks brty, and no need to apologise. I am the one who should thank you for constructive critisicm.

Regarding my "2008" posts. Yes, it's my wrong, they should have all said 2007. I mistyped it in my first post and than kept coping that mistake into all subsequent ones.




skc said:


> +1.
> 
> Keep an open mind about how to approach the market. Not one approach is universally correct or most profitable...




Definitely, and I respect those that achieve resuls doing it differently. 

But I roughly know what works for me and I've been doing it for some time now. At this point, I am not going to abandon what I'm doing in favour of something completely different. It's more about refinement and gradual additions/changes.


----------



## KnowThePast

Julia said:


> I am also still confused.
> 
> If indeed you did buy into this by then strong downtrend (though perhaps you didn't after all), I'd be interested to know your rationale for so doing.  Did you do it because you gave no credence to the gathering global storm clouds?  Believed all the genius advisers who assured investors it would all be nothing much, that Australia was deliciously uncoupled from the rest of the world?  etc etc.  Or because you considered all that irrelevant as long as you were happy with your own valuation of all those sixteen companies?
> 
> I'm not setting out to be provocative or unreasonably persistent.  All the time we have people telling us how they believe in averaging down.  It's something I find hard to understand but accept the assurances that it works for some.  If you have not 'averaged down' on already held familiar stocks, but bought 16 new companies in the circumstances described above, I'd really like to try to understand why anyone would do that.  There must be something I'm missing.
> 
> I'd be equally appreciative of anyone else who is in favour of such an entry point explaining why it's a good idea.
> 
> No obligation to respond, of course.




Hi Julia,

Just to clarify once more, I've never bought those shares. This was just a back test I did in June 2013 to see how a "Buy and hold great companies" strategy would work in the worst possible scenario. Worst possible scenario being:
1. At, or near the highest point in the market before GFC.
2. No regard paid to the price of shares, just buy them at any price.

I've chosen a round date of 6 years ago, being June 2007. Apologies for me saying 2008 in some posts, all of them should have said 2007.

This is not a strategy I am using, nor would I recommend that to anyone. Although my reasons for not buying those companies at that time wouldn't have been that they market was in downturn. My reasons would be that most of those companies were selling at prices much too high.


----------



## craft

Hi KTP

Nice to see this tread back on track in the civility department – I didn’t imagine people for a second could think you were talking about anybody but you and your approach with the lazy comment.  The problems with forums I guess, everybody interprets from their own perspective and you inadvertently offend. 

A few posts back SKC summed up nicely as he often does.



> Again, it's a trade-off between having a pre-defined trigger that's probably less than perfect and bound to create false negatives, vs the chance of inaction (due to emotions, denial etc) when the "trigger event" does present itself.




Obviously from my posts I’m with you on the no predefined exit,  my question is how you intend to manage the bit after ‘vs’ in the above paragraph.

How do you protect yourself if you lose (don’t actually have) the abilities to invest without safeguards? I think it was Phil Fisher that was an  interesting cases study in relation to losing the ability. 

Cheers


----------



## KnowThePast

craft said:


> Hi KTP
> 
> Nice to see this tread back on track in the civility department – I didn’t imagine people for a second could think you were talking about anybody but you and your approach with the lazy comment.  The problems with forums I guess, everybody interprets from their own perspective and you inadvertently offend.




Thanks craft.



craft said:


> A few posts back SKC summed up nicely as he often does.
> 
> _Again, it's a trade-off between having a pre-defined trigger that's probably less than perfect and bound to create false negatives, vs the chance of inaction (due to emotions, denial etc) when the "trigger event" does present itself. _
> 
> Obviously from my posts I’m with you on the no predefined exit,  my question is how you intend to manage the bit after ‘vs’ in the above paragraph.
> 
> How do you protect yourself if you lose (don’t actually have) the abilities to invest without safeguards? I think it was Phil Fisher that was an  interesting cases study in relation to losing the ability.
> 
> Cheers




I've had a long train journey yesterday, so I took a chance to re-read, selectively, Fisher's book. Couldn't find any case studies specifically on this topic, but it was a great refresher anyway.

Funny how upon re-reading something you realise that you had a totally different perception of it before. I've always remembered Fisher as one of the biggest advocates of hold forever strategy, mainly due to his "the correct time to sell a good company is almost never". But on reading it today again, he actually has one of the most trigger happy sell criterias - he chooses a growth company that meets 15 of his points and advises selling when it starts to deviate significantly from those 15 points. Finding a company that meets and sustains those 15 points for more than a couple of years is rare, in my opinion. 

It's the rare "great growth" companies that he advises holding on to forever.

The key point to remember, though, is that this sell criteria is recommended for a strategy where stocks are selected if their growth is expected to be substantially above average. Therefore, he recommends selling not even when the company is deteriorating, but as soon as it becomes apparent that high growth into the future in unlikely. 

For someone with a different buy criteria, the sell criteria will be different too.

The key point to take out of all this, for me, is that a regular review should be conducted of your holdings. And one key question should be asked - based on my Buy criteria, would I want to buy this company again today? More to it of course, but that's the key question.

Fisher did have one hard rule which I like - the 3 year rule. He gave a stock 3 years, if at that point it still didn't perform, he sold it. I think I will implement that as well.

And as he said, each rule has exceptions, but not many.


----------



## tech/a

A lot like a woman!


----------



## craft

KnowThePast said:


> Thanks craft.
> 
> 
> 
> I've had a long train journey yesterday, so I took a chance to re-read, selectively, Fisher's book. Couldn't find any case studies specifically on this topic, but it was a great refresher anyway.
> 
> Funny how upon re-reading something you realise that you had a totally different perception of it before. I've always remembered Fisher as one of the biggest advocates of hold forever strategy, mainly due to his "the correct time to sell a good company is almost never". But on reading it today again, he actually has one of the most trigger happy sell criterias - he chooses a growth company that meets 15 of his points and advises selling when it starts to deviate significantly from those 15 points. Finding a company that meets and sustains those 15 points for more than a couple of years is rare, in my opinion.
> 
> It's the rare "great growth" companies that he advises holding on to forever.
> 
> The key point to remember, though, is that this sell criteria is recommended for a strategy where stocks are selected if their growth is expected to be substantially above average. Therefore, he recommends selling not even when the company is deteriorating, but as soon as it becomes apparent that high growth into the future in unlikely.
> 
> For someone with a different buy criteria, the sell criteria will be different too.
> 
> The key point to take out of all this, for me, is that a regular review should be conducted of your holdings. And one key question should be asked - based on my Buy criteria, would I want to buy this company again today? More to it of course, but that's the key question.
> 
> Fisher did have one hard rule which I like - the 3 year rule. He gave a stock 3 years, if at that point it still didn't perform, he sold it. I think I will implement that as well.
> 
> And as he said, each rule has exceptions, but not many.




Hi TKP

What I was getting at with Phil Fisher is that he developed dementia/Alzheimer's.  I recall reading something by his son Kenneth that his latter year performance wasn’t at the level of earlier years and his investing was probably being affected by the dementia well before the dementia was diagnosed.

It’s a bit of an extreme example but it re-enforces the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.


----------



## odds-on

craft said:


> Hi TKP
> 
> What I was getting at with Phil Fisher is that he developed dementia/Alzheimer's.  I recall reading something by his son Kenneth that his latter year performance wasn’t at the level of earlier years and his investing was probably being affected by the dementia well before the dementia was diagnosed.
> 
> It’s a bit of an extreme example but it re-enforces the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.




Pick a game (e.g. Poker, Bridge, Backgammon, etc) that you enjoy. Purchase some software and load it onto your computer. Become proficient in the game. Set a simple test that if you can beat the computer over a set number of matches then your brain is in a fit state to make an investment decision, if you cannot beat the computer, walk away!

I used to work with a principal engineer who did something similar with a desktop puzzle – if he could not solve the puzzle in 5 mins then he would not make decisions on complex engineering projects. He accepted his brain was tired and therefore likely to make mistakes.

Cheers


----------



## KnowThePast

tech/a said:


> A lot like a woman!




The 3 year performance rule? 



craft said:


> Hi TKP
> 
> What I was getting at with Phil Fisher is that he developed dementia/Alzheimer's.  I recall reading something by his son Kenneth that his latter year performance wasn’t at the level of earlier years and his investing was probably being affected by the dementia well before the dementia was diagnosed.
> 
> It’s a bit of an extreme example but it re-enforces the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.




Hi craft,

I don't think I am going to do anything about it. I will make mistakes and I will learn from them. 

There's often a tendency to fix everything, present in humans and especially bureaucracies. But sometimes the right solution is just to get better. But it will take time and there will be mistakes along the way.

I would not recommend this to everyone. Certainly not to someone who is just starting out or has to preserve capital above all else.

I've been at it for 10 years and have 30 more to go until retirement, I have time and risk tolerance for it.



odds-on said:


> Pick a game (e.g. Poker, Bridge, Backgammon, etc) that you enjoy. Purchase some software and load it onto your computer. Become proficient in the game. Set a simple test that if you can beat the computer over a set number of matches then your brain is in a fit state to make an investment decision, if you cannot beat the computer, walk away!
> 
> I used to work with a principal engineer who did something similar with a desktop puzzle – if he could not solve the puzzle in 5 mins then he would not make decisions on complex engineering projects. He accepted his brain was tired and therefore likely to make mistakes.
> 
> Cheers




I like it! The danger is that by the time you solve the puzzle your brain will no longer be in a good enough state 

I found out (the hard way, on many occasions) that I am bad at making quick, on the spot decisions. Very bad, significantly worse than average. I tend to do much better if I can sit on an idea for a while and think about it. This was one of the major reasons behind my rule of investing once a month. Although I shouldn't say investing, it's really more about making a decision only once a month.

Sometimes an opportunity comes along and I need to analyze it quicker, but generally, I know what my best few options are a month before I actually buy or sell. I have that month to sit on it, think things through, look things up, etc. 

I find that this forced month of "no decisions" works very well for me. 

Now that I typed all this, I think that's a good answer to craft's question above as well.


----------



## Sir Osisofliver

Hi KTP,

Nice to see you back. I've been busy too but thought I would pop in. Especially nice to see you responding so well in this thread, I love people who have a clear thought process, who know themselves well, yet remain open to commentary.

As per usual though, I'm going to ask a couple of thought provoking questions for you and give you my thoughts (This is still based on the idea that while you like the idea of a hard exit, you don't know how to implement - if you've changed that the below might be pointless)...here we go...



> Sir O quite rightly pointed out that risk lies in what is unexpected. So why use a known criteria for an unknown event? When the event happens, one needs to weigh the options and decide whether selling is the best use of capital at this point in time.




*Can we know everything? * Of course not. No matter how diligent our analysis of a stock may be, (whether technical or fundamental) we frequently operate in an environment of imperfect or incomplete information. I run several systems across differing time periods. I'm also a weird person because I use both Technical and Fundamental analysis, having no preference for either style...They both have their place. For some of my systems, FA has more weight, some TA. *All my systems however employ mechanisms to limit downside risk*. The reason being that it produces a statistically better result over the longer term. To me a stop loss is a mechanism to determine when the imperfect or incomplete information is going to adversely impact my investment...IE a measure of *financial risk* within my strategy of investment.

You asked above why use a known criteria for an unknown event. My answer (not necessarily yours) is because the third dimension of financial risk, (the extent) is unknowable. The "event" may cause a small retracement in the share price, or may be the initiating event that snowballs into complete destruction. Only with hindsight can we know the answer to this question.  

Let me give you an example of what I am talking about (based on Fundamentals). I purchased Babcock and Brown at IPO. Purchasing at IPO there *is* no TA to be done. The stock (at listing) had all those characteristics that you have identified. Low/no debt, significant ownership by management, excellent ROC and simple to understand (similar model as Macquarie Bank). I managed to get my hands on 2,000 B&B IPO shares at $5.00 (a relatively small position size within that system, and purchased another 1,500 shares on the first day of listing at $8.27) (over 60% increase from IPO price).

I held the stock for 12 months before conducting any significant analysis beyond looking at the price. I eventually sold the stock at $28 and some change (from memory I think it got comfortably over $30). At this stage B&B was still being compared to Macquarie Bank and analysts were still talking it up. Whilst I appreciate that you don't have all the information (see what I did there?) *Why do you think I sold it?*

* * * * * 

I've seen you repeatedly state that you will use diversification as a method to reduce risk in your investing activities. Fair enough, diversification *will* reduce certain types of risk. Specific stock risk in particular is mitigated (not eliminated) by diversification. *What about market risk?* Market risk is something that impacts the entire market, for example, Interest rates. A stop loss mechanism is a way of mitigating (not eliminating) an event that can impact your entire portfolio. If it's your intention to carry positions for long periods of time in your system or strategy, you will be impacted by Market Risk...how do you intend to recognize and/or mitigate this risk?

That's all for now, I have more but time-poor.

Cheers

Sir O


----------



## burglar

KnowThePast said:


> ... I am bad at making quick, on the spot decisions. ...




Sometimes, I can't type fast enough to get out of trouble!
On top of that, I am racked by indecision! 

I feel that I am very slow. 

To overcome this huge disadvantage, 
I have found it is helpful to have an exit plan, even before I buy.


----------



## craft

craft said:


> the question I’m trying to get at which is how to protect ourselves from ourselves. I reckon everybody should have an answer to that question but it becomes even more important if you have open exposure and no automatic exit criteria.






KnowThePast said:


> Hi craft,
> 
> I don't think I am going to do anything about it. I will make mistakes and I will learn from them.
> 
> There's often a tendency to fix everything, present in humans and especially bureaucracies. But sometimes the right solution is just to get better. But it will take time and there will be mistakes along the way.
> 
> I would not recommend this to everyone. Certainly not to someone who is just starting out or has to preserve capital above all else.
> 
> I've been at it for 10 years and have 30 more to go until retirement, I have time and risk tolerance for it.




TKP – I respect the strategy to back yourself, however in my opinion the answer to my question lies not in the ‘how to’ of your strategy – but in knowing when to sack yourself.

My personal answer has two parts.

First Part: Am I any good at this?  

I use a linear regression line on 5 years of both my equity curve and the XAO Accumulation index.  If the slope of my equity regression line does not outperform the XAO Accumulation regression line – I’m history as manager of my money  on performance grounds and will commence transferring funds to a broad based low cost ETF.

Second part:  Am I losing my ability?

I draw a channel around my long term equity curve and my long term cash distributions – If It penetrate the lower bound of either something has potentially changed. If one is breached I’m on high alert – If both are breached I’m at the very least stood down pending a major investigation.

********

Do you have a properly recorded equity curve for your actual 10 year history? Its an imperative piece of data IMO. If you don't have it - start now and also ponder that the majority of people (like 99% on forums) think they are better then average.


----------



## Ves

Craft, where have you found a reliable source for historical XAO Accumulation Index monthly data?   

I have tried to find it before - without much success.   Is it something you need to pay a data provider for?


----------



## craft

odds-on said:


> I used to work with a principal engineer who did something similar with a desktop puzzle – if he could not solve the puzzle in 5 mins then he would not make decisions on complex engineering projects. He accepted his brain was tired and therefore likely to make mistakes.
> 
> Cheers




I like that engineer

- - - Updated - - -



Ves said:


> Craft, where have you found a reliable source for historical XAO Accumulation Index monthly data?
> 
> I have tried to find it before - without much success.   Is it something you need to pay a data provider for?




I get it included with my paid data. Don't know of any frees sources off the top of my head but imagine they would exist - try the free charting site maybe?.


----------



## skc

Ves said:


> Craft, where have you found a reliable source for historical XAO Accumulation Index monthly data?
> 
> I have tried to find it before - without much success.   Is it something you need to pay a data provider for?




I can send it to you if you want. How far back do you need?


----------



## Ves

skc said:


> I can send it to you if you want. How far back do you need?



Thanks for the offer, skc - my portfolio started in April 2011, would be good if it went back that far. Would it be possible to export it to an Excel file?


----------



## skc

Ves said:


> Thanks for the offer, skc - my portfolio started in April 2011, would be good if it went back that far. Would it be possible to export it to an Excel file?




See PM. 

Apologies for all off-topic posts.


----------



## KnowThePast

Sir Osisofliver said:


> Hi KTP,
> 
> Nice to see you back. I've been busy too but thought I would pop in. Especially nice to see you responding so well in this thread, I love people who have a clear thought process, who know themselves well, yet remain open to commentary.
> 
> As per usual though, I'm going to ask a couple of thought provoking questions for you and give you my thoughts (This is still based on the idea that while you like the idea of a hard exit, you don't know how to implement - if you've changed that the below might be pointless)...here we go...




Thanks Sir O.



Sir Osisofliver said:


> *Can we know everything? * Of course not. No matter how diligent our analysis of a stock may be, (whether technical or fundamental) we frequently operate in an environment of imperfect or incomplete information. I run several systems across differing time periods. I'm also a weird person because I use both Technical and Fundamental analysis, having no preference for either style...They both have their place. For some of my systems, FA has more weight, some TA. *All my systems however employ mechanisms to limit downside risk*. The reason being that it produces a statistically better result over the longer term. To me a stop loss is a mechanism to determine when the imperfect or incomplete information is going to adversely impact my investment...IE a measure of *financial risk* within my strategy of investment.
> 
> You asked above why use a known criteria for an unknown event. My answer (not necessarily yours) is because the third dimension of financial risk, (the extent) is unknowable. The "event" may cause a small retracement in the share price, or may be the initiating event that snowballs into complete destruction. Only with hindsight can we know the answer to this question.




I agree it is only with hindsight that we will know which ones continue falling and which ones will bounce back. 

But what are the odds? I will ramble on...

Out of 10, or 100, good, financially sound companies - how many continue going down and how many recover? My analysis/experience/reading tells me that selling after a big drop in these kind of companies is not the best strategy. 

Furthermore, "good" companies experiencing large drops are very often (but far from always) the very best investment opportunities. Again, I feel experienced human judgement is required rather than an automatic decision.

Another argument is about risk - is the company that dropped in price more volatile and therefore more risky, or is it less risky because it is cheaper? 

I agree that selling on substantial decline will further mitigate risk - but I think it will end up being the wrong decision more often than not. For the type of companies I invest in, anyway. 

A lot of FA is based on finding companies that are priced below value. In many cases, this means you look at companies that have had a fall in price. This results in a situation where for the same kind of company:
- If I already own it, than I sell.
- If I don't own it, Buy!

Let's go back to CAB. I bought it 2009 for my super at $6.20. It has recently fallen down to under $4, for reasons we all know. Now, I agree with "the market" that the company is worth less now than a year ago. It has deteriorated. Should I sell? But despite deterioration in value, I still think there's plenty there now that the price has fallen.

If I sold at $4 or under because it's gone down, when do I allow myself to buy back in? Do I time the market? 

What do I do with companies like LYL, where I expect them to have a bad year in 2014. I bought them because they were cheap enough, I did not try to time the low point. If they go on to have a bad 2014, just as I expect, and the share price drops even further, do I sell? My underlying assumptions have not changed, everything is going as I expect, what to do?

I am curious of what your previous FA experience tells you. How often did you get out and the price has gone back up? Was it a worthwhile percentage play in your case?

I think a lot of the auto sell comes from background of timing the market. Sell, wait till it goes up, buy again. I have nothing against that approach, but I have long ways to go before I am competent in anything like that. So what are the benefits of it for me, who makes no attempt to time the market?



Sir Osisofliver said:


> Let me give you an example of what I am talking about (based on Fundamentals). I purchased Babcock and Brown at IPO. Purchasing at IPO there *is* no TA to be done. The stock (at listing) had all those characteristics that you have identified. Low/no debt, significant ownership by management, excellent ROC and simple to understand (similar model as Macquarie Bank). I managed to get my hands on 2,000 B&B IPO shares at $5.00 (a relatively small position size within that system, and purchased another 1,500 shares on the first day of listing at $8.27) (over 60% increase from IPO price).
> 
> I held the stock for 12 months before conducting any significant analysis beyond looking at the price. I eventually sold the stock at $28 and some change (from memory I think it got comfortably over $30). At this stage B&B was still being compared to Macquarie Bank and analysts were still talking it up. Whilst I appreciate that you don't have all the information (see what I did there?) *Why do you think I sold it?*




I will have to disagree with you on one bit - simple to understand. I looked back on my notes for it and I have just one sentence against it - "I don't understand this business well enough". But that's for me, it's not the kind of company I usually invest in, so other may find it easy to understand.

But that places me in a good position for your experiment because I've done no research on them and can therefore try to guess why you sold:
- got too expensive based on FA analysis
- too many people talking it up, etc.
- fundamentals changed.

Am I close? Or was there a large dip in the price?

* * * * * 


Sir Osisofliver said:


> I've seen you repeatedly state that you will use diversification as a method to reduce risk in your investing activities. Fair enough, diversification *will* reduce certain types of risk. Specific stock risk in particular is mitigated (not eliminated) by diversification. *What about market risk?* Market risk is something that impacts the entire market, for example, Interest rates. A stop loss mechanism is a way of mitigating (not eliminating) an event that can impact your entire portfolio. If it's your intention to carry positions for long periods of time in your system or strategy, you will be impacted by Market Risk...how do you intend to recognize and/or mitigate this risk?
> 
> That's all for now, I have more but time-poor.
> 
> Cheers
> 
> Sir O




That's a good point, short/medium term, I am not really protected against market risk. Some protection I do have:
- generally long term holding
- 2+ years to enter the market.
- safety margin on my investments. Due to the price I am willing to pay for my investments, I tend to buy less when the market is high and hold less in stock. I am also a lot more likely to sell as some of my stocks will trigger my sell price. 

I will expand further on my sell strategy, as I've realised it may sound like I don't have one. I have clear rules about when I will sell, and I do so on a regular basis. I've posted the following sell criteria in my first post, almost directly from Phil Fisher:

1. When I made a mistake.
2. When circumstances changed.
3. When there's a better investment.
4. In some special cases, when performance objective was complete. Will mainly apply to less than stellar companies trading below NTA.
and I've recently added:
5. 3 years performance rule.
6. I should add a new one yet again, based on my experience with IRI a few months back. Sell whenever something gets "Stock of the Month/Year" award.

1 & 2 -fairly self explanatory. I regularly revisit my investments to see if my reasons for buying are still valid. If they changed, either due to new events or finding a flaw in my reasoning, I sell. But first, I consider the investment merit of it in light of new evidence, and whether I would have liked to buy into this now if I didn't already hold.
4. Special situations - won't happen often, so let's move on.
5. enough said.
3. This is key. It's a small point, but has a lot to it. One important thing to remember is that all my investments need to also be compared to a cash account. When the price gets high, I will sell, even if there's no other equity investment to put it in.

I've mentioned this before, for me, buying a share is not a yes/no decision. It is a comparison. What do I compare on?:
1. Price. I do a valuation of the company based on what I think is most likely scenario.
2. Risk.
3. Long term potential.
4. Certainty of earnings or competition moat.

I try and keep these things separate, eg. I don't price risk in my valuation. I can then look at all companies which prices are below my required margin of safety. I know that my price estimates, like anyone else's are probably way off, so whether a company if 50% under value, or 70%, does not make a big difference to me. I assume they are priced about the same. 

I can then compare these companies on the other 3 factors. Again the key to the comparison is that Cash account is an option I compare against, as it has all 4 factors locked in.

Which means I will sell when the price gets above my value. The company with more risk and less potential and earnings certainty will be sold at a less of a premium than one with low risk, higher potential, etc.

To reach the selling trigger, either the price has to go up, or the value to come down. But I disagree, that under this methodology, sell trigger can be reached by price going down 


I fully understand everyone's arguments about stop losses and their benefits. My point is that not all risks have to be mitigated. It's a decision that's based on personal circumstances. And sound logic, hopefully. There's risks which you may decide are worth bearing, for more reward. But one must understand exactly what's at risk. Do I?


----------



## KnowThePast

craft said:


> TKP – I respect the strategy to back yourself, however in my opinion the answer to my question lies not in the ‘how to’ of your strategy – but in knowing when to sack yourself.
> 
> My personal answer has two parts.
> 
> First Part: Am I any good at this?
> 
> I use a linear regression line on 5 years of both my equity curve and the XAO Accumulation index.  If the slope of my equity regression line does not outperform the XAO Accumulation regression line – I’m history as manager of my money  on performance grounds and will commence transferring funds to a broad based low cost ETF.
> 
> Second part:  Am I losing my ability?
> 
> I draw a channel around my long term equity curve and my long term cash distributions – If It penetrate the lower bound of either something has potentially changed. If one is breached I’m on high alert – If both are breached I’m at the very least stood down pending a major investigation.
> 
> ********
> 
> Do you have a properly recorded equity curve for your actual 10 year history? Its an imperative piece of data IMO. If you don't have it - start now and also ponder that the majority of people (like 99% on forums) think they are better then average.




Good points craft.

Yes, I do measure myself. Against XAO. So far, so good. Beaten it over the last 6 years, but no Buffet.

I greatly enjoy this game, but like with most things, I only enjoy it if I am getting better and can beat more and more of others. I am competitive. 

If my 5 year returns are below XAO, I will use an index fund.


----------



## Ves

Sir Osisofliver said:


> Let me give you an example of what I am talking about (based on Fundamentals). I purchased Babcock and Brown at IPO. Purchasing at IPO there *is* no TA to be done. The stock (at listing) had all those characteristics that you have identified. Low/no debt, significant ownership by management, excellent ROC and simple to understand (similar model as Macquarie Bank). I managed to get my hands on 2,000 B&B IPO shares at $5.00 (a relatively small position size within that system, and purchased another 1,500 shares on the first day of listing at $8.27) (over 60% increase from IPO price).
> 
> I held the stock for 12 months before conducting any significant analysis beyond looking at the price. I eventually sold the stock at $28 and some change (from memory I think it got comfortably over $30). At this stage B&B was still being compared to Macquarie Bank and analysts were still talking it up. Whilst I appreciate that you don't have all the information (see what I did there?) *Why do you think I sold it?*



Babcock and Brown is a great lesson for new investors, I agree.

However, suffice to say the problems and risks with this company should have been made clear or at least more identifiable to anyone who bothered to read their cash flow statements.

Look at the operating and investing cashflow.   It's non-existent.   It's little wonder they went bankrupt - they literally bled cash.  Even as far back as 2004 and 2005 you can see the big cash flow deficits building up.

BNB is a fantastic example of why return on equity is a slippery figure prone to accounting wizardry.  You really, really need to know how cash flows through the business.... how they fund their operations and growth,  what return they can achieve on future investments and how their balance sheet is structured to accomodate this.

Learning how to read cash flow statements instead of relying on the profit and loss statement (or reported NPAT taken off a broking site) would help a lot of investors make better decisions.


----------



## skc

KnowThePast said:


> What do I do with companies like LYL, where I expect them to have a bad year in 2014. I bought them because they were cheap enough, I did not try to time the low point. If they go on to have a bad 2014, just as I expect, and the share price drops even further, do I sell? My underlying assumptions have not changed, everything is going as I expect, what to do?
> 
> I am curious of what your previous FA experience tells you. How often did you get out and the price has gone back up? Was it a worthwhile percentage play in your case?
> 
> I think a lot of the auto sell comes from background of timing the market. Sell, wait till it goes up, buy again. I have nothing against that approach, but I have long ways to go before I am competent in anything like that. So what are the benefits of it for me, who makes no attempt to time the market?




I think with LYL you are confusing "timing the market" (which a FA may rightly choose not to do) with "timing the industry" (which a FA absolutely should do especially for companies in a cyclical industry).


----------



## KnowThePast

2 month update:


----------



## Sir Osisofliver

KnowThePast said:


> Thanks Sir O.
> 
> I agree it is only with hindsight that we will know which ones continue falling and which ones will bounce back.
> 
> But what are the odds? I will ramble on...
> 
> Out of 10, or 100, good, financially sound companies - how many continue going down and how many recover? My analysis/experience/reading tells me that selling after a big drop in these kind of companies is not the best strategy.
> 
> Furthermore, "good" companies experiencing large drops are very often (but far from always) the very best investment opportunities. Again, I feel experienced human judgement is required rather than an automatic decision.
> 
> Another argument is about risk - is the company that dropped in price more volatile and therefore more risky, or is it less risky because it is cheaper?
> 
> I agree that selling on substantial decline will further mitigate risk - but I think it will end up being the wrong decision more often than not. For the type of companies I invest in, anyway.




I'm not wanting to sound critical here, just trying to demonstrate the differences in how people (and therefore the market) think, using myself in the role as a commentator/analyser on the stocks you've selected as "good" companies. So far you've indicated that you have purchased CAB, SDL and LYL. Ok let's take a look at one of them and I'll choose CAB because it was the first you purchased and you mention it below. (I haven't looked at CAB for a while - so this should be interesting). This is the normal process I go through, (and for this example will be somewhat superficial - I just want to tell you what I'm thinking)... *NOTE - I DO NOT HOLD CAB. THIS IS NOT ADVICE...DON"T MAKE ME GET THE DISCLAIMERS OUT. I MEAN IT. DYOR.*

CAB - Mcap 523M 120 Million shares on issue  Average of broker consensus - Sell recommendation price target $4.49  current price $4.43  (Ok so with that MCAP the stock is well outside the top end of the market. As such in terms of how I would categorize the stock it does not meet my criteria for a "Blue Chip" portfolio. (It does meet a couple of the requirements, but it fails for me to class it as blue chip {and therefore be prepared to hold the stock on a longer-term - across market cycles - basis}). It would therefore fit into one of the other categories I use to determine the appropriate time to invest in the this type of stock. Income, Growth, Cyclical or Defensive. These are dominant categories - frequently stocks possess attributes across categories. Looking at the stock it would appear to have income characteristics (nominally due to the high payout ratio), but have significant growth/cyclical characteristics. It's greatest optimal entry for a capital growth objective (as opposed to an income objective) would therefore *tend* to occur in a late cycle of the broader market cycle. Prior to late cycle it would be suitable as a trading position.  *Are you intending to hold this for yield or growth?* 

Earnings 0.48
Market 0.98
Sector 0.68

Actual NPAT fall in 2012 Forecast NPAT fall in 2013 2014  Ouch! errr that's not attractive, that's catching a falling sword. There would need to be a significant announcement on the 22nd of August when it releases it's Prelim Report. Taking a look at those numbers immediately turns me off the stock and makes me wonder if there is a short position to be had at the end of August depending upon the prelim report.... we'll see. 

Top five shareholders hold 48.94% of issued capital Hey that's not half bad...hope none of them pull the pin. In fact I think I might see if any of them have been adjusting their holdings (Looking for either an overhang or predatory behaviour)... Hmm So UBS Australia has been been selling down but UBS London have been buying up as has Aberdeen (based in Singapore) in the last few months....in fact hold about 14% of issued capital... I see them doing this for yield in comparison to yields in their home countries - confirmation of the income characteristics I spoke above.

Hmmm ok so a purchase now would seem to be a contrary to *popular* opinion but overall Institutions seem keen under an income basis to acquire. On one hand you have an obvious headwind in the short term time-frame you are working against. On the other hand the Insto's tend to be sticky holders and 14% holding isn't insignificant). But I do want to ask.....how does the above match up with...



> But generally, I will only buy companies that have at least some of these:
> 1. I feel have every chance of being around and doing very well 20 years from now.
> 2. Company founder or long serving management on board, and owning a large stake in the company.
> *3. Consistently profitable over many years.*
> 4. Acceptable or higher ROC.
> 
> Things I generally won't invest in:
> 1. Things I don't understand, whether it is the business, the industry, or the annual reports.
> 2. Companies that are generally not profitable.
> 3. High debt.



 My bolds.

It would seem that the market, superficially at least, does not agree with your assessment. But, this is the art of stock selection, finding good companies that are sold well below their intrinsic value, and then allowing the market time to recognize the intrinsic value. I would have said that (without doing any TA) that you were early in your purchase if your objective is capital growth, as an upwards trend of sentiment does not yet exist, but that early signs are there for the possibility, but it may be six to 12 months away. I would start looking at the announcements from here on looking for fundamental stability and news flow. It is at this point I would normally go do TA to see if the tech and fund align or if I just got it wrong - but you aren't interested in that. (One quick look tells me that the stock has been neutrally trending since 2009 and in a negative trend since May 2012.....a period of time where the market went from 4088 to +5000... It's trending *against* the market).  Given that you have said that you are benchmarking against the index....*How do you feel about that? (given that expectation is fundamental to financial risk).*



> Let's go back to CAB. I bought it 2009 for my super at $6.20. It has recently fallen down to under $4, for reasons we all know. Now, I agree with "the market" that the company is worth less now than a year ago. It has deteriorated. Should I sell? But despite deterioration in value, I still think there's plenty there now that the price has fallen.
> 
> If I sold at $4 or under because it's gone down, when do I allow myself to buy back in? Do I time the market?
> 
> I am curious of what your previous FA experience tells you. How often did you get out and the price has gone back up? Was it a worthwhile percentage play in your case?




Given the number of transactions I have done over the years this has happened many times.  Do I regret any of them...no, would I do it exactly the same again...yes. 



> I think a lot of the auto sell comes from background of timing the market. Sell, wait till it goes up, buy again. I have nothing against that approach, but I have long ways to go before I am competent in anything like that. So what are the benefits of it for me, who makes no attempt to time the market?




I would suggest you then need to look at what your goals and objectives are and think deeply about whether you want to benchmark against the index. Perhaps something more akin to a stated target regardless of market performance would suit you better.







> I will have to disagree with you on one bit - simple to understand. I looked back on my notes for it and I have just one sentence against it - "I don't understand this business well enough". But that's for me, it's not the kind of company I usually invest in, so other may find it easy to understand.
> 
> But that places me in a good position for your experiment because I've done no research on them and can therefore try to guess why you sold:
> - got too expensive based on FA analysis
> - too many people talking it up, etc.
> - fundamentals changed.
> 
> Am I close? Or was there a large dip in the price?



 I hope the above gave you a bit of window into process.  Knowing the process now, you could imagine that I looked at BNB like this....

1) Is not a blue chip (doesn't meet my requirements)
2) My goal is therefore shorter-term capital gain rather than longer term income/gain 
3) The stock is cyclical in nature (like MQG).
4) The market is late cycle.
5) I've had an almost 500% increase on my purchase price.
6) They've spent a lot of the money they've raised on expensive assets late in the cycle.
7) The cash-flow statement looks a bit squiffy. 
8) They triggered a technical sell signal (which was ultimately a little early)

All the above = sell, ignore those that said it was going to reach $50.00, go find the next one.


KTP - if you were to do the same, using those simple characteristics above, what part of the cycle are we in, what sort of stock is it, what category does it fit in....what would you come up with for SDI and LYL?

Cheers

Sir O


----------



## KnowThePast

New purchase - NWH. 2100 @ 0.98.

There is one reason for this purchase - cheap.

Cheap based on its PE of 3.6.
Cheap based on its Price/NTA of 0.9.
Cheap based on its PE of last 5 years average - 5.3
Cheap(ish) based on its earnings from 5 years ago - 7.5.
Cheap based on assumption their average long term earnings will 1/3 of last years - PE of 8.4.
Cheap based on a current dividend yield of 18.4%.
Cheap based on 1/3 of dividend yield of 6%.

It has a funny cash/debt situation. $210m cash on hand and $240m debt. About $200m of unused debt facilities. 
A glorious, popular and exciting business of earth moving. So what are the negatives about this Cinderella in the rough:
- It is a relative of the mining sector.
- Original founders are no longer part of the business, but the MD has been there a long time and owns a substantial number of shares.
- high capital requirements + fixed costs. 

Now, as much as I would love for them to continue making as much money as they do now, I do not think that is a realistic expectation. Not out of the question, mind you, just very unlikely. Instead, I am making an assumption that they will shrink to a third of their size. If this investment makes sense to me after a 2/3 drop, I think there is sufficient margin of safety for me to take on this risk. So, what am I expecting to happen along the way? 3 most likely scenarios:
1. Management will wait out the downturn in expectation of quick turnaround. Capital expenditure will remain about the same, losses likely in the next year or two.
2. Fixed expenses are reduced by asset sales, write-offs, redundancies, etc.
3. Fixed expenses are reduced by not maintaining the unutilised equipment. P/L will still be negative, but cash flow should show a healthy surplus.

Most likely a combination of 2 & 3. Because of high depreciation/cap exp., operating cash flow is significantly higher than reported profit. $467m versus $257m over the last 6 years. Depreciation last year was $41m. 
So given my expectation of a 2/3 drop for this company, what is likely to happen, should this drop occur over 3 years:

Start: $210m cash, $240m debt. Net 30m debt + $200m unused debt facilities.
Redundancies, etc. Current staff of over 4,000. Assuming 2,500 are made redundant at a cost of $20k each, that is $50m.
Say another $20m for any expenses, leases, etc.
Gives us debt of $100m.

Now we can add extra equipment sold, or depreciation charge unused. $28m*3 = $84m. Their PPP is $360m on the balance sheet, so I think $84m for 2/3 of it is conservative.
Total = $16m debt, $200m unused facilities, ~30m/year earnings, PE of 8.4.

Above is what I think the most realistic bad case scenario is. More likely, in 5 years time the company will be somewhere between this and today.

There's 1.3bn worth of work in hand, so next year might not be a complete disaster. But depending on how much of that work is newly won, or a carryover from last year's $1.9bn order book, things may start to get messy in the second half of next year.

As long as this company can remain alive without massive share dilutions, I think it will work out well.


----------



## Klogg

KnowThePast said:


> There's 1.3bn worth of work in hand, so next year might not be a complete disaster. But depending on how much of that work is newly won, or a carryover from last year's $1.9bn order book, things may start to get messy in the second half of next year.
> 
> As long as this company can remain alive without massive share dilutions, I think it will work out well.




OK, I must ask - while they have 1.3bn order book:
- What are the margins like?
- What's the future macro picture look like? (check out mining capex forecasts - you won't like what you see... and yes, they're only forecasts)
- As a result of the above, are the asset valuations on the balance sheet accurate? (i.e. will there be write-downs?)

This is not to say they can't continue on, but you're essentially investing in a company where you're expecting very minimal profits in the next few years and therefore minimal/no cash returned to shareholders.

I personally stay away from miners and mining services because I don't understand the area well enough and they're essentially price takers... but if you're jumping in, you'd want to know the answers to the above questions.


----------



## KnowThePast

Klogg said:


> OK, I must ask - while they have 1.3bn order book:




Hi Klogg,

Thank you for the questions to keep me honest.



Klogg said:


> - What are the margins like?




Last year, but prior years are similar:
EBIT/Revenue = 11.3%
NPA/Revenue = 7.1%
ROC = 20%

I expect these to take a hit, how much depends on whether they downsize or not.



Klogg said:


> - What's the future macro picture look like? (check out mining capex forecasts - you won't like what you see... and yes, they're only forecasts)




The consensus seems to be that the outlook for the next couple of years is terrible. I don't disagree. But what about long term? Is it not safe to say that humans will consume more and more resources as population grows and so do consumer demands? It is no secret that this is a cyclical industry.

Buy low, sell high. The big problem with buying low is that there's always a perfectly good reason why things are low. 

I had a look at the forecasts. Yes, they are bad. But I went much further than any of them and assumed that things will decline 67%. Based on that, the investment still made sense to me. That's my margin of safety.



Klogg said:


> - As a result of the above, are the asset valuations on the balance sheet accurate? (i.e. will there be write-downs?)




Yes, quite possibly there will be write-downs. 

The way I look at it is that they could take all their unused equipment to the scrap yard, spend some money on redundancies and continue being profitable with a much lower cost base to match that of demand. Write-downs of this kind will result in a reported loss, but positive cash flow.



Klogg said:


> This is not to say they can't continue on, but you're essentially investing in a company where you're expecting very minimal profits in the next few years and therefore minimal/no cash returned to shareholders.




Yep, that is part of the price that I pay for future earnings. 

I worked out what the business is worth, say 5 years from now, when write-downs are finished and business is profitable off a lower cost base. The correct thing to do, I guess, would be to discount it to present value.

But it's also quite likely, that if the company doesn't lose too much money, and does generate some cash from asset sales, it will continue paying some dividends. Sale price of assets does not need to equal the value on the balance sheet - it's the cashflow that's important here.



Klogg said:


> I personally stay away from miners and mining services because I don't understand the area well enough and *they're essentially price takers*... but if you're jumping in, you'd want to know the answers to the above questions.




That is an excellent point. 

NWH is not a company that enjoy any competitive advantage as far as I can tell.

Therefore, strong argument can be made that they are worth a replacement value of their assets, as long as the business they are in, remains viable *long term*, which I think it clearly is.

I have not done an accurate valuation of the company's replacement value, because a quick look at the balance sheet told me that they are trading far below it.

Another interesting value-based premise - a company that achieves a poor return on capital is:
1. in an industry that is not viable long term
2. has poor management.
3. operates in a temporary industry environment of either under-demand, or over-supply.

My money is on number 3. I think that due to various factors there is less mining related work available in the near future. Long term, however, it is a viable industry that will continue growing. I don't know when it will turn, but I am sure that it will and I am betting money that NWH will be there once it happens.


----------



## KnowThePast

Sir O,

I have to say our thinking is both very different and very alike - we seem to arrive at similar conclusions for complete different reasons.



Sir Osisofliver said:


> I'm not wanting to sound critical here, just trying to demonstrate the differences in how people (and therefore the market) think, using myself in the role as a commentator/analyser on the stocks you've selected as "good" companies. So far you've indicated that you have purchased CAB, SDL and LYL. Ok let's take a look at one of them and I'll choose CAB because it was the first you purchased and you mention it below. (I haven't looked at CAB for a while - so this should be interesting). This is the normal process I go through, (and for this example will be somewhat superficial - I just want to tell you what I'm thinking)... *NOTE - I DO NOT HOLD CAB. THIS IS NOT ADVICE...DON"T MAKE ME GET THE DISCLAIMERS OUT. I MEAN IT. DYOR.*




OK 



Sir Osisofliver said:


> CAB - Mcap 523M 120 Million shares on issue  Average of broker consensus - Sell recommendation price target $4.49  current price $4.43  (Ok so with that MCAP the stock is well outside the top end of the market. As such in terms of how I would categorize the stock it does not meet my criteria for a "Blue Chip" portfolio. (It does meet a couple of the requirements, but it fails for me to class it as blue chip {and therefore be prepared to hold the stock on a longer-term - across market cycles - basis}). It would therefore fit into one of the other categories I use to determine the appropriate time to invest in the this type of stock. Income, Growth, Cyclical or Defensive. These are dominant categories - frequently stocks possess attributes across categories. Looking at the stock it would appear to have income characteristics (nominally due to the high payout ratio), but have significant growth/cyclical characteristics. It's greatest optimal entry for a capital growth objective (as opposed to an income objective) would therefore *tend* to occur in a late cycle of the broader market cycle. Prior to late cycle it would be suitable as a trading position.  *Are you intending to hold this for yield or growth?*




To be honest, I never understood the distinction between yield and growth. I am there for profit. Yes, arguments can be made mentioning things such as earnings and dividends stability, asset backing, yada, yada. But I generally completely disregard this in my valuations. Whether management distributes cash or re-invests it in the business is an interesting topic and is one of the things I look at when assessing management, but I don't build it into the price.



Sir Osisofliver said:


> Earnings 0.48
> Market 0.98
> Sector 0.68
> 
> Actual NPAT fall in 2012 Forecast NPAT fall in 2013 2014  Ouch! errr that's not attractive, that's catching a falling sword. There would need to be a significant announcement on the 22nd of August when it releases it's Prelim Report. Taking a look at those numbers immediately turns me off the stock and makes me wonder if there is a short position to be had at the end of August depending upon the prelim report.... we'll see.
> 
> It is at this point I would normally go do TA to see if the tech and fund align or if I just got it wrong - but you aren't interested in that. (One quick look tells me that the stock has been neutrally trending since 2009 and in a negative trend since May 2012.....a period of time where the market went from 4088 to +5000... It's trending *against* the market).  Given that you have said that you are benchmarking against the index....*How do you feel about that? (given that expectation is fundamental to financial risk).*




You are looking at EPS/profit figures and price movements. I am going to go ahead and mention the elephant in the room. The inquiry, which resulted in lots of uncertainty surrounding the stock, culminating in a recommendation that will eat away a substantial amount of CAB's revenues and profits. It gives a clear explanation why the price was going down and earnings are forecast to decline. 

What comes first - price action or news? In short term future, depends. 

But when looking back, it is usually major news + earnings that move share price long term.

While I won't dispute that prolonged price decrease may signal worse things to come, one must also look if there's an underlying reason for that. Most importantly, does that reason still apply?

In CAB's case, the underlying reason is resolved. End result was deterioration in company's value, but also an end to uncertainty. That's my reasoning for forthcoming "reversal of the downtrend".



Sir Osisofliver said:


> Top five shareholders hold 48.94% of issued capital Hey that's not half bad...hope none of them pull the pin. In fact I think I might see if any of them have been adjusting their holdings (Looking for either an overhang or predatory behaviour)... Hmm So UBS Australia has been been selling down but UBS London have been buying up as has Aberdeen (based in Singapore) in the last few months....in fact hold about 14% of issued capital... I see them doing this for yield in comparison to yields in their home countries - confirmation of the income characteristics I spoke above.




Closely related to this is the biggest known risk for me in this investment - given that this is such a widely followed stock, what are the chances of me valuing the company more accurately. My honest opinion - close to zero. But when everything else about a stock matches your criteria, is this a valid enough reason not to buy? Still pondering over this one.



Sir Osisofliver said:


> Hmmm ok so a purchase now would seem to be a contrary to *popular* opinion but overall Institutions seem keen under an income basis to acquire. On one hand you have an obvious headwind in the short term time-frame you are working against. On the other hand the Insto's tend to be sticky holders and 14% holding isn't insignificant). But I do want to ask.....how does the above match up with...
> 
> But generally, I will only buy companies that have at least some of these:
> 1. I feel have every chance of being around and doing very well 20 years from now.
> 2. Company founder or long serving management on board, and owning a large stake in the company.
> *3. Consistently profitable over many years.*
> 4. Acceptable or higher ROC.
> 
> My bolds.




CAB has always been profitable. It will not be as profitable in the future due to new regulations, but it's always been profitable. I usually look for profit growth, but not always.



Sir Osisofliver said:


> It would seem that the market, superficially at least, does not agree with your assessment. But, this is the art of stock selection, finding good companies that are sold well below their intrinsic value, and then allowing the market time to recognize the intrinsic value. I would have said that (without doing any TA) that you were early in your purchase if your objective is capital growth, as an upwards trend of sentiment does not yet exist, but that early signs are there for the possibility, but it may be six to 12 months away. I would start looking at the announcements from here on looking for fundamental stability and news flow.




Yes, quite possibly I am early. But that's the difference in our approaches. I buy when there's enough "value", I don't try to time it.

Saying that - I find that most often when a company announces bad news, there's more bad news to come. While good companies usually recover and grow from this bad news, it is rare for it to happen quickly.

So, I don't necessarily disagree that one should get out quickly when bad news start coming, and I don't disagree that one should probably wait until bad news stop coming. The period in between is usually 1-2 years, I find.

But CAB is different, I feel, because the bad news did not originate within the company and will not take any/much effort to implement. They will simply charge less per transaction, while everything else will remain as is. 

So I simply take CAB's value prior to inquiry, subtract the expected effect and carry on.




Sir Osisofliver said:


> _I am curious of what your previous FA experience tells you. How often did you get out and the price has gone back up? Was it a worthwhile percentage play in your case? _
> 
> Given the number of transactions I have done over the years this has happened many times.  Do I regret any of them...no, would I do it exactly the same again...yes.




Interesting, thanks for that. 

As I wrote above, I agree in principle that one should get out on bad news, and try and buy again when things start to pick up. It's the automatic stop loss and my ability to time the market which worry me. Without the ability to get back in properly, at the right time, however, stop loss will stop more long term gains than losses in my type of portfolio.




Sir Osisofliver said:


> I would suggest you then need to look at what your goals and objectives are and think deeply about whether you want to benchmark against the index. Perhaps something more akin to a stated target regardless of market performance would suit you better.




Maybe for my overall wealth...

For share investments, though, I want to learn and get better. Measure against an index is the only way that I know of to properly track your progress. 



Sir Osisofliver said:


> I hope the above gave you a bit of window into process.  Knowing the process now, you could imagine that I looked at BNB like this....
> 
> 1) Is not a blue chip (doesn't meet my requirements)
> 2) My goal is therefore shorter-term capital gain rather than longer term income/gain
> 3) The stock is cyclical in nature (like MQG).
> 4) The market is late cycle.
> 5) I've had an almost 500% increase on my purchase price.
> 6) They've spent a lot of the money they've raised on expensive assets late in the cycle.
> 7) The cash-flow statement looks a bit squiffy.
> 8) They triggered a technical sell signal (which was ultimately a little early)
> 
> All the above = sell, ignore those that said it was going to reach $50.00, go find the next one.
> 
> 
> KTP - if you were to do the same, using those simple characteristics above, what part of the cycle are we in, what sort of stock is it, what category does it fit in....what would you come up with for SDI and LYL?




We have very different ways of looking at things, but I can see a lot in your ways that would be useful for me.

LYL:
1. Not a blue chip.
2. Stock is cyclical.
3. It is well down from the top of the cycle. The T/A in me says they will fall further. F/A says the price is good enough, better than cash account adjusted for risk.
4. They preserved cash and are prepared the downturn.

Buy/Sell depends on time frame here. 

SDI:
1. Not a blue chip.
2. Not cyclical.
3. Poor earnings growth, going down in fact. Until forecast for this year.
4. Price has been going up and up from 0.10 in July 12, to 0.65 today.

I am guessing you would sell based on how much price appreciation it had and its P/E multiple. I am also guessing that you would have never bought it in the first place? Disclaimer: I bought at 0.15 in my super.

I suspect you won't approve of my latest purchase either - NWH 


You mention that you only hold blue chip stocks through all cycles. I generally don't look at these and have a different criteria for stocks I would want to hold on to:
- small/micro cap companies that keep on growing and become an ASX100/200 member.

Getting lucky with just 1 or 2 of such stocks can erase a huge number of errors from one's portfolio. And this is the biggest reason why someone's portfolio may significantly outperform the market over many years. It takes a lot of luck, I don't think this is something you can forecast with significant accuracy. But one can increase his chances by digging around somewhere in the vicinity. Makes a good case for more diversification in that area as well.


Sir O, your posts always make me think and question my approach. It is especially enlightening for me when discussed in the context of stocks I know, a big thank you for your efforts.


----------



## Ves

KnowThePast said:


> NWH is not a company that enjoy any competitive advantage as far as I can tell.






KnowThePast said:


> Another interesting value-based premise - a company that achieves a poor return on capital is:
> 1. in an industry that is not viable long term
> 2. has poor management.
> *3. operates in a temporary industry environment of either under-demand, or over-supply.*
> 
> My money is on number 3. I think that due to various factors there is less mining related work available in the near future. Long term, however, it is a viable industry that will continue growing. I don't know when it will turn, but I am sure that it will and I am betting money that NWH will be there once it happens.




I think this is the most important part of your analysis and your starting point for valuation.

Arguably, for a company that does not enjoy a competitive advantage, but participates in a stable or growing industry, the valuation should be equal to the _reproduction value of its assets._  The cavaet to this is, of course, if the entity will continue to be a going concern - you need to answer that question (and it appears that you have above).

The future earnings are irrelevant because the long-term profitability of this business (ie. its return of capital) will not exceed its cost of capital if it does not have a competitive advantage.   This means that new entrants and other competitors could enter the same industry and compete on a level-footing if they are willing to stump up the costs of purchasing assets of a similar nature. In other words; how much would a competitor need to spend to derive the same profit that NWH makes?

If you do not understand why this theory almost always works in practice then you need to read more about competitive advantage.


----------



## KnowThePast

Ves said:


> I think this is the most important part of your analysis and your starting point for valuation.
> 
> Arguably, for a company that does not enjoy a competitive advantage, but participates in a stable or growing industry, the valuation should be equal to the _reproduction value of its assets._  The cavaet to this is, of course, if the entity will continue to be a going concern - you need to answer that question (and it appears that you have above).
> 
> The future earnings are irrelevant because the long-term profitability of this business (ie. its return of capital) will not exceed its cost of capital if it does not have a competitive advantage.   This means that new entrants and other competitors could enter the same industry and compete on a level-footing if they are willing to stump up the costs of purchasing assets of a similar nature. In other words; how much would a competitor need to spend to derive the same profit that NWH makes?
> 
> If you do not understand why this theory almost always works in practice then you need to read more about competitive advantage.




Hi Ves,

It seems we read the same books


----------



## Ves

KnowThePast said:


> Hi Ves,
> 
> It seems we read the same books



It's mentioned in a lot of the value-investing literature, but my favourite sources for this are Bruce Greenwald and Aswath Damodaran.   

Greenwald's "Competition Demystified" is definitely worth a read if you want to explore competitive advantage further.


----------



## KnowThePast

Ves said:


> It's mentioned in a lot of the value-investing literature, but my favourite sources for this are Bruce Greenwald and Aswath Damodaran.
> 
> Greenwald's "Competition Demystified" is definitely worth a read if you want to explore competitive advantage further.




You wording made me think Greenwald, so I was partly right.


----------



## KnowThePast

Another out of schedule purchase - CKL, 2355 @ 0.845. 45 more shares pending, but doesn’t look like they will get filled.

Every time I bought a share, this came a close second in my comparison. Looking back, buying LYL and NWH ahead of this was the wrong decision. I was buying into slightly more attractive opportunities that depend on change within an industry in order to make a profit, and that usually takes time. CKL, on the other hand, was undervalued right now.

With hindsight, I now know that I would have bought CKL at 0.70 if I pulled the trigger earlier. Not much would have happened in terms of price with LYL and NWH should I have bought a little later.

I wrote this back in July, before deciding on LYL instead.

Essentials:
- A family run packaging business, directors own lots of shares.
- modest debt.
- always profitable.
- acceptable ROC. I would prefer it higher, they are getting good margins for their industry, I don't think there's much left to squeeze out price wise. Saying that, I do expect their margins to improve, see more on that below.

My first thought about the packaging business was that it is quite likely to move offshore. While that pressure is certainly there, there is always a place for a local company with good customer service and products. 
They've recently made a big acquisition (late 2011). Usually, I do not like them, but I can't fault their judgement on this one. It's one of the few times I've seen where the company had to recognise an immediate profit on acquisition, as the purchase price paid was less than assets acquired. 

$5m was paid for the acquisition (Carter Holt Harvey).
$8.8m was booked as profit, due to increase in net assets.
$10.9m was then spent on restructuring the business to fit it in.
Making the total price about $7.1m, or one year's worth of earnings.

What do they get in return? CHH was generating about $125m in revenues, but making almost no money from them, as it was concentrating on "expansion", worry about profits later strategy. That hasn't quite work out for them, so CKL will now have a job of getting rid of any contracts that are not making money, leaving the profitable ones. 

They are essentially going to be doing it by raising the prices for those customers when the contract is up for renegotiation and they are expecting lots of those low-margin clients not to re-sign.

Assuming only 20% of the acquired revenues are worth keeping, they've paid a great price for them. And there’s more, CHH’s low prices have no doubt been undercutting CKL. Just getting rid of a competitor with $100m+ business was worth the price paid.

Here's an interesting part. If one was to look at financials of CKL without understanding of the underlying factors, one could easily conclude that:
- revenues are going down.
- margins are shrinking.
- Last year was a loss of $3.2m, a first. Due to one off restructuring charges related to acquisition.
- business is clearly going downhill.

But if one is to take away the unprofitable contracts from acquisition, it is the exact reverse for the underlying business - revenues are growing, margins improving, as are earnings, as evidenced by first half of 2013.

Their NPAT/Revenue prior to acquisition was ~7.2%. Once the dust settles, assuming they keep 40% of acquired revenues as profitable ones, I would then expect total revenues of $130m and npat of $9.36m, or 0.115/share, or a PE of 6.8.

That's for a business that is excellently managed, has modest debt, long history of earnings and growth.

The focus in the last year was paying down debt, prior to that they had to pay for the acquisition and integration, prior to that they invested a lot of money in new, state of the art equipment. I think it is very likely that they will increase their payout ratio in the near future.

So what are the risks?
1. Offshore pressures and competition. This is very real and they will certainly be losing customers to offshore competitors, even with the recent fall in AUD. My wife recently had to get packaging organised for her business, and her experience left me convinced that there is always room for a local player, whom you can talk to face to face. CKL normally go for much bigger customers than my wife's business, but it's true on that level as well. The hassles of dealing with problems are much bigger when they are offshore. And great product/service is always going to find a buyer willing to pay a premium. 

2. Debt. It is modest but higher than I like. Large chunk of it is due to the acquisition, which I thought was a good opportunity to seize, and they are concentrating on paying it off now. A lot of their customers are on multi-year contracts, giving some stability to revenues. Still, it is something to watch.

At the current price, if they can achieve/maintain/grow earnings of 11c/share, it's more than enough margin of safety for me to invest in. 

************************
I almost bought CLK again on the 1st of August, but again, it came second to NWH. I was also slightly spooked by their announcement about plant relocation and $2.5m expense to go with it. There were 5 days to go until their annual results announcement, I couldn't work out why they couldn't just announce it then. So, I held back just in case.

Annual report was good. Full year profit was a little under what I was expecting. A slight surprise was that they are confident of record profit not just in 2014, but also in 2015. 

Falling AUD should help CKL, but I am going to assume that offshore competition will further intensify. What could their earnings look like over the next 10 years, assuming management downsizes appropriately and doesn't try to maintain an empire.

I use earnings, rather than traditional adjusted cash flow for 2 reasons:
1. Historically, it's about the same for CKL.
2. For a company that downsizes, cap expenses should fall below depreciation charge, eg. cashflow should be better than reported profit. I won't make estimates by how much, this will simply be my buffer.

2014 = 0.09. Growth in underlying profit, but offset by plant relocation expenses.
2015 = 0.12. Growth in underlying profit + savings from relocation.
2016 = 0.12.
2017=0.11. I assume this industry will move offshore more and more, somewhat offset by CKL gaining greater Australian market share.
2018 = 0.10
2019 = 0.09
2020 = 0.08
2021 = 0.07
2022 = 0.06. I will expect the company to be sustainable at roughly half of its current size, as there is always a place for a local, customer friendly option.
2023 = 0.06

Gives me a total of $0.90, less than $0.70 in present value, depending on inputs. 
In addition to that, there's a company left over generating 0.06/year.

This is not the worst case scenario, but I think it is substantially worse than the "most realistic scenario".

*************************

So far I've talked mainly about negatives and how cheap CKL is. Are there any positives? A few, I think:

1. I think management is doing an outstanding job, and has their skin in the game. Reading their annual reports over the last 10 years, they always do what they say, they clearly understand the business and are in it for the long haul. 
2. They keep increasing their market share, up to number 2 in Australia, behind Amcor. There's ~25 competitors in Australia. Before packaging is offshored completely out of Australia, I would expect there to be some consolidation into the strongest(s) player. So, I think they have room to grow in Australia for some time even while the total market is shrinking.

This is a company operating in the toughest of industries, yet they management to consistently grow their revenues, profits and assets without issuing more shares or taking on excessive debt.


----------



## Sir Osisofliver

Hey TKP,

You broke the rules again? Assume the position. (not serious, just something I say to myself when I'm tempted to break my own trading rules).



> To be honest, I never understood the distinction between yield and growth. I am there for profit. Yes, arguments can be made mentioning things such as earnings and dividends stability, asset backing, yada, yada. But I generally completely disregard this in my valuations. Whether management distributes cash or re-invests it in the business is an interesting topic and is one of the things I look at when assessing management, but I don't build it into the price.




OK two things...

- So do you measure your holdings on TSR? (Total Shareholder Return - yield and growth together) - in which case your benchmark is not the All Ords Index, but the *All Accumulation Index*...mind you I'm still thinking that this is not the way for you to benchmark, but this is your show.

- I asked the question, because it tends to solidify (in my mind at least) the underlying reason for continuing to hold a stock.  If my driving motivation is yield...then I know I will be holding the stock for a reasonable period of time.  If my objective if growth...I'm holding it until I've made enough money and my decision to sell is more transparent.  I was talking to someone last month who put a not inconsiderable portion of an inheritance into Gold.  With gold there is no div, when I pointed this out, they clearly realized that their objective *had to be *growth and focused their decision.



> Yes, quite possibly I am early. But that's the difference in our approaches. I buy when there's enough "value", I don't try to time it.




So lets turn that around....why do think I *do* try and time it? Obviously sometimes I'm going to get it wrong, I'm going to stuff it royally, and kick myself when my analysis was right and there's an event that makes the price jump before I've entered. Why do you think I *persist* in attempting to time it?



> For share investments, though, I want to learn and get better. Measure against an index is the only way that I know of to properly track your progress.




I'm going to talk to you about the three main portfolio's I run personally. 
1) Run's across market cycles and is comprised of big end of town, blue chip investments. (My definition - part of my stock selection). There's a bit of filling around the edges during the market cycle as far as doing things like Covered Calls, and Underwriting but the main focus of this portfolio is *Income* and growth is a secondary characteristic of it.  This portfolio uses Leverage, (which is how I enhance my ROE because I'm using other people's money to make money) and the concentration on income means that the interest burden on the leverage is offset (and produces an additional income). I can effectively hold this portfolio *indefinitely*. My goal is to beat the long term performance of the market by a 2% yoy margin. (because most of the profit occurs in this portfolio at inception) so I can coast over the remaining part of the share market cycle.

2) Is a shorter-term portfolio whose focus is growth. I don't care what the index is doing - my goal is to make 40% per year. Funds generated here, go into number 1. An index and it's performance is just a number. It's just a target that you set to beat. This portfolio is *not leveraged*.

3)  Is an outlier system that I only turn on only in the later part of the share market cycle. There's an example in the Newbie Thread when I spoke about JBH, or BNB earlier, but I'm also looking for smaller cap stuff that's going to explode...Last time it was coal seam gas stocks. I'm looking for multibaggers. My goal is 3x equity invested (300% return) over the later part of the share market cycle - (I will only know this in hindsight). I have other measures on a shorter-term timescale.

An index is just a number you can measure against, you could just as easily say... I wish to earn better than bank deposit rates... and track your performance against that. If your goal is to *learn and get better*, setting an unrealistic target will *discourage* you.



> LYL:
> 1. Not a blue chip.
> 2. Stock is cyclical.
> 3. It is well down from the top of the cycle. The T/A in me says they will fall further. F/A says the price is good enough, better than cash account adjusted for risk.
> 4. They preserved cash and are prepared the downturn.




1) So under my systems it would not fit into number 1 or 2 (for reasons I won'y detail). I would *only* be looking at it from a multi-bagger, system 3 perspective.
2) Being *cyclical* it does have the dominant characteristics that I'm looking for in system 3...it's cyclical and SHOULD grow during the later part of the share market cycle.
3) No you misunderstood. Where are we now?  What part of the cycle are we currently in? This is an environmental big picture look. I hold Blue chips with yield focus because regardless of the time in the cycle, that yield sustains the value over the entire cycle. I buy Outliers, late cycle, because in the balance, there is a higher probability of success of this system *only* during that part of the cycle.
4) Is great, but will only be transferred to an equity increase, in the kind of way I'm looking for, at a certain part of the cycle.

Can you see how critical point three is to the investment decision and type of share I purchase?

From my perspective, a lot of what you've purchased fit's into number 3....and of all the systems, number three has the greatest *volatility* associated with it.  When something has high volatility, your options are...hold on through it and back yourself that you are right, or attempt to time and use stops, positional sizing, money management etc, to skew the probability in your favor.

You are doing the first one...I do the second one. Here's the sixty thousand dollar question......why do *I* do the second one?

Cheers

Sir O


----------



## KnowThePast

Sir Osisofliver said:


> Hey TKP,
> 
> You broke the rules again? Assume the position. (not serious, just something I say to myself when I'm tempted to break my own trading rules).




Yes, sir!

My list of available opportunities at a great margin of safety to my valuation is almost exhausted, I will now invest in opportunities as they come up, so the pace will probably slow down from now on.



Sir Osisofliver said:


> OK two things...
> 
> - So do you measure your holdings on TSR? (Total Shareholder Return - yield and growth together) - in which case your benchmark is not the All Ords Index, but the *All Accumulation Index*...mind you I'm still thinking that this is not the way for you to benchmark, but this is your show.




Excellent point, will correct from my next update onwards.

I use index as the benchmark, because I want to measure how good I am at investing in the sharemarket. It's not so much about measuring wealth/progress for me, as it is about measuring skill. Or luck.



Sir Osisofliver said:


> - I asked the question, because it tends to solidify (in my mind at least) the underlying reason for continuing to hold a stock.  If my driving motivation is yield...then I know I will be holding the stock for a reasonable period of time.  If my objective if growth...I'm holding it until I've made enough money and my decision to sell is more transparent.  I was talking to someone last month who put a not inconsiderable portion of an inheritance into Gold.  With gold there is no div, when I pointed this out, they clearly realized that their objective *had to be *growth and focused their decision.




Makes sense. CAB is probably more of a dividend play for me. However, I also expect it to be re-appraised to a higher multiple in the future. Reasoning for that is that it will remain a near monopoly, just with small profit margins.




Sir Osisofliver said:


> So lets turn that around....why do think I *do* try and time it? Obviously sometimes I'm going to get it wrong, I'm going to stuff it royally, and kick myself when my analysis was right and there's an event that makes the price jump before I've entered. Why do you think I *persist* in attempting to time it?




Because you are able to do it successfully often enough to be worthwhile, I would imagine. 

I've never had much luck doing it myself, however. 

What is your focus when it comes to timing it? Is it the general cycle/outlook for the economy/sector or more company specific? Do you try to form your opinion or do you look at measurable indicators such as average PEs, interest rates, etc?



Sir Osisofliver said:


> I'm going to talk to you about the three main portfolio's I run personally.
> An index is just a number you can measure against, you could just as easily say... I wish to earn better than bank deposit rates... and track your performance against that. If your goal is to *learn and get better*, setting an unrealistic target will *discourage* you.
> 
> 1) So under my systems it would not fit into number 1 or 2 (for reasons I won'y detail). I would *only* be looking at it from a multi-bagger, system 3 perspective.
> 2) Being *cyclical* it does have the dominant characteristics that I'm looking for in system 3...it's cyclical and SHOULD grow during the later part of the share market cycle.
> 3) No you misunderstood. Where are we now?  What part of the cycle are we currently in? This is an environmental big picture look. I hold Blue chips with yield focus because regardless of the time in the cycle, that yield sustains the value over the entire cycle. I buy Outliers, late cycle, because in the balance, there is a higher probability of success of this system *only* during that part of the cycle.
> 4) Is great, but will only be transferred to an equity increase, in the kind of way I'm looking for, at a certain part of the cycle.
> 
> Can you see how critical point three is to the investment decision and type of share I purchase?




Yes, I think I understand exactly where you are coming from.

I think we are doing the same thing, in a different way. You look at cycles, trends and catalysts. I look at value relative to price. If we are both right in our analysis, we should make the same decisions most of the time, even though we arrive at them from completely different angles.

I buy mining service stocks now because they trade at low PEs, high NTA/share, etc. This approach means it is unlikely I will ever buy them at the top of the market. It is no guarantee I will buy at the bottom either, but in some ways, that's what I am aiming for, juts from a value perspective. 

In terms of where we are in the cycle, as I said, I don't belive in my ability to time it, but here's my take: We are no longer on top, both from price and demand/supply point of view. For many years supply has been catching up to demand, we may now be somewhere closer to parity at the moment. Which means drop in prices for resources, even if volumes remain the same or just grow moderately. At the moment, noone yet knows juts how much prices will drop and how much flow on effect it will have. So current prices are market's estimates of how bad things will get in the next year or two. This is usually closer to the low point, *long term* things are generally not as bad as people predict them to be. 

Still, commodity prices will flow, it will have a flow on effect, and even though all this may already be built in the price, there's no telling how much lower things can go on those news. So, depending on just how badly companies will report in the next year, we could be either close to the bottom, or just the first leg into it. 

On a sharemarket as a whole, I think we will see a recovery that leads to new XAO highs in the next 2-5 years. In the meantime, I expect a bumpy ride. 



Sir Osisofliver said:


> From my perspective, a lot of what you've purchased fit's into number 3....and of all the systems, number three has the greatest *volatility* associated with it.  When something has high volatility, your options are...hold on through it and back yourself that you are right, or attempt to time and use stops, positional sizing, money management etc, to skew the probability in your favor.
> 
> You are doing the first one...I do the second one. Here's the sixty thousand dollar question......why do *I* do the second one?
> 
> Cheers
> 
> Sir O




I think you do that to reduce risk as measured by volatility, and to take human emotion out of equation.

I also think you misunderstand my approach - it is not buy and hold forever. I will sell things on a regular basis and I have clear price targets + trigger points when I will do so. I also do use position sizing and timed entries.

But I don't necessarily agree that volatility = risk, and I don't always agree that small = risky. 

But assuming that is so, one must not forget that there is much more upside as well. You can be lucky 1 time out of 10, and do extremely well. My current portfolio is a an example of that at the moment: I outperform the index because 1 company out of 5 decided to move up 50%. This completely made up for the relative underperformance of the other 4. 

It comes down to risk tolerance. I am happy to spread my entire capital over quality small companies. Every one I invest in, I look for a high margin of safety, and won't invest in until the price falls to a level I find acceptable. At the same time I know, that if I am to significantly outperform the market, it will most likely be because of a couple of standout performers. 

Sounds easy in theory, but in practice it is much, much harder. Looking at most of these small caps that went on to become big, most of the had great fluctuations in price and earnings over the years. If one can time this, great. If not, it is better to hold on. Unless something fundamentally changes. 

Going back to stop losses - they make sense, provided you can then time the entry back correctly. I can't do that, not at this point anyway. If I am just going to implement stop losses anyway, that will completely invalidate two key points of my strategy:
- investing in small caps, expecting some of these to move ASX200 in distant future.
- calculation of value and belief that market price is not always reflective of that. 

Take NWH. Let's pretend, I think it is worth $2+. I may also think it may be worth $0.50 in case of bankruptcy. I bought at $0.98. Say the price drops to $0.50, with no visible changes in the company itself. I might not average down in this specific case, because there's no certainty to future revenues, but to sell now? Do I admit that I was wrong at this point despite no fundamental changes? Is the company now more risky, despite trading at firesale values?

If a company announces an unexpected earnings downgrade or other bad news, I am not opposed to selling. I will sell in most cases like that myself. But if nothing changed except for the price, not so convinced.


----------



## Ves

CKL has been coming up in my scans for quite some time now.   I have also done some fairly in-depth thinking / research on it over the past few weeks in particular.

I am still undecided on it;  I agree with much of what you have said.   In summary, it's a closely held by astute management, operates in a boring (semi-defensive industry), has fairly well diversified revenue streams across a few industry segments and has achieved adequate long-term returns that support the case of there being some kind of competitive advantage  (especially in the pharma packaging business which helps them generate the highest margins out of all of their business segements).

The margin declines (some would say quite dramatic) over the last few years have been due to acquistions (and integration costs) outside of their traditional core pharma business.   The expanded business will not be able to generate EBIT margins at tradition levels of around 16% and it will be closer to 8 or 9% at the very most going forward I would have thought.

As you said  Amcor and Visy are their biggest competitors.    The CHH acquisition enabled them to compete on an even footing against both in the folding cartons space. And they got it dirt cheap.

Also handy to look at vertical integration - Amcor has been winding down or closing their mills; whilst Colorpak seems to be going for the centralisation of their cost base  (they also have contracts with NZ mills that may give them a cost advantage in the short and medium term).

I am still not sure about the long-term prospects of this business (see sustainable competitive advantage), but it is definitely at an appealing stage of the capex / rationalisation curve (most of the major spending has been down) and the debt and margin cycles have probably seen the worst.

Price is attractive, but the question of long-term competitive advantage is the key for me, not quite clear enough on that in my own thinking.   It means that I may miss opportunities, but my strategy is buy right, hold tight so I am punished if I get the company wrong in the first place.


----------



## KnowThePast

Ves said:


> CKL has been coming up in my scans for quite some time now.   I have also done some fairly in-depth thinking / research on it over the past few weeks in particular.
> 
> I am still undecided on it;  I agree with much of what you have said.   In summary, it's a closely held by astute management, operates in a boring (semi-defensive industry), has fairly well diversified revenue streams across a few industry segments and has achieved adequate long-term returns that support the case of there being some kind of competitive advantage  (especially in the pharma packaging business which helps them generate the highest margins out of all of their business segements).
> 
> The margin declines (some would say quite dramatic) over the last few years have been due to acquistions (and integration costs) outside of their traditional core pharma business.   The expanded business will not be able to generate EBIT margins at tradition levels of around 16% and it will be closer to 8 or 9% at the very most going forward I would have thought.
> 
> As you said  Amcor and Visy are their biggest competitors.    The CHH acquisition enabled them to compete on an even footing against both in the folding cartons space. And they got it dirt cheap.
> 
> Also handy to look at vertical integration - Amcor has been winding down or closing their mills; whilst Colorpak seems to be going for the centralisation of their cost base  (they also have contracts with NZ mills that may give them a cost advantage in the short and medium term).
> 
> I am still not sure about the long-term prospects of this business (see sustainable competitive advantage), but it is definitely at an appealing stage of the capex / rationalisation curve (most of the major spending has been down) and the debt and margin cycles have probably seen the worst.
> 
> Price is attractive, but the question of long-term competitive advantage is the key for me, not quite clear enough on that in my own thinking.   It means that I may miss opportunities, but my strategy is buy right, hold tight so I am punished if I get the company wrong in the first place.




Hi Ves,

That's a great summary, thanks for posting it up. 

How did you arrive at your future EBIT margin of 8-9%? Is it your general feeling of industries future, competitor numbers, or the CKL's trend over the past few years?

It's very difficult thing to get a grasp on at the moment. As a result of the acquisition, they obviously inherited some unprofitable contracts that they still had to fulfill and that reduced their margins the last 2 years. I believe they've now fulfilled all those contracts and either renegotiated them to a better rate, or let the customers go.

Prior to that, they spent a couple of years buying lots of new eqiupment, heavy capital spending. 

This coming year should be more or less return to the baseline, apart from $2.5m plant relocation cost.

Management stated that after 2014 capital expenditure should be in line with depreciation for a "few years", which tells me there are no forthcoming needs to replace outdated equipment or anything like that.

My thinking was along the lines of:
-Their 2013 EBIT margin was 7.8%, on EBIT of $13.8m.
-$2.5m plant relocation is expected to pay itself off within 12 months, so we can add $4.5m (EBIT/NPAT).
-All bad acquisition contracts coming off the books after this year, let's say that will reduce Revenues by $10m, with no effect on EBIT.
- Further efficiency improvements are expected in 2015, I'll assume another $2m to EBIT.

Assuming no new revenue streams, gives me revenues of $167m and EBIT of $20.3m. Margin = 12.1%.


Their long term prospects were my biggest question mark as well and that's why I spent the last 2 months bypassing them in favour of another stock every time. In the end, I decided that at the current price, they don't need great long term prospects, they just need to remain competitive for a few more years. Should they grow as well, it will be a very welcome upside. 

Sounds like our strategies are a little different too - I look for companies that I can hold, but have nothing against finding opportunities to exploit temporary mispricings and getting out afterwards. CKL is somewhere between those two - like yourself, I do not have a firm view of where they may be long term.


----------



## Ves

KnowThePast said:


> How did you arrive at your future EBIT margin of 8-9%? Is it your general feeling of industries future, competitor numbers, or the CKL's trend over the past few years?



I've just looked at what I thought was possible if they aimed for organic growth, price competition and the business cycle over the long term.  They appear to me to have focussed on lower margin growth over the past few years because they already hold a high market share in their phrama packaging operations. I expect this to continue.

I'm not given the impression that they will shed too much more revenue, most of the fat appears to be gone.

EBIT post-rationalisation  I think will be around $16m (give or take a bit in terms of the plant rationalistion in Victoria, but I'm not sure it adds $4.5m per year).  I usually discount any management estimates of rationalised or synergised cost savings!

Base line revenue is around $174m - I'd actually expect it to grow slightly after they have renegotiated and retained existing contracts and tried to win business against lessor competitors post Amcor's mill closures...   hence EBIT margins falling somewhere between 8-9%.

All of that being said... short and medium term is pretty meaningless to me if they don't have a moat that allows them to retain their profitability going forward.


----------



## craft

KnowThePast said:


> Hi Ves,
> 
> That's a great summary, thanks for posting it up.
> 
> How did you arrive at your future EBIT margin of 8-9%? Is it your general feeling of industries future, competitor numbers, or the CKL's trend over the past few years?
> 
> It's very difficult thing to get a grasp on at the moment. As a result of the acquisition, they obviously inherited some unprofitable contracts that they still had to fulfill and that reduced their margins the last 2 years. I believe they've now fulfilled all those contracts and either renegotiated them to a better rate, or let the customers go.
> 
> Prior to that, they spent a couple of years buying lots of new eqiupment, heavy capital spending.
> 
> This coming year should be more or less return to the baseline, apart from $2.5m plant relocation cost.
> 
> Management stated that after 2014 capital expenditure should be in line with depreciation for a "few years", which tells me there are no forthcoming needs to replace outdated equipment or anything like that.
> 
> My thinking was along the lines of:
> -Their 2013 EBIT margin was 7.8%, on EBIT of $13.8m.
> -$2.5m plant relocation is expected to pay itself off within 12 months, so we can add $4.5m (EBIT/NPAT).
> -All bad acquisition contracts coming off the books after this year, let's say that will reduce Revenues by $10m, with no effect on EBIT.
> - Further efficiency improvements are expected in 2015, I'll assume another $2m to EBIT.
> 
> Assuming no new revenue streams, gives me revenues of $167m and EBIT of $20.3m. Margin = 12.1%.
> 
> 
> Their long term prospects were my biggest question mark as well and that's why I spent the last 2 months bypassing them in favour of another stock every time. In the end, I decided that at the current price, they don't need great long term prospects, they just need to remain competitive for a few more years. Should they grow as well, it will be a very welcome upside.
> 
> Sounds like our strategies are a little different too - I look for companies that I can hold, but have nothing against finding opportunities to exploit temporary mispricings and getting out afterwards. CKL is somewhere between those two - like yourself, I do not have a firm view of where they may be long term.




KTP – you’re more optimistic than me – I’m around 8% Ebit Margin next year and 9% by 2016 on flat to slightly increasing revenue.  Accounting treatment of the uneconomical contracts has been a boost to the current numbers – no such tail wind next year.  How much of the benefits from the plant relocation will stick to CKL’s ribs in a competitive industry?

Amcor closing their paperboard mill is the significant story here to me. The big questions: Does CKL now have a competitive advantage in raw material sourcing because of the relationship with CHH? What happens to imported prices for competitors with the dollar decline? Will Amcor look for higher margins now that the packaging business can’t be cross subsidised with the board manufacture. 

Tough competitive, capital intensive industry – Appears some potential that industry conditions may move in favour of participants (short  to mid term play) – but all in all for this lazy long term investor,  I’m with Ves  – it doesn’t warrant a spot on my team. 

If the industry conditions are in fact easing – I hope you complete a timely trade and make some nice bucks. It’s refreshing that you have sparked a bit more in-depth research then ASF normally sees.


----------



## KnowThePast

Ves said:


> I've just looked at what I thought was possible if they aimed for organic growth, price competition and the business cycle over the long term.  They appear to me to have focussed on lower margin growth over the past few years because they already hold a high market share in their phrama packaging operations. I expect this to continue.
> 
> I'm not given the impression that they will shed too much more revenue, most of the fat appears to be gone.
> 
> EBIT post-rationalisation  I think will be around $16m (give or take a bit in terms of the plant rationalistion in Victoria, but I'm not sure it adds $4.5m per year).  I usually discount any management estimates of rationalised or synergised cost savings!
> 
> Base line revenue is around $174m - I'd actually expect it to grow slightly after they have renegotiated and retained existing contracts and tried to win business against lessor competitors post Amcor's mill closulres...   hence EBIT margins falling somewhere between 8-9%.
> 
> All of that being said... short and medium term is pretty meaningless to me if they don't have a moat that allows them to retain their profitability going forward.




Thanks Ves,

I do agree it is quite possible that their margins, revenues and profits will take a hit long term. It's very useful to hear someones else's thinking on it as well.

I've priced it based on some severe long term reductions and the price was still under my margin of safety.

An interesting question, I think, is whether great management can be considered a competitive advantage. True, it is not enduring, but to counter that, great management leaving does not usually get punished by the market as much as it should, IMHO.


----------



## KnowThePast

craft said:


> KTP – you’re more optimistic than me – I’m around 8% Ebit Margin next year and 9% by 2016 on flat to slightly increasing revenue.  Accounting treatment of the uneconomical contracts has been a boost to the current numbers – no such tail wind next year.  How much of the benefits from the plant relocation will stick to CKL’s ribs in a competitive industry?





Hi craft,

Not being optimistic, I do agree with you that margins are going to shrink. The calculations I've posted are the best case scenario, then I discount from that. 

An an excellent point on uneconomical contracts, yes, they were recorded as liabilities that were than worked off.



craft said:


> Amcor closing their paperboard mill is the significant story here to me. The big questions: Does CKL now have a competitive advantage in raw material sourcing because of the relationship with CHH? What happens to imported prices for competitors with the dollar decline? Will Amcor look for higher margins now that the packaging business can’t be cross subsidised with the board manufacture.
> 
> Tough competitive, capital intensive industry – Appears some potential that industry conditions may move in favour of participants (short  to mid term play) – but all in all for this lazy long term investor,  I’m with Ves  – it doesn’t warrant a spot on my team.
> 
> If the industry conditions are in fact easing – I hope you complete a timely trade and make some nice bucks. It’s refreshing that you have sparked a bit more in-depth research then ASF normally sees.




Thanks craft, I am really enjoying this and was also surprised at the level of detail many forum members have gone into here compared to other threads. Hopefully, this keeps up. I'll be doing my part.

Somewhat on topic, should some of the posts in this thread be copied over to stock specific threads? I don't mind copying them over, but I am too lazy to clean them up to separate company specific writings from my portfolio specific writings.


----------



## KnowThePast

3 months update:


----------



## Valued

I didn't read this whole thread, just the OP and your last post.  I don't own any shares in any companies you have in your portfolio. Why did you originally invest in CKL anyway? Was it because it's trading at a discount to book value?

SDI, NWH, and CKL are stocks I wouldn't have invested in so I am just curious as to why you did. LYL is something I would consider investing in for the right price (and if I conducted a bit more research into the company). CAB I would consider perhaps if the price was very attractive but I still avoid companies with gearing that high normally. It's also important not to be results oriented. I obviously do see that NWH and SDI delivered amazing returns but these are not companies I would find myself investing in.


----------



## robusta

You may have to read part of the thread, Know The Past has given a very clear and concise rationale for each of his investments. 

What are the reasons you wouldn't invest in most of these companies?


----------



## Ves

Valued said:


> CAB I would consider perhaps if the price was very attractive but I still avoid companies with gearing that high normally.



CAB isn't that highly geared.

Net Interest bearing debt is only 1.4x EBITDA.

Gross Operating cash flow (ex-interest) is $95.9m  vs net interest of $7.6m.  A coverage ratio of 12.75.   Cash flow has been very stable over the last decade.     Might be jumping at shadows a bit here given the nature of the business.


----------



## Valued

robusta said:


> You may have to read part of the thread, Know The Past has given a very clear and concise rationale for each of his investments.
> 
> What are the reasons you wouldn't invest in most of these companies?




I had a quick look through just now. It seems he picked NWH based on a variety of factors, some I don't consider myself. I would not invest in NWH since it does not pass my initial screens. I just don't screen for companies with debt/equity ratios that high. At the time of purchase though I believe that was a sufficient discount to my calculation of intrinsic value to warrant it but I would then consider if there are better companies with brighter prospects to invest in. Forecasts look bleak but after I took some time to consider it, that price was attractive. I still have not researched the company fully though.

I consider SDI and CKL to be overpriced at the time of purchase. The companies arn't worth nearly their price. The reasons are simply poor returns that result in a low intrinsic value by my calculations. 

I like CAB in some ways but I probably wouldn't invest since I consider it's growth opportunities to speculative on first look. I don't see much room for growth in Australia and its UK joint venture seems like a gamble. I would have to look more into its growth opportunities though. I would also have to closely inspect its intrinsic value to come to a better idea.

As for CAB gearing only being 1.4x EBITA well I don't look at EBITA since it seems to me to be "earnings before we calculate lots of other important stuff".


----------



## Ves

Valued said:


> As for CAB gearing only being 1.4x EBITA well I don't look at EBITA since it seems to me to be "earnings before we calculate lots of other important stuff".



To avoid this problem you need to understand the how EBITDA compares to operating cash flow.   This will be reflected in the quality of the accounting.  You are correct in saying that the differences between EBITDA, EBIT and NPAT are important,  and you will need to understand them any way to get an idea of the companies financials,  so using EBITDA in debt ratios should be no problem whatsover if you do the correct due dilligence.

Perhaps it is a preference thing - but I never use debt to equity ratios either.   The equity component in particular can be garbled by creative alchemy by willing accountants.  The whole "book value" debate might be best saved for another thread, though.  If you have a problem with EBITDA then you are compouding it greatly by relying on the equity line of the company financials in my view.

My main source of knowledge for the companies ability to pay its loan requirements is the cash flow statement.   There is no getting around it.


----------



## Valued

The main problem I have with companies with a high debt/equity ratio is not necessarily the ability to pay back loans, but the effect it has on the intrinsic value. Obviously, I look for positive cashflow to make sure loans can be paid back though in the required time frame. Two companies equal in all respects but one has debt and the other does not results in the company with debt being worth less. I rarely find good opportunities in the current market where there is a high debt/equity ratio since not alot except unproven companies are trading far enough under intrinsic value to warrant investing despite a high debt/equity ratio.

I think CAB is trading enough below it's value though. Instead of issuing more shares they have seem to have taken the debt route which seems reasonable in order to not have angry shareholders. I would need to look deep into what they needed the extra money for. Their debt levels more than doubled between 2012 and 2013. If it's for their UK expansion plans well then I have to consider the prospects of success in that. 

CAB might very well be a good investment but then I worry it may be a speculative one depending on the chances of success in the UK.


----------



## McLovin

Valued said:


> Two companies equal in all respects but one has debt and the other does not results in the company with debt being worth less.




This doesn't make sense. A company with debt will not necessarily have a lower EV. And two companies equal in every other way except capital structure would in theory (ie ignoring things like taxes) have the same EV. Leverage can also turbo charge returns on equity and provides a tax shield, with all the usual caveats about risk etc.

Anyway, without knowing what makes up the equity in debt/equity the ration is near meaningless. A company jam packed with goodwill is not the same as one with a super clean balance sheet. So I agree with Ves, ability to service debt is far more important. 

A company that can earn 50% RoE can carry more debt than one that can only return 10% RoE, all things being equal.


----------



## Valued

McLovin said:


> This doesn't make sense. A company with debt will not necessarily have a lower EV. And two companies equal in every other way except capital structure would in theory (ie ignoring things like taxes) have the same EV. Leverage can also turbo charge returns on equity and provides a tax shield, with all the usual caveats about risk etc.
> 
> Anyway, without knowing what makes up the equity in debt/equity the ration is near meaningless. A company jam packed with goodwill is not the same as one with a super clean balance sheet. So I agree with Ves, ability to service debt is far more important.
> 
> A company that can earn 50% RoE can carry more debt than one that can only return 10% RoE, all things being equal.




It must make sense. Perhaps I was not being clear or everything I know about the world is wrong.

If we have company A and we have company B. Assume a magical realm of no inflation and this happens in a vacuum.

Company A has $100 of assets and company B has $100 of assets. Company A makes $20 per year and company B makes $20 per year. Both have a 100% net profit pay out ratio. Therefore, every year company A returns $20 on their $100 of assets and this continues forever and every year Company B returns $20-interest every year and this continues forever. Company A has no debt. Company B has $50 of debt. Everything about each of the companies is the same. Company A must be worth more than company B when calculating intrinsic value because company B is worth $50 less.

Company B's EV will converge on Company As eventually since eventually company B will pay back their loan and then deliver the same returns. Given infinity company A is equal to company B (I am guessing they will converge together at infinity but maybe not, I am not that good at theoretical math). In a more realistic investment term though, company B is worth less than company A because we might only invest for say 20 years and therefore company B's returns will be lower than Company As.


----------



## burglar

Valued said:


> It must make sense. Perhaps I was not being clear or everything I know about the world is wrong ...




The way I see it, the companies are equal until company B borrows $50. 
If the return on the loan exceeds the interest on the loan, company B is expanding!!


----------



## McLovin

Valued said:


> It must make sense. Perhaps I was not being clear or everything I know about the world is wrong.




OK. Let me ask you this question. Two firms both with $100 in assets, A and B, A is 100% financed by equity and B is 90% debt financed and 10% equity financed. Both earn $20 EBIT (ie they are identical businesses with different capital structures). Which firm is worth more?


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## Valued

On closer inspection I would not invest in CAB because the 10% surcharge is a complete rort. I doubt it will be allowed in the future. It has been looked at in Victoria already. I have an ethical problem in investing in complete rip offs to consumers. I dont want to own sucv a dodgy business.

- - - Updated - - -



McLovin said:


> OK. Let me ask you this question. Two firms both with $100 in assets, A and B, A is 100% financed by equity and B is 90% debt financed and 10% equity financed. Both earn $20 EBIT (ie they are identical businesses with different capital structures). Which firm is worth more?




Let me think about this and reply later. I am out for lunch and replying from my phone.


----------



## Valued

McLovin said:


> OK. Let me ask you this question. Two firms both with $100 in assets, A and B, A is 100% financed by equity and B is 90% debt financed and 10% equity financed. Both earn $20 EBIT (ie they are identical businesses with different capital structures). Which firm is worth more?




If they are identical in all respects Company A must have more shares than Company B. We can just assume $10 equity per share so Company A has 10 shareholders and Company B has one shareholder. Given that both have $10 equity per share with the same return it might tempt someone to say that the companies must be of equal intrinsic value. I do not see how this can be the case though. Company B will make less net profit and produce a lower return than Company A because they have to pay out interest on their loan and meet minimum repayments or repay the loan in a lump sum at some specified time in the future. Therefore, Company B is worth less than Company A.

If this is incorrect please tell me but I just don't see how Company B can be worth the same as Company A when Company B has to pay off a huge loan and make interest repayments.


----------



## galumay

Valued said:


> ......
> 
> If this is incorrect please tell me but I just don't see how Company B can be worth the same as Company A when Company B has to pay off a huge loan and make interest repayments.




The calculation of an implied intrinsic value is not an exact science, there are an infinite number of methods and formulas that help us as fundamental investors, make assumptions about our guesstimate for IV.

I guess what is important is that you are happy with the methodology you use, and the lengthy debate about debt and its effect on IV above just shows how different methodologies give varying weight to its effect on IV.


----------



## burglar

Valued said:


> Company B has to pay off a huge loan and make interest repayments.




You get the huge loan up front!!!!

You invest it in your business, where hopefully you will 
get the same % return as your company's ROE (say 30%)

You make a repayment or twelve (Principal + Interest)

Hopefully your investment is appreciating!!
Company B is expanding/growing, whatever.
It will show up somewhere in the Balance Sheet.

Voila!


----------



## Valued

burglar said:


> You get the huge loan up front!!!!
> 
> You invest it in your business, where hopefully you will
> get the same % return as your company's ROE (say 30%)
> 
> You make a repayment or twelve (Principal + Interest)
> 
> Hopefully your investment is appreciating!!
> Company B is expanding/growing, whatever.
> It will show up somewhere in the Balance Sheet.
> 
> Voila!




In the example Company A and Company B are in all respects equal but have different capital structures. Company B can't expand or grow since it only earns $20 EBIT and will only ever earn $20 EBIT. It's based off the example given. It's called a "toy game" in which we use simple scenarios to gain intuition about complex analysis. It's a concept applied to games like poker by adopting a game theory approach. Company B's EBIT will always equal Company As since Company A and Company B are the same company basically but with different capital structures. One is 100% financed by equity and the other 90% financed by debt and 10% financed by equity.


----------



## craft

Valued said:


> It must make sense. Perhaps I was not being clear or everything I know about the world is wrong.




It does not make sense.


Equity multiple will depend on borrowing costs verses return on assets funded and an assessment of risk arising from the borrowing. 

If the risk premium plus the borrowing cost is less then return achievable by the business then the financial leverage will give the company with borrowings a higher equity multiple then the one without. 

Enterprise value (market Cap + net debt)

You need to think in EV/EBIT terms to get comparative basis that eliminates the financial structure and you should be able to nut it out. 

What is the intrinsic valuation calculations you are referring too?


----------



## KnowThePast

Valued said:


> I had a quick look through just now. It seems he picked NWH based on a variety of factors, some I don't consider myself. I would not invest in NWH since it does not pass my initial screens. I just don't screen for companies with debt/equity ratios that high. At the time of purchase though I believe that was a sufficient discount to my calculation of intrinsic value to warrant it but I would then consider if there are better companies with brighter prospects to invest in. Forecasts look bleak but after I took some time to consider it, that price was attractive. I still have not researched the company fully though.
> 
> I consider SDI and CKL to be overpriced at the time of purchase. The companies arn't worth nearly their price. The reasons are simply poor returns that result in a low intrinsic value by my calculations.
> 
> I like CAB in some ways but I probably wouldn't invest since I consider it's growth opportunities to speculative on first look. I don't see much room for growth in Australia and its UK joint venture seems like a gamble. I would have to look more into its growth opportunities though. I would also have to closely inspect its intrinsic value to come to a better idea.
> 
> As for CAB gearing only being 1.4x EBITA well I don't look at EBITA since it seems to me to be "earnings before we calculate lots of other important stuff".




Hi Valued,

Thanks for the feedback.

We clearly use different calculations for IV, as well as different screens. Many different approaches work, I don't consider mine the best, but it worked for me.

Others, Ves in particular, gave a very good response on why I think CAB is not highly geared.

With NWH, if you subtract cash from their debt, you'll find that their debt is negligible.

Both SDI and CKL have a unique set of events that obscure their true earnings over the last 1-3 years. To calculate IV properly for them, one must use earnings as they would have been without the effect of those abnormals. Definitely not an exact science.  

I have my own opinions about debt ratios but I think it's best discussed in a separate thread.

I don't know which calculation you use for IV, but I suspect you use current earnings as one of the inputs. This works in most cases, but there are some situations where numbers do not give a true picture. It's rare, but these have always worked out to be my best investments. In part, I suspect, because that makes these companies ignored by most filters/IV calculations. Tomorrow, if my order executes, I will write about another such company, where traditional metrics just don't make sense.


----------



## KnowThePast

Purchase of the month – PMP 5500 @ 0.35.

This is very much a “special situation” play, as this is certainly not a wonderful company. They’ve made a loss in 4 out of the last 5 years, with this year being the biggest being this year at $68m. A few very average years before that, and there was, of course, an epic $500m loss in 2001. It is ugly, very ugly. 

So why am I interested? It is trading at less than half of NTA, which is what initially caught my attention. But that is no guarantee of a sound investment, even though buying anything at under NTA is not the worst strategy to follow. I prefer to buy things at well below NTA only if they have a very reasonable chance of not going bankrupt, and preferably, making some money. At this price, it does need to be an efficient operation. Any return whatsoever is a bonus that is not priced in.

PMP have taken on a heap of debt, acquired a bunch of things, and invested a lot of money into things that were either making a loss or provided a dreadful return on capital. The debt, of course, is the problem that suddenly put a stop to all this in 2008. 

Since then, instead of spending their way into diversification of earnings, they’ve completely turned the focus around. They are now writing off anything in sight and selling under-performing assets. And focusing just on cash, they’ve been positive for all those years. 

They’ve been steadily paying down debt over the last few years and reducing their operations. A big thing for me, is that they’ve done it without excessive share issues. A company in a bad position usually has a very low price, and issuing shares to raise capital at that point digs a deep hole that is very hard to climb out of. 
Here’s an interesting comparison between their reported profit and cash flow over the last 4 years:




In total, cash flow outperformed reported profit by $222.7m over the last 4 years, or $0.68/share.

I have done a similar analysis about a year back, but at that point, I felt that it was too risky for me. Now, their debt levels have been substantially reduced, most of the goodwill has been written off, and the company seems not too far away from a reduced asset base that they can resume profitable operations off. 

I mention NTA value quite often in my valuations, although I never really use it to put a price on the company. It is an important metric, however. Company trading at a substantial discount to NTA is generally an indication of a good margin of safety. The only exception to that are companies that go broke. When evaluating these sub-NTA opportunities, that is the biggest question I ask – what are the chances of this company going under? PMP has reached a point where I think it is very unlikely in the next few years. Their operations are profitable, debt-cash is much lower and paying it off completely is an obvious priority for management.

Earnings and dividends are a much more important factor in determining valuation. In cases like these, where price is so far below NTA, or replacement asset value, any earnings in the future are a welcome bonus, and a catalyst of a re-rating. Doesn’t matter how good they are, as long as the market no longer prices the company for liquidation, and has some confidence in earnings being maintained, no matter how poor they are. The picture here is still muddy, but some conclusions can be drawn. 

Earnings for 2013, before significant items were $20.5m. Operating cash flow - $7.6m. Difference explained by one-off restructuring charges, no issue there. Goodwill has been largely written off, so no large write downs are expected in the future. PPP reduced by 22%, I will roughly assume the same reduction in depreciation charge next year, giving a saving of $8.3m. Debt has been reduced by 27%, which should give an interest saving of $3.7m. Management claims $13.6m annual savings from 2013, with $23.5m to come in 2014. I have to assume depreciation + interest saving is included there, leaving another $11.5m. Considering that they’ve closed some business lines and fired over 400 people, this doesn’t seem too excessive. 

So, assuming no more significant items and the same underlying performance, I would expect NPAT next year to be around $44m, or ~$0.135/share, placing the company on a PE of 2.6. While trading on half of NTA backing, giving a significant margin of error. 

I think there is a good chance there will be more restructuring charges next year, and the one after. In this case, however, and at the current price, that can only be a good thing.

The next big question is what will happen to the printing industry in the future? I think it will continue declining. I think it will always be around, but it will become less and less relevant. This process will take a long time to play out. With PMP, as long as they don’t go back to leveraged acquisitions to force growth in an industry where there is none, money can still be made for many years. They’ve been scaling down their operation for a few years now to match that of demand, and I trust them to continue doing so in the future. As I mentioned before, absolutely any sustainable profit should result in a significant re-rating of the company. With a little bit more of an improvement, they should also be very close to being included in the All Ordinaries index, which should help. 

My current buying is based on analysis that the market is pricing the company for liquidation and a significant re-rating will occur once that is clearly not a short/medium term threat. Whether I will continue holding after that, will largely depend on the price and what management does after the transformation phase is over. 

P.S. There’s a great discussion thread on HC for PMP in case anyone wants to read up more about it.


----------



## McLovin

Valued said:


> If they are identical in all respects Company A must have more shares than Company B. We can just assume $10 equity per share so Company A has 10 shareholders and Company B has one shareholder. Given that both have $10 equity per share with the same return it might tempt someone to say that the companies must be of equal intrinsic value. I do not see how this can be the case though. Company B will make less net profit and produce a lower return than Company A because they have to pay out interest on their loan and meet minimum repayments or repay the loan in a lump sum at some specified time in the future. Therefore, Company B is worth less than Company A.
> 
> If this is incorrect please tell me but I just don't see how Company B can be worth the same as Company A when Company B has to pay off a huge loan and make interest repayments.




Like craft said, you need to think in EV/EBIT or EV/EBITDA. By using either of those ratios you get an idea of the _unlevered _cash flows of the business v the amount of capital (debt and equity) used to fund the business. If the unlevered cash flow of two assets is identical and the assets themselves are identical, then you'd pay the same price to buy either of those assets.


----------



## Valued

McLovin said:


> Like craft said, you need to think in EV/EBIT or EV/EBITDA. By using either of those ratios you get an idea of the _unlevered _cash flows of the business v the amount of capital (debt and equity) used to fund the business. If the unlevered cash flow of two assets is identical and the assets themselves are identical, then you'd pay the same price to buy either of those assets.




Hmm. I will look more into it. I have avoided this issue by simply looking for companies that do not have much debt.


----------



## craft

KnowThePast said:


> Thanks skc, some great advice there.
> 
> I'll comment:
> Rule 1 - you are right that it is intent, but there's more to it. The expanded rule is that I will try to avoid riskier investments. I will invest in things that I think are safest for preservation of capital. There's a great illustration of Risk/Return I saw in "The Most Important Thing" by Howard Marks:
> 
> View attachment 52591
> 
> 
> The rule is that I will stay closer to the left side of the chart. Less potential returns and less potential losses. Risk, of course, has no precise definition, but my hopefully my intentions are now clear.






KnowThePast said:


> Purchase of the month – PMP 5500 @ 0.35.





How does this purchase fit with your rule (intention)?  It may offer adequate risk/reward through providing high reward as the insolvency discount is potentially unwound but there is no way its a low risk investment.


----------



## Valued

craft said:


> How does this purchase fit with your rule (intention)?  It may offer adequate risk/reward through providing high reward as the insolvency discount is potentially unwound but there is no way its a low risk investment.




The problem with risky investments is that it is difficult to calculate the actual percentage of times where you will make a gain, what that gain will be, and whether that offsets the risk associated with the investment.

In poker you can take a risky play i.e. a 51% chance of winning a hand by going all in for your entire stake at the table. However, you know this is a good bet because you will win more than you will lose. You can calculate exactly how much you will win too. In poker at some stages of the hand it is correct to put all your money in even with only a 30% chance to win or even less, because the gain is going to be so great. You can calculate how much that gain will be. 

The huge caveat to poker is that when you make such thin plays you do so with such a small portion of your overall bankroll (your poker networth). If you only have 10 buy ins you have a high chance of going broke. If you have 100 buy ins then your risk of going broke is exceptionally low. In the stock market if you invest 1% of your networth in something risky and you can make rough estimates of the calculations, it could be correct. However, could that 1% networth be better used elsewhere? Unlike poker, I am dealt one hand for every company listed on the ASX and get given a new price to play that hand also. Therefore, you pick the most profitable opportunities available. The only way this risky investment makes sense is if you do it with a small amount of your total portfolio and there are no better options for the use of that money and that it is going to deliver a positive expectation. It is not good enough that an investment is +EV if another investment is more +EV.


----------



## KnowThePast

craft said:


> How does this purchase fit with your rule (intention)?  It may offer adequate risk/reward through providing high reward as the insolvency discount is potentially unwound but there is no way its a low risk investment.




Hi craft,

6 months ago, this would have been a risky investment, but not any more. 

Despite their reported profit looking so bad for so many years, they have always generated positive cash flows from operations. Taking away goodwill write-downs, this has always been a profitable business.

I bought it now because I felt that their debt has gone down to the level where it is no longer a problem. The remaining debt will be reduced even further, quickly, being management's number 1 priority.

The key to this investment is that they continue to generate positive cash flows, which will eventually make its way to reported profit once all the write-downs and restructurings are done. There's no need for the underlying business to improve, it is simply concealed by accounting at the moment. 

Their revenues, while declining, have more predictability than most business, with many customers on long term contracts. 

The printing industry, has terrible economics and bleak outlook, but a better one than many mining related companies. Yet PMP is trading at a much, much cheaper price. 

In summary, I think this company has finally become a safe investment after many years of serious problems. It will never be a "good" company, or a company with great growth prospects. But it deserves a much higher price, still, once the market recognises that it is no longer a risky investment. To put it in context, should they finally achieve a reported profit, and a PE of 5, I should double my money. Not a lot to ask.

But you are absolutely right, this investment is slightly outside of what I normally invest in. Opportunities like this, I certainly intend to participate in, when I see them, but I don't expect them to be a large part of my portfolio.


----------



## KnowThePast

Valued said:


> The problem with risky investments is that it is difficult to calculate the actual percentage of times where you will make a gain, what that gain will be, and whether that offsets the risk associated with the investment.
> 
> In poker you can take a risky play i.e. a 51% chance of winning a hand by going all in for your entire stake at the table. However, you know this is a good bet because you will win more than you will lose. You can calculate exactly how much you will win too. In poker at some stages of the hand it is correct to put all your money in even with only a 30% chance to win or even less, because the gain is going to be so great. You can calculate how much that gain will be.
> 
> The huge caveat to poker is that when you make such thin plays you do so with such a small portion of your overall bankroll (your poker networth). If you only have 10 buy ins you have a high chance of going broke. If you have 100 buy ins then your risk of going broke is exceptionally low. In the stock market if you invest 1% of your networth in something risky and you can make rough estimates of the calculations, it could be correct. However, could that 1% networth be better used elsewhere? Unlike poker, I am dealt one hand for every company listed on the ASX and get given a new price to play that hand also. Therefore, you pick the most profitable opportunities available. The only way this risky investment makes sense is if you do it with a small amount of your total portfolio and there are no better options for the use of that money and that it is going to deliver a positive expectation. It is not good enough that an investment is +EV if another investment is more +EV.




Yes, investing is a lot more dynamic.

With PMP, the risk is that they will go broke. At this point, while I haven't tried to calculate the exact odds, I know they are very low. While at the current market price, any other outcome will be a good one.

Knowing whether risk is 51% or 49% is very important. But when the odds are 80%+, there's no need for exact science, been "probably right" is good enough.


----------



## odds-on

KnowThePast said:


> Yes, investing is a lot more dynamic.
> 
> With PMP, the risk is that they will go broke. At this point, while I haven't tried to calculate the exact odds, I know they are very low. While at the current market price, any other outcome will be a good one.
> 
> Knowing whether risk is 51% or 49% is very important. But when the odds are 80%+, there's no need for exact science, been "probably right" is good enough.




Hi KTP,

Have you calculated the Altman Z Score for PMP? There is a paper with the statistics for the Z score predictability - a valuable resource when investing in businesses that have a few issues.

http://en.m.wikipedia.org/wiki/Altman_Z-score. Read the paper at the top of the References section.

Cheers

Oddson


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## Valued

I thought more about the capital structure of a company. 

If Company A is 50% financed by debt and 50% financed by equity and Company B is 100% financed by equity and both have enterprise values of $100 (no company has any cash or preference shares etc) and both make $20 EBIT well if I was going to buy Company A I am not going to pay $100 for it. I am going to pay $50 to the shareholders and then give $50 to the bank if I want to pay off the debt. However, this is if I was buying the whole company. If I am going to buy shares in one of these companies, I would say Company B is worth more than Company A so I should be paying more for Company B than I should be for Company A if I were to be paying fair value. This is because anyone who buys Company A has to pay off the debt to get the same company as Company B and therefore Company A at fair value is worth half as much as Company B at fair value.

Further, if as a shareholder looking to buy, you might find out that management does not want to pay off Company A's debt any time soon and there will be interest on that $50 which means cashflow for Company A will be reduced somewhat (of course you can claim interest on tax, but then you only get back 30% of it). 

Therefore, I am still concluding it is better to go for companies with low gearing as a general rule. Of course, it gets more complex if the company can generate a higher return than the interest rate on that debt.


----------



## craft

Valued said:


> I thought more about the capital structure of a company.
> 
> If Company A is 50% financed by debt and 50% financed by equity and Company B is 100% financed by equity and both have enterprise values of $100 (no company has any cash or preference shares etc) and both make $20 EBIT well if I was going to buy Company A I am not going to pay $100 for it. I am going to pay $50 to the shareholders and then give $50 to the bank if I want to pay off the debt. However, this is if I was buying the whole company. If I am going to buy shares in one of these companies, I would say Company B is worth more than Company A so I should be paying more for Company B than I should be for Company A if I were to be paying fair value. This is because anyone who buys Company A has to pay off the debt to get the same company as Company B and therefore Company A at fair value is worth half as much as Company B at fair value.
> 
> Further, if as a shareholder looking to buy, you might find out that management does not want to pay off Company A's debt any time soon and there will be interest on that $50 which means cashflow for Company A will be reduced somewhat (of course you can claim interest on tax, but then you only get back 30% of it).





What about the number of shares on issue?  




Valued said:


> Therefore, I am still concluding it is better to go for companies with low gearing as a general rule. Of course, it gets more complex if the company can generate a higher return than the interest rate on that debt.




Higher return OR lower return - same return and the financial structure is neutral.


----------



## Valued

craft said:


> What about the number of shares on issue?
> 
> 
> 
> 
> Higher return OR lower return - same return and the financial structure is neutral.




I noted in a previous example that the company with the debt would have less shares on issue than the company without the debt if they have the same equity per share. However, the company with debt has to pay interest. If the companies are completely equal and earning the same EBIT on their EV of $100 then the company with debt is paying interest. There net profit will not be $20 it will be $20 - the interest on their debt. Therefore, the company with debt must have shares that are worth less if they are trading at fair value. They are making less ROE, less net profit, and if the payout ratio is 100%, are paying out less. 

This seems so simple to me. If all things being equal one company makes $20 and another company makes $20 less more than 0, the company that makes $20 makes more money! If all things are equal except one company makes a little less money, the company that makes a little less money should, in an efficient market, be trading at less than the company that makes that bit more money. I am failing to see what the fuss is about. In a takeover situation I might payout the same for both companies but only to pay out the debt, so the people who own the company with debt arn't getting the same amount of money as they would if the company had no debt.


----------



## craft

Valued said:


> I noted in a previous example that the company with the debt would have less shares on issue than the company without the debt if they have the same equity per share. However, the company with debt has to pay interest. If the companies are completely equal and earning the same EBIT on their EV of $100 then the company with debt is paying interest. There net profit will not be $20 it will be $20 - the interest on their debt. Therefore, the company with debt must have shares that are worth less if they are trading at fair value. They are making less ROE, less net profit, and if the payout ratio is 100%, are paying out less.
> 
> This seems so simple to me. If all things being equal one company makes $20 and another company makes $20 less more than 0, the company that makes $20 makes more money! If all things are equal except one company makes a little less money, the company that makes a little less money should, in an efficient market, be trading at less than the company that makes that bit more money. I am failing to see what the fuss is about. In a takeover situation I might payout the same for both companies but only to pay out the debt, so the people who own the company with debt arn't getting the same amount of money as they would if the company had no debt.




Have you got excel – If so, see if this helps.  The shaded cells are for variables for you to play around with.

View attachment TEMP.xlsx


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## Valued

craft said:


> Have you got excel – If so, see if this helps.  The shaded cells are for variables for you to play around with.
> 
> View attachment 54226




Thanks, I will have a look


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## burglar

Valued said:


> ... Of course, it gets more complex if the company can generate a higher return than the interest rate on that debt.




Companies may do a thing called DCFA (Discounted Cash Flow Analysis)
From Investopedia:


> Definition of 'Discounted Cash Flow - DCF'
> A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.



Investopedia


----------



## Ves

Valued said:


> In a takeover situation I might payout the same for both companies but only to pay out the debt, so the people who own the company with debt arn't getting the same amount of money as they would if the company had no debt.




In a takeover situation you would pay the vendor (ie current owners the company) an agreed amount for the entire assets of the company.

The vendor takes the proceeds and pays out the debt - not the purchaser.

It looks like there has been a few crossed wires in this discussion.   You are talking about the valuation of the equity alone (Enterprise value - debt).  Others are taking about the enterprise value which takes into account the whole ownership structure and includes all of the assets. You need to know the profitability of the underlying assets.

You cannot value the equity without first valuing the entire company - the world does not exist in a vacuum!  Ownership / financial structures can change rapidly.

If you want to takeover the company you have to pay for all its assets regardless of the ownership structure. If the assets are identical (regardless of debt) and earn the same return, then you would need to pay the same price.   Where the money goes after it reaches the vendor is irrelevant to the purchasing decision.

As a stock market investor you need to value the assets of the company in their entirety as if there was a neutral ownership structure.   Once you have calculated the enterprise valuation you then subtract the debt from this valuation to ascertain what you would pay for the equity portion of the current ownership structure.

Please note that different valuation techniques may take into consideration the risk levels of the debt and factor this into any net present value of the enterprise.


----------



## McLovin

Ves said:


> In a takeover situation you would pay the vendor (ie current owners the company) an agreed amount for the entire assets of the company.
> 
> The vendor takes the proceeds and pays out the debt - not the purchaser.
> 
> It looks like there has been a few crossed wires in this discussion.   You are talking about the valuation of the equity alone (Enterprise value - debt).  Others are taking about the enterprise value which takes into account the whole ownership structure and includes all of the assets. You need to know the profitability of the underlying assets.
> 
> You cannot value the equity without first valuing the entire company - the world does not exist in a vacuum!  Ownership / financial structures can change rapidly.
> 
> If you want to takeover the company you have to pay for all its assets regardless of the ownership structure. If the assets are identical (regardless of debt) and earn the same return, then you would need to pay the same price.   Where the money goes after it reaches the vendor is irrelevant to the purchasing decision.
> 
> As a stock market investor you need to value the assets of the company in their entirety as if there was a neutral ownership structure.   Once you have calculated the enterprise valuation you then subtract the debt from this valuation to ascertain what you would pay for the equity portion of the current ownership structure.
> 
> Please note that different valuation techniques may take into consideration the risk levels of the debt and factor this into any net present value of the enterprise.




Bah! Thanks, V. I've been trying to write something similar but you said it perfectly. My brain has been fried the last week or so. Too many reports.

The only thing I would add is that the purchaser will often acquire the debt and then make a decision about the capital structure post the acquisition.


----------



## Ves

craft said:


> Have you got excel – If so, see if this helps.  The shaded cells are for variables for you to play around with.
> 
> View attachment 54226



Good presentation of the underlying numbers in the calculation, by the way.   Should help for those more numerically inclined in their learning. 



			
				McLovin said:
			
		

> The only thing I would add is that the purchaser will often acquire the debt and then make a decision about the capital structure post the acquisition.



Yup.  Acquisitions can get messy - but they always need to be based on the underlying value of the assets to make sense.


----------



## McLovin

Ves said:


> Yup.  Acquisitions can get messy - but they always need to be based on the underlying value of the assets to make sense.




Absolutely. Which is why debt/equity is such a rubbery number. Full of accounting quirks and omissions. As Einstein said "not all that counts can be counted and not all that can be counted counts".

You really need to understand the nature of the business. Which is I guess gives you the underlying value of the assets.


----------



## KnowThePast

odds-on said:


> Hi KTP,
> 
> Have you calculated the Altman Z Score for PMP? There is a paper with the statistics for the Z score predictability - a valuable resource when investing in businesses that have a few issues.
> 
> http://en.m.wikipedia.org/wiki/Altman_Z-score. Read the paper at the top of the References section.
> 
> Cheers
> 
> Oddson




I haven't, but what an excellent suggestion. 

The score, like all statistical scores have some drawbacks when used against a specific scenario, but nevertheless, this exercise was very helpful. Here's a quick overview of Altman Z score for others reading:

3.0+       : Safe
2.7-3.0   : Warning
1.8-2.7   : chance of bankruptcy in the next 2 years
<1.8       : severely distressed.

And here are the numbers for the last few years for PMP. 



I seem to have been right in my assessment that the company is a much safer investment than before. In fact, even safer than before things imploded in 2008. It is also interesting to note, that while there is some correlation between Alt Z and share price, there's a much stronger correlation between reported profit and share price.

Taking it one step further, I am even more interested in what Alt Z would be next year. While I expect underlying profit next year to be stronger that this year, I will assume that:
- underlying profit is the same as this year.
- no dividends paid, debt reduced with profit.
- remaining goodwill written off.

This would give a 2014 score of 2.2728. Not completely safe, but consistently improving with a profitable, underlying business.

Should the business improve EBIT from 34.2 to 45, score becomes 2.3825.

Another funny quirk of the score is that it takes market cap into consideration. Assuming share price for PMP doubles, score becomes 2.6632, making this almost completely safe from statistical standpoint.

Overall, I think the ratio shows the same results as my analysis, but also shows that statistically, this is still somewhat riskier than my "minimum risk" rule.


----------



## odds-on

KnowThePast said:


> I haven't, but what an excellent suggestion.
> 
> The score, like all statistical scores have some drawbacks when used against a specific scenario, but nevertheless, this exercise was very helpful. Here's a quick overview of Altman Z score for others reading:
> 
> 3.0+       : Safe
> 2.7-3.0   : Warning
> 1.8-2.7   : chance of bankruptcy in the next 2 years
> <1.8       : severely distressed.
> 
> And here are the numbers for the last few years for PMP.
> View attachment 54309
> 
> 
> I seem to have been right in my assessment that the company is a much safer investment than before. In fact, even safer than before things imploded in 2008. It is also interesting to note, that while there is some correlation between Alt Z and share price, there's a much stronger correlation between reported profit and share price.
> 
> Taking it one step further, I am even more interested in what Alt Z would be next year. While I expect underlying profit next year to be stronger that this year, I will assume that:
> - underlying profit is the same as this year.
> - no dividends paid, debt reduced with profit.
> - remaining goodwill written off.
> 
> This would give a 2014 score of 2.2728. Not completely safe, but consistently improving with a profitable, underlying business.
> 
> Should the business improve EBIT from 34.2 to 45, score becomes 2.3825.
> 
> Another funny quirk of the score is that it takes market cap into consideration. Assuming share price for PMP doubles, score becomes 2.6632, making this almost completely safe from statistical standpoint.
> 
> Overall, I think the ratio shows the same results as my analysis, but also shows that statistically, this is still somewhat riskier than my "minimum risk" rule.




Hi KTP,

Interesting analysis. A couple of points:

1.	As you have pointed out the Z Score uses the Market Value of Equity in the calculation, I personally think the Private Business version of the Altman Z Score which uses the Book Value of Equity instead of Market Value of Equity is more suitable for some listed companies to remove the effect of market volatility/illiquidity on the results (i.e. ignore the market!). Note Altman did research into proving his Private Business (and Foreign Markets) version of the Altman Z Score and provides the results in the paper. Revisiting your calculations by applying the Private Business version of the Altman Z score might be an interesting exercise.
2.	For me the paper took some digesting, but I came to the conclusion that the Z score is a useful tool for certain turnaround situations and it is interesting to see his checks 30+ years later to see how effective the original formula has been. IMO, selecting an appropriate Z score formula, careful selection of cut-off and trending the Z score over time can provide insight into a possible turnaround (note I found on the web a business academic recommending it as a management KPI tool).

Cheers

Oddson


----------



## craft

odds-on said:


> Hi KTP,
> 
> Interesting analysis. A couple of points:
> 
> 1.	As you have pointed out the Z Score uses the Market Value of Equity in the calculation, I personally think the Private Business version of the Altman Z Score which uses the Book Value of Equity instead of Market Value of Equity is more suitable for some listed companies to remove the effect of market volatility/illiquidity on the results (i.e. ignore the market!). Note Altman did research into proving his Private Business (and Foreign Markets) version of the Altman Z Score and provides the results in the paper. Revisiting your calculations by applying the Private Business version of the Altman Z score might be an interesting exercise.
> 2.	For me the paper took some digesting, but I came to the conclusion that the Z score is a useful tool for certain turnaround situations and it is interesting to see his checks 30+ years later to see how effective the original formula has been. IMO, selecting an appropriate Z score formula, careful selection of cut-off and trending the Z score over time can provide insight into a possible turnaround (note I found on the web a business academic recommending it as a management KPI tool).
> 
> Cheers
> 
> Oddson




From memory a lot of the Z sore factors have Total Assets as the denominator. Increasing Z scores based on improving profitability would have to be a lot more robust then an increasing score due to the company writing off good will and implementing asset sales and lease backs.


----------



## craft

KnowThePast said:


> Hi craft,
> 
> 6 months ago, this would have been a risky investment, but not any more.
> 
> Despite their reported profit looking so bad for so many years, they have always generated positive cash flows from operations. Taking away goodwill write-downs, this has always been a profitable business.
> 
> I bought it now because I felt that their debt has gone down to the level where it is no longer a problem. The remaining debt will be reduced even further, quickly, being management's number 1 priority.
> 
> The key to this investment is that they continue to generate positive cash flows, which will eventually make its way to reported profit once all the write-downs and restructurings are done. There's no need for the underlying business to improve, it is simply concealed by accounting at the moment.
> 
> Their revenues, while declining, have more predictability than most business, with many customers on long term contracts.
> 
> The printing industry, has terrible economics and bleak outlook, but a better one than many mining related companies. Yet PMP is trading at a much, much cheaper price.
> 
> In summary, I think this company has finally become a safe investment after many years of serious problems. It will never be a "good" company, or a company with great growth prospects. But it deserves a much higher price, still, once the market recognises that it is no longer a risky investment. To put it in context, should they finally achieve a reported profit, and a PE of 5, I should double my money. Not a lot to ask.
> 
> But you are absolutely right, this investment is slightly outside of what I normally invest in. Opportunities like this, I certainly intend to participate in, when I see them, but I don't expect them to be a large part of my portfolio.




OCF less a reasonable estimate for maintenance capex was negative this year.  Reported FCF was massaged by the asset sale and lease back. Debt reduction was solely as a result of the assets sales. 

I’m not saying with enough detailed analysis that a case for an adequate risk/reward investment doesn’t exist – I haven’t done the work.

 Just saying this is no sure turn around bet – It’s a HIGH risk play.  If that’s going to be your game you should recognise it in your rules and consider your risk management accordingly.


----------



## KnowThePast

odds-on said:


> Hi KTP,
> 
> Interesting analysis. A couple of points:
> 
> 1.	As you have pointed out the Z Score uses the Market Value of Equity in the calculation, I personally think the Private Business version of the Altman Z Score which uses the Book Value of Equity instead of Market Value of Equity is more suitable for some listed companies to remove the effect of market volatility/illiquidity on the results (i.e. ignore the market!). Note Altman did research into proving his Private Business (and Foreign Markets) version of the Altman Z Score and provides the results in the paper. Revisiting your calculations by applying the Private Business version of the Altman Z score might be an interesting exercise.
> 2.	For me the paper took some digesting, but I came to the conclusion that the Z score is a useful tool for certain turnaround situations and it is interesting to see his checks 30+ years later to see how effective the original formula has been. IMO, selecting an appropriate Z score formula, careful selection of cut-off and trending the Z score over time can provide insight into a possible turnaround (note I found on the web a business academic recommending it as a management KPI tool).
> 
> Cheers
> 
> Oddson




Hi Oddson,

I haven't read the paper yet, but I will once I get some time. 

Using book value instead of market value does not seem to make much sense to me - Total Assets and Total Liabilities are already inputs into the ratio, so using Net Assets would seem to be measuring similar things, giving them a higher weighting. Market value makes more sense to me, as it measures "sentiment".

Nevertheless, here are the results using both Market Value (MV) and Book Value (BV) side by side:




Giving a much rosier picture.

There are 3 things in Alt Z calculation, that, in my opinion, potentially give a lower score to PMP than it may currenly deserve:

1. Market price - as seen above, it has no direct correlation with financial stability.

2. Net Assets - Alt Z formula uses Revenue/Net Assets, meaning that company with more assets will get a lower score. Last year, PMP sold off some underperforming assets, and this margin will improve significantly once restructuring costs are removed.

3. Retained Earnings being negative. This is a matter of time, probably 3-4 years. The money was spent long ago, on bad acquisitions. Writing off goodwill now has absolutely no effect on the stability of the company. As long as they keep avoiding acquisitions, as they've been doing for the past few years, this is a non-factor. Using my projection numbers, should retained earnings have been +20, instead of -100, score would have been above 3, meaning Nil chance of bankruptcy.


----------



## Ves

craft said:


> OCF less a reasonable estimate for maintenance capex was negative this year.  Reported FCF was massaged by the asset sale and lease back. Debt reduction was solely as a result of the assets sales.
> 
> I’m not saying with enough detailed analysis that a case for an adequate risk/reward investment doesn’t exist – I haven’t done the work.
> 
> Just saying this is no sure turn around bet – It’s a HIGH risk play.  If that’s going to be your game you should recognise it in your rules and consider your risk management accordingly.



Looks close to being fully-priced to me at 6.5-7x EBIT with a fairly high debt.   No growth,  no competitive advantage,  shrinking industry with high capital requirements   (looking at the historical numbers they are nearing the bottom of their lumpy capital cycle and there is more pain ahead). So agree with the comment about reasonable estimates of maintenance capex.  

Another one I could only value at net replacement cost of assets (after subtracting debt).


----------



## KnowThePast

craft said:


> OCF less a reasonable estimate for maintenance capex was negative this year.  Reported FCF was massaged by the asset sale and lease back. Debt reduction was solely as a result of the assets sales.
> 
> I’m not saying with enough detailed analysis that a case for an adequate risk/reward investment doesn’t exist – I haven’t done the work.
> 
> Just saying this is no sure turn around bet – It’s a HIGH risk play.  If that’s going to be your game you should recognise it in your rules and consider your risk management accordingly.




Hi craft,

Yep, OCF - depreciation was negative this year. But, this is a business that relies mainly on long term contracts. Timing of payments may distort things from year to year. Looking at it on a 5 year view, profit matches cashflow well enough. Not all of their one-offs were write-offs either, some were restructuing charges that cost real money.

I certainly think that the reward justifies the risk in this case.

I don't agree that it is a HIGH risk play, with all capitals, but it is high risk. Higher than my rules allow. I am still thinking this over, haven't yet reached a decision on whether I need to change anything or not.

Thanks for keeping me honest.

- - - Updated - - -



craft said:


> From memory a lot of the Z sore factors have Total Assets as the denominator. Increasing Z scores based on improving profitability would have to be a lot more robust then an increasing score due to the company writing off good will and implementing asset sales and lease backs.




Absolutely. 

But selling off assets is still better than having those assets produce low/negative return. 

The interesting thing about Alt Z ratio is that increase in Total Assets increases the risk of bankruptcy. In other words, taking two companies, both without debt - one with more assets is considered more risky than the other.

Makes sense from a capital expenditure point of view, but still looks slightly odd.


----------



## KnowThePast

Ves said:


> Looks close to being fully-priced to me at 6.5-7x EBIT with a fairly high debt.   No growth,  no competitive advantage,  shrinking industry with high capital requirements   (looking at the historical numbers they are nearing the bottom of their lumpy capital cycle and there is more pain ahead). So agree with the comment about reasonable estimates of maintenance capex.
> 
> Another one I could only value at net replacement cost of assets (after subtracting debt).




Hi Ves,

I think one of us made a bad calculation error. I have EBIT at $34.2m for 2013, with the current market cap of $115m, giving me 3.36x EBIT. At 7x EBIT, I would agree it is not a good investment.

Furthermore, current EBIT is obscured by restructuring, which I expect will improve EBIT. Just by reducing deprectiation+interest, if nothing else. An EBIT of $45m, which I forecast for next year puts it on 2.6x.

I agree with all your other points, except for competitive advantage. A high fixed cost, low margin business does not invite new competitors, so existing businesses can continues generating their (low) returns until the demand reduces to nil.  Not the best kind of advantage to have, but an advantage nevertheless. 

Still, they are essentially protected by the fact that replacement cost of assets does not generate sufficient returns and therefore no sane person would start up a business to compete with them. Which would value them at even less than replacement value. I certainly don't envy those that supplied capital to PMP to acquire those assets in the first place.

But I can now acquire those assets at a massive discount to replacement value.

P.S. A quick note about capital expense cycle as well. Looking at historical numbers may be misleading - while cap expense was higher, so were PPP assets. $403m in 2008 vs $244m in 2013.


----------



## craft

KnowThePast said:


> Hi Ves,
> 
> I think one of us made a bad calculation error. I have EBIT at $34.2m for 2013, with the current market cap of $115m, giving me 3.36x EBIT. At 7x EBIT, I would agree it is not a good investment.




I reckon V is talking EV/EBIT multiple.

Reported EBIT (before non-recurring items) was 33.9 Million. 

Current EV is 205 Million. 

EV\EBIT = 6.04

Doesn’t make much sense to compare EBIT (which is before interest) to market cap which is price of equity only.




KnowThePast said:


> Furthermore, current EBIT is obscured by restructuring, which I expect will improve EBIT. Just by reducing deprectiation+interest, if nothing else. An EBIT of $45m, which I forecast for next year puts it on 2.6x.



 EBIT is a before Interest measure. Depreciation is an accounting charge - potentially misleading if it doesn't corresponded with economically sustainable level of maintenance capex.


KnowThePast said:


> I agree with all your other points, except for competitive advantage. A high fixed cost, low margin business does not invite new competitors, so existing businesses can continues generating their (low) returns until the demand reduces to nil.  Not the best kind of advantage to have, but an advantage nevertheless. *Hmmmmm*
> 
> Still, they are essentially protected by the fact that replacement cost of assets does not generate sufficient returns and therefore no sane person would start up a business to compete with them. Which would value them at even less than replacement value. I certainly don't envy those that supplied capital to PMP to acquire those assets in the first place.
> 
> But I can now acquire those assets at a massive discount to replacement value.



A competitive disadvantage deserves a discount to NTA if they reinvest capital into that business then the discount can not be large enough for a long term holder (the real reason I can't be bothered with this sort of investing) 



KnowThePast said:


> P.S. A quick note about capital expense cycle as well. Looking at historical numbers may be misleading - while cap expense was higher, so were PPP assets. $403m in 2008 vs $244m in 2013.




I have 22 years of data over that time and after allowing for growth capex net PPE /Receipts from customers has averaged 3.2%. That would give a normalised maintenance capex on current receipts of 35 Million. 
Last years capex was 23 million, dep’n was 37 Million. I would expect that as a major restructure is being undertaken and some of the assets have been migrated to lease liabilities that maintenance capex would come down.  At a guess - 20 million maintenance capex + few ?? million lease obligations hot on the heels of the restructure with a longer term degeneration back towards 3% PPE/Receipts.   That sort of capital intensity in a low margin competitive industry doesn’t rock my boat but if you can see the leverage working out in your favour over the short term and it fits your plan .... happy investing.

I'll leave it to you now, gotta get back to reading reports of good companies. Timing leveraged turn arounds not my thing.


----------



## KnowThePast

craft said:


> I reckon V is talking EV/EBIT multiple.
> 
> Reported EBIT (before non-recurring items) was 33.9 Million.
> 
> Current EV is 205 Million.
> 
> EV\EBIT = 6.04
> 
> Doesn’t make much sense to compare EBIT (which is before interest) to market cap which is price of equity only.
> 
> 
> EBIT is a before Interest measure. Depreciation is an accounting charge - potentially misleading if it doesn't corresponded with economically sustainable level of maintenance capex.




Ah, of course. My apologies to V, should have thought about it first before replying. 

Depreciation charge, at the moment, is too high if anything. They are scaling down, so expect their cap expense to remain below depreciation charge for a bit longer.



craft said:


> A competitive disadvantage deserves a discount to NTA if they reinvest capital into that business then the discount can not be large enough for a long term holder (the real reason I can't be bothered with this sort of investing)




Couldn't agree more. But over the last few years, PMP's management has shown that they will continue downsizing and paying off debt, rather than invest any money into expansion. At the first sign of acquisitions, or plant expansion, I am out.



craft said:


> I have 22 years of data over that time and after allowing for growth capex net PPE /Receipts from customers has averaged 3.2%. That would give a normalised maintenance capex on current receipts of 35 Million.
> Last years capex was 23 million, dep’n was 37 Million. I would expect that as a major restructure is being undertaken and some of the assets have been migrated to lease liabilities that maintenance capex would come down.  At a guess - 20 million maintenance capex + few ?? million lease obligations hot on the heels of the restructure with a longer term degeneration back towards 3% PPE/Receipts.   That sort of capital intensity in a low margin competitive industry doesn’t rock my boat but if you can see the leverage working out in your favour over the short term and it fits your plan .... happy investing.
> 
> I'll leave it to you now, gotta get back to reading reports of good companies. Timing leveraged turn arounds not my thing.




Point taken, and you could well be right. As I said, I am still trying to decide whether I should on occasions be involved in riskier plays such as this.


----------



## KnowThePast

Another purchase - WTP 2800 @ 0.695.

Market Cap = $128m.
2013 NPAT = -$4.6m.
Without writedowns, a profit of $17.2m
Share price = $0.695
NTA = $1.14

The company is involved in 3 operations:
- construction
- civil and mining
- property

Construction and mining are profitable, property is not. But that is not a problem for much longer, as the company is selling off all of its property assets. Over $100m were sold in 2013, a little under $100m remaining.

Both construction and mining divisions have a strong order book, and with the current financial position of the company, I see no reason to worry about any short/medium term slowdown.

This, however, is an asset play. I am only concerned with assets here. I am looking at earnings only for the margin of safety. Should the company continue making money and pay dividends, that will be a welcome bonus.

It is looking very attractive at the moment, with no debt, cash reserves, profitable underlying business, trading at 60% of its NTA. Next year, I'll assume they break even and ignore earnings all together. I will also assume that they will sell their remaining property assets for $70m. This will leave the balance sheet with:
- an extra $70m in cash, taking it to $207m. 
- debt reduced by $70m, to just $6m.
- NTA remains the same, or less should they make a loss on sales. But, more of it will be made up of cash, a lot more.

Which means that Current Assets - Total Liabilities = $115m. Market cap = $114m.

This is what Ben Graham called a Net Net, and it is extremely rare to see for a company with a profitable underlying business. Not a stellar business, and one without a competitive advantage. But profitable nevertheless.

Pick it apart, guys.

P.S. I should talk more about my invest once a month rule. This is now the third time I've bought out of schedule. I've made allowance for special situations, but what does that mean? Basically, it means that I see something trading at less than 50% of my valuation. This doesn't happen often, and I am surprised I got 3 such opportunities in less than 4 months.


----------



## notting

KnowThePast said:


> It is looking very attractive at the moment, with no debt, cash reserves, profitable underlying business, trading at 60% of its NTA. Next year, I'll assume they break even and ignore earnings all together. I will also assume that they will sell their remaining property assets for $70m. This will leave the balance sheet with:
> - an extra $70m in cash, taking it to $207m.
> - debt reduced by $70m, to just $6m.
> - NTA remains the same, or less should they make a loss on sales. But, more of it will be made up of cash, a lot more.




They should do just fine selling the property in this environment.


----------



## Ves

What about the off-balance sheet finance lease liabilities under note 19?

$123.823m in the next five years.   That's about $0.60 a share which to me explains the difference between NTA and the share price.

Happy if someone more experienced can explain how this works... but I assume that is where the difference lies.


----------



## Ves

Ves said:


> What about the off-balance sheet finance lease liabilities under note 19?
> 
> $123.823m in the next five years.   That's about $0.60 a share which to me explains the difference between NTA and the share price.
> 
> Happy if someone more experienced can explain how this works... but I assume that is where the difference lies.



please ignore...  I read the report wrong at first.  They're on the balance sheet at $110.908m which matches total debt.


----------



## tech/a

Have worked for WATPAK

If they don't have the contracts then they will continue to shrink to maintain viability.
Then when larger contracts come along they may find it difficult to gear up.

There is a reason their chart looks like this over the last 5 yrs.
And looked healthy 5 yrs prior.
And unless there is an expansion phase again in infrastructure then this is not going to out perform.


----------



## odds-on

KnowThePast said:


> Pick it apart, guys.




Hi KTP,

My analysis is similar to yours, so is of no help to you. I am watching WTP as I think there is a probability of a turnaround/takeover catalyst causing a market re-rate; a dividend will probably do it or a move by Besix. Traded for a tidy profit early in the year and am watching for a suitable re-entry.

Cheers


----------



## craft

KnowThePast said:


> Another purchase - WTP 2800 @ 0.695.
> 
> Market Cap = $128m.
> 2013 NPAT = -$4.6m.
> Without writedowns, a profit of $17.2m
> Share price = $0.695
> NTA = $1.14
> 
> The company is involved in 3 operations:
> - construction
> - civil and mining
> - property
> 
> Construction and mining are profitable, property is not. But that is not a problem for much longer, as the company is selling off all of its property assets. Over $100m were sold in 2013, a little under $100m remaining.
> 
> Both construction and mining divisions have a strong order book, and with the current financial position of the company, I see no reason to worry about any short/medium term slowdown.
> 
> This, however, is an asset play. I am only concerned with assets here. I am looking at earnings only for the margin of safety. Should the company continue making money and pay dividends, that will be a welcome bonus.
> 
> It is looking very attractive at the moment, with no debt, cash reserves, profitable underlying business, trading at 60% of its NTA. Next year, I'll assume they break even and ignore earnings all together. I will also assume that they will sell their remaining property assets for $70m. This will leave the balance sheet with:
> - an extra $70m in cash, taking it to $207m.
> - debt reduced by $70m, to just $6m.
> - NTA remains the same, or less should they make a loss on sales. But, more of it will be made up of cash, a lot more.
> 
> Which means that Current Assets - Total Liabilities = $115m. Market cap = $114m.
> 
> This is what Ben Graham called a Net Net, and it is extremely rare to see for a company with a profitable underlying business. Not a stellar business, and one without a competitive advantage. But profitable nevertheless.
> 
> Pick it apart, guys.
> 
> P.S. I should talk more about my invest once a month rule. This is now the third time I've bought out of schedule. I've made allowance for special situations, but what does that mean? Basically, it means that I see something trading at less than 50% of my valuation. This doesn't happen often, and I am surprised I got 3 such opportunities in less than 4 months.




Whether you leave it as cash or pay down debt – selling something that is already in Current Assets as Inventory does nothing to improve your Net-Net position. The current Net-Net position is  negative 25m and apart from potentially dragging forward conversion of a bit of Non-current inventory I can’t see the NET-NET position improving much – nowhere near getting to Graham’s definition.  And as V said don’t forget the off balance sheet liabilities.

If you are serious about your original rules then I would pay serious attention to this quote.



> It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.- _Warren Buffett_



Don’t think you are very serious about your stated rules so maybe just disregard.

- - - Updated - - -



Ves said:


> please ignore...  I read the report wrong at first.  They're on the balance sheet at $110.908m which matches total debt.




I think you were right the first time looks like there is 123M of lease commitments in addition to the debt.


----------



## Ves

craft said:


> I think you were right the first time looks like there is 123M of lease commitments in addition to the debt.



I think the $123m is financial equipment lease commitments + future interest.   The principle amount stated in that note of $109m  matches the balance sheet and also the first table and second table in note 19.

Operating cash flow in 2013 was $155m.    However,  non-repeatable changes in working capital (including inventories) and tax benefits was $108m.  This leaves $47m cash flow from existing operations before taking into account a fair assessment of future maintenance capex.  If you consider this requirement then it most likely either negative or barely positive.    Co-incidently  this was very similar to the total debt repayments.

Working capital deficit funding is still required - so cash on hand & the term deposit (held as security for the debt refer note 19) is not distributable.

Non-current Assets on the balance sheet (to calculate NTA) are based on purchase costs less past impairments.   If assets earn a return that is less than the cost of capital then there will be further impairments and no willing buyer will pay for them at balance sheet cost.   Where are we at in the cycle and what are the future returns?    Profitability is still important - because it dictates whether the assets are worth their replacement cost or should be treated closer to their liquidation value which may be substantially different to the reported NTA.   


Hmmm not my kind of company.


----------



## craft

Ves said:


> I think the $123m is financial equipment lease commitments + future interest.   The principle amount stated in that note of $109m  matches the balance sheet and also the first table and second table in note 19.




I went and had another look (wasting more time on another crap company Hmmm)

I now agree with your second take - no lease liabilities. The 123M is made up of on-balance sheet Interest bearing debt and the forecast interest due.  The 123 is just a total. 

ps.

crap layout in the headings for this note - so we are excused for being dumb.


----------



## McLovin

craft said:


> I think you were right the first time looks like there is 123M of lease commitments in addition to the debt.





Maybe I'm misreading the note but it doesn't appear that they are off balance sheet. Whoever did the accounts could take a lesson in how to make information presented in a meaningful way.


----------



## odds-on

Oh come on...everybody knows WTP is not the next Coca Cola...but it is cheap (or am missing something here?) and there is a probability of a turnaround/takeover (again, am I missing something here?). Position sizing will be important.

I am genuinely interested in learning this art.

http://www.youtube.com/watch?v=_7Jq3Y3FceQ


----------



## craft

odds-on said:


> Oh come on...everybody knows WTP is not the next Coca Cola...but it is cheap (or am missing something here?) and there is a probability of a turnaround/takeover (again, am I missing something here?). Position sizing will be important.
> 
> I am genuinely interested in learning this art.
> 
> http://www.youtube.com/watch?v=_7Jq3Y3FceQ





I know most people interrupt that video as Buffett saying he would look for Graham type investments with small sums but for me the most important point is that he mentions the irony of GEICO .  In one of the appendixes of a later edition of intelligent investor Graham also talks about the irony of his investment in GEICO – it’s very informative. 

Give me a large position in a quality company with a high probability of long term success any day over a small position in a turnaround that is ‘cheap’ if my maybe assumptions turn out to be correct.  Even if I’m right in my business assumptions timing of the repricing becomes a time value of money issue and I have to get out pay tax and repeat to have a decent long term record.   

A large position in an almost inevitable asset revaluation – that’s a different proposition and worth looking for if you want to give a small sum a turbo boost (and you have the balls for it)  – haven’t seen one of those mentioned on this thread.

all just my


----------



## Klogg

craft said:


> Give me a large position in a quality company with a high probability of long term success any day over a small position in a turnaround that is ‘cheap’ if my maybe assumptions turn out to be correct.  Even if I’m right in my business assumptions timing of the repricing becomes a time value of money issue and I have to get out pay tax and repeat to have a decent long term record.




I was just listening to a lecture with Thomas Russo speaking about Buffett's well-known idea of buying a dollar for 50cents. He then goes on to add to that idea...
Paraphrasing his lecture, he states that you'd rather buy the dollar for 60c and have it increase in value over time, than buy it for 50c and have its intrinsic value remain at $1. Not only do you avoid having to constantly find undervalued opportunities, but you avoid having to pay tax each time.

He does add more on the subject, but it's probably better you listen to it yourself:
(http://www.bengrahaminvesting.ca/Resources/audio.htm - by the way, the audio download of Pabrai is also very worthwhile)

I believe this is what Craft is saying and it's a very important point.



Finally on the topic of WTP - I only very briefly looked at the company, but I question the value of those particular assets. 3% margin on its revenue (based on 'underlying' profit) speaks for itself...

And if this is an asset play, there are other questions that arise... It has 238mil net assets - 30mil of that in Intangibles that will essentially be wiped out (although I haven't looked at each segment/entity). Leaves you with 208m and 184m shares (diluted). Factor in that the 'property, plant and equipment' may be overvalued (I don't know the assets well enough) by 30% and you're not far off the current share price... 
(There's a section in Security Analysis about asset values that's a great read... if only I could remember which chapter/s)

This is all hypothetical as I don't want to spend too much time on this company, but I would have thought the evidence is clear.


----------



## KnowThePast

craft said:


> Whether you leave it as cash or pay down debt – selling something that is already in Current Assets as Inventory does nothing to improve your Net-Net position. The current Net-Net position is  negative 25m and apart from potentially dragging forward conversion of a bit of Non-current inventory I can’t see the NET-NET position improving much – nowhere near getting to Graham’s definition.  And as V said don’t forget the off balance sheet liabilities.




Hi craft,

Thank you so much, great advice as always. I've made an embarrassing mistake of just assuming it's all NCA.

But to my defence, some of it is! Their inventory is $60m in current, and $35m in non-current. Redoing my calculation.... Next year, we get, assuming $70m is realised for $95m of those assets, and writedowns are cancelled by some profits:
Current assets = $413.
Total Liabilities = $333m.

Yes, not quite a net net, but very close, unless there's a total meltdown in property prices and/or underlying business performance. I've allowed for a 25% reduction in property prices and $13m EBIT reduction.

I think we are all in agreement now that there are no hidden leases, there's also this statement in the commentary to make it a little more clear: "_The balance of gross debt at 30 June 2013 totals $110.9M and relates solely to equipment financing facilities which support the National Mining and WA Civil business. The Group’s debt therefore now only supports income producing assets. There are no significant off-balance sheet lease commitments relating to plant & equipment assets._"



Ves said:


> Operating cash flow in 2013 was $155m.    However,  non-repeatable changes in working capital (including inventories) and tax benefits was $108m.  This leaves $47m cash flow from existing operations before taking into account a fair assessment of future maintenance capex.  If you consider this requirement then it most likely either negative or barely positive.    Co-incidently  this was very similar to the total debt repayments.




Hi Ves, it's great to get your feedback as well.

What do you use for assessment of future cap ex? Sounds like their current depreciation charge of $48m, which I don't think is any indication of what their cap ex will actually be, now that a lot of assets have been sold, with more sales to come. They have $177m in PPP, so $50m maintenance capex, is a bit excessive, I think. About half of it sounds right, looking at similar companies. Which would leave a very healthy cash flow.



Ves said:


> Working capital deficit funding is still required - so cash on hand & the term deposit (held as security for the debt refer note 19) is not distributable.
> 
> Non-current Assets on the balance sheet (to calculate NTA) are based on purchase costs less past impairments.   If assets earn a return that is less than the cost of capital then there will be further impairments and no willing buyer will pay for them at balance sheet cost.   Where are we at in the cycle and what are the future returns?    Profitability is still important - because it dictates whether the assets are worth their replacement cost or should be treated closer to their liquidation value which may be substantially different to the reported NTA.
> 
> Hmmm not my kind of company.




All fair points. ROC is a lot better than it looks once you take out property division out, and better still once you subtract cash balances. But, I do not think this company deserves liquidation value status, very far from it. Yet, it trades at a price awfully close to it.

If they manage to sell their remaining properties at a 25% discount to book value, they will have:
Cash = $207m.
Receivables = $158m
Inventories = $15m
Other = 7m

Let's discount some of these to allow for bad debtors, etc. Say by $25m.
Total Current Discounted Assets = $362m
Total Liabilities = $333m.

Remainder = $29m.

On to NCA:
Goodwill, Tax Assets, etc = 0.
PPP = $177m.

So, in order to justify the current market cap of $114m at liquidation value, PPP needs to have a sale value of 52% of book value. 

I have absolutely no idea whether that is achievable or not. But this price is close enough for me to say that the only questions that needs to be answered is "will this company remain a going concern", and "will their capital structure allow them to survive any unforeseen short term difficulties".



craft said:


> I went and had another look (wasting more time on another crap company Hmmm)
> I am very sorry, and extremely grateful for your advice here.
> 
> I wanted to thank you again for your commentary on my previous purchase of PMP. Some of what you said changed my thinking and I am still thinking of what to do with that.






craft said:


> I know most people interrupt that video as Buffett saying he would look for Graham type investments with small sums but for me the most important point is that he mentions the irony of GEICO .  In one of the appendixes of a later edition of intelligent investor Graham also talks about the irony of his investment in GEICO – it’s very informative.
> 
> Give me a large position in a quality company with a high probability of long term success any day over a small position in a turnaround that is ‘cheap’ if my maybe assumptions turn out to be correct.  Even if I’m right in my business assumptions timing of the repricing becomes a time value of money issue and I have to get out pay tax and repeat to have a decent long term record.




No argument from me, I fully agree.

But I think there's another message there that goes unnoticed - just because great companies are better investments, does not mean that Graham type investments are bad ones! 

I would love to only buy great companies, and I am prepared to pay significantly more for them. But opportunities like that don't come often. In the meantime, I must make a decision on whether to hold cash, or to invest them in other opportunities. The opportunities like WTP are not my ideal investment, but it's far better than holding cash, in my mind.

I've chosen a strategy that takes me around 2 years to invest my capital. Possibly longer, as I will be getting dividends and selling some shares. Therefore, I know that I can make a few plays like this, and still have plenty of capital available should a great company come up at a good price. Once I find myself in a position where I am short of cash and a great opportunity appears, WTPs and PMPs will be out of my portfolio in a heart beat.

Buffett is also not the only value investor with an outstanding record. There's plenty others, including those with massively diversified portfolios and those that spend most of the time looking at the sewers of the stock market. Buffett himself had a great record looking for bargain stocks earlier in his career.



Klogg said:


> I was just listening to a lecture with Thomas Russo speaking about Buffett's well-known idea of buying a dollar for 50cents. He then goes on to add to that idea...
> Paraphrasing his lecture, he states that you'd rather buy the dollar for 60c and have it increase in value over time, than buy it for 50c and have its intrinsic value remain at $1. Not only do you avoid having to constantly find undervalued opportunities, but you avoid having to pay tax each time.
> 
> He does add more on the subject, but it's probably better you listen to it yourself:
> (http://www.bengrahaminvesting.ca/Resources/audio.htm - by the way, the audio download of Pabrai is also very worthwhile)
> 
> I believe this is what Craft is saying and it's a very important point.




Hi Klogg and thanks for the input.

I fully agree with that thinking, as I said above I would prefer to do that. But I won't turn down the other scenario either if I have cash available and no "great company" opportunity available.




Klogg said:


> Finally on the topic of WTP - I only very briefly looked at the company, but I question the value of those particular assets. 3% margin on its revenue (based on 'underlying' profit) speaks for itself...
> 
> And if this is an asset play, there are other questions that arise... It has 238mil net assets - 30mil of that in Intangibles that will essentially be wiped out (although I haven't looked at each segment/entity). Leaves you with 208m and 184m shares (diluted). Factor in that the 'property, plant and equipment' may be overvalued (I don't know the assets well enough) by 30% and you're not far off the current share price...
> (There's a section in Security Analysis about asset values that's a great read... if only I could remember which chapter/s)
> 
> This is all hypothetical as I don't want to spend too much time on this company, but I would have thought the evidence is clear.




Hi Klogg,

That's absolutely correct - the company is now trading at rougly its liquidation value? So, I am asking myself - is this really such a bad company that it has no chance of future earnings and the best use of capital is to liquidate all of it? Really? There's hundreds of companies on ASX that are worse in every sense of the word trading at a much higher price. 

I have to agree with what Oddson here - yes, there's plenty wrong with this company. Some things were mentioned, I could mention a few more myself. But it's trading at liquidation value, of course there's things wrong with it! But as a private owner of this business, bought at this price, what are the chances of me losing my investment?


----------



## KnowThePast

tech/a said:


> Have worked for WATPAK
> 
> If they don't have the contracts then they will continue to shrink to maintain viability.
> Then when larger contracts come along they may find it difficult to gear up.
> 
> There is a reason their chart looks like this over the last 5 yrs.
> And looked healthy 5 yrs prior.
> And unless there is an expansion phase again in infrastructure then this is not going to out perform.
> 
> View attachment 54413
> 
> 
> 
> View attachment 54414




Thanks tech/a, it's great to get some inside knowledge of it.

I have to admit I am dumb when it comes to reading the charts, I look at fundamentals. In this case, they look about the same 

Scaling down doesn't worry me too much, in fact, I like the fact they are able to do that. 

They have $1.34b order book, compared to $1.48bn in revenues last year (which includes discontinued operations). Any idea how much of a pullback might be too much for the company to be able to scale down to, and still be able to cover fixed costs?

Thanks 

KTP


----------



## craft

KnowThePast said:


> Hi craft,
> 
> Thank you so much, great advice as always. I've made an embarrassing mistake of just assuming it's all NCA.
> 
> But to my defence, some of it is! Their inventory is $60m in current, and $35m in non-current. Redoing my calculation.... Next year, we get, assuming $70m is realised for $95m of those assets, and writedowns are cancelled by some profits:
> Current assets = $413.
> Total Liabilities = $333m.
> 
> Yes, not quite a net net, but very close, unless there's a total meltdown in property prices and/or underlying business performance. I've allowed for a 25% reduction in property prices and $13m EBIT reduction.




KTP

The only way I could come up with those numbers is to double count the 70m you expect from realising the inventories in both cash and debt reduction. 

How bout laying your calcs out long hand – so someone a bit slow like me can follow.


----------



## KnowThePast

craft said:


> KTP
> 
> The only way I could come up with those numbers is to double count the 70m you expect from realising the inventories in both cash and debt reduction.
> 
> How bout laying your calcs out long hand – so someone a bit slow like me can follow.




It's not you, it's me 

I have reduced debt without decreasing cash. It's like that, I make one mistake, then try to correct it too quickly by making others.

Current Assets (discounted) - Total Liabilities are now at about break even, with PPP priced at about 2/3 of book value. Projected NTA @ $1.14, same as this year (doh!).

Still very cheap, but not by as much as I erroneously calculated before. 

A very sincere thank you.


----------



## odds-on

Hi KTP,

Over the years, I have read a few investment articles which make the same excellent point about data inputs and prediction accuracy, the articles are based on studies of sports gamblers and their prediction accuracy compared to the number of data inputs they use in prediction. The studies show the more data the gambler has access to the more confident they are in their prediction; unfortunately they do not get more accurate after a certain amount of data inputs. Putting aside the whole gambling/investing discussion, there is a parallel to take into consideration when applying a “Buy Lots of Cheap Stocks” strategy – after a few data points an investor is probably not going to improve their accuracy rate, better to just create a sausage factory to churn these investment decisions out using a simple investment flowchart (James Montier has a good example in his book, Value Investing).

I found reading papers about the Altman Z Score and Piotroski F score, in conjunction with the Tweedy Browne literature, incredibly useful when I started thinking about applying a cheap stock strategy. There is a lot in those papers, especially if you compare it to reading about the cheap stocks investments of Buffett, Greenblatt, or another crafty investor – sometimes, it is as if they are purely playing the numbers and sometimes they are just being plain old crafty. Just be clear about drawing a line between playing the numbers and being crafty.

This thread is going to be an entertaining and informative read over the next couple of years, keep it up. 

Cheers


----------



## Klogg

KnowThePast said:


> Hi Klogg,
> 
> That's absolutely correct - the company is now trading at rougly its liquidation value? So, I am asking myself - is this really such a bad company that it has no chance of future earnings and the best use of capital is to liquidate all of it? Really? There's hundreds of companies on ASX that are worse in every sense of the word trading at a much higher price.
> 
> I have to agree with what Oddson here - yes, there's plenty wrong with this company. Some things were mentioned, I could mention a few more myself. But it's trading at liquidation value, of course there's things wrong with it! But as a private owner of this business, bought at this price, what are the chances of me losing my investment?




You're right, it's trading a little below liquidation value as listed in their accounts. But your margin of safety just isn't there. 

Assets are clearly overvalued if all they can return is 3% on the revenue generated. That being said, if you apply a reasonable margin on assets (as described in my previous post), you're left without a margin of safety.


Of course, the other thing to remember with an asset play is you need something to trigger the realisation of that net asset value. If management continue to run a business with these assets that has poor returns, the stock will continue to trade at a discount to its assets. Ofcourse, if they decide to sell up, then shareholders may benefit - chances of this is very slim IMO.

For what its worth, I made this mistake with REX. They trade well below NTA, have little debts and a decent cash pile, but the share price tracks that of its earnings. I didn't lose any of my capital, but there was an opportunity cost over those 15months.


----------



## craft

KnowThePast said:


> It's not you, it's me
> 
> I have reduced debt without decreasing cash. It's like that, I make one mistake, then try to correct it too quickly by making others.
> 
> Current Assets (discounted) - Total Liabilities are now at about break even, with PPP priced at about 2/3 of book value. Projected NTA @ $1.14, same as this year (doh!).
> 
> Still very cheap, but not by as much as I erroneously calculated before.
> 
> A very sincere thank you.




Ok

Cheap, but somewhere in the range from deservedly so to potentially opportunistically cheap I would say. Certainly No NET-NET can’t lose territory.  So the real question and what I have been driving at in this thread – Was it worth breaking your rules for?

Even if you are ultimately right about it being cheap you have introduced timing risk. Will it have repriced in your time frame? If not you are going to be potentially ultimately right but still incur a loss to free up capital for investments that meet your long-term plan. 

My objection is not about this sort of investing, I’m aware some do it and do it well and they do it from a fundamental valuation approach. 

My objection is about breaking rules.

The market doesn’t dictate rules – its actually pretty boundless in the opportunities and risks it presents, especially if you add leverage.  We make up the rules and guidelines to expose ourselves to some opportunity without exposing ourselves to the boundless risk.

Rules and guidelines should be made when we are at our smartest, most realistic about our skills and abilities, most relaxed and thinking holistically. We make them to protect and guide us when we are at our dumbest most stressed and narrowly focused. 

If this type of investment fits within your holistic approach – write it into your rules and do the work and develop the skills to execute that form of investing well.  – If not, let your rules stop you from jumping at potential mirages. 

Passing on WTP may ultimately turn out to be a mistake of omission when viewed in isolation but a much bigger mistake of commission is ignoring your rules. I would rather miss a bit of potential profit from opportunity outside my rules then miss the outcomes of a well thought out and executed plan.  To me this is a really important point for ultimate success – I guess why I keep responding to your detours from your stated plan, so having stated my point as clearly as I can I shall leave you in peace next time you bend the rules -promise.


Happy investing.


----------



## craft

Klogg said:


> He does add more on the subject, but it's probably better you listen to it yourself:
> (http://www.bengrahaminvesting.ca/Resources/audio.htm - by the way, the audio download of Pabrai is also very worthwhile)
> 
> I believe this is what Craft is saying and it's a very important point.





I liked Russo’s concept of capacity to suffer.


----------



## Klogg

craft said:


> I liked Russo’s concept of capacity to suffer.




Reminds me very much of Fisher's approach (Common Stocks and Uncommon Profits) and he describes it quite well. His example of Nespresso really hit home with me, because I see them all around me now, but didn't know the company spent millions developing this beforehand...


----------



## KnowThePast

craft said:


> Ok
> 
> Cheap, but somewhere in the range from deservedly so to potentially opportunistically cheap I would say. Certainly No NET-NET can’t lose territory.  So the real question and what I have been driving at in this thread – Was it worth breaking your rules for?
> 
> Even if you are ultimately right about it being cheap you have introduced timing risk. Will it have repriced in your time frame? If not you are going to be potentially ultimately right but still incur a loss to free up capital for investments that meet your long-term plan.
> 
> My objection is not about this sort of investing, I’m aware some do it and do it well and they do it from a fundamental valuation approach.
> 
> My objection is about breaking rules.
> 
> The market doesn’t dictate rules – its actually pretty boundless in the opportunities and risks it presents, especially if you add leverage.  We make up the rules and guidelines to expose ourselves to some opportunity without exposing ourselves to the boundless risk.
> 
> Rules and guidelines should be made when we are at our smartest, most realistic about our skills and abilities, most relaxed and thinking holistically. We make them to protect and guide us when we are at our dumbest most stressed and narrowly focused.
> 
> If this type of investment fits within your holistic approach – write it into your rules and do the work and develop the skills to execute that form of investing well.  – If not, let your rules stop you from jumping at potential mirages.
> 
> Passing on WTP may ultimately turn out to be a mistake of omission when viewed in isolation but a much bigger mistake of commission is ignoring your rules. I would rather miss a bit of potential profit from opportunity outside my rules then miss the outcomes of a well thought out and executed plan.  To me this is a really important point for ultimate success – I guess why I keep responding to your detours from your stated plan, so having stated my point as clearly as I can I shall leave you in peace next time you bend the rules -promise.
> 
> Happy investing.




Hi craft,

What a fantastic post, deserves to be framed somewhere. It really helped me get some things straight in my head so today:

I've sold all my shares in PMP @ 0.33 for a $170 loss.

I was wrong, and greedy.

Main consideration was the fact that PMP is operating in a shrinking industry. As much as it may be undervalued at the moment, the longer the turnaround takes, the greater that value will deteriorate at that point. And while I still think the reward justifies the risk in this case, it is not for me. As you rightly pointed out, it violated to some extent every single one of my rules.

I've considered changing my rules, but it didn't feel right to change them in order to justify a specific investment. When I feel I want to get into things like that, I'll change rules first, then look for opportunities.

Thank you so much for you time, craft. Just because I am slow and my brain takes weeks to think through things, I do actually listen 



craft said:


> I guess why I keep responding to your detours from your stated plan, so having stated my point as clearly as I can I shall leave you in peace next time you bend the rules -promise.




Please don't 



Now, after all that thinking, I've looked at WTP again in context of my rules. Which were, as posted in the beginning:

_I will look at (nearly) everything. But generally, I will only buy companies that have *at least some* of these:
1. I feel have every chance of being around and doing very well 20 years from now.
2. Company founder or long serving management on board, and owning a large stake in the company.
3. Consistently profitable over many years.
4. Acceptable or higher ROC._

While I may sometimes come across as a long term, "Buffett-style" investor, that was never my intention. It was always my intention to enter some less than stellar companies, provided adequate safety. WTP, I feel, fits into my investment criteria just fine:

*1.* While cyclical, the industry will grow long term in my opinion. WTP has as good a chance as any company in the industry to be around in some shape 20 years from now. Short/medium term they look better than many others, give how much cash they have/will have.
*2.* 3 long serving directors. 2 directors own close to a million shares each. Not a massive shareholding, but not trivial either.
*3.* Profitable in 9 out of the past 11 years. 2 years of losses are due to property division that they are no longer going to be involved in.
*4.* This is the only rule that doesn't fully stand up. But, ROC was very good prior to 2009, then property division  greatly dragged down the result. Taking property division away, ROC is still not great, but not so bad that I want to run away screaming. Given that it is a cyclical industry, and not in the best of times, I would expect it to improve.

So, I'd say WTP meets my Buy criteria, about 3.5 out 4.0. My rules allow for some flexibility so I have no issue here.

What about things I won't invest in:
_Things I generally won't invest in:
1. Things I don't understand, whether it is the business, the industry, or the annual reports.
2. Companies that are generally not profitable.
3. High debt._

*1.* No issues here, I understand them well enough, I think. I really liked reading their annual report as well. Described things in English, without much bull****.
*2.* As I wrote above, company has pretty much always been profitable. Writedowns of assets, while a loss, are mostly a sign of bad capital allocation than operating losses.
*3.* No more net debt as of last report, and will get even better with more asset sales. 

So, in summary, I think WTP fits into my rules just fine.


----------



## KnowThePast

odds-on said:


> Hi KTP,
> 
> Over the years, I have read a few investment articles which make the same excellent point about data inputs and prediction accuracy, the articles are based on studies of sports gamblers and their prediction accuracy compared to the number of data inputs they use in prediction. The studies show the more data the gambler has access to the more confident they are in their prediction; unfortunately they do not get more accurate after a certain amount of data inputs. Putting aside the whole gambling/investing discussion, there is a parallel to take into consideration when applying a “Buy Lots of Cheap Stocks” strategy – after a few data points an investor is probably not going to improve their accuracy rate, better to just create a sausage factory to churn these investment decisions out using a simple investment flowchart (James Montier has a good example in his book, Value Investing).
> 
> I found reading papers about the Altman Z Score and Piotroski F score, in conjunction with the Tweedy Browne literature, incredibly useful when I started thinking about applying a cheap stock strategy. There is a lot in those papers, especially if you compare it to reading about the cheap stocks investments of Buffett, Greenblatt, or another crafty investor – sometimes, it is as if they are purely playing the numbers and sometimes they are just being plain old crafty. Just be clear about drawing a line between playing the numbers and being crafty.
> 
> This thread is going to be an entertaining and informative read over the next couple of years, keep it up.
> 
> Cheers




Thanks odds-on.

Still haven't read the Alt Z paper, my reading list keeps growing at a faster rate than I am reading, but I'll get to it eventually.



Klogg said:


> You're right, it's trading a little below liquidation value as listed in their accounts. *But your margin of safety just isn't there*.
> 
> Assets are clearly overvalued if all they can return is 3% on the revenue generated. That being said, if you apply a reasonable margin on assets (as described in my previous post), you're left without a margin of safety.
> 
> 
> Of course, the other thing to remember with an asset play is you need something to trigger the realisation of that net asset value. If management continue to run a business with these assets that has poor returns, the stock will continue to trade at a discount to its assets. Ofcourse, if they decide to sell up, then shareholders may benefit - chances of this is very slim IMO.
> 
> For what its worth, I made this mistake with REX. They trade well below NTA, have little debts and a decent cash pile, but the share price tracks that of its earnings. I didn't lose any of my capital, but there was an opportunity cost over those 15months.




Hi Klogg,

I probably didn't explain my valuation of the company well enough in my original post, causing some confusion.

I do not think liquidation value, or even NTA or replacement value is necessarily the correct valuation in this instance. I believe the company will continue to operate profitably for many years to come, although it will have its cycles. There won't be any trigger to realize asset values, and it will usually be valued by the market by its earnings.

I've harped on so much about its current price been close to liquidation value not because I think that is what it is worth, but because I don't think it can be worth significantly less than that. That's essentially my margin of safety, that barring major disasters, it is difficult to see how one can lose money here, from a perspective of a private owner.

At this price, a lot of things can happen that would make the company more valuable in the eyes of the market, earnings may improve, new contracts may be won, a year or two of reported profits will change the perception of the company, etc. In contrast, there's are not that many realistic scenarios that would cause the price to fall significantly below current levels.

It is not a sure thing, but I believe my downside is limited in short/medium term, and at these kind of prices, good things tend to happen. 

For everyone's enjoyment, some quotes from Walter Schloss that I really like:

- Earnings have a way of changing, and it’s far more fickle than assets. 
- Something good will happen. 
- I learned that if I can simply survive in the market, just like surviving in the war, and not lose money, eventually I will make something. 
- If a stock is cheap, I start buying.
- When I buy a stock that is depressed it hardly ever turns around immediately. 
- Anything terrible that doesn’t happen to you is profit!
- I felt that I was a grocery store owner, holding stocks as my inventory. Sometimes these stocks paid dividends, and so they were worth the wait. Eventually, someone would come along and offer a good price for my inventory, and I would sell. 
- I always held 50 to 100 stocks at any given time because it would have been very stressful if one particular stock had turned against me.
- Use book value as a starting point to try and establish the value of the enterprise
- Don’t sell on bad news. 
- Have a philosophy of investment and try to follow it. 
- Try to buy assets at a discount than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings. 
- I try to protect myself from permanent loss of capital by investing in stocks that are depressed. 
- I like to buy companies with very little debt so it has a margin of safety.
- I like companies that sell near their book value. 
- You have to do a certain amount of research. 
- I don’t really focus on what the earnings are going to be next year, I try to protect myself and that I don’t lose money.
- A stock has lost half, and you go in and buy more. That is not easy. People will think you are crazy.


----------



## Valued

My problem with an asset play like WTP is that the assets are unlikely to be worth as much if the assets were actually sold. Further, I am of the belief that if you have assets you are never going to sell then they are only worth as much as the net income that they can generate. If a company is going to keep its land and its factories for 50 years and it's going to keep it's machinery until it dies well then the assets are simply worth the profit that they generate. If they are worth more then the future net profits then the company should just liquidate right now and disperse the money to shareholders. 

I don't understand asset based investments for that reason. I have a significant amount of money (significant for me anyway) in a company trading over twice its book value as the net profit it will generate from its assets in the future exceeds the worth of the assets themselves. 

I might be wrong though and perhaps in theory a company should at least reach its book value if it's generating a positive net income. If I end up losing money in the stock market at some point well then I will have to fire myself


----------



## KnowThePast

4 months update:


----------



## KnowThePast

Valued said:


> My problem with an asset play like WTP is that the assets are unlikely to be worth as much if the assets were actually sold. Further, I am of the belief that if you have assets you are never going to sell then they are only worth as much as the net income that they can generate. If a company is going to keep its land and its factories for 50 years and it's going to keep it's machinery until it dies well then the assets are simply worth the profit that they generate. If they are worth more then the future net profits then the company should just liquidate right now and disperse the money to shareholders.
> 
> I don't understand asset based investments for that reason. I have a significant amount of money (significant for me anyway) in a company trading over twice its book value as the net profit it will generate from its assets in the future exceeds the worth of the assets themselves.
> 
> I might be wrong though and perhaps in theory a company should at least reach its book value if it's generating a positive net income. If I end up losing money in the stock market at some point well then I will have to fire myself




Hi Valued,

I think we are in agreement here.

I expect WTP to remain a going concern for many years. Since it does not hold any strong competitive advantage, I expect it to be worth roughly the reproduction cost of its assets.

A company generating less than average returns would need to be discounted, while the company with great management and above average returns may command a premium.

WTP, at first glance, produces returns that don't justify its cost of capital. But, with the sell off of its property division and focus on core business, I expect ROC to go up significantly. It is also operating in a cyclical industry, returns will fluctuate through the cycle quite a bit. 

I value WTP at somewhere between NTA and reproduction cost of assets. I haven't properly calculated its reproduction cost of assets, but at the time of purchase, it was trading at a 40% discount to its NTA. This was a large enough margin of safety for me. Its strong balance sheet means I can sleep well while I wait for things to improve.


----------



## Valued

Fair enough.

I am a bit of a prude and only invest in extraordinary companies with big competitive advantages that I can see being sustained for at least five years. Of course, I then want a massive discount to its intrinsic value. Even if it may be profitable, WTP wouldn't pass my initial screen for the simple reason that I see below NTA price with a low return on equity and a low return on capital. It makes me think a write down is coming. If the write down does come and the share price plummets then I might consider buying. I don't like paying for sub-NTA stocks with low RoE and RoC since I can't sleep easy at night thinking there is going to be a write down.

It also doesn't help that I value WPT at around $0.60 per share if I am being bullish and more like $0.40 if I am being bearish. I am probably being quite conservative compared to you though. I demand massive discounts to intrinsic value unless the company is most extraordinary (for example, I would be likely to buy CBA if it were at even a small discount to intrinsic value).


----------



## KnowThePast

A new purchase, but first, a change of strategy. I was going to post about it earlier, but never got around to it. You’ll just have to believe me that strategy came first, not the buying.

I now want to allocate some of the capital to companies trading at a substantial discount to their assets. Most of these will be ugly in some way. While I expect these to have a high error rate, I am walking into this knowing that as a group, these opportunities provide returns above average. 

Eventually, I see myself playing in this area more and more, but for now, some rules to restrict me:
-	No more than 20% of my capital
-	Invest $1000 (2%) at a time, but look to average down at 20%+ discount once, occasionally twice.
-	I have a set trigger to sell at a profit, but won’t disclose it here, sorry.
-	I will give each trade 3 years to make a profit. Exceptions will be made when the entire market is in decline.
-	Prefer Net Debt/Equity less than 50%.
-	Prefer solid business/industry in trouble, rather than shaky business models.
-	Try to avoid the really dreadful once.

So, with the above in mind, I bought BOL, 5000 @ 0.20.

It’s an average business, in a bad state, in the wrong industry, in a bad part of a cycle, with bad (stock market) reputation. The only thing worse is its share price, although it’s already substantially improved from a few months ago. 

Net of all liabilities, they have $313m of assets that they struggle to deploy in ways to earn an adequate return. Current market value, is $94m. They can essentially throw away half of their Net Assets, and still be worth the current price, in theory. Tangible assets are $238m.

They’ve already announced, again, more redundancies. And sale of some old, unused cranes for ~$10m. Focus is on retiring debt, than initiating a buyback. 

I won’t focus much further on the immediate picture, at these prices, two things are key for me.
1.	Their services are going to be needed in the long term, therefore their assets have value that competitors will need to buy/replicate. Temporary contractions in demand may mean that over-leveraged businesses such as BOL may need to shrink, but I think the price differential allows for a lot of value destruction before earnings equilibrium is reached.
2.	They can survive the short/medium term. Their balance sheet is rapidly getting better, cash flows are positive, cap ex is expected to reduce, personnel reduced, asset sales will help. Furthermore, I expect that market would still tolerate a capital raising or two, should there be temporary “liquidity” problems.

This is very much a statistical play, which I know will work in my favour often enough. Main thing I am trying to do here is not so much to pick the best opportunities, but avoid the worst ones. This is certainly not an investment for the long term, quality growth oriented investors.


----------



## KnowThePast

5 months update:


----------



## odds-on

KnowThePast said:


> 5 months update:
> 
> View attachment 55052




Hi KTP,

I notice WTP is now trading above a $1.00. Are you tempted to sell?

Cheers


----------



## KnowThePast

Bought BYL. 6000 @ 0.34.

This is a very similar company to NWH, and I bought it for exactly the same reasons.

It is very cheap by juts about any metric. It is in a business where I expect long term demand to increase and I believe it will survive any short/medium term fluctuations. 

Original founder is on board, a few directors own lots of shares. 

Their cash balance/debt are not as good as NWH's, however, most of that debt is equipment leasing.

Not much more to say, really. I'll know if I'm right about the industry outlook in a few years.


----------



## KnowThePast

odds-on said:


> Hi KTP,
> 
> I notice WTP is now trading above a $1.00. Are you tempted to sell?
> 
> Cheers




Hi odds-on,

No, it is still nowhere near what I would call overvalued. In fact, I could probably still make a case that it is worth buying at these prices.


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## KnowThePast

Is value investing dead?

Warning - lots of words and numbers to follow.

I've mentioned before that I use my software development skills to help me with investing. I thought I'd share what I do and how I go about it.

A topic that's always been of great intrest to me was backtesting based on fundamental analysis. There is already a lot of great literature on the subject, such as "What works on Wall Street" by James P. O'Shaughnessy and "What has worked in investing" by Tweedy, Browne. Ben Graham  and Seth Klarman were also proponents of semi-automated stock picking strategy, among many others. Reading all these works have been of tremendous benefit to me, and is the backbone of my investment strategy. I have always felt, however, that there are some unanswered questions. They may lead to the same answer, but I always wanted to ask. Such as:

1. Most studies base strategy on buying at a particular point in time, then rebalancing at a particular point in time. Usually going from lowest to highest. That is, backtest on Low EPS strategy would rebalance portfolio based on stocks with lowest PE once a year, or so. This would be fine for a fund manager who can accumulate all stocks meeting criteria. Not so fine for a smaller investor such as myself, that will probably buy only a few stocks and not once a year, but when an opportunity comes up.
2. Not many studies based on Australian stocks.
3. Knowing how a strategy works across an entire market is very useful, but even more useful is knowing how it works across stocks that I personally am interested in. For instance, I don't invest in mining and biotec specs, startups with no earnings history, companies with chronic debt/acquisition problems, etc. This is very personal and no automoated filter can be setup for this. Basically I want to backtest just on stocks I am interested in, this is very specific to my style/situation.
4. What about portfolio management? Some things that may make a big difference are averaging down/up, selling losers, limiting number of purchases per month/year.
5. What if you have limited capital? What percentage to allocate to each purchase? How long to hold for? When to sell? What if I want to combine multiple criteria, and possibly have different ones for buy and sell?

Overall, I wanted a system that would allow me to setup an algorithm that would step through, historically, day by day, and make buy/sell/topup decisions as I would, in real time. At the time, I couldn't find anything that met the criteria, so I built my own. 


The first test of the system, was, of course, the classical Ben Graham approach - buying companies at below asset value. Does that approach still, statistically, make money, even though it's been known about for many decades? Below are my ramblings on it.

DISCLAIMER: This post is for discussion only. This is not a system I use, nor do I recommend it to anyone. There's lots of things that could throw an error here. It is based on my own list of ~230 companies, filtered based on nothing but my own opinion, there's some survivorship bias, there may be bugs/data errors. I repeat, this test is done on a very specific set of data. Doing it with a different data set is likely to produce different results.


For the purpose of this exercise, all backtests will be:
a) Run for the last 10 years, 01/11/2003 to 01/11/2013
b) based on ~230 companies in my watchlist. These include some companies that have since been delisted, but not all, so there is some survivorship bias. Most of these are companies with at least a few years of generally profitable operations.
c) no dividends included
d) $10,000, or 2% of portfolio parcels, whichever is greater. $30 brokerage, based on closing price, no slippage.
e) backtest will step through on a monthly basis. Each week, it will evaluate current holdings to see if any meet the sell criteria. It will evaluate all companies to see if they meet the buy criteria.

First step is to establish a benchmark. 
XAO returned 69.4%. 
The proper benchmark, however, is simply buying all the companies that I will use in the backtest and holding on to them. This returned 158.04%, and will be used as the benchmark. 

Criteria for Buy will be Market Value compared to Total Assets. I will break this down into multiple backtests to show the results based on discount size. 
Criteria for Sell will be Current Market Value > Net Assets X 3.
No averaging up/down.




A strong correlation between asset value and return, especially at the lower end. Buying at below 0.25 P/B shows massive returns, but there were only 26 trades over 10 years. Given that I am already using a cut down data set, this simply isn't enough data to treat as reliable evidence. Nevertheless, my results showed what other studies have shown over the last few decades - buying at lower book values tends to give better returns. And the lower you buy, the better. What's also interesting is that the success rate has not changed by much in each test, if anything, it improved with lower value P/Bs, which would normally be considered riskier.

Let's now take it further. For buy criteria, I will use P/B < 0.70, as that is the value at which the test above returns above the benchmark, at 236.41%. Time to play with sell criteria:




There seems to be relatively little difference whether to sell at PB>1 or PB>5. However, selling sooner would have tax implications, which are not accounted for here. Also, my capital is limited and I do not have enough funds to buy everything that meets the criteria. So let's make changes to accomodate me. Capital will be restricted to $250,000, 2% per trade, so that is only enough initial capital for 50 trades. Because we now won't be able to buy everything that matches that criteria, companies wll be ordered by P/B. The lowest ones will be chosen. This should give us an idea whether it is better to recycle the funds, or stay invested once bought. Let's now re-run the tests above with these changes.




Tests above confirm that it's better to sell holdings before they become too expensive, but just at what price is a lot less clear. The higher you go, the more capital is tied up for longer. Also, at P/B > 5, there's only 49 trades, as most of the capital was tied up in the first few years and no cash was available to buy opportunities available later. 

My take on it is that this is one of the many things that can't be automated. Selling at P/B of anywhere between 1 and 4 would make sense, depending on the number of new opportunities available and cash needed. 

Let's go on.

I'll use P/B < 0.7 as buy criteria and P/B > 2 as the sell criteria for future tests. P/B > 3 shows a slightly better result, but I prefer a lower one as it results in more trades, and the result is less likely to be attributed to a lucky few trades.

On of the more surprising things to me was that the success rate was consistently above 70% for all tests. Nevertheless, I would think it prudent to pick safer companies, with better metrics. Even if it doesn't improve the result, it should lower risk. So let's try a few things to see if we can improve the result, such as net debt/equity, ROC, OCF. Admittedly, this is not a good test for this data set, as it is already mostly made up of more solid companies.




Amazingly, none of these show any positive contribution to either risk or return. But again, it must be stressed that my data set is already heavily skewed towards "safer" companies. Checking for positive operating cash flow over 5 years gives a slightly better result, so I'll use that as the benchmark going forward.

As the success rate is quite high, it would be reasonable to assume that averaging up/down should give a better results. Let's try a few different tests. Original buy criteria will be checked when topping up, no averaging on deteriorating fundamentals in other words.




As expected, averaging does produce a better result. What's less expected is that averaging up produced better result than averaging down. Let's now keep averaging up, 20%, twice, as the new benchmark.

I am limited to how much I can post in one entry, so I will continue in the next post.


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## KnowThePast

What about another common tactic of letting winners run and selling losers? Let's experiment by selling losers after different time periods. Stocks sold won't be bought again.




Strangely, this does not seem to be correct for this portfolio. However, at least in part this is due to the fact that more funds are freed up, and therefore, more purchases were made in the last 1-2 years of the tests. These have not yet had enough time to make a profit and dragged down performance of previous trades. So, I think selling losers makes sense, with 3+ years sounding about right.


I could go on for a while, but let's do just one more. As funds are limited, and there's no way where a bottom, or top, will be, would it make sense to restrict purchase frequency?




There are, of course, an unlimited number of possibilities and strategies, so I'll stop here. The statistic I am most curious about at the moment is how many people read all the way up to here.

P/B is of course only one ratio of many, and not one I would exclusively use. I also find it most useful to analyse individual trades in the backtest, more so than the end result.


So back to the original questions, is value investing dead? No, I think it clearly still works. But I do not think a fully automated approach works. Buying things on the cheap is the right thing to do, but stock selection/exclusion and portfolio management are just as, if not more important. 


To show off, I've recorded a video of the software in use:
[video=youtube_share;a85bD6iXBVc]http://youtu.be/a85bD6iXBVc[/video]


If anyone found this of interest, and would like for me to post similar things in the future, please let me know. Even if you are a lurker that doesn't usually post, a simple "Yep" would be much appreciated.


Questions/Suggestions/Requests?

Thanks for indulging me.


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## qldfrog

Thanks for your work, I actually read all the way   but did not watch the video..yet
Not sure it will change my trading pattern but like the study on averaging up more than down... counter intuitive initially then make sense
better loadding on winners then losers?
anyway thanks a lot


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## galumay

+1, also read all the way, havent watched the video yet. getting ready to ride my bike to work so it was a bit of a superficial read but very interesting.


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## tech/a

Some great work here.
I too have only had a summary read but will
Spend the time it deserves later.

Thanks for sharing.


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## 5oclock

KnowThePast---please continue with your posting--good read, thanks


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## KnowThePast

A highly unusual trade for me today. I've bought a share with an intention to sell it the same day, something I haven't done for a very, very long time.

So, bought FGE 2000 @ 0.495 at 10.39am
     sold     FGE 2000 @ 0.70   at 12.02pm

While I had a high degree of confidence in the outcome, I felt that it may have been an all or nothing bet, so I followed my standard criteria, which meant a parcel size of $1000 for this kind of company.

I didn't really want to invest long term into it yet, I generally prefer not to invest in companies that just got in trouble, it usually takes a couple of years to get back on track, and buying 1-2 years later normally doesn't result in significantly greater price. While I think FGE will ultimately be fine, I think it will be quite some time before there's any good news. I was therefore getting ready to sell regardless of whether I was in a profit or not that day.

It is interesting what kind of opportunities the market sometimes throws up and reasons for them. Another good case to make against efficient market here, huge volume indicating that funds were selling FGE as if it wasn't worth any price. 

Confidently seizing these opportunities is where I think I need to make an improvement on. My current parcel size rules obviously don't allow me to be too bold in these cases, but this is one thing I will definitely revisit once I am closer to fully invested and have some profits as a psychological buffer.

Now that I've sold it, it will probably climb to $1+ by end of day.


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## KnowThePast

6 months update.


----------



## skc

KnowThePast said:


> 6 months update.




Good FGE trade. But don't pad the stats


----------



## KnowThePast

skc said:


> Good FGE trade. But don't pad the stats




What did I stuff up?

Or was that a  whoosh..


----------



## KnowThePast

Bought CKF, 1068 @ $1.85.

The company operates KFC and Sizzler restaurants in Australia and Asia. A fast food business such as this, I would expect reliable cash flows, low chance of large revenue/profit fluctuations and steady dividends. This is what I think will most likely happen and based on the current market price, the return would be quite acceptable to me. Current dividend yield is 6% and I have a high degree of confidence that it will be going up over time. That’s enough talk about the upside, let’s look at what the risks are.

The first that jumps out at me is their relationship with Yum!, the owner of the KFC brand. They renew the licence every 20 years (10+10), with 18 years left on the current one. While it certainly not unheard of that the parent company would take back control, the odds are not great. Even if it is not renewed 18 years’ time, it still seems to be worth it at current earnings + small growth. Furthermore, residual value in case of termination will not be zero, there’s likely to be some kind of payout, they still have Sizzler, and are planning to acquire a third brand. The last option, I have my reservations about, but it remains to be seen what they may have in the works.
Second – level of debt. I would certainly want this to be lower, and this is the reason, I believe, why this is on sale at such a low earnings multiple. Here are the numbers:

Debt: $105m
Interest: $6.2m
Reported Earnings: $16m
OCF: $41.2m
Depreciation: $15.7m (due to clauses in Yum! Agreement, cap ex. Is unlikely to come down).

This isn’t great, but it’s not terrible. What gives me comfort is that this is the kind of business where cash flow is unlikely to drop suddenly and debt reduction is a focus of management. Should they use half of their free cash flow to pay down debt, the businesses will be in a much, much better shape in 2-3 years. The consistency of their cash flows and demand, which I’ve mentioned about 25 times already, gives me great confidence that their position will not change greatly during this time.

Next one must look at what they need capital for. Let’s look at KFC first, - the opening of a new KFC restaurant seem to cost approximately $1.2m in capital spend. Last year, KFC contributed $44.7m to EBITDA. Over 122 stores, this averages $366k/store. After crudely averaging Depreciation to $76k per store, that becomes $290k/store, 24.2% pre-tax return on invested capital, not counting working capital (which is actually negative). At the moment, interest payments reduce that substantially, but as that is paid off, the returns will become greater and greater for this high capital, low margin, low risk business.

And finally, I get to Sizzler. It has been a trouble child for a long time. US company filed for bankruptcy in 1995, which voided their leases and allowed them to re-open a year later. It has never made what can be described as adequate return from what I can tell, and I see no sign of that changing in CKF’s hands. My personal opinion of the place probably don’t matter, but, I have to say this. The website is terrible, price seem outrageously high for a chain and some fairly run of the mill dishes. I see no point of differentiation from thousands of other restaurants, other than high prices. Which would be fine if it was working. But it is not, and I do not see any reason why it will in the future. It is making a profit, which makes it a good problem to have, and it is dragging down the excellent returns that KFC franchise makes. Hopefully, this will find a way to get out of it painlessly at some point in the future. I could be wrong, and I hope that I am, but I certainly expect no upside from this part of the business.

Still, even with an added weight that is Sizzler, the business overall generates a good return, I expect debt to decrease, which will in turn increase dividends and speed up organic growth. That is all.

I wrote all this a few weeks back and was waiting for my next routine purchase time. Shortly before that, they happened to announce an acquisition of 44 KFC restaurants in WA and NT, which drove the price up from $1.60 to $1.85. The news themselves, I do not think should have caused a significant re-rating of the stock. The purchase price itself is fine, even with $25m extra to be spent on renovations. In the end, they are going to be getting these 44 sites at roughly the same cost as setting them up from scratch themselves. Definitely a good buy then, at these kind of investment prices, it is a good deal, as I’ve talked about it above.

The negative is, of course, that they will fund it by taking on more debt. Not ideal, but given a rare opportunity to acquire a large number of business units identical to their own, at a price no different to their own, I think they had to do it while they had a chance. And just like reliable cash flows from their own sites paid their existing debt, so will the cash flow from the new sites service the new one.


----------



## skc

KnowThePast said:


> What did I stuff up?
> 
> Or was that a  whoosh..




Just saying you set out your investment journey to invest in certain types of companies fo rhte long term blah blah blah.

So when you pick up a few hundred $ on FGE's wild day, I wouldn't have included it towards the outcome of your journey...


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## KnowThePast

skc said:


> Just saying you set out your investment journey to invest in certain types of companies fo rhte long term blah blah blah.
> 
> So when you pick up a few hundred $ on FGE's wild day, I wouldn't have included it towards the outcome of your journey...




I'll have to disagree. I'd rather simply include everything than selectively exlude some.

Also, while the journey started with one intention, it doesn't mean that it can't take detours or change directions. I may end up a raving chartist for all I know. And than it would be a much more interesting read.


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## galumay

I am with SKC on this one, I run two separate portfolios, my long term investment one and a speculative one. When I check performance of my investment portfolio I dont include the couple of speccies that I own and I dont include any short term trades that I might make along the way. The short term trades get added to the spec portfolio.

Not saying your approach is wrong, you can do what you like!


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## KnowThePast

Averaged down in BOL - 8500 @ 0.125.


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## KnowThePast

I hope everyone is having a great holiday and that the new year will be even more successful than the last.

My usual monthly update:




My free provider of XAO accumulation index data is no longer free, so I will measure against XAO until I find a replacement.

I've also added an "annualised" return figure, as I am adding funds fairly slowly, it is a better measure of performance than gross.


----------



## George Washingto

KnowThePast said:


> I hope everyone is having a great holiday and that the new year will be even more successful than the last.
> 
> My usual monthly update:
> 
> View attachment 56083
> 
> 
> My free provider of XAO accumulation index data is no longer free, so I will measure against XAO until I find a replacement.
> 
> I've also added an "annualised" return figure, as I am adding funds fairly slowly, it is a better measure of performance than gross.




I use the WAM Capital monthly letter to get the Accumulation Index numbers for free.


----------



## KnowThePast

George Washingto said:


> I use the WAM Capital monthly letter to get the Accumulation Index numbers for free.




Thanks for that George. I had a look at their website, but couldn't find any recent newsletters, however.


----------



## KnowThePast

Bought IRI, 1700 @ $1.105.

I've followed this company for many years and owned it in my super. So, I didn't need to do much analysis on this one once I saw their earnings guidance this morning and bought on open.

If there's interest, I may post a more detailed write up on IRI later.


----------



## Ves

KnowThePast said:


> If there's interest, I may post a more detailed write up on IRI later.



Yes please...  has fairly high ROIC,  but admittedly I have never been able to understand what it is that they actually do and the specifics of their business model to make an informed decision about value.


----------



## galumay

KnowThePast said:


> If there's interest, I may post a more detailed write up on IRI later.




I am with Ves on this one, it will help my learning process, the look at their reports I just did shows a big drop in profit  in the previous half, 23%, and then a bounce back up this quarter.

The item I really dont understand is in the liabilities, they have current liabilities of $20m odd - more than half their equity, $7m of it is obvious, but $13m is explained in note 17 as deferred revenue - can you explain that to me.

If they can maintain the turnaround in NPAT then my IV calculator spits out an IV of just around $1


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## George Washingto

KnowThePast said:


> Thanks for that George. I had a look at their website, but couldn't find any recent newsletters, however.




http://www.asx.com.au/asxpdf/20131212/pdf/42lkz8q9xn8vb6.pdf

They are put up on the ASX website as announcements.

http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=WAM

I'm sure most LICs would have those numbers up there for free as well.


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## KnowThePast

Sold IRI, 1700 @ $1.15.

I am very busy at the moment, so have no time to write a proper post at the moment. Will do so in a week or so.


----------



## KnowThePast

Integrated Research is a software company that develops performance monitoring software and diagnostics software for large networks. 

All of company’s business comes from the software products that it has developed and owns the IP for, it is a software product company, and its income comes from 3 sources:
1. License sales
2. Support and Maintenance
3. Consulting and client specific development.

Company’s spending is therefore divided into two main groups – those related directly to the 3 above, and the investment into general product development. The first results in matching revenue, the second one does not.
Competitive advantage for a company like this usually comes from these sources:
a) patents
b) first move advantage
c) cost of switching
d) cost and/or quality of development.

IRI has a lot of d) and some of b) and c)

It is very difficult to judge the quality of software development operations, even when you work in the company. Almost impossible from the outside. But I look for positive signs, and more importantly, absence of warnings bells:
- reinvesting 20% of profits into R&D is what every software company should be doing. It is all too common to develop a product that is barely good enough, then just let support and change requests clutter and deteriorate the code base to a level that is unmaintainable. 
- Profits from consulting is another sign that making changes to a code base can be done at an efficient level.
- Projects are never very late. Any software project can be late by a bit, but once that are months/years late can never be rescued in my experience. They can be dragged across the line after massively overspending the budget, but will degrade to such a mess by that point, that only a complete re-write could fix it. And a complete re-write is only likely to be successful with a new team and management. 

So, from an outsider’s perspective, I think it is a well-run company with some competitive advantages. What is it worth is an even more difficult question. The starting point would normally be the cost of writing their software + marketing, etc. Unfortunately, that figure is very, very blurry. The company partially expenses and partially capitalises their R & D. Furthermore, they need amortise some of it due to accounting rules, which does not necessarily reflect reality. Worse still, client specific development and general product development are often too closely related to separate them cleanly, even if you are working on the project yourself. Customer relationships and how difficult it is for them to switch to a competitor is yet another major factor, which will greatly influence the value of their “marketing”. And so the goodwill figure on the books is just about useless – in my opinion it is probably greatly understated. 

Due to all the points in the above paragraph, equity and ROC measure are not well suited to value a company like IRI. If I was an expert in developing performance measuring software, I may have given a shot at estimating how long the software would take to write from scratch, fix up, market, etc. But I don’t have that level of expertise. 

Everything above I still find useful to think about in order to provide the right frame of thinking, but for valuation, I ended up pretty much looking at the company’s earnings and the likelihood of them growing at a good rate, something that I feel they have a very good chance of doing given their competitive position. 
Guidance was provided for $4.4m-$4.8m. With second half usually stronger than first half, I would expect a full year NPAT to be around $10+m, placing the company on a PE of ~18. In my opinion, this is approximately fair value, not too cheap, not too expensive. 

So why did I buy it? Very short term thinking in this case. An announcement was made that pointed to a new record full year NPAT and stock was previously trading at almost $1.50 on lower earnings. When I was able to buy it at $1.105 on open, which was only a little above the price pre-announcement, I felt there was only a small chance of a price going down and a significantly higher chance of the price going up. I ended up being barely right, having made just 0.86% ($16) on the trade. 

This, however, was achieved while the market was dropping. If I am in this situation again, with the same kind of odds, I’ll make the same decision every time. 

I didn’t hold on to it, but I feel that this is an excellent company, with greater than average chance of growing far into the future. It’s just that it doesn’t have enough margin of safety for me at the current price.


----------



## KnowThePast

Bought DCG, 510 @ $1.967.

Similar to BOL, this is very much a statistical purchase, where I expect stocks with certain fundamental characteristics to outperform the market, as a group. Thus, I often deliberately ignore a lot of the research that I do on them.


----------



## KnowThePast

George Washingto said:


> http://www.asx.com.au/asxpdf/20131212/pdf/42lkz8q9xn8vb6.pdf
> 
> They are put up on the ASX website as announcements.
> 
> http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=WAM
> 
> I'm sure most LICs would have those numbers up there for free as well.




Thanks GW,

These reports just provide the % change over the last year, which doesn't work with my monthly updates and different starting dates.

For my full year update, I will certainly use these.

Thanks again.


----------



## Ves

Hi KTP,  thank you for the detailed summary on IRI.   My initial post probably under-sold my knowledge of it,  and from my basic research I came up with something in the same vein as your post.   The ROIC looks very healthy,  the R & D is being pumped back into the business at a decent clip,  the deferred revenue is a good source of free funding  (ie. customers pay in advance), clean balance sheet.

I understand that they provide software that gives owners of large computer networks performance diagnostics reports (especially early warning alerts) and other related functions to do with VOIP and there is also a package that improves efficiency in relation to payments.  It's all about improving the efficiency and reducing the down time of computer networks and communications infrastructure and functions within them by the looks of it.

However,  my lack of knowledge,  and of a few others who know more about big company IT than I do, was the question of what is it that this software does,  that other developers don't,  that attract the big blue clip clients that they currently have?   Their current client base has some big names at the moment,  I haven't dug in too far, but the presentations are helpful in this respect.  How far behind are their competitors?    They also have an agreement with one of the big players in hardware,  Avaya is it?

Big picture, company specific stuff that would form a long-term investment thesis.    I wouldn't be looking to trade or invest in this on a momentum basis,  so I wouldn't want to take a big leap of faith on this stuff.  



Sorry...  I probably wasn't very clear in the first place.   Has anyone used or had experience with their software?


----------



## KnowThePast

Ves said:


> Hi KTP,  thank you for the detailed summary on IRI.   My initial post probably under-sold my knowledge of it,  and from my basic research I came up with something in the same vein as your post.   The ROIC looks very healthy,  the R & D is being pumped back into the business at a decent clip,  the deferred revenue is a good source of free funding  (ie. customers pay in advance), clean balance sheet.
> 
> I understand that they provide software that gives owners of large computer networks performance diagnostics reports (especially early warning alerts) and other related functions to do with VOIP and there is also a package that improves efficiency in relation to payments.  It's all about improving the efficiency and reducing the down time of computer networks and communications infrastructure and functions within them by the looks of it.
> 
> However,  my lack of knowledge,  and of a few others who know more about big company IT than I do, was the question of what is it that this software does,  that other developers don't,  that attract the big blue clip clients that they currently have?   Their current client base has some big names at the moment,  I haven't dug in too far, but the presentations are helpful in this respect.  How far behind are their competitors?    They also have an agreement with one of the big players in hardware,  Avaya is it?
> 
> Big picture, company specific stuff that would form a long-term investment thesis.    I wouldn't be looking to trade or invest in this on a momentum basis,  so I wouldn't want to take a big leap of faith on this stuff.
> 
> 
> 
> Sorry...  I probably wasn't very clear in the first place.   Has anyone used or had experience with their software?




Hi Ves,

I don't analyze things to this level of detail. I check for any immediate threats, but generally don't pay too much attention to those that may be years away.

Almost all business have no real, lasting competitive advantage. Most software products could be replicated by new or existing competitors if enough money was thrown at it. Sometimes it happens, sometimes it doesn't and I find it impossible to explain why it doesn't most of the time.

As an example, the company I work for at the moment is very similar to structure to IRI, although our product is in a different sector (banking/finance). We are a market leader in our niche. We have 3-4 competitors, all of whom have existed for 10+ years. Returns can be quite good in this area, yet for some reason no one else joined the party for many years. Even though, apart from being the largest in this niche, we hold no barriers to entry. Some of the skills required are niche, but they can be hired. I don't know why, but the same holds true for most companies in my experience.

All software has problems, and these problems continually get fixed. A large, and growing customer base, as well as high returns, point to the fact that the software is doing what it should do. If a competitor's product appears which can do a better job, it may be a threat now, but what about in a year's time when those problems are fixed and perhaps new ones appear in a competing product?

For a company like IRI, it is all about relationships. They do not develop a retail product which is then sold for a small amount to millions of customers. Most of their sales would be a license sale + a project to fit the software into customer's site. Relationships built during those projects are at least as important as software quality itself. Furthermore, being projects, most software would be extensively UAT'd by the customer prior to go live. When the software does go live, most problems are fixed and problems during UAT eventually forgotten. 

Apologies for the unstructured rambling above, hopefully it gives an idea of how I think about these things, even if I avoided answering your question 

As a last thought - Our company has just lost a salesperson/account manager, who's been with us for 15 years and knows every single person in our niche. If he goes to work for a competitor, that would scare me (if I was an owner of this company) a lot more than any new competing product that appears, no matter how much better it is. And these are the kind of things that no amount of analysis and research may show.


----------



## burglar

KnowThePast said:


> ... If he goes to work for a competitor, that would scare me ...




These are the things that are not in the public sphere, and even if they were, cannot be measured in $'s.


----------



## Ves

KnowThePast said:


> Apologies for the unstructured rambling above, hopefully it gives an idea of how I think about these things, even if I avoided answering your question



No rambling at all, very informative in fact.    Investing is as much about knowing what can happen than it is what will happen and accounting for this in some way in your assessment of business and valuation risk.   For instance,  if there are too many potential torpedoes that could  (not necessarily will) destroy a lot of shareholder value in a business then I normally just wouldn't invest unless there were some exceptional circumstances.  Look at Forge for an example of known,  but unlikely risks, suddenly becoming reality.  My time horizon is as long as it takes before the business to stop producing acceptable returns (which in the ideal case is a long, long time)...   so I can't put such risks in the bottom draw unfortunately.

Still not sure about IRI,  definitely not at the current price,  but undecided at lower prices...


----------



## Sir Osisofliver

Hi KTP,

Just thought I would pop in and see how you are doing with the portfolio. (I particularly wanted to come and look at CAB Because it's been a few months and I'd thought you jumped the gun a bit.)



KnowThePast said:


> View attachment 56083




I note the PMP transaction. This isn't one you had when I was following your thread early on. I note what you said about you breaking your rules to invest into it...and I note that the shares are now trading at $0.46.

I was wondering if you would like to do some analysis with me on both a fundamental and *technical *basis. (I've never held PMP and have no intention of doing so). Frequently the best way of learning is to evaluate our less successful transactions as opposed to our successful ones.

Cheers

Sir O


----------



## KnowThePast

Sir Osisofliver said:


> Hi KTP,
> 
> Just thought I would pop in and see how you are doing with the portfolio. (I particularly wanted to come and look at CAB Because it's been a few months and I'd thought you jumped the gun a bit.)
> 
> 
> 
> I note the PMP transaction. This isn't one you had when I was following your thread early on. I note what you said about you breaking your rules to invest into it...and I note that the shares are now trading at $0.46.
> 
> I was wondering if you would like to do some analysis with me on both a fundamental and *technical *basis. (I've never held PMP and have no intention of doing so). Frequently the best way of learning is to evaluate our less successful transactions as opposed to our successful ones.
> 
> Cheers
> 
> Sir O




Hi Sir O,

I was going to do a post covering my mistakes at end of year, but we can start now 

You were right about CAB, it hasn't moved since I bought it. Still, I don't time when a turnaround may happen, I buy when it is cheap enough. That's my strategy and I am sticking to it. Therefore, I do not think I've erred here.


PMP has been a mistake twice. Once when I bought it, and once when I sold it.  When I bought it, it was again my rules, so I should have either altered the rules and not have bought it in the first place.

The mistake to sell it was even worse though. But that point I was already seriously considering having separate rules for some "alternative" investments, but did not want it to appear that I've created those roles to justify a previous purchase of PMP. So, I've sold it even though it fits perfectly into my statistical investment criteria.

I should have just gone ahead and made a logical decision to change the rules no matter how it may appear. This has certainly highlighted one of the problems of posting my trading on a public domain. This is a mistake that's cost me over $500 at today's price.

As far as doing some more analysis on PMP - technical is certainly not my thing, but I am happy to add more detail on the fundamental side. I've put up a post on it previously, in case you've missed it, it's on page 7.

I look at it now as very much a statistical play - its price is/was low by almost any measure. As a group, companies at these prices should provide an above average return. But it does mean that you often close your eyes on the troubles of any individual company. Which is what I should have done with PMP.

Another thing, that made this mistake even worse: at the moment, almost all "cheap" companies are in mining services sector. As much as I like statistics and past history, I would prefer to spread my money across multiple industries. PMP was a good fit on that front as well. 

I am thinking of getting back in, but at $0.46 it is not as attractive as it was at $0.35.


----------



## KnowThePast

Ves said:


> No rambling at all, very informative in fact.    Investing is as much about knowing what can happen than it is what will happen and accounting for this in some way in your assessment of business and valuation risk.   For instance,  if there are too many potential torpedoes that could  (not necessarily will) destroy a lot of shareholder value in a business then I normally just wouldn't invest unless there were some exceptional circumstances.  Look at Forge for an example of known,  but unlikely risks, suddenly becoming reality.  My time horizon is as long as it takes before the business to stop producing acceptable returns (which in the ideal case is a long, long time)...   so I can't put such risks in the bottom draw unfortunately.
> 
> Still not sure about IRI,  definitely not at the current price,  but undecided at lower prices...




I agree there isn't too much room for error at the current price.

Years ago, I bought it for my super at $0.30. Definitely one of my better decisions.


----------



## Sir Osisofliver

KnowThePast said:


> Hi Sir O,
> 
> I was going to do a post covering my mistakes at end of year, but we can start now
> 
> You were right about CAB, it hasn't moved since I bought it. Still, I don't time when a turnaround may happen, I buy when it is cheap enough. That's my strategy and I am sticking to it. Therefore, I do not think I've erred here.




Well my view on CAB hasn't changed yet, we are yet to get a technical signal for entry...but it appears to be getting closer... So long as you are happy with your purchase that is the important thing...because risk is about expectations.



> PMP has been a mistake twice. Once when I bought it, and once when I sold it.  When I bought it, it was against my rules, so I should have either altered the rules and not have bought it in the first place.
> 
> The mistake to sell it was even worse though. But that point I was already seriously considering having separate rules for some "alternative" investments, but did not want it to appear that I've created those roles to justify a previous purchase of PMP. So, I've sold it even though it fits perfectly into my statistical investment criteria.
> 
> I should have just gone ahead and made a logical decision to change the rules no matter how it may appear. This has certainly highlighted one of the problems of posting my trading on a public domain. This is a mistake that's cost me over $500 at today's price.
> 
> As far as doing some more analysis on PMP - technical is certainly not my thing, but I am happy to add more detail on the fundamental side. I've put up a post on it previously, in case you've missed it, it's on page 7.
> 
> I look at it now as very much a statistical play - its price is/was low by almost any measure. As a group, companies at these prices should provide an above average return. But it does mean that you often close your eyes on the troubles of any individual company. Which is what I should have done with PMP.
> 
> Another thing, that made this mistake even worse: at the moment, almost all "cheap" companies are in mining services sector. As much as I like statistics and past history, I would prefer to spread my money across multiple industries. PMP was a good fit on that front as well.
> 
> I am thinking of getting back in, but at $0.46 it is not as attractive as it was at $0.35.




Ok I'm going to focus on the technical features... starting simple and building up.





OK so in the above chart (which is a weekly chart), I've identified for you several price features, plus your entry and exit from the position.

The smaller lines designated by 1 are the same size...a repeat of range. The beginning of that first line is the start of the new *trend*, which as you can see occurs *before* the technical signal is given and the breakout from the descending resistance line.

In terms of the price action, we see impulsive movements (either up or down) followed by consolidation (go sideways) or retracement (movement in the opposite direction). This is perfectly natural and *expected*. Two steps forward...one step back = upward trend...two steps back one step forward = downward trend.

Can you see that regarding your timing for entry and exit that (over a relatively small time period), you purchased towards the end of a small impulsive move? So the most likely thing (the highest probability) to happen will be either consolidation or retracement. 




It's clearer when we look at the price action via a daily chart (even though a daily has more chaos in the price action). So the stock is clearly currently in an upward trend, exhibited by Higher Highs and Higher Lows. Until the price action breaks the lower ascending line it remains in an upward trend.

I'm going to pause here for you to comment and ask questions.

Cheers

Sir O


----------



## KnowThePast

A new statistical investment - HNG, 1800 @ $0.555.

This one is cheap on all measures and for a good reason, its last profitable year was 2009.

The company owns a number of businesses, the majority of which retail specialist branded products. Owning a number of these provides an advantage of diversification within one business, but at the same time poor performance of one business may offset an excellent contribution from another.

The printing business has dragged down the overall performance for the last few years, but that is slowly reversing. Cash flows are positive and improving, significant restructuring/downsizing costs have already been incurred. Only a very modest profit is needed to justify the current market price. 

Having watched this company for many years, the one thing I found pleasing is that whenever they've sold one of their businesses, it was usually at a price at least equal to balance sheet value, usually greater. So I think there's value there and there's always a possibility of finding a private buyer.

The other thing I remember from years back is that this company was compared to Berkshire, in its methods of operation and returns generated. I've never really agreed with that comparison, but the practice of buying the majority in companies and leaving owners with a large stake to continue operating their business is something that I like, in theory.

Lately, most of my purchases were "statistical" ones, where I buy anything that's priced low enough. There's two reasons for that:
1. I find this type of investment practice more and more appealing the more I learn.
2. There's less opportunities I currently see in the market than a few months ago. Most of the ones that are there, are in mining service sector, and I feel I already have enough of those.


----------



## KnowThePast

An 8 months update.

January has been a good month for me, with XAO dropping, but my portfolio going up.

More and more, I find myself attracted to "statistical" investment. Which is basically investing on a formula with minimal research done to make sure there aren't any obvious no-nos.

While there's plenty of historical evidence that this approach tends to produce adequate returns, at least in part this is due to the fact that XAO has gone up since I started and there aren't many "good" companies left at attractive prices.

And so, my hope for the immediate future is that the market will continue falling and more opportunities emerge. While I am still not convinced that my in-depth research and picking of "good" companies provides any extra value over statistical approach, it feels safer, and is something one can always practice to get better at.


----------



## KnowThePast

Sir Osisofliver said:


> Well my view on CAB hasn't changed yet, we are yet to get a technical signal for entry...but it appears to be getting closer... So long as you are happy with your purchase that is the important thing...because risk is about expectations.
> 
> 
> 
> Ok I'm going to focus on the technical features... starting simple and building up.
> 
> 
> View attachment 56480
> 
> 
> OK so in the above chart (which is a weekly chart), I've identified for you several price features, plus your entry and exit from the position.
> 
> The smaller lines designated by 1 are the same size...a repeat of range. The beginning of that first line is the start of the new *trend*, which as you can see occurs *before* the technical signal is given and the breakout from the descending resistance line.
> 
> In terms of the price action, we see impulsive movements (either up or down) followed by consolidation (go sideways) or retracement (movement in the opposite direction). This is perfectly natural and *expected*. Two steps forward...one step back = upward trend...two steps back one step forward = downward trend.
> 
> Can you see that regarding your timing for entry and exit that (over a relatively small time period), you purchased towards the end of a small impulsive move? So the most likely thing (the highest probability) to happen will be either consolidation or retracement.
> 
> View attachment 56481
> 
> 
> It's clearer when we look at the price action via a daily chart (even though a daily has more chaos in the price action). So the stock is clearly currently in an upward trend, exhibited by Higher Highs and Higher Lows. Until the price action breaks the lower ascending line it remains in an upward trend.
> 
> I'm going to pause here for you to comment and ask questions.
> 
> Cheers
> 
> Sir O




Hi Sir O and thank you for the post.

I have to admit that I was often curious about combining fundamental and technical approach but has recently come to a conclusion that the two are mutually exclusive.

Too often, the two will give an exactly opposite conclusion and you have to pick one or the other. Picking a middle ground usually results in doing both approaches badly.

I really, really, really don't want to start a TA vs FA subject. I'll give a quick overview of my opinion below, but if someones wants to discuss this topic in greater detail, could they please start a separate thread 

For my own investments, I found it best to completely ignore any technical signals. My game is to buy companies that are substantially under-valued, and wait for that value to be realized, which usually takes a few years. Looking for proper time to enter or exit has never proven to be consistently correct for me, but has caused me to miss some great opportunities. My typical successful investment will return 100%+ over the next few years, missing out on it to get a few extra percent is just not worth it.

Another part of my game is that I expect a large number of investments to not work out. Around 20%-50% I would expect to lose me money. But there's no way to tell (in my opinion), which ones those will be until I hold them for a few years. And this is the biggest reason I don't use stop losses.

For strategies that have a higher than 50% expected success rate, simple maths tells us that averaging down (or up), will make a positive contribution. That is why I average down. And up. Sometimes.

I do sometimes venture into something different, something like FGE and IRI trades, but these are rare and out of character. I will certainly continue to put money into these when I see them, but I don't see them ever becoming my bread and butter.

PMP buy and sell were in accordance with above. I bought it according to my fundamental principles and sold it when I considered that I made a mistake in my fundamental principles. I deliberately ignored any technical signals when making those two decisions.


----------



## burrow

"My game is to buy companies that are substantially under-valued, and wait for that value to be realized, which usually takes a few years".

Hi KtP,

You may have discussed this before (if so, can you steer me to your post) but how do you establish 'value'?

Regards,

Tim.


----------



## robusta

Nice results KYP, it never fails to amaze me how many different approaches there is to value investing. Please keep it up even though there is not much input from me I always read your posts and excellent analysis with interest.


----------



## KnowThePast

robusta said:


> Nice results KYP, it never fails to amaze me how many different approaches there is to value investing. Please keep it up even though there is not much input from me I always read your posts and excellent analysis with interest.




Thanks Robusta!


----------



## Ves

Hey KTP,

What did you think of the CKL half-yearly reported released yesterday?

In all honesty,  looking back on my comments earlier in the thread, if I had have taken a position based on my analysis (I didn't) it hasn't shaped up as well as I would have expected.

The margins look like they are going the wrong way...  some of this is caused by temporary internal restructuring problems but it looks like they're still being squeezed by external market forces.  Perhaps we haven't reached the bottom of the cycle yet,  or their cost base isn't competitive enough to make the restructuring benefits stick to their bones  (as craft put it earlier in the thread).  Fairly big fall in underlying EBIT (excl. "one offs") whatever the cause!

Maybe jumping the gun,  but looks worse than we when looked at it previously,  and my interest in it is very low now.


----------



## Sir Osisofliver

Hi KTP - sorry for the delay in responding to you..life gets busy sometimes.



KnowThePast said:


> Hi Sir O and thank you for the post.
> 
> I have to admit that I was often curious about combining fundamental and technical approach but has recently come to a conclusion that the two are mutually exclusive.




Respectfully KTP we are going to disagree on that. I find Tech and Fund together to be essential, but as I have always said...use what works for *you*. If you find TA confuses your assessment..don't use it. I added the simple tech assessment for you to show you a different perspective than your own.



> Too often, the two will give an exactly opposite conclusion and you have to pick one or the other. Picking a middle ground usually results in doing both approaches badly.
> 
> I really, really, really don't want to start a TA vs FA subject. I'll give a quick overview of my opinion below, but if someones wants to discuss this topic in greater detail, could they please start a separate thread
> 
> For my own investments, I found it best to completely ignore any technical signals. My game is to buy companies that are substantially under-valued, and wait for that value to be realized, which usually takes a few years. Looking for proper time to enter or exit has never proven to be consistently correct for me, but has caused me to miss some great opportunities. My typical successful investment will return 100%+ over the next few years, missing out on it to get a few extra percent is just not worth it.
> 
> Another part of my game is that I expect a large number of investments to not work out. Around 20%-50% I would expect to lose me money. But there's no way to tell (in my opinion), which ones those will be until I hold them for a few years. And this is the biggest reason I don't use stop losses.
> 
> For strategies that have a higher than 50% expected success rate, simple maths tells us that averaging down (or up), will make a positive contribution. That is why I average down. And up. Sometimes.
> 
> I do sometimes venture into something different, something like FGE and IRI trades, but these are rare and out of character. I will certainly continue to put money into these when I see them, but I don't see them ever becoming my bread and butter.
> 
> PMP buy and sell were in accordance with above. I bought it according to my fundamental principles and sold it when I considered that I made a mistake in my fundamental principles. I deliberately ignored any technical signals when making those two decisions.




OK so long as you are satisfied that you have valid reasons for your actions its probably best not to dwell. 

Cheers

Sir O


----------



## KnowThePast

Apologies all for not replying to all the posts been travelling and working too much lately. There's two questions in particular about CKL and my valuation methods that I wanted to give a proper response to, which I will try to do on the weekend.

In the meantime, after getting off a Melbourne - London flight and having a 10 hour afternoon nap, I've bought MCP, 1540 @ $1.30.

McPherson’s is a company that sells housewares, personal care, household consumables and merchandising products. These are sold under a number of brands, main ones being: Manicare, Lady Jayne, Swisspers, Moosehead, Footcare, Euromaid, Wiltshire, Stanley Rogers and Multix.

For many years, the company achieved solid, but unspectacular performance. Like many others, it got a little too leveraged before GFC. Together with reduced consumer spending, the results have been impacted, culminating with a $50m write-down and $32m loss last year. 

Goodwill appears as a large and scary figure at first, and given that the return on capital is generally under 10%, there’s certainly plenty more write downs possible. But, for me the main thing is not their previous acquisition mistakes, but their ability to generate profits in the future and pay dividends. At the moment, they are on track to make ~$20m in profit, and a policy of 60% payout indicates a dividend yield of over 10%. Needless to say, the company is cheap on almost every metric.

It is interesting is that the company does not manufacture any of the products, it outsources it to China. So it is essentially a shell that buys brands, develops them and manages sales and distribution. Counter-intuitively, this make me feel safer with this investment. There is no competitive advantage to lose, the company is in an almost “commodity” business and generates returns a little above cost of capital due to its effective sales/distribution network and size. And therefore, I expect long term future returns to be largely in line with historical averages. It should also be noted that profits are boosted substantially due to effective use of debt.

What’s good is that the company invested hundreds of millions of dollars over the years into all the brands, yet I can now buy it on market for just $100m.


----------



## VSntchr

KnowThePast said:


> It is interesting is that the company does not manufacture any of the products, it outsources it to China. So it is essentially a shell that buys brands, develops them and manages sales and distribution. Counter-intuitively, this make me feel safer with this investment. There is *no competitive advantage to lose*, the company is in an almost “commodity” business and generates returns a little above cost of capital due to its *effective sales/distribution network and size*. And therefore, I expect long term future returns to be largely in line with historical averages. It should also be noted that profits are boosted substantially due to effective use of debt.
> 
> What’s good is that the company invested hundreds of millions of dollars over the years into all the brands, yet I can now buy it on market for just $100m.




I think an effective distribution network is a pretty decent competitive advantage to have..!


----------



## Valued

The one thing that turned me to technical analysis is that good traders make better returns year on year than Warren Buffet, they just didn't start with the same amount of money. Buffet had made 19% year on year and he is world class. World class traders can get higher returns than 19% per year. Even if they could only match Buffet's performance in a bull market, they would have shorted through the big bear markets buffet held through, giving further profits (again if they were world class - bad traders will lose money like bad investors). Warren Buffet got free leverage from his insurance companies so he was able to use a lot of capital for not much risk. He was always leveraged and could do so without the carrying costs of derivatives or other interest expenses.


----------



## robusta

Interesting purchase, I looked at MCP a while back. The thing that bothered me was the push by Woolworths and Coles to home brands. These businesses also have a very effective distribution network and seem to be trying to cut agents like MCP out by going direct.


----------



## KnowThePast

burrow said:


> "My game is to buy companies that are substantially under-valued, and wait for that value to be realized, which usually takes a few years".
> 
> Hi KtP,
> 
> You may have discussed this before (if so, can you steer me to your post) but how do you establish 'value'?
> 
> Regards,
> 
> Tim.




Hi Tim,

I thought no one would ever ask 

The short answer is that I do not provide a single valuation figure for any of the stocks that I follow. 

What I try and do is to imagine all kinds of likely scenarios that may happen to a business in the future and what the rough valuation would be then. I can then look at a range of different possible valuations and decide whether the odds of profitable outcomes are greater than those of poor ones. 

The calculation of value for any specific outcome is different often as well. I use DCF, PE, PSR, PB, EV, and all kinds of other valuation techniques/metrics. Depends on the company and scenario involved. I will usually use multiple valuation methods for a single stock. I have to stress this point - I don't do this to get more precise, but the exact opposite. I want to see a likely range of outcomes, not a nice, easy to use figure. As such, I don't have a single figure to use for buy or sell. 

Here's where it gets tricky. Once I work out my valuations for stocks, I need to pick which one to invest in. This is very important - it's not a yes/no decision, it is always a comparison. Without a single valuation figure against each stock, it is difficult to assess which one is a better decision. I usually end up starting from the top of my candidates list and comparing them one by one. As I go down the list, I just compare each new prospect with what I worked out my top one to be at that point.

More and more, however, I find myself doing less valuations and just buying the cheapest companies on the list (by PE, PSR, PB, EV/EBIT and some others). It is my belief that greatest mispricings occur on extremes - the cheapest and most expensive stocks. By buying the cheapest, one should then produce a better than average return, although a high error rate may be expected.

When I buy stocks from the "cheapeset" list, I try to pick one that I think has best prospects, but I am still doubtful that my meddling adds any value. I could well be better off simply buying 20-30 cheapest stocks.


----------



## KnowThePast

Valued said:


> The one thing that turned me to technical analysis is that good traders make better returns year on year than Warren Buffet, they just didn't start with the same amount of money. Buffet had made 19% year on year and he is world class. World class traders can get higher returns than 19% per year. Even if they could only match Buffet's performance in a bull market, they would have shorted through the big bear markets buffet held through, giving further profits (again if they were world class - bad traders will lose money like bad investors). Warren Buffet got free leverage from his insurance companies so he was able to use a lot of capital for not much risk. He was always leveraged and could do so without the carrying costs of derivatives or other interest expenses.




I looked at it differently. Most long term/fundamental investors that I know, make money over the years. They may underperform the index, but they are profitable nevertheless. Whereas the majority of "traders" that I know either lose money or blow up every now and then.

I am not arguing that returns are potentially much better with technical analysis and that there are many people who are successful at it, but I knew that I am going to be doing this for many years. I want it to be stress free, consistent, and I really don't want to be starting again at any point in the future, if I can help it.

19% for 60 years is a hell of a lot of money, even without the use of leverage. $10k becomes $340m at that rate.


----------



## KnowThePast

Ves said:


> Hey KTP,
> 
> What did you think of the CKL half-yearly reported released yesterday?
> 
> In all honesty,  looking back on my comments earlier in the thread, if I had have taken a position based on my analysis (I didn't) it hasn't shaped up as well as I would have expected.
> 
> The margins look like they are going the wrong way...  some of this is caused by temporary internal restructuring problems but it looks like they're still being squeezed by external market forces.  Perhaps we haven't reached the bottom of the cycle yet,  or their cost base isn't competitive enough to make the restructuring benefits stick to their bones  (as craft put it earlier in the thread).  Fairly big fall in underlying EBIT (excl. "one offs") whatever the cause!
> 
> Maybe jumping the gun,  but looks worse than we when looked at it previously,  and my interest in it is very low now.




Hi Ves,

I didn't think it was that bad. Certainly worse than expected, but well within my possible projections. Sure, if this half is the beginning of a long term trend, that is not good. But I do not see anything that wouldn't fit into normal ups and downs. 

Underlying result is expected to be roughly in line with previous year, so a stronger second half is expected.

I wrote previously that the acquisition that they made was one of the few that I liked. I still think it was a great investment. Problems with integration after acquisitions are very common and if a sub par year (or two) happen as a result of it, I still think they paid a good price for it.

So, overall, while I have revised my valuations slightly down, I am still very happy to hold at the current price. I was also thinking of buying more when it dropped to ~$0.73.


----------



## KnowThePast

VSntchr said:


> I think an effective distribution network is a pretty decent competitive advantage to have..!




Hi VSntchr,

I hope you are right, but I think in this case, it is different. 

Effective distribution network is a great advantage when it provides the kind of saving that makes it difficult for others to compete. I do not think it is of that size, nor do I think the effect on price is such for their type of products.

Furthermore, one of the bigger threats the company faces at the moment is branded products in supermarkets, which themselves have a pretty good distribution network.


----------



## KnowThePast

robusta said:


> Interesting purchase, I looked at MCP a while back. The thing that bothered me was the push by Woolworths and Coles to home brands. These businesses also have a very effective distribution network and seem to be trying to cut agents like MCP out by going direct.




Hi Robusta,

That is certainly a very real threat, but I do not think it is likely to be too serious. I also think that the current price has it factored in.

I live in UK at the moment, where "home brands" are a lot more developed. And yet, there's still plenty of room for other suppliers. Australia is usually a few years behind in these things, and if a few years from now, the situation in Australia will be similar to that in UK/Europe, I think MCP will be just fine.

There's still plenty of suppliers fighting to get into supermarkets, many do and many are very succesful. This is not the end 

On a more philosophical note, it would seem that it would be so much better if everything was eventually rolled into a single, massive business, that would do everything from supermarkets to mining services. Benefits of scale would be unbeatable. But this doesn't happen, efficiency instead is lost as business grows and other upstarts and specialised firms fill the space. 

I am not trying to wave this off, as I said, it is a very real threat, and could have a severe impact. But at the current price, I like my chances.


----------



## KnowThePast

9 month update:




Last month, I said that I had a good month, with my portfolio increasing in value while ASX was dropping. The punishment for that boasting was swift and brutal. I've lost 8.35% in February, underperforming XAO by 12.39%.

Strange thing was that all the half year results were roughly what was expected, no major surprises and none that made me question my decisions. A quick summary of my holdings:

CAB - after going nowhere for 8 months, they release a half year report, which shows the exact result everyone expected them to have. New regulations don't start until now, so the last half was business as usual. For some reason, however, the "market" liked those news. I certainly agree that the company is worth a lot more, but I saw no reason for a revaluation based on latest figures.

SDI - another strange one. It's been hovering around 50 cents for some time, then silver and AUD started to move in the right direction for them. In anticipation of greater profits, price kept going up, at one point reaching $0.77. And then the news come - anticipated greater profits have materialized, and they were at the upper range of my expectations. On that news, the price drops to $0.55 again. An expectation of greater profit is worth more than confirmed greater profit in this case. I will continue to hold at $0.55 and at $0.77. The company is now generating plenty of free cash, major spend on R & D is back, as are interim dividends. Improved sales in Brazil and a new, cheaper offshore facility makes me think they'll be plenty more good news in years to come.

LYL - half year result was a drastic reduction, along the lines they've been predicting half a year ago. The market, and me, expected the possibility of new big contracts that could improve the situation, but that hasn't happened. 

NWH - profit halved for the half year, which I didn't see as bad news. In my pricing, I thought NWH offered value even if profit dropped 67% and stayed there for years. I remain a happy holder, even though this was one of my bigger underperformers in February.

CKL - this is the only one that came below my expectations during the reporting season. I've wrote a post about it before, so I won't write further here.

WTP - an excellent half year report, bright outlook and a massive (and growing) cash war chest failed to move the price. 

BOL - things are going as I expect so far. Making a small profit during very difficult times, good cash flow is allowing them to pay down debt. One of my cheapest holdings by almost any measure, any kind of turnaround, no matter how small can potentially greatly increase the price. At these prices, I can wait for many years to see if that will happen.

BYL - an outstanding half year result, compared to others in this sector. Nevertheless, this hasn't contributed to my results in Feb.

CKF - announced some difficulties with Sizzler, causing the price to drop more than 10%. My valuation is based mainly on their KFC ownership, Sizzler has always been a pain. 

DCG - pretty much my only holding in Feb to increase in price, a good half year report. No fundamental changes.

HNG - no news, everything is going as expected. Which is badly. 

MCP - Down 6% in Feb, no major fundamental changes.

At the moment, 50% of my portfolio is fully, or partially exposed to mining investment. I don't expect to know whether I am right or wrong until the next cyclical upturn, if it ever happens. Until then, I will patiently hold on to any survivors that I have.


----------



## galumay

Interesting update KMP, I noticed the same thing in my portfolio, I also hold CAB and saw the response to the half yearly report, meanwhile MOC also reported a very good half - and fell about as hard as CAB went up!! I guess it just confirms that markets are irrational!

NWH I have done well on because I bought so cheap, but they are another one that is very volatile, I still think they are one of the best in the sector.


----------



## KnowThePast

Bought CDA, 1677 @ $0.74.

Plenty has been written about them recently, I won’t be able to add much.

The company manufactures and sells 3 things:
Metal Detectors (Sales: 68%, profit: $78.6m, 90%)
Communications equipment (Sales: 24%, profit: $8.9m, 10.4%)
Mining equipment (Sales: 6%, loss of $2.4m)

So this business is essentially about metal detectors. And sales of those are linked to gold price. And much like mining services stock, now is the time that everyone is very pessimistic about this business. They may be right, but I like the odds. 

At a current market cap of $130m, if metal detectors business was completely shut down, and mining equipment business was either shut down or brought to break even, the company would be trading at a PE of 14.4. That’s just on its communications business, which brought in only 10% of profits in 2013. 

Yes, communications equipment has its own problems, revenue falling the last few years is one of them. But I like the odds at these prices.

I do expect metal detector business to get better again at some point, and I don’t expect their radios and other equipment to become obsolete overnight.

My decision is also made easier by the fact that number wise, this company is cheap enough to buy into my “statistical” portfolio, where I buy based on numbers, without analysing the business too much.


----------



## galumay

LOL! Thats another of my holdings KTP, I added to them recently due to my belief the market has mis-priced them currently. Its the first time I have averaged down into a share.


----------



## skc

KnowThePast said:


> Bought CDA, 1677 @ $0.74.
> 
> Plenty has been written about them recently, I won’t be able to add much.
> 
> The company manufactures and sells 3 things:
> Metal Detectors (Sales: 68%, profit: $78.6m, 90%)
> Communications equipment (Sales: 24%, profit: $8.9m, 10.4%)
> Mining equipment (Sales: 6%, loss of $2.4m)




These numbers look wrong. Are these revenue instead of profit?


----------



## KnowThePast

skc said:


> These numbers look wrong. Are these revenue instead of profit?




Thanks skc, 

Should have checked the totals before posting.

These are segment results before "Corporate expenses" and tax. Assuming equal spread of those costs:
Communications: $4.743m
Metal Detectors: $41.957m

A PE of 24, should there be death of metal detectors business.


----------



## KnowThePast

galumay said:


> LOL! Thats another of my holdings KTP, I added to them recently due to my belief the market has mis-priced them currently. Its the first time I have averaged down into a share.




Perhaps we should just share our shopping list to save time


----------



## skc

KnowThePast said:


> Thanks skc,
> 
> Should have checked the totals before posting.
> 
> These are segment results before "Corporate expenses" and tax. Assuming equal spread of those costs:
> Communications: $4.743m
> Metal Detectors: $41.957m
> 
> A PE of 24, should there be death of metal detectors business.




But these are FY13 full year numbers?! The corresponding numbers from H1 FY14

Communications: $5.442m
Metal detection $9.155m
Unallocated expense $9.284m

Split unallocated expense equally and communications made something like $0.8m. 

Management thinks it's too hard to provide guidance for the full year FY14. 

I am not saying whether or not CDA will turn things around... I think CDA has demonstrated it's operational leverage and at this level it may be worth a calculated position. I just think the logic you've presented may not be correct. 

What would be interest is to actually find out the reason behind the large spike in FY13. High gold price may be an explanation but gold had already peaked back in Jun 2011. May be there were multiple bonaza / big nugget finds which attracted heaps of prospecters (much like a multi million jackpot on the lotto attract a huge amount of casual players).


----------



## KnowThePast

skc said:


> But these are FY13 full year numbers?! The corresponding numbers from H1 FY14
> 
> Communications: $5.442m
> Metal detection $9.155m
> Unallocated expense $9.284m
> 
> Split unallocated expense equally and communications made something like $0.8m.
> 
> Management thinks it's too hard to provide guidance for the full year FY14.
> 
> I am not saying whether or not CDA will turn things around... I think CDA has demonstrated it's operational leverage and at this level it may be worth a calculated position. I just think the logic you've presented may not be correct.
> 
> What would be interest is to actually find out the reason behind the large spike in FY13. High gold price may be an explanation but gold had already peaked back in Jun 2011. May be there were multiple bonaza / big nugget finds which attracted heaps of prospecters (much like a multi million jackpot on the lotto attract a huge amount of casual players).




Hi skc,

Yes, these are 2013 numbers, which I've use quite deliberately. The big spike that year was due to greater metal detector sales. I discount those greatly in my valuation, whereas the other divisions have not jumped during those bonanza years from memory. 



skc said:


> I am not saying whether or not CDA will turn things around...




I am. I've just written a post in craft's valuation thread exactly on this topic - most company's earnings, especially those without competitive advantage tend to revert to mean. My investment in CDA is a bet that current earnings are not a new mean/baseline and that those will improve in the long run. They don't need to be back to the 2013 high, even a moderate improvement in current earnings will make this worthwhile. 

While I am taking what could be called a statistical gamble, there are also some hard facts that will help current earnings. Last year company made an unfortunate decision to expand capacity and inventory levels, which they now have to reverse. They've already made $10m/year savings, which will flow through to profit, should things stay as they are.



skc said:


> Communications: $5.442m
> Metal detection $9.155m
> Unallocated expense $9.284m
> 
> Split unallocated expense equally and communications made something like $0.8m.




Not quite that bad, by equally I didn't mean 50/50 but rather as a relative percentage of profit (2013), which would allocate the majority of those expenses to Metal Detection. At the same ratio, Communications would be in profit of $2.9m.



skc said:


> What would be interest is to actually find out the reason behind the large spike in FY13.




I imagine there would be some lag between gold price movement, some people using devices successfully and masses jumping in. But that's just my guess.


There's lots of things that look potentiall scary at the moment about this business. The one which I think is most likely to materialize is a capital raising to pay off debt should earnings not recover soon enough. I am bracing myself for the need of extra funds to avoid dilution, but I think the current price justifies the risks.

Thanks for your posts sks, discussing things helps me greatly to focus and get it clear in my own head.

And to correct stupid errors.


----------



## KnowThePast

A monthly update:

March has been another bad month for me, and my portfolio is now performing worse than XAO, for the first time:


----------



## robusta

Had to happen sooner or later KTP. Frankly I'm surprised and impressed at how well your portfolio has done in the short term considering your strategy of looking for deep value in the unloved and hated corners of the market. Looking to the long term the businesses you hold seem to have good assets, cash flow and dividends.


----------



## KnowThePast

robusta said:


> Had to happen sooner or later KTP. Frankly I'm surprised and impressed at how well your portfolio has done in the short term considering your strategy of looking for deep value in the unloved and hated corners of the market. Looking to the long term the businesses you hold seem to have good assets, cash flow and dividends.




Thanks robusta,

Yes, at the moment I am not concerned with portfolio's performance. Most value strategies take 3 years on average to show result, until then, I would expect average performance roughly in line with the index, with fluctuations. 

I have to admit, though, that in the last 2 months, I had to on occasion remind myself of the difference between investment process and investment outcome. 

I am reading "Value Investing" by James Montier, at the moment. While I do not see anything yet that hasn't been written by others, it is a great summary of studies and conclusions of value-based "automatic" strategies. It does do a fantastic job, however, of hamming in the point about investment process, and how it should not be judged by short term outcomes.


----------



## robusta

KnowThePast said:


> Thanks robusta,
> 
> Yes, at the moment I am not concerned with portfolio's performance. Most value strategies take 3 years on average to show result, until then, I would expect average performance roughly in line with the index, with fluctuations.




Those fluctuations from the index can be rather large and last a long time. While the market is efficient in pricing assets in the long term there can be lengthy periods with sectors and businesses being under or over valued. 



KnowThePast said:


> I have to admit, though, that in the last 2 months, I had to on occasion remind myself of the difference between investment process and investment outcome.
> 
> I am reading "Value Investing" by James Montier, at the moment. While I do not see anything yet that hasn't been written by others, it is a great summary of studies and conclusions of value-based "automatic" strategies. It does do a fantastic job, however, of hamming in the point about investment process, and how it should not be judged by short term outcomes.




Thank you I will check that book out.


----------



## qldfrog

Hi I notice you still have FGE listed as a profit:
you probably need to be honest with yourself and  put the lot at a straight loss.
Not pleasant but at best you will get a few dollars after a class action in 2 years time.
The money is gone
I believe in cases like that (has happened to me in the past) it is better not to hide the figure, even if the miss/lady of the house is not impressed
OOPS My mistake
you sold!!!
great
nice to remember that with the timing on that one, you could have wiped out your whole profit in one go!!


----------



## KnowThePast

qldfrog said:


> Hi I notice you still have FGE listed as a profit:
> you probably need to be honest with yourself and  put the lot at a straight loss.
> Not pleasant but at best you will get a few dollars after a class action in 2 years time.
> The money is gone
> I believe in cases like that (has happened to me in the past) it is better not to hide the figure, even if the miss/lady of the house is not impressed
> OOPS My mistake
> you sold!!!
> great
> nice to remember that with the timing on that one, you could have wiped out your whole profit in one go!!




Hi qldfrog,

Not a problem 

I am proud to say that at the time of making that day trade, I wrote that even at those ridiculously low prices, it was too risky to hold on to. I played what I thought was an almost inevitable bounce, and I am very happy to have been proven right on that one.


----------



## KnowThePast

Bought KKT, 11891 @ $0.11.

Konekt Limited is a provider of health and safety services. It has 3 main services: return to work injury management services, injury prevention service, and safety consulting service. 

It is such an exciting business, that I find there’s little I can write about it. It’s the vibe of it that I like.

Those that follow my posts, of course, know the real reason I buy this – it is cheap on almost any measure. Since I started this thread, most of my investments have been of these kind, but I would usually try to pick what I thought was the most sensible one from my screens, even if it wasn’t the cheapest. 

I am now mostly going to run a valuation screen of mine, and just by the cheapest. There’s 3 reasons I am favouring this approach more and more now:
1.	It reduces human judgement/preference risk. I’d like to think that my attempts at picking best of the worst produce results. But, in practice, I don’t see much evidence that they’ve added any extra value over the years.
2.	My portfolio is diversified to a point where I feel more comfortable with this approach.
3.	Almost 50% of my portfolio is currently exposed to mining, although some companies only partially. I am trying to bring this ratio down, it’s a little too much exposure to one sector for my liking. And, looking at my screens, there’s now only a few non-mining companies that meet my valuation targets. None of them have a good story. While KKT is currently the cheapest on my list, this is one of the few reasons where I may still override with a human judgement. It will possibly lower returns, but reduce the impact of some of the black swan events. 

When I analyse my performance at end of year, KKT will be listed as a mistake. Had I bought it from the beginning, as my screens told me to, I would have been $5,000+ better off.

I’ve recently mentioned the difference between investment process and investment outcome. $5,000 opportunity cost is, of course, the outcome. But there was a very real error in investment process. It was always one of the cheapest on my screens, but I passed it up in favour of more expensive prospects that I felt were “safer”. In effect, I was doing the average of two perfectly good approaches, whereas I needed to pick one. Either I had to invest businesses with competitive advantage and growing intrinsic value, or the cheapest. Too often, I tried to pick companies that are a little bit of both. 

As a result, I know have a few stocks in my portfolio that I still think make good investment sense, but don’t fit into my current investment process. This creates a mess in my head, because I bought them for different reasons, and my sell criteria feels like it should be different. I am still undecided whether I need to take any actions now. But I know which ones will be first to go when I am short of cash.


----------



## KnowThePast

A while ago, when I purchased PMP, a topic of Altman Z score came up (thanks oddson!). I’ve applied it as it was relevant to the purchase of PMP at the time, but didn’t get around to investigating it further in a more general way. Until now.

Altman Z score is a score that is derived of numerous financial measure to establish a risk of bankruptcy, typically within the next 2 years. Ratio greater than 3 means virtually no chance of bankruptcy, while value of less than 1.8 indicates distress. There doesn’t seem to be much debate about it, it has been shown to work reasonably well over many years. It’s been shown that chance of bankruptcy increases in inverse proportion to the Alt Z score.

What is of interest to me, is whether this ratio is actually helpful in making investment decisions. Sure, at first it seems obvious – companies with higher score are highly unlikely to go under and are therefore a better investment. You wouldn’t base your investment on just this score alone, obviously, but it could be a useful screen.

As I’ve mentioned before, I wrote software that performs backtests among other things. So, let’s run a few tests, to see how well the score performs. 

A few regular disclaimers:
-	I run backtests on a group of ~300 companies manually selected by me. They cover most of stocks that are not resource specs, bio specs, etc.
-	There’s some survivorship bias.
-	It’s hasn’t been tested independently, could all be wrong for all I know.
-	This is not advice!

First step is to establish a benchmark. Simply investing in all companies in my list for the last 10 years would generate a return without dividends of 131.64%.

Let’s now see if buying companies within specific Alt Z ranges can give us a better result. Rules are:
-	4% of capital per trade
-	Sell all after a year and buy matching prospects again.
-	4% cash rate for unused capital.
-	$100,000 capital, $30 brokerage.
-	Companies will be ordered by Alt Z score, ascending. 




The results are certainly surprising – it is the distressed companies that provide  a greater return. As well as a better hit rate and a smaller number of big losers. The smaller number of big losers is partially explained by only holding companies for 1 year, but there’s still a very consistent correlation between lower score and fewer big losers. 

It is interesting that investing in any range of scores above distressed produces roughly the same outcome in all ranges. It is only once it gets into distressed zone that there are statistically significant differences.

Most people, at this point, will probably say that Alt Z score was never meant to be used in isolation. It is rather an addition measure to assess a group of companies. Similar to Piotrovski F score, the theory is that first you select a group of cheap companies, and then you use this ratio to filter out the better prospects. 

So, let’s do just that. I’ve written previously and Price/Book strategy. Let’s do it again here, and test how it works with different Alt Z scores.

Rules:
-	Buy if Price/Book < 1.
-	Sell after a year and buy matching prospects again.
-	4% cash rate for unused capital
-	$100,000 capital, $30 brokerage.
-	Companies will be ordered by Price/Book, ascending. 




What jumps out immediately is that the Alt Z score correctly predicts the number of bad losers in this portfolio. The lower the score the more losers.

On the total return front, however, picture is not as clear. Buying in any range of scores produces a lower return than one achieved by simply investing in all cheap stocks. A very high Alt Z score result shows promise, but with only 51 trades over 10 years, there isn’t enough data. Only 22% of capital found a place with that criteria, so the return on the total $100,000 portfolio was only 84%.

It is possible that cheap stock are already priced for a high chance of bankruptcy and doing any further analysis of this is futile. I won’t draw any further conclusions from this because I have none. Alt Z is one of the ratios I often look at when I evaluate companies, but it’s never really been something that I would factor in. I still don’t see anything that convinces me that I should pay more attention to it.

I hope this has been of interest.

KTP.


----------



## KnowThePast

Monthly update:


----------



## Ves

Thanks for the update,   I take it that you plan to give some more detailed thoughts on your performance and any reservations once the portfolio hits its anniversary date in June?   

Obviously a year is probably not long enough,   no where near it,  with the extended feedback loop of long-term investing,  but still useful to reflect and ponder.

Still watching with interest,  but haven't had much to add.   I see you have have 18,000 thread views now too,  so obviously has a few followers.


----------



## TPI

What broker do you use? 

Would cheaper brokerage help?

4 trades cost you $59.90 each, which is more than your annualised profit to date.

And is your annualised return inclusive of dividends?

Is this an IRR (internal rate of return) calculation?


----------



## KnowThePast

Ves said:


> Thanks for the update,   I take it that you plan to give some more detailed thoughts on your performance and any reservations once the portfolio hits its anniversary date in June?
> 
> Obviously a year is probably not long enough,   no where near it,  with the extended feedback loop of long-term investing,  but still useful to reflect and ponder.
> 
> Still watching with interest,  but haven't had much to add.   I see you have have 18,000 thread views now too,  so obviously has a few followers.




Hi Ves,

Yes, certainly planning a post of yearly reflections in July. Technically it will be 13 months, but since I've had mininal funds  invested in the first months, it will make no significant difference. Synching it with financial end of year will make it easier in the future.

My current results sucks. Things I note at the moment (good and bad):
- companies that I tried to pick purely on numbers performed substantially better so far than ones where I've tried to analyze long term potential. $726.45 vs ($714.92). Even better if I exclude the most recent purchases and didn't have a brain meltdown with PMP.
- I simulate a few different value strategies along side with my live investing. Most are underperforming at the moment. 
- My rule of investing once a months has been a huge drag on my portfolio. Had I invested my funds immediately without this limitation, I would have been well above the index. Absolutely no regrets here, it'd be a completely opposite story in a falling market.
- It is surprising that there has been absolutely no significant fundamental changes in any of my companies. And so, I find it easy to continue holding until something happens, regardless of current price.
- A lot value investing literature mentions 3+ years as a typical holding period. So yes, it is way too early to start making any conclusions from results.

18,000 views is nice, if only I had a dollar for each. And I still have a long way to go to catch robusta.



TPI said:


> What broker do you use?
> 
> Would cheaper brokerage help?
> 
> 4 trades cost you $59.90 each, which is more than your annualised profit to date.
> 
> And is your annualised return inclusive of dividends?
> 
> Is this an IRR (internal rate of return) calculation?




I use commsec @ $29.95/trade. $59.90 is for stocks that I sold, so there's brokerage x 2.

Return is inclusive of dividends. Calculation is just a simple XIRR function in Excel. Once I commit all my funds, I do not plan to keep adding to it, so from then on the calclation of return will be as simple as Profit/Portfolio at start of year.


----------



## VSntchr

KnowThePast said:


> I use commsec @ $29.95/trade. $59.90 is for stocks that I sold, so there's brokerage x 2.




Create a CDIA account with CBA/CommSec and fund your trades from there...that should trim the broker down to $20 a side...


----------



## TPI

KnowThePast said:


> I use commsec @ $29.95/trade. $59.90 is for stocks that I sold, so there's brokerage x 2.
> 
> Return is inclusive of dividends. Calculation is just a simple XIRR function in Excel. Once I commit all my funds, I do not plan to keep adding to it, so from then on the calclation of return will be as simple as Profit/Portfolio at start of year.




Ok fair enough.

If you are measuring your return inclusive of dividends, then shouldn't you be benchmarking your returns against the All Ords Accumulation Index?

On Apr 25, the All Ords Accumulation Index return was 19.57% for the financial year to date...


----------



## galumay

TPI said:


> Ok fair enough.
> 
> If you are measuring your return inclusive of dividends, then shouldn't you be benchmarking your returns against the All Ords Accumulation Index?
> 
> On Apr 25, the All Ords Accumulation Index return was 19.57% for the financial year to date...




Where can you see that for the financial year to date? I use http://au.spindices.com/indices/equity/all-ordinaries but it only shows 1 year annualized returns, which shows accumulation index having increased 10.43%

EDIT - The reason the return was so high for financial year to date is because of the very sharp drop in  the market in june 2013, and shows the danger of comparing to indicies performance over the short term, its a pretty meaningless comparison unless you went from zero to fully invested on 30th June 2013.

It shows the danger of using a single matrix to measure your portfolio performance - and in the case of us long term fundamental investors its probably best avoided until you have been fully invested for a number of years and that sort of comparison becomes more meaningful.

Its also perhaps a function of confusing price and value.


----------



## McLovin

galumay said:


> Where can you see that for the financial year to date?




It's in Iress, XAOAI.

The RBA publish XJOAI in their monthly F7 report.

http://www.rba.gov.au/statistics/tables/pdf/f07.pdf?accessed=2014-05-01-10-05-57


----------



## galumay

McLovin said:


> It's in Iress, XAOAI.
> 
> The RBA publish XJOAI in their monthly F7 report.
> 
> http://www.rba.gov.au/statistics/tables/pdf/f07.pdf?accessed=2014-05-01-10-05-57




Thanks mate, i dont have an Iress account, but i guess i could calculate from the RBA report, also its ASX200 but i suppose that would be near enough to All Ords.


----------



## Ves

http://www.afr.com/share_tables/

You need to select the dates you want by week  and then find the Excel / CSV file for Weekly Roundup - Australian Indices.

All of the major indices are shown.   If you scroll to the right it also shows the accumulation index for each.

I checked and confirm that the XJO figures for the ASX 200 match to the RBA reports.


----------



## TPI

galumay said:


> Where can you see that for the financial year to date? I use http://au.spindices.com/indices/equity/all-ordinaries but it only shows 1 year annualized returns, which shows accumulation index having increased 10.43%




It is hard to find, but I get it from Colin Nicholson's website at www.bwts.com.au, he includes it in his weekly portfolio journals.

This index value was 38270.22 at 30/6/13.

On 25/4/14 it was 45760.237, ie a 19.57% increase.

You can get the current value from www.au.spindices.com/indices/equity/all-ordinaries - click on "Fact Sheet", then you will see the current accumulation index value (45389.48) under "Total Returns". 

The year-to-date return % figures are not for the financial year-to-date though, but you can work that out using the 38270.22 figure I quoted above.

Of course such comparisons are better made over a number of years, but it is interesting to compare one's progress relative to a benchmark in the short-term.

And make sure you are using the right benchmark in the first place. 

An under-performance of 18.97% maybe worth looking into just to make sure your underlying strategy and selection approach is not faulty.


----------



## galumay

TPI said:


> Of course such comparisons are better made over a number of years, but it is interesting to compare one's progress relative to a benchmark in the short-term.
> 
> And make sure you are using the right benchmark in the first place.
> 
> An under-performance of 18.97% maybe worth looking into just to make sure your underlying strategy and selection approach is not faulty.




i think that perfectly illustrates why its actually not very helpful to compare, in this case the "under-performance of 18.97%" is totally irrelevant unless you happened to become fully invested on exactly that week at the end of June when the market hit its low point. Otherwist the distortion is just too great to be meaningful, the fact that the % for the last 12 months (ie April 2013 - 2014) is about half the % for the financial year shows the danger of measuring your performance against an index over the short term.


----------



## TPI

TPI said:


> And make sure you are using the right benchmark in the first place.




Ie. whether it is the All Ords, S&P/ASX200, S&P/ASX300 or some other index, and with or without dividends included.


----------



## KnowThePast

VSntchr said:


> Create a CDIA account with CBA/CommSec and fund your trades from there...that should trim the broker down to $20 a side...




Thanks VSntchr. Not available for existing customers, only new ones signing up 

I'll call them and threaten to leave. Or beg.



TPI said:


> Ok fair enough.
> 
> If you are measuring your return inclusive of dividends, then shouldn't you be benchmarking your returns against the All Ords Accumulation Index?
> 
> On Apr 25, the All Ords Accumulation Index return was 19.57% for the financial year to date...




Return includes dividends.

You are absolutely right, and I used to measure against that until my free provider of that data stopped being free. 



Ves said:


> http://www.afr.com/share_tables/
> 
> You need to select the dates you want by week  and then find the Excel / CSV file for Weekly Roundup - Australian Indices.
> 
> All of the major indices are shown.   If you scroll to the right it also shows the accumulation index for each.
> 
> I checked and confirm that the XJO figures for the ASX 200 match to the RBA reports.




Thanks Ves!

I spent a lot of time trying to find something that reports it on a daily basis, finally got it. 

I'll start using it again for my updates.


----------



## KnowThePast

Sold CKL, 2400 @ 0.65 for a loss of $444.13 (-21.39%). 

I've been thinking about selling it for some time the trigger was the latest profit downgrade.

Things haven't worked out as I expected them too. While there are perfectly good reasons why the company may bounce back up in the near future, usually, bad news come in bunches. With my original investment reasons gone, there's no reason for me to continue holding on.

Numbers wise, it is not too far off from being in my statistical purchases category, so if it drops further, I will quite possibly buy it again.


----------



## KnowThePast

Bought SSM, 6350 @ $0.201

Another less than stellar company bought at a very cheap price.


----------



## KnowThePast

Bought ICS, 30976 @ $0.041

Something different this time. A tiny growth company in early stages. 

I like their business model, I like their seemingly good development capabilities that deliver things on time and budget, despite what I imagine would be a fairly complicated environment.

This is not the main reason for me buying in to this one. When I research new companies, I download the last 10 years of reports and I read through them in chronological order. Where possible, I try not to look up anything about the current state of the company. As I read through the reports, I take notes and make guesses of what is likely to happen in years to come. Occasionally, I get a feeling about a company, that it is something "special". I am often wrong, but it was usually these kind of feel good companies that did very well. 

The company is tiny, with a market cap of $9m, which I like, statistically speaking. Valuation on current financials at these prices is not very useful. It will either grow or not, with very little downside protection if it doesn't. So this is very much a punt for me.


----------



## VSntchr

I like this one. I don't think the risk of not growing is as much of a punt at your post alludes to. The nature of this business is that the current client base is somewhat sticky. Management pays a good div as they are not a rapidly expanding business (and I think this is also to please those with large stakes, one of whom has been selling out in big volume).
But they are at a nice point where most incremental sales are falling to the bottom line resulting in some decent margin expansion - so not very much revenue growth is needed to keep growing profits. 

I don't think this one is going to shoot the lights out, but I think the business is much better than many listed <5c counterparts


----------



## odds-on

Hi KTP,

Thank you for posting your test results of the Altman Z score. It seems the more distressed the business is the more likely there will be a mispricing by the market, which does makes sense.  Your comparison test using the Price to Book ratio highlights to me that I need to be selective about how much weight I should apply to certain factors like the Altman Z score in my investment process. This thread (and experience) is teaching me that I need to find a realistic  investment process for my IQ, temperament and my current personal commitments (a growing young family). Focus on my investment process – thank you.

IMO, this blog post is excellent and worth reading when thinking about investing strategy and process - http://guythomas.org.uk/blog/?e=27. When I look at my performance over the last few years, I cannot help but think the extract below is the way to go for me.

_“Small bets on large discrepancies, superficially understood When I find a price which looks very wrong for seemingly robust reasons, I sometimes prefer to make a small bet without fully researching the company.  Although I might do deeper research later, the price often corrects before I do. This is fine – I just sell and go on to the next one.   By keeping positions small I keep them easy to sell, that is I preserve options to change my mind as prices and my expectations change.”_

Keep it light: spend 10 mins a day reading the business news, check the 52 week lows/highs, follow some posters/threads. When I see a discrepancy make a small bet. No more big bets!

You have posted that you use ratios like Price to Book, EBIT/EV , as a guide to finding value in the market, are you not tempted to use recent market price action (e.g. 50% drop in 3 months)? Or multi-year lows? 

Also, NBL is looking cheap; trading below NTA and near multi-year lows.

Cheers.


----------



## KnowThePast

VSntchr said:


> I like this one. I don't think the risk of not growing is as much of a punt at your post alludes to. The nature of this business is that the current client base is somewhat sticky. Management pays a good div as they are not a rapidly expanding business (and I think this is also to please those with large stakes, one of whom has been selling out in big volume).
> But they are at a nice point where most incremental sales are falling to the bottom line resulting in some decent margin expansion - so not very much revenue growth is needed to keep growing profits.
> 
> I don't think this one is going to shoot the lights out, but I think the business is much better than many listed <5c counterparts




Hi VSntchr,

That's an excellent summary, and yes, I may sound too pessimistic at times.

The stickiness of their revenues is one of the major reasons I liked their business model, they are profitable and by the indications I see, very competent. I like the company and I think that not only is the potential excellent, it is also greatly underpriced currently. 

Where it is somewhat different from my other investments is downside risk. Most of my other companies have a lot of bad news factored in. ISC is trading on expectation of more good news. If they don't materialize, impact will be much greater than for companies that are already in the toilet.


----------



## KnowThePast

odds-on said:


> Hi KTP,
> 
> Thank you for posting your test results of the Altman Z score. It seems the more distressed the business is the more likely there will be a mispricing by the market, which does makes sense.  Your comparison test using the Price to Book ratio highlights to me that I need to be selective about how much weight I should apply to certain factors like the Altman Z score in my investment process. This thread (and experience) is teaching me that I need to find a realistic  investment process for my IQ, temperament and my current personal commitments (a growing young family). Focus on my investment process – thank you.
> 
> IMO, this blog post is excellent and worth reading when thinking about investing strategy and process - http://guythomas.org.uk/blog/?e=27. When I look at my performance over the last few years, I cannot help but think the extract below is the way to go for me.
> 
> _“Small bets on large discrepancies, superficially understood When I find a price which looks very wrong for seemingly robust reasons, I sometimes prefer to make a small bet without fully researching the company.  Although I might do deeper research later, the price often corrects before I do. This is fine – I just sell and go on to the next one.   By keeping positions small I keep them easy to sell, that is I preserve options to change my mind as prices and my expectations change.”_
> 
> Keep it light: spend 10 mins a day reading the business news, check the 52 week lows/highs, follow some posters/threads. When I see a discrepancy make a small bet. No more big bets!
> 
> You have posted that you use ratios like Price to Book, EBIT/EV , as a guide to finding value in the market, are you not tempted to use recent market price action (e.g. 50% drop in 3 months)? Or multi-year lows?
> 
> Also, NBL is looking cheap; trading below NTA and near multi-year lows.
> 
> Cheers.




Hi odds-on,

I am glad you find my thread useful, you may just hold back on taking notes until I have some results to show.

Funny that you mention NBL. I had 3 buy orders a few days ago - SSM, ICS and NBL. I wanted to buy 2 and NBL just missed out. So it's on my radar all right.

The market price action is useful as well, but when you buy the cheapest companies on the market they tend to be ones that have fallen recently anyway. I may do a separate post on it, you seem to always give me some homework to do 

The subject of many small bets is a very interesting one to me. Obviously, I am in agreement with it, given the strategy that I follow. 

There's a very relevant study on estimation and forecasts. The experts would be given minimal information about a problem and then asked to make a prediction. They would then be given more and more information. What the study has found is that with more information, the confidence level increased, but the accuracy level hasn't.

I actually think that this study is incomplete. I would think that at some point, with enough information, tests, and research, a better accuracy rate can be achieved. But a disproportionate amount of work would need to be done to get there. 

You could also work on the other end, by improving your skill and experience, you could make a more accurate first guess with minimal information.

Applying the above to myself in the share market, I do not think I have enough skill, experience on insight to research companies well enough to make a better than average valuation. So, I fall back on many little bets in strategies that have a positive expectancy.


----------



## skc

KnowThePast said:


> Bought LYL 500 @ 4.31
> 
> At the current price, it is acceptable to me for the profits to half and growth to resume in full after 3-5 years. Until then, I will have to weather the storm, I suspect.




Update by LYL today forecasting a H2 loss of $2.3m. From the time of your posting LYL reported $22m NPAT. So profit has unfortunately reduced by more than half. 

Your thoughts and action plan?


----------



## odds-on

KnowThePast said:


> The market price action is useful as well, but when you buy the cheapest companies on the market they tend to be ones that have fallen recently anyway. I may do a separate post on it, you seem to always give me some homework to do




Hi KTP,

A while back on another forum a well-respected poster analysed the share price performance of companies that respect their share capital. The poster illustrated the point by comparing EBIT growth to Issued Share Capital growth over a long time frame for a small number of companies, the results were interesting to say the least. The post really illustrated that some companies have the business model and management to grow EBIT whilst not keeping asking for money from the shareholders. If….if….I had the data and the skills, it would be fascinating to see the results for a large selection of companies. Do you know anybody with the data and skills? 

Do you find the problem with cheap companies is that once you start reading the business profile/annual report/announcements that you are instantly repelled? It makes it difficult to buy! Best to look with one eye closed.

So far NBL is underperforming for me. HHL and SSM are on the watchlist. TSE has been a winner for me.

Cheers


----------



## VSntchr

odds-on said:


> Do you find the problem with cheap companies is that *once you start reading the business profile/annual report/announcements that you are instantly repelled?* It makes it difficult to buy! Best to look with one eye closed.
> 
> 
> Cheers




Personally, this is why I like to have a decent database of businesses under my belt - so that if the prices of any fall, for whatever reason...I have my initial perception to contrast against the 'new perception' that is causing the SP fall..

It's hard to keep track of many, but I am follow about 10 quite closely and then another 20 with some interest that I can delve deeper should the sitation present.


----------



## KnowThePast

skc said:


> Update by LYL today forecasting a H2 loss of $2.3m. From the time of your posting LYL reported $22m NPAT. So profit has unfortunately reduced by more than half.
> 
> Your thoughts and action plan?




Apologies for not replying to anyone for a few days, I do not think I've ever been more busy with work than over the last few months. But the end is in sight, unless they move retirement age again.

To summarise my reaction to LYL's announcement in one word - £"$£! The share price has taken a beating, and it is highly improbable that it will make a recovery to my purchase price any time soon. But, I am holding on, because my investment theory has not been broken on this one. This is one bad half/year, I expected a substantially reduced profit on average over the next few years. It still has plenty of cash reserves, and the same capable management and people. The profit drop is almost certainly caused by industry conditions, rather than anything wrong with the company itself. Furthermore, it is not trading at an attractive enough price to go into my statistical portfolio.

What has certainly been a mistake on my part, was to buy it at the price that I did. I paid a premium for a company that I though was the best in its sector. With a very severe downturn that the industry was about to enter, this was not a time to do so. At that valuation, bad news tends to punish a lot harder than for something that is already trading cheaply. 

I think it was craft who mentioned a while back that he doesn't think it was yet the time to invest in these. He proved to be right, MS stocks are steadily dropping in price over the last few months, and waiting longer to buy them  certainly would not have hurt me.

Another interesting thought I have in relation to LYL is that they are typically well managed, and will not take on unprofitable/risky contracts. It is better to record a small loss during bad times, than to take on large risk for a possibility of smaller profit. But it makes you wonder what the case is with other companies that announce contract wins and revenue growth during these times.


----------



## KnowThePast

odds-on said:


> Hi KTP,
> 
> A while back on another forum a well-respected poster analysed the share price performance of companies that respect their share capital. The poster illustrated the point by comparing EBIT growth to Issued Share Capital growth over a long time frame for a small number of companies, the results were interesting to say the least. The post really illustrated that some companies have the business model and management to grow EBIT whilst not keeping asking for money from the shareholders. If….if….I had the data and the skills, it would be fascinating to see the results for a large selection of companies. Do you know anybody with the data and skills?




Thanks for the idea! I've tested those two in isolation, but not in combination/comparison. 



odds-on said:


> Do you find the problem with cheap companies is that once you start reading the business profile/annual report/announcements that you are instantly repelled? It makes it difficult to buy! Best to look with one eye closed.




Tell me about it! You could say you often have to make a leap of faith. Faith in the process, not in any individual company, I mean.

But this is the reason so few people follow this value approach and probably the biggest reason why it works. It looks wrong, it feels wrong and you will most certainly be wrong a lot of the times, sometimes for years.

Things I remind myself of:
- these strategies will usually result in close to half of investments losing money.
- most studies show these strategies outperform over 5+ years, but these's plenty of individual underperforming years. 10%-40% of years will underperform, depending on which source/strategy you look at.
- glacial speeds is a term I've heard to describe the recovery of value stocks. It usually takes 3+ years.
- rewards are not gradual. Years of patience are quite often rewarded in a few days.


----------



## Ves

Hi KTP

Some quick thoughts, as some of what I *think* that you are saying may need further comment.



KnowThePast said:


> What has certainly been a mistake on my part, was to buy it at the *price* that I did. I *paid a premium* for a company that I though was the best in its sector. With a very severe downturn that the industry was about to enter, this was not a time to do so. At that *valuation*, bad news tends to punish a lot harder than for something that is already trading cheaply.




The language used in your comments here is a little confusing...  are you using price and valuation interchangeably here?   Because the foundation of your investment strategy, as it reads to me,  is to come up with a valuation based on your forecasts for the company's future earnings / cash flows. As a long-term investor who uses his own valuation as a decision point,  you are not being paid to consider price action! When you said that you "paid a premium" are you referring to the compression of the market multiple  (price action)  or are you suggesting that you made a mistake in your forecasting?   My understanding is that you are referring to the former, and your valuation has not changed,  but you are lamenting the foregone opportunity to buy at a lower price.

Which is dangerous in itself... because if you are over-riding your own judgment with the market's price action,   are you not second guessing yourself?   It makes you much, much more likely to be shaken out of the stock as a "weak hand",  when as a long-term investor,  if you are relying on your valuation you need to be a "strong hand" to stay in the stock through out all of the market's fluctuations  (unless your business analysis thesis is broken).



> I think it was craft who mentioned a while back that he doesn't think it was yet the time to invest in these. He proved to be right, MS stocks are steadily dropping in price over the last few months, and waiting longer to buy them  certainly would not have hurt me.



My understanding is that craft was referring to business fundamentals and the impact of cyclical earnings on future cash flows. I do not think he was suggesting that you should wait for the price action to steer itself even lower   (but he may have referred to this as a corollary of the market valuations reverting to be more realistic of the earnings power over the entire cycle of these mining services companies).

I don't think craft is an advocate of waiting for market signals  (ie.  price action) to tell him when to buy,   he may correct me,  but I believe his focus is more in line with what I said above, in that he interpreted that the prevailing market prices in the M/S companies _overstated_ their long term earnings power.  In other words,  he thought that they were overvalued,  and as happens to all overvalued companies,  they eventually revert to a more sensible price. 

Here is a post by him in another thread.


----------



## qldfrog

and today NBL is down down down..I cut my losses...


----------



## KnowThePast

Ves said:


> Hi KTP
> 
> Some quick thoughts, as some of what I *think* that you are saying may need further comment.
> 
> 
> 
> The language used in your comments here is a little confusing...  are you using price and valuation interchangeably here?   Because the foundation of your investment strategy, as it reads to me,  is to come up with a valuation based on your forecasts for the company's future earnings / cash flows. As a long-term investor who uses his own valuation as a decision point,  you are not being paid to consider price action! When you said that you "paid a premium" are you referring to the compression of the market multiple  (price action)  or are you suggesting that you made a mistake in your forecasting?   My understanding is that you are referring to the former, and your valuation has not changed,  but you are lamenting the foregone opportunity to buy at a lower price.
> 
> Which is dangerous in itself... because if you are over-riding your own judgment with the market's price action,   are you not second guessing yourself?   It makes you much, much more likely to be shaken out of the stock as a "weak hand",  when as a long-term investor,  if you are relying on your valuation you need to be a "strong hand" to stay in the stock through out all of the market's fluctuations  (unless your business analysis thesis is broken).
> 
> 
> My understanding is that craft was referring to business fundamentals and the impact of cyclical earnings on future cash flows. I do not think he was suggesting that you should wait for the price action to steer itself even lower   (but he may have referred to this as a corollary of the market valuations reverting to be more realistic of the earnings power over the entire cycle of these mining services companies).
> 
> I don't think craft is an advocate of waiting for market signals  (ie.  price action) to tell him when to buy,   he may correct me,  but I believe his focus is more in line with what I said above, in that he interpreted that the prevailing market prices in the M/S companies _overstated_ their long term earnings power.  In other words,  he thought that they were overvalued,  and as happens to all overvalued companies,  they eventually revert to a more sensible price.
> 
> Here is a post by him in another thread.




Hi Ves,

Excellent points.

My comments are mainly about valuation, rather than price. And the mistake I made in my valuation. 

While I think I got the company specific things right, I think I underestimated the risk present in the industry and how little control individual company has against these industry specific winds. I don't think my valuation was greatly off, but I do not think I should have made it as high as I did at the time. 

And it is not even hindsight thinking, I've been mulling it over for a while, and almost pulled the trigger to sell it when it reached $5 at one point. I didn't, and it is now at $2.50. 

When I bought it at $4.30, it had the following financial characteristics:
PE: 7.5
P/B: 2.5
P/Sales: 0.68
EV/EBIT: 4.8

Certainly not too expensive. But, with an industry that was almost certainly going to go into a period of decline, I do not think this had enough of a margin of safety. Put another way, I was bracing myself to have half the profit for the next few years, which would place it on a PE of 15. And that's too much.

My other purchases in the sector, such as NWH and BYL I am much more comfortable with. I think their pricing allows for a lot more bad news. 

Also, I am certainly not advocating waiting for price action. The way I understood craft's comment back in the thread was that it wasn't just about price, it was about sentiment. At the time I bought LYL, there wasn't quite enough doom and gloom about the MS sector. I think it is getting there. I don't know when it will stop, but with repricing of LYL, I am now quite comfortable about Price/Value measure of my related stocks. 

If only I could backtest on a measurable ratio of Sentiment!


----------



## KnowThePast

qldfrog said:


> and today NBL is down down down..I cut my losses...




SSM makes an almost immediate contribution to my portfolio, by preventing me from buying NBL just at the right time.

I had orders for SSM and NBL, and was going to buy whichever got filled first.

It's still an interesting opportunity though, although perhaps with both eyes closed in this case.

No debt, $10m cash and no more goodwill to write down. 
On the other side, there's a significant number of long term leases. 

And who would like to speculate what this will turn out to mean:
"The independent directors of the board are presently considering and discussing with the Kindl family, the strategic alternatives with respect to the company's capital structure".


----------



## qldfrog

I had just jumped in, and was ready to double (but only a few k) so a nice 10% loss: I can live with that even if yesterday was my bad luck day....
but indeed the "strategy alternatives" ready rang alarm bells and i sold on the spot


----------



## Ves

KnowThePast said:


> My comments are mainly about valuation, rather than price. And the mistake I made in my valuation



It is a very hard sector to get a gauge on going forward in my opinion.   I have been reluctant to even look at it at the moment, let alone attempt to value the companies in any detail.

It sounds like you are doing the right thing and trying to learn from it.


----------



## McLovin

Ves said:


> It is a very hard sector to get a gauge on going forward in my opinion.   I have been reluctant to even look at it at the moment, let alone attempt to value the companies in any detail.
> 
> It sounds like you are doing the right thing and trying to learn from it.




IMHO, there will be plenty of time to go hunting in this sector once it is completely unloved. I'd expect over the next 18-24 months more companies going broke and maybe some consolidation. Less work usually means the little guys get squeezed out, and it is damn risky to be trying to pick small cap MS companies. I don't think I'm smart enough to try and play a sector declining off a once in a century boom, let alone small/micros in that sector.


----------



## craft

KnowThePast said:


> Hi Ves,
> 
> When I bought it at $4.30, it had the following financial characteristics:
> PE: 7.5
> *P/B: 2.5*
> P/Sales: 0.68
> EV/EBIT: 4.8
> 
> Certainly not too expensive. But, with an industry that was almost certainly going to go into a period of decline, I do not think this had enough of a margin of safety. Put another way, I was bracing myself to have half the profit for the next few years, which would place it on a PE of 15. And that's too much.
> 
> My other purchases in the sector, such as NWH and BYL I am much more comfortable with. I think their pricing allows for a lot more bad news.




I have observed a few things catch people out with the mining services companies. 

Firstly there was Roger Montgomery followers with his idiotic static models, the passing of peak earnings had them way overvaluing the stocks and earnings reports are sufficiently slow to see the price decimated before they had information to update their models. Add in a bit of psychology difficulties around taking big losses and lots will probably hold until they just can’t bare it anymore and will eventually lock in a huge losses.

Next, Because the good times had rolled on for 10 years the historical extrapolators got themselves in trouble – they looked back but just didn’t see the depth of a real cycle trough.  Not knowing your process real well and looking at the P/B multiple you payed, I suspect this might include you.

I like to try and look forward (even though knowing the future is impossible) and what I say to myself is that operating margins are slim and that contract estimating is difficult. The contract values are large in relation to the equity. Large, difficult and slim margins are not a good combination in the best of times but add in a down cycle where the capacity is larger than the demand in the industry and things get real problematic.  If you can’t make your cost of capital you have to shed capacity – Businesses don’t by choice want to shed capacity, so straight away you can see contracts getting bid down to cost of capital margins. So new skinnier margins and you still have the inherent difficulties of large and complicated projects to stuff things up.  The lowest bidding companies will sustain their workforces but at increased risk and at best make cost of capital. Other companies won’t find enough work and will have to reduce capacity – if they can’t shed their fixed costs (debt servicing etc ) they are in trouble, even if they can redundancy payments and carrying underutilised equipment etc is going to make the numbers look pretty ordinary.  

So I see a scenario where making cost of capital whilst you try and survive the creative destruction of an over capacity part of the cycle as the best outcome – If you can only make cost of capital, then you are only worth the replacement cost of your assets.  That’s the upper limit and many will be worth less.

What competitive advantage does LYL have that means it can make more then it’s cost of capital through an entire cycle – If it doesn’t have a true competitive advantage it will still be able to make higher rates during the under capacity part of the cycle but it will make less during the overcapacity part. It will average out above cost of capital only if it has a competitive advantage over its competition. 

If you work through how operational leverage works on a business – the least robust companies actually get the biggest boost from a beneficial industry tail breeze and then go bust when faced with a head wind. So just looking at the best performers in the upswing is dangerous (FGE)

So far I’ve had a crack at UGL (not entirely engineering services thesis) and bailed – so still on the sidelines for me with this sector. The Infrastructure focus of the government might aid some companies.

Sorry just rambling – I’ll stop now.


----------



## Huskar

craft said:


> Sorry just rambling – I’ll stop now.




Rambling is far better than rant..


----------



## KnowThePast

craft said:


> I have observed a few things catch people out with the mining services companies.
> 
> Firstly there was Roger Montgomery followers with his idiotic static models, the passing of peak earnings had them way overvaluing the stocks and earnings reports are sufficiently slow to see the price decimated before they had information to update their models. Add in a bit of psychology difficulties around taking big losses and lots will probably hold until they just can’t bare it anymore and will eventually lock in a huge losses.
> 
> Next, Because the good times had rolled on for 10 years the historical extrapolators got themselves in trouble – they looked back but just didn’t see the depth of a real cycle trough.  Not knowing your process real well and looking at the P/B multiple you payed, I suspect this might include you.
> 
> I like to try and look forward (even though knowing the future is impossible) and what I say to myself is that operating margins are slim and that contract estimating is difficult. The contract values are large in relation to the equity. Large, difficult and slim margins are not a good combination in the best of times but add in a down cycle where the capacity is larger than the demand in the industry and things get real problematic.  If you can’t make your cost of capital you have to shed capacity – Businesses don’t by choice want to shed capacity, so straight away you can see contracts getting bid down to cost of capital margins. So new skinnier margins and you still have the inherent difficulties of large and complicated projects to stuff things up.  The lowest bidding companies will sustain their workforces but at increased risk and at best make cost of capital. Other companies won’t find enough work and will have to reduce capacity – if they can’t shed their fixed costs (debt servicing etc ) they are in trouble, even if they can redundancy payments and carrying underutilised equipment etc is going to make the numbers look pretty ordinary.
> 
> So I see a scenario where making cost of capital whilst you try and survive the creative destruction of an over capacity part of the cycle as the best outcome – If you can only make cost of capital, then you are only worth the replacement cost of your assets.  That’s the upper limit and many will be worth less.
> 
> What competitive advantage does LYL have that means it can make more then it’s cost of capital through an entire cycle – If it doesn’t have a true competitive advantage it will still be able to make higher rates during the under capacity part of the cycle but it will make less during the overcapacity part. It will average out above cost of capital only if it has a competitive advantage over its competition.
> 
> If you work through how operational leverage works on a business – the least robust companies actually get the biggest boost from a beneficial industry tail breeze and then go bust when faced with a head wind. So just looking at the best performers in the upswing is dangerous (FGE)
> 
> So far I’ve had a crack at UGL (not entirely engineering services thesis) and bailed – so still on the sidelines for me with this sector. The Infrastructure focus of the government might aid some companies.
> 
> Sorry just rambling – I’ll stop now.




Hi craft,

Thank you very much for this, your rambling is very, very useful.

As I wrote in the post yesterday, my valuation of LYL 10 months ago was incorect, pretty much for the reasons you've summarised so well in your post. 

As for competitive advantage of LYL, I think it has some, mainly its people. But it certainly not enough to offset the industry conditions. 



craft said:


> So I see a scenario where making cost of capital whilst you try and survive the creative destruction of an over capacity part of the cycle as the best outcome – If you can only make cost of capital, then you are only worth the replacement cost of your assets.  That’s the upper limit and many will be worth less.




That's essentially where my thinking got me to, when reflecting back on LYL purchase. Any MS companies in my portfolio would need to trade at a significant discount to replacement cost of assets.  I should have listended more to you last year.



craft said:


> Next, Because the good times had rolled on for 10 years the historical extrapolators got themselves in trouble – they looked back but just didn’t see the depth of a real cycle trough.  Not knowing your process real well and looking at the P/B multiple you payed, I suspect this might include you.




Spot on. Guilty as charged. I looked too much at the numbers produced, rather than the numbers that can realistically be expected to be produced.

Here's the current numbers for what I am now holding.



Plenty of food for thought, but my entry prices for these have been much more reasonable in comparison to LYL.  LYL is still not super cheap, but I do also consider it more likely to make an above average return (some competitive advantage).

There's always something to worry about. And I am worried.


On a somewhat related topic, something I find to be more and more true is that there's hardly ever a rush to buy something that's declining. Occasionally you'll miss out (such as MMS), but more often than not, decline will take awhile, and recovery will take awhile. There's no rush. The next time I buy MS stock in 2013, I will wait a little longer. Although, 1 year on, with only a little over half of capital commited, I am not exactly pushing people out of the way to get in either.

My last 8 puchases have been in other sectors, so I am no longer over-exposed to it. But whether to buy more, and when, is something I often ask myself, with my filters mainly consisting of MS companies. 


It's very nice to see you back, craft.


----------



## odds-on

qldfrog said:


> I had just jumped in, and was ready to double (but only a few k) so a nice 10% loss: I can live with that even if yesterday was my bad luck day....
> but indeed the "strategy alternatives" ready rang alarm bells and i sold on the spot




I read the announcement and sold straight away. A small loss for the portfolio.


----------



## KnowThePast

craft said:


> If you can only make cost of capital, then you are only worth the replacement cost of your assets.  That’s the upper limit and many will be worth less.




How much of it do you think applies to people businesses such as LYL?

They hold almost no PPP, or intangibles. The bulk of their assets is working capital. They are similar, in this way to DTL.  DTL's P/B is 2.8, but it's hard to argue that they are expensive...

Certainly replacement cost of capital is not the same as net assets, but for businesses such as these, it would normally be substantially higher, not lower. The marketing, the contacts, hiring & training costs, etc. do not appear on the balance sheet, but would be very real costs if one was to "replace" those assets.

I have to admit that I did not even try to calculate the replacement value for LYL, I wouldn't know where to start with a business like that. But you've highlighted the P/B ratio in my post, so I thought I'd use that as an excuse to kick off this topic...


----------



## craft

KnowThePast said:


> How much of it do you think applies to people businesses such as LYL?
> 
> They hold almost no PPP, or intangibles. The bulk of their assets is working capital. They are similar, in this way to DTL.  DTL's P/B is 2.8, but it's hard to argue that they are expensive...
> 
> Certainly replacement cost of capital is not the same as net assets, but for businesses such as these, it would normally be substantially higher, not lower. The marketing, the contacts, hiring & training costs, etc. do not appear on the balance sheet, but would be very real costs if one was to "replace" those assets.
> 
> I have to admit that I did not even try to calculate the replacement value for LYL, I wouldn't know where to start with a business like that. But you've highlighted the P/B ratio in my post, so I thought I'd use that as an excuse to kick off this topic...




Hi KTP

Your guess is as good as mine – actually yours would be better than mine because I don’t know LYL very well.

As you say replacement value is not net assets or net tangible assets or anything actually that is discernible directly from the balance sheet. You have to estimate it, and it is the value at which a competent competitor would rather reproduce the business assets and position rather than buy the business.  

If the top half dozen principle employee’s struck out on their own it probably wouldn’t cost them much more then working capital to recreate LYL. Without those people it could be significantly more costly, so there is no real easy or accurate answer to replacement cost.  

Despite the difficulty in estimating replacement cost – I find the concept has lots of merit for focusing valuation thinking.  The world is not capital constrained, any margin that is not protected by a competitive advantage will be attacked until any excess return has been competed away.  In cyclical industries the competition arriving in the bad times is guaranteed because too much capacity is added during the good times.  


Cheers


----------



## KnowThePast

A monthly update.

Technically, my 1 year anniversary will come up in a few days, but I'll do a yearly update next months. This will make it synch with financial year and will make things easier going forward. Since I had only minimal activity in the first months, the impact on results will be minimal.


----------



## KnowThePast

Bought DTL, 1841 @ $0.69.

It's been on my radar for a long time. It's a tiny bit out of my preferred value range, but I have absolutely no issues with paying a slightly higher price for a higher quality business.

The DTL thread on this forum is very good, so I won't be able to add much to what's been said there. In summary, I like that they provide a mundane, unwanted, but necessary service and they do it at a lower cost than most.

This industry is more prone to cycles than most, but with IT being an essential evil, it cannot stay down forever. So, I am comfortable in buying a business like this in bad times and waiting until things get better.


----------



## odds-on

odds-on said:


> I read the announcement and sold straight away. A small loss for the portfolio.




And guess what....There is a market update from NBL today, advising that the company has received interest in a potential acquisition of a controlling stake in, or all of the share capital. NBL is now trading >50c.


----------



## Ves

odds-on said:


> And guess what....There is a market update from NBL today, advising that the company has received interest in a potential acquisition of a controlling stake in, or all of the share capital. NBL is now trading >50c.



In my opinion,  selling for the right reasons  (ie.  the investment thesis has been broken) is much better than holding _in hope_ that the price will turn around.    You may occasionally miss an out-of-the-box event such as takeover speculation / bids (in this case),  but unless that is your absolute focus,  it is just something that you cannot control.

Put it this way,  you will incur less losses in the long-run by selling companies that no longer meet your investment thesis,  than you will make profits from continuing to hold them and a takeover bid appearing.


----------



## KnowThePast

odds-on said:


> And guess what....There is a market update from NBL today, advising that the company has received interest in a potential acquisition of a controlling stake in, or all of the share capital. NBL is now trading >50c.




Hi oddson,

This, very conveniently, touches on the topic that we've discussed so recently.

A strategy of buying cheapest stocks, by whatever measure, is likely to be made up of portfolio where any stock in isolation looks ugly. I've also made a point that a profit is often made after many years, and not gradually, but within a matter of days. NBL is a perfect example of a "success" story for this strategy, if you can call it that. Premature, yes, especially for those who bought it cheap a year or two ago, but let's not let facts interfere with this discussion.

Focussing on the process, there's a couple of takes on this.

You bought an ugly share, but sold it when it became even less good looking, and cheaper. If the strategy was to buy a basket of cheap, ugly stocks, this doesn't quite sound right to me.

Alternatively, you could well conclude that while the outcome was good in hindsight, the risk/reward ratio was not there last week. The small chance of an event like takeover and its likely effect on price, was not enough to counter the other likely possibilities such as liquidation. In this case, it would be about assessing the value and risk of individual stocks, rather than the whole basket.

Yet another take on it could be what I call a manual override. One may follow a strategy of buying a basket of cheap stocks, but a manual override is needed at times for various reasons. Whether the last announcement warranted such as intervention is the question. These manual overrides, and their potential abuse is a very significant factor in long term performance of such strategies, IMHO.

Now, which one was it, in your opinion?


----------



## odds-on

KnowThePast said:


> Now, which one was it, in your opinion?




My initial purchase was based on the discount to NTA, low debt and the Kindl family owning a major stake. I placed a small bet as I thought there was limited downside and I had an _expectation_ that there would be a turnaround in sales/change in strategy that would see a re-pricing of the business in the next year or so, the decision took about 15 minutes after comparing to other candidates/current holdings. The market update on the 28/05/2014 forced me to re-assess the risk/reward ratio and I decide to drop NBL for a small loss as my interpretation of the market update was that the turnaround in sales did not seem likely in the foreseeable future and I was spooked by the statement about the strategic alternatives to the capital structure – the ugly share got uglier!

I am both grinning and banging my head about the announcement on the 04/06/2014 because I would have made an approx. 20-30% profit (I would have sold and moved on) if I had just waited a week or so, such is life sometimes!

Your thread is really making me focus on my investment process, thank you. Also, I think we hunt in the same part of the forest, please do not shoot me by accident.

Cheers


----------



## KnowThePast

odds-on said:


> My initial purchase was based on the discount to NTA, low debt and the Kindl family owning a major stake. I placed a small bet as I thought there was limited downside and I had an _expectation_ that there would be a turnaround in sales/change in strategy that would see a re-pricing of the business in the next year or so, the decision took about 15 minutes after comparing to other candidates/current holdings. The market update on the 28/05/2014 forced me to re-assess the risk/reward ratio and I decide to drop NBL for a small loss as my interpretation of the market update was that the turnaround in sales did not seem likely in the foreseeable future and I was spooked by the statement about the strategic alternatives to the capital structure – the ugly share got uglier!
> 
> I am both grinning and banging my head about the announcement on the 04/06/2014 because I would have made an approx. 20-30% profit (I would have sold and moved on) if I had just waited a week or so, such is life sometimes!
> 
> Your thread is really making me focus on my investment process, thank you. Also, I think we hunt in the same part of the forest, please do not shoot me by accident.
> 
> Cheers




I've noticed a while ago that our strategies seem to be the most similar out of the posters on ASF. Thanks for your contributions to my thread!


----------



## KnowThePast

My first yearly update.

Over the last year, my return has been a loss of 4.5%, compared to a gain of 16.5% for All Ordinaries Accumulation Index. A very significant underperformance.

I have talked a lot before about concentrating on investment process rather than investment outcome. Given the poor performance to date, I feel I must nevertheless analyse the reasons, where possible, of the outcome.

In order of significance:
1.	Investing my money slowly over a 2 year period, rather than whenever the opportunity came up. This safety mechanism had an incredibly high cost in the last year. Had I not done this, using the same investment process my return would have been over 40%. 
2.	From Feb onwards, most value strategies have performed poorly. With half of my funds invested during that period, and all of them into “value” stocks, I did as well as those strategies allowed during that time.
3.	I have significant exposure to mining services stocks, which have been in consistent decline since I invested in them. 

The question to answer is whether the investment process is sound, and whether I should continue on its course, ignoring the results Things to consider about semi-automated strategies that I am pursuing:
-	Value strategies, on average, take 3+ years to outperform, often underperforming in the first 2 years. O’Shaughnessy’s funds are a classic example of this.
-	These strategies do not perform consistently, 1 out 3 years, on average, tend to underperform.
-	Outperformance tends to occur due to rare, but significant re-ratings of 50%-60% of stocks. None of my stocks have so far had any changes which would warrant a significant price movement up or down. 
-	My backtesting shows me that such period of underperformance are common.

Given all of the above, I still think I should continue with my investment process, despite the current results. 

At the same time, I see more and more value in picking quality companies at low prices, although low prices for these would be way above my current criteria. I am becoming more interested in consistency and predictability of performance, rather than highest positive expectancy. 

And so, some changes will be made to my portfolio management:
-	I will normally hold a large amount of cash, unless there are outstanding opportunities (~25%).
-	First preference will be stock meeting my quality criteria. There’s awfully few of these, so I don’t expect many additions to it. Current stock meeting (mostly) that criteria: CAB, SDI, LYL, CKF, CDA, DTL, ICS.
-	Surplus cash will be invested in the cheap stocks, the kind that make up the major part of my portfolio now. 

I don’t plan to make any changes to accommodate these, I am quite happy with the makeup of my current portfolio. But with a slight change of focus, I expect my portfolio to evolve naturally towards this over the next few years.

As part of this review, I was going to go over each of my holdings. But, to date there’s been very little news to discuss on any of them. I may do this review after all the annual reports come out.

Now, what have my mistakes been last year? Here’s some of them, in order of stupidity:
1.	Buying, then selling PMP. I’ve bought this as I was still deliberating whether to switch to an automated value strategy. After buying it, I back out of it. I then reconsidered my investment approach that would allow it back in, but it was too late. I should have acted decisively, and I would have been $500 better off.
2.	KKT has been on top of my value list from the beginning, but I didn’t buy it until much, much later. I would have tripled my money had I let my automatic strategy be automatic. Manual overrides for things such as over-exposure to on industry are fine, but there was no reason why I should have avoided KKT. This single mistake alone would have just about pushed my performance in line with the index. Yet another example of following the investment process and being decisive.
3.	Paying too much for LYL and SDI. These were not bought as part of my automated strategy, so I’ve paid a premium that I thought these deserved. Looking back at it, I paid too much of a premium. LYL halved, and while SDI has rewarded me with some good results in the last few days, I certainly didn’t expect a result this good in my valuation. It is certainly worth that price now, but that was an unexpected development.
4.	MMS – one of the rare cases where there was a single factor, election, with known probability, that controlled the outcome, with the price clearly not being in sync with it. And for reasons I still cannot explain, I did not act on it.
5.	RFG – should have bought it when it dropped below $4. The redeeming factor is that I had a lot of it already in my super, where I bought it for $3.30.

There’s certainly more, but I’ve had enough kicking myself. 

Thank you everyone who participated for your help and patience. 

I look forward to a second, hopefully profitable, year and wish the same to all of you.


----------



## DeepState

Looks like the major relative loss was in market timing.  This was apparently done for risk management purposes.  The XAOAI fully invested is not really a fair comparison if a risk management decision was made without an attempt at aggregate market level prediction over the two-year time frame.  It does not suggest a break down in process or ability if executed according to your plan within this type of circumstance.  It could have gone either way.  You can backtest your average in strategy over different periods and markets to soothe yourself unless you believe that you actually made a bad prediction.  In that case, I would seriously examine the process of prediction for veracity.

You suggest regret at not stepping to increase market exposure in when opportunities presented themselves.  How did you know they were opportunities at the time?  What in your process or abilities allows you to expect strong predictive power in relation to such matters?  As you would know, market timing tends to be a losing game for most.  Do you have evidence that your methodology allows you to consistently pick entry points in a market aggregate?  You also know that market timing to this level dominates the overall portfolio performance.  If I may, what you write about your decisions is loaded with hindsight bias.  The right decision always looks so easy and clear in retrospect.  What a difference a second makes.  "Experience is what we get after we needed it most." I love that one...sort of.

Your portfolio seems to be exposed to other factors as well which were a negative impact.  The strongest style factors on a multi-variate basis over the last year as determined by Axioma were positive SIZE and negative VOLATILITY.  It seems you were caught in the cross-hairs on that front, at a guess.   In a generic sense, VALUE was pretty flat on the year.  It picked up to Feb 2014 and then declined.  It may be negative on a univariate sense, because it loads on neg(SIZE) and VOLATILITY.  One learning from this is to ensure that if your bet is value...that you actually get it.  You mentioned overrides for industry concentration. This is similar.  

Thanks for taking me/us along your journey.


----------



## peter2

Congrats on your first year. 
Most people that start a blog stop posting after a very short time which shows their lack of commitment. You have shown us all that you are committed to making this work. Well done and I think you'll get many helpful suggestions. Generally when the results don't match the anticipated outcome it will be either a faulty process or a poor application of the process. I'm unable to tell which it is in your case as my approach is mostly chart based. I'll bet you have an idea which it is. 

I hope your analytical process for identifying "value" stocks is written down and you know the difference between which info is essential and what's desirable as you'll rarely find a stock that is perfect. The main benefit of a written process is consistency. I've noticed that many of your stock selections seem to be discretionary and perhaps reactive rather than proactive. Buying after bad news is reactive unless you've been waiting for a lower price and have assessed the bad news as only temporary and you take the opportunity to add.

An observation: stocks going down in price when the market is going up or sideways shows that there is something seriously wrong within the company as the longer term investors are slowly bailing out (LYL). Only a very small % of these unwanted companies will be "valuable". Can your analysis identify these gems or are you better off buying those companies that are above your "value" price but are going up.

I hope that you identify what needs to improve and have the courage and motivation to change either the process or your application of the process. All the best for the new FY and remember that one year may not be long enough for your edge to appear. 

ps: I'm pleased to see you refer to the XAOAI rather than the XAO.


----------



## qldfrog

And if it helps
I am not sure the comparison you make with the XAOI is very fair on you;
basically the XAO(AI or not) is "The banks", TLS and RIO/BHP
Ok not 100% but not that far;
if you compare your results, compare them to the pool of company you work with;And you will see that small cap or  the market in Oz without these few big names was actually running at a loss last year.
Correct me if I am wrong as I did not check the final figures for EOFY;
There is currently a huge gap in perf between these monster stocks and the overall market;
If you add the fact that mining is the key player in term of numbers/capitalisation for the smaller fry, well you probably did not underperformed by much;
And if you learn something about it, might be your best investment ever: an educational fee..
PS: I lost a lot as well: all my T/A and value choices returned a fair value but I invested big for a crash in april (options) which did not occur;
the options lapsed, i lost 50k on those; And gains elsewhere did not make up  so at a loss EOFY.
I got my lesson, not on the "educated bet" but on the tool to use.An expensive course.
If it helps to cheer you up...


----------



## Huskar

KnowThePast said:


> . . . Now, what have my mistakes been last year? Here’s some of them, in order of stupidity:
> 1.	Buying, then selling PMP. I’ve bought this as I was still deliberating whether to switch to an automated value strategy. After buying it, I back out of it. I then reconsidered my investment approach that would allow it back in, but it was too late. I should have acted decisively, and I would have been $500 better off.
> 2.	KKT has been on top of my value list from the beginning, but I didn’t buy it until much, much later. I would have tripled my money had I let my automatic strategy be automatic. Manual overrides for things such as over-exposure to on industry are fine, but there was no reason why I should have avoided KKT. This single mistake alone would have just about pushed my performance in line with the index. Yet another example of following the investment process and being decisive.
> 3.	Paying too much for LYL and SDI. These were not bought as part of my automated strategy, so I’ve paid a premium that I thought these deserved. Looking back at it, I paid too much of a premium. LYL halved, and while SDI has rewarded me with some good results in the last few days, I certainly didn’t expect a result this good in my valuation. It is certainly worth that price now, but that was an unexpected development.
> 4.	MMS – one of the rare cases where there was a single factor, election, with known probability, that controlled the outcome, with the price clearly not being in sync with it. And for reasons I still cannot explain, I did not act on it.
> 5.	RFG – should have bought it when it dropped below $4. The redeeming factor is that I had a lot of it already in my super, where I bought it for $3.30.
> 
> There’s certainly more, but I’ve had enough kicking myself.




Self-analysis is key DeepState - if only I could all be as frank with myself.

Just don't make the same mistakes twice - keep a temple to them even, and don't forget the mistakes of omission (as well as commission)!


----------



## DeepState

qldfrog said:


> I got my lesson, not on the "educated bet" but on the tool to use.




Hi QF.  Just curious.  I figure the above relates to a loss on (I guess) Puts in April.  Does it?  What did you learn? Apart from taking a (I guess again) material loss, how did you come to that conclusion?  Again, just curious...not seeking a justification.

If this is too far off thread, please feel free to ignore the above.  With apologies to thread participants and OP if so.


----------



## KnowThePast

DeepState said:


> Looks like the major relative loss was in market timing.  This was apparently done for risk management purposes.  The XAOAI fully invested is not really a fair comparison if a risk management decision was made without an attempt at aggregate market level prediction over the two-year time frame.  It does not suggest a break down in process or ability if executed according to your plan within this type of circumstance.  It could have gone either way.  You can backtest your average in strategy over different periods and markets to soothe yourself unless you believe that you actually made a bad prediction.  In that case, I would seriously examine the process of prediction for veracity.
> 
> You suggest regret at not stepping to increase market exposure in when opportunities presented themselves.  How did you know they were opportunities at the time?  What in your process or abilities allows you to expect strong predictive power in relation to such matters?  As you would know, market timing tends to be a losing game for most.  Do you have evidence that your methodology allows you to consistently pick entry points in a market aggregate?  You also know that market timing to this level dominates the overall portfolio performance.  If I may, what you write about your decisions is loaded with hindsight bias.  The right decision always looks so easy and clear in retrospect.  What a difference a second makes.  "Experience is what we get after we needed it most." I love that one...sort of.
> 
> Your portfolio seems to be exposed to other factors as well which were a negative impact.  The strongest style factors on a multi-variate basis over the last year as determined by Axioma were positive SIZE and negative VOLATILITY.  It seems you were caught in the cross-hairs on that front, at a guess.   In a generic sense, VALUE was pretty flat on the year.  It picked up to Feb 2014 and then declined.  It may be negative on a univariate sense, because it loads on neg(SIZE) and VOLATILITY.  One learning from this is to ensure that if your bet is value...that you actually get it.  You mentioned overrides for industry concentration. This is similar.
> 
> Thanks for taking me/us along your journey.




Thanks RY, it's always great to get your feedback.

You are right about hindsight bias, but it is very difficult to evaluate past performance and eliminate it completely. It is even more difficult not to subconsciously develop heuristics based on some random, past outcomes. Still, I feel attempting to do so is very important, so I tried as much as possible to find mistakes in the process, regardless of what the outcome has been. 

Size and volatility - yep, I was on the wrong end of that one this year. But this is one I do not plan to do much about at the moment. Long term, I do not see as great opportunity there, so I will stick to small and volatile and ride out the bad years. 

On market timing - I did not attempt to time it, I spread out my capital input over two years, so that I could sleep well, knowing that there hardly any chance of me losing significant part of my money. That has been achieved, and I do not regret it. The cost of that risk measure turned out to be huge, but it could have just as easily gone the other way, as you pointed out.

The longer I do this for, the more I realise that I am hundreds of steps behind guys like you, as well as some others on this forum (and elsewhere). Playing it safe, while I am catching up, seems to me to be the right thing to be doing.

Thanks again.


----------



## KnowThePast

peter2 said:


> Congrats on your first year.
> Most people that start a blog stop posting after a very short time which shows their lack of commitment. You have shown us all that you are committed to making this work. Well done and I think you'll get many helpful suggestions. Generally when the results don't match the anticipated outcome it will be either a faulty process or a poor application of the process. I'm unable to tell which it is in your case as my approach is mostly chart based. I'll bet you have an idea which it is.
> 
> I hope your analytical process for identifying "value" stocks is written down and you know the difference between which info is essential and what's desirable as you'll rarely find a stock that is perfect. The main benefit of a written process is consistency. I've noticed that many of your stock selections seem to be discretionary and perhaps reactive rather than proactive. Buying after bad news is reactive unless you've been waiting for a lower price and have assessed the bad news as only temporary and you take the opportunity to add.
> 
> An observation: stocks going down in price when the market is going up or sideways shows that there is something seriously wrong within the company as the longer term investors are slowly bailing out (LYL). Only a very small % of these unwanted companies will be "valuable". Can your analysis identify these gems or are you better off buying those companies that are above your "value" price but are going up.
> 
> I hope that you identify what needs to improve and have the courage and motivation to change either the process or your application of the process. All the best for the new FY and remember that one year may not be long enough for your edge to appear.
> 
> ps: I'm pleased to see you refer to the XAOAI rather than the XAO.




Thanks Peter,

I fully agree on the written down process. Even if you don't have a specific set of buy/sell rules, having a written down philosophy of your investment process help greatly.

I found that the best thing I get out of this forum is that it forces me to write things down. There were so many cases where I made up my mind to do somthing, start drafting a post about it, read what I wrote, and realise that I made a decision that I can't justify. 

In his book, 'Thinking fast and slow, Daniel Kahneman talk about fast thinking, which is dominated by quick mental shortcuts, and slow thinking, which is logical, analytical, and very difficult for humans to do, especially for long periods. I feel that writing things down forces me to apply this slow thinking.

If anyone ever asks me for an unqualified and unproven advice, it will be to write down the justification for all your decisions in as much detail as possible. 

I've been guilty over the last few months of not writing in as much detail as I should have. In part this was due to the fact that most of my decisions were automated, but I will still try and do better this year.


----------



## KnowThePast

qldfrog said:


> And if it helps
> I am not sure the comparison you make with the XAOI is very fair on you;
> basically the XAO(AI or not) is "The banks", TLS and RIO/BHP
> Ok not 100% but not that far;
> if you compare your results, compare them to the pool of company you work with;And you will see that small cap or  the market in Oz without these few big names was actually running at a loss last year.
> Correct me if I am wrong as I did not check the final figures for EOFY;
> There is currently a huge gap in perf between these monster stocks and the overall market;
> If you add the fact that mining is the key player in term of numbers/capitalisation for the smaller fry, well you probably did not underperformed by much;
> And if you learn something about it, might be your best investment ever: an educational fee..
> PS: I lost a lot as well: all my T/A and value choices returned a fair value but I invested big for a crash in april (options) which did not occur;
> the options lapsed, i lost 50k on those; And gains elsewhere did not make up  so at a loss EOFY.
> I got my lesson, not on the "educated bet" but on the tool to use.An expensive course.
> If it helps to cheer you up...




Ha, I didn't realize it was all smalls, not just value ones.

I've started on my automated strategy with a purchase of BOL on 23/10/2014, which was juts about the highest point for XSO, which has subsequently lost 5.5%. Subtracting my high brokerage costs, I'm doing reasonably well in comparison. 

In reality, given my capital allocation approach during the first two years, there's no right index to benchmark against. XAOAI seems most logical to me, as that's what I could do by investing in a general index fund.

Thanks for putting a positive spin on my results 

Sorry to hear about your losses - I've heardsomeone say that the more money you lose, the quicker you learn.


----------



## LionTurtle

Good read! 

Your portfolio seems pretty high risk? and all your stocks are around $1 or less each? is this related?


----------



## KnowThePast

LionTurtle said:


> Good read!
> 
> Your portfolio seems pretty high risk? and all your stocks are around $1 or less each? is this related?




Thanks LionTurtle.

All stocks around $1 - I've never noticed that, you are quite right. This wasn't intentional.

As for high risk, I have to disagree. While many of my individual stocks a higher risk than normal, on a portfolio level, I am almost too defensive. 50% of my capital is currently in cash, the rest spread out over 16 stocks. 

Furthermore, value stocks that I tend to buy, tend to be lower risk as a group, especially in the long run.

Of course, it all depends on your definition of risk


----------



## LionTurtle

KnowThePast said:


> Thanks LionTurtle.
> 
> All stocks around $1 - I've never noticed that, you are quite right. This wasn't intentional.
> 
> As for high risk, I have to disagree. While many of my individual stocks a higher risk than normal, on a portfolio level, I am almost too defensive. 50% of my capital is currently in cash, the rest spread out over 16 stocks.
> 
> Furthermore, value stocks that I tend to buy, tend to be lower risk as a group, especially in the long run.
> 
> Of course, it all depends on your definition of risk




Oh true, I didn't really think about you cash, maybe in your monthly updates in the table you could add the cash, and the interest on that, might also get you passed the red for the last year?

And yeah I guess you have good risk management threw diversification


----------



## KnowThePast

LionTurtle said:


> Oh true, I didn't really think about you cash, maybe in your monthly updates in the table you could add the cash, and the interest on that, might also get you passed the red for the last year?
> 
> And yeah I guess you have good risk management threw diversification




I've thought about it, but decided against it. My interest is mainly to measure the return on capital I get from my investments, ie. I want to measure ability more so than performance. 

Next year, once my capital is fully committed, this will stop being an issue. 

This is certainly another factor, however, that makes it very difficult to put a precise figure on my return the first two years.


----------



## KnowThePast

Bought SBB, 16,618 @ $0.073.


This is an interesting one. A Chinese clothing company, recently floated, that is moving into owning its own stores and expanding. Which would normally be of no interest to me, but for the current situation.

As it stands, the company is now one of the cheapest companies on ASX by almost any metric. By while others in the same price bucket are normally severely distressed, this one produces excellent returns, and is set for growth in the future.

The official theory is that some minority owners who hold 190 million shares, got their shares out of the escrow and immediately started selling on market. Which is perfectly plausible. Those holders probably wanted to turn their investment into cash for some time, and listing was the means to do that. Even at these low prices they are making a great profit on their original investment. And if that is, in fact, the whole reason for the drop in price, this one is greatly undervalued.

There’s two main unknowns/risks with this one that everyone is worried about (just read hotcopper), and one that I’ll add myself:
1.	Risk of fraud. From what I can tell, this is mainly a worry because it is a Chinese company and Chinese companies had a less than stellar history of accounting purity. From my research I did not uncover anything that raised definite red flags. It’s been hugely helpful to read posts from members here and HC, who have done a lot of the leg work in checking things out. Thank you. The tipping argument for me was that the CEO/Founder, who owns 55% of the company, has his shares in escrow for another 18 months. If fraud is going to be committed, now is an unlikely time.
2.	Why are minority holders selling out? I don’t know. But insider buying is a much more important indicator than selling. While they could be selling due to knowledge of terrible secrets, quite possibly they just want to cash out at a profit. Given the number of shares they own and the size/liquidity of the company, it would have normally taken them years to unload it at more reasonable prices.
3.	The amount of ramping this now receives on forums is noteworthy. There’d be few institutions buying and perhaps the retail holders are finding it difficult to absorb 190 million shares even with all the publicity. But I generally feel more comfortable when everyone thinks it’s hopeless.

The risk/reward here, however, I think is very good. The interesting thing about this situation, I find, is that there’s only a few factors to consider and you can assign a percentage chance to each. Risk of fraud, and risk of insider selling. And while both are very real risks that could totally wipe out my investment, I think the market is currently mispricing those odds, and to a great degree.


----------



## galumay

KnowThePast said:


> The risk/reward here, however, I think is very good.




Will be interesting to see, for once our views are very divergent, i found the risk to be overwhelming with little chance of reward. The more I looked into the company the more fishy it looked to me, the existing shareholders are bailing out enmasse at a price that is very cheap. Fact is they are bailing out at the first real opportunity due to the escrow on their holdings. This is exactly the opposite of what you would expect if the company is really a profitable concern going forward. Lots of hype and spin from the pump and dumpers on HC etc which is always a warning sign for me!

I suspect this is a train wreck coming, we have already seen considerable fraudulent auditing and accounting with various US listed Chinese companies and this may be one for us.

I very much hope I am wrong, KTP, and it turns out to be a missed opportunity for me and a multi bagger for you!


----------



## agumby

looks like your portfolio has received a boost today KTP after BYL updated the market on its position, nice jump in share price and hopefully a rise in dividend and guidance to go with it when they announce their results in august


----------



## McLovin

KnowThePast said:


> The official theory is that some minority owners who hold 190 million shares, got their shares out of the escrow and immediately started selling on market. Which is perfectly plausible. Those holders probably wanted to turn their investment into cash for some time, and listing was the means to do that. Even at these low prices they are making a great profit on their original investment. And if that is, in fact, the whole reason for the drop in price, this one is greatly undervalued.




Does that really seem plausible to you? That these investors would sell an asset for less than the cash at bank, on 2x earnings and with an implied dividend yield of 10-15% just because they couldn't possibly wait any longer to get out? IMO, that takes a fairly large leap of faith.


----------



## skc

KnowThePast said:


> Those holders probably wanted to turn their investment into cash *for some time*, and listing was the means to do that.




Have you worked out how long have these minority owners been holding?



KnowThePast said:


> Even at these low prices they are making a great profit on their original investment.




Does that really make sense? Why would they only look backwards on how much they paid? Shouldn't they look forward on what the share is worth and how much dividends would be paid etc? This company, according to the reports from the last few years, has been an absolute cash cow. They would have got their original investment back many times already. The financials are suggesting one thing, the behaviour of the holders are suggesting something completely different. 

A single distressed holder selling out? It's more than plausible. 
A group of minority holders cashing out after being locked in for a long time, and doing so in a rational manner? gain plausible. 
Almost all holders selling aggressively in unison at the first available opportunity? You have to ask... what's the rush? 



KnowThePast said:


> The risk/reward here, however, I think is very good. The interesting thing about this situation, I find, is that there’s only a few factors to consider and you can assign a percentage chance to each. Risk of fraud, and risk of insider selling. And while both are very real risks that could totally wipe out my investment, I think the market is currently mispricing those odds, and to a great degree.




I keep reading the risk/reward is very good on this. But I just don't see how. Given the uncertainty, one has to assume a 100% loss. If it is not a fraud and it goes back up towards the IPO price, you've made something like 3R. A 3:1 reward to risk is not particularly outstanding, imo. 

You may choose to assign a probability of it being a fraud, but sizing a binary outcome on probability should only be done if you have the opportunity to do so over a large sample size (e.g. you are a fund buying distressed bond). It shouldn't be done on a single position.

Anyway, not saying I am definitely right, but I believe there is much more to this story. I will post a bit more on the SBB thread tonight for you to consider.

P.S. CFO just resigned. Ooops.


----------



## McLovin

skc said:


> P.S. CFO just resigned. Ooops.




Not that I want to start second guessing things, but "personal circumstances" I call BS. He's 28 and has been given a pretty plum job of being CFO of a, albeit, small publically listed company when his only real experience was in audit and assurance (employed by SBB's auditor no less).

Even more hilarious is he will stay with the company until the 4th of August to "assist with the transition". Is there some sort of all night supermarket that sells CFOs?


----------



## KnowThePast

galumay said:


> Will be interesting to see, for once our views are very divergent, i found the risk to be overwhelming with little chance of reward.






McLovin said:


> Does that really seem plausible to you? That these investors would sell an asset for less than the cash at bank, on 2x earnings and with an implied dividend yield of 10-15% just because they couldn't possibly wait any longer to get out? IMO, that takes a fairly large leap of faith.






skc said:


> Have you worked out how long have these minority owners been holding?
> 
> Does that really make sense?
> 
> P.S. CFO just resigned. Ooops.






McLovin said:


> Not that I want to start second guessing things, but "personal circumstances" I call BS. He's 28 and has been given a pretty plum job of being CFO of a, albeit, small publically listed company when his only real experience was in audit and assurance (employed by SBB's auditor no less).
> 
> Even more hilarious is he will stay with the company until the 4th of August to "assist with the transition". Is there some sort of all night supermarket that sells CFOs?




Thanks everyone for your feedback on SBB. A big thank you in particular to McLovin and skc, your previous posts on the company have been extremely helpful. 

And I have to say that I fully agree with everything you say, the odds of losing money is very high here. What I disagree with is a risk/reward ratio. SKC proposed 3/1. That would mean that as long as the company has greater than 33% chance of being legitimate, the odds are good. Plus margin of safety, of course.

A very good point that this only works when investing in a group of such companies - but that's exactly what I'm doing. Most of my portfolio is in stocks that are depressed for various reasons and I expect a high failure rate. Because I buy companies at such low prices, all of them have very good reasons for concern and most times I have to close my eyes to them and trust in the average outcome. 

Keep in mind that my approach is different from most - I don't really pick individual companies. I invest in all the ones that meet my criteria, but I allow for manual overrides for situations where a fully automated strategy may lead me into trouble. SBB fits perfectly well in my buying criteria. And so, I ask myself - is this a situation where a manual override is necessary?

There are 3 things that are concerns with this stock:
1. Minority holders selling out at any price.
2. CFO resigning.
3. A bunch of small things that essentially add up to - It's Chinese, and there been frauds with Chinese companies before.

All 3 are warnings flags, but none add up to odds of 67% looking at hard data. That's where my manual override analysis stops - it's there to prevent overloading risk and obvious traps, nothing else.

The 3 things listed above happen all the time, and ideally I would have statistics from previous cases so that I could calculate odds properly. I don't, but I am confident the odds are in my favour.

While not part of my decision, for the discussions sake, I will go on further, in reverse order:
3 - yes, there's been Chinese companies committing fraud. I haven't seen anything that definitely proves it. Almost any company can be made to look suspicious with enough effort and I haven't seen anything beyond that. Assigning a base rate risk to it makes sense, I don't know what it is, but I suspect it is less than 10%. This is a standalone risk, however. 1, 2 and this should not be treated together - it doesn't make other factors more suspicious, as this company will always be Chinese. 1 & 2 together are more alarming than on their own, but not 3.

2. Happens all the time. Often followed by profit downgrades/writedowns. Occasionally by bankrupties. Most of the time, it's just a person moving on to another job. 

1. Happens as well, but not often in these quantities and for an illiquid stock. There's many explanations, good and bad. I won't try to guess which one, but I will tell a tale of a friend of mine. He owns a private company, incidentally deals a lot with China. Very profitable. He wanted to sell it for a very long time, but finding buyers is difficult. He recently sold a small percentage of it (<10%) to another private investor, at a price roughly equals to a PE of 2. There was no market for his shares and he wanted/needed the money. He could either sell at that price or wait two years, but he made this "illogical" decision, because he had no choice. 

His company is a little smaller than SBB and he spent the last 4 years trying to take it public on a major stock exchange. A major one, because he would likely get a higher valuation on it. Certain rules and regulations and his company's individual circumstances has made it a very long process. I am sure that once he lists, he would be happy to sell out at a very cheap price quickly, because he is sick and tired of doing the same thing for the last 20 years. 

While this is obviously not the same scenario with SBB, it rhymes. So in my mind, I can very well see a scenario where holders sell out at such prices.

I don't think it is possible to fully trace who the real owners/benefitors of the minority holders are. SKC, did you find something? Looking forward to your upcoming post.


----------



## KnowThePast

agumby said:


> looks like your portfolio has received a boost today KTP after BYL updated the market on its position, nice jump in share price and hopefully a rise in dividend and guidance to go with it when they announce their results in august




Yep, that was a brilliant result.

SDI, KKT, BYL and DTL have all announced good guidances this month.

BOL release results I was expecting.

Waiting for others, it is most certainly not going to be all good news.


----------



## skc

KnowThePast said:


> And I have to say that I fully agree with everything you say, the odds of losing money is very high here. What I disagree with is a risk/reward ratio. SKC proposed 3/1. That would mean that as long as the company has greater than 33% chance of being legitimate, the odds are good. Plus margin of safety, of course.




Your position sizing on SBB although small in absolute terms, is significantly larger than your other positions in risk terms. Putting $2k on a company that could go to zero vs putting $2k on a company that is in a cyclical downtrun is very different.

But I am sure $2k isn't life changing to you one way or the other so it's really not that big a deal. I am more interested in making sure that no one goes "back up the truck" (to borrow a term popular on HC) on this one thinking that they can generate 3:1 reward:risk.

I will respond to the specifics on SBB on the SBB thread.

P.S. Good stuff on BYL (a good calculated bet) and KKT (a well spotted unknown).


----------



## KnowThePast

skc said:


> Your position sizing on SBB although small in absolute terms, is significantly larger than your other positions in risk terms. Putting $2k on a company that could go to zero vs putting $2k on a company that is in a cyclical downtrun is very different.
> 
> But I am sure $2k isn't life changing to you one way or the other so it's really not that big a deal. I am more interested in making sure that no one goes "back up the truck" (to borrow a term popular on HC) on this one thinking that they can generate 3:1 reward:risk.
> 
> I will respond to the specifics on SBB on the SBB thread.
> 
> P.S. Good stuff on BYL (a good calculated bet) and KKT (a well spotted unknown).




Thanks skc,

My position on SBB is actually $1250, less than normal. I think I got position sizing/risk/reward ratio about right here. 

And I agree with the disclaimer, this is a high risk bet that is not suitable for most people, I'd say.


----------



## KnowThePast

Year 2, month 1.




A big month. My portfolio value increased by $4,137, or 15.27%.

This brings my total return closer to the indexes, I now include two to measure against. XSOAI is where pretty much all of my holdings are, and that is a more relevant one to measure investment ability. XAOAI is what I could achieve without active management, and is an important benchmark as well.

A few of my holdings announced trading updates during the months, so far they have all been favourable. It's been very good to see some of my holdings improve from fundamental perspective. I now feel that some of these gains are justified, whereas previous price movements were just noise, based on no fundamental changes.

My once a month rule has hurt me once again. I wanted to top up CKF around $2, but by the time I got around to it, it went up to over $2.40. But no complaints, with that spare money I picked up SBB, and if things stay as are, it should provide a nice boost to my August performance.

I'll be on holidays through most of August and will try to minimize my time at the computer. Probably not a bad thing, considering the usual information overload during the reporting season.


----------



## KnowThePast

Bought BYI 1050 @ $1.24

Beyond International is an Australian-based producer of television content and distributor of television programs, feature films and home entertainment.

Revenue/EBIT for 2013 is divided as such: (I’ve roughly estimate the allocation of corporate expenses)
Production – 44.1% / 82.9%
Home Entertainment – 22.5% / 9.5%
Distribution – 22.1% / 14.4%
Digital Marketing – 11.3% / -6.4%

And so, despite make less than half of revenue, production segment is responsible for the majority of profit. And 
this is the biggest concern, while they record a number of different programs, their profitability depends on landing a ‘hit’ that will run for many seasons. They have some at the moment, but how much certainty should one place on them being able to continue repeating it? Judging by the quality and originality of many of the TV shows, it doesn’t appear a daunting task, but that may be just my taste. 

On the brighter side, some of their current shows are likely to be running for a few more seasons, giving some stability to earnings.

Directors own over a third of shares, there’s no debt, and the business seems to be well managed by all indicators. 

This is not an easy decision, there’s plenty to be worried about with this business. Question is whether it is cheap enough to offset that. Numbers are:
PE ~ 9
EV/EBIT ~ 6.6
Price/Book ~ 1.69
Price/Sales ~ 0.70
Dividend yield ~ 6.9%.

It is cheap, but only if the profitability does not continue falling. And long term, this business has less certainty of earnings than most others. 

Looking at their ROC and EBIT margin, they’ve been higher the last few years than before. The big question is whether the business now has a competitive edge that will see it maintain these kind of margins, or whether it will revert back to old averages. If it reverts, than the profitability will roughly halve. And, assuming that half of 2013 earnings is the long term profitability to be expected from this business, numbers become:

PE: 15
EV/EBIT: 10.86
Dividend yield: 3.45%

Of course, the current director estimate is for 15-20% drop in 2014 and then growth again in 2015, a very different outcome from 50% drop. But realistically, this is what I think the worst case scenario is for this business, assuming it remains in roughly its current state.


----------



## galumay

KnowThePast said:


> Bought BYI 1050 @ $1.24




I had these on my watch list for a while KTP, the thing that put me off was their reliance on Mythbusters - which I believe they have lost/or is not being continued - either way a big hit for them.


----------



## KnowThePast

galumay said:


> I had these on my watch list for a while KTP, the thing that put me off was their reliance on Mythbusters - which I believe they have lost/or is not being continued - either way a big hit for them.




Agreed galumay, that's the biggest risk. Long term, the success of the business relies in great part on producing hits.

With the number of shows that they produce, I think they will find success with one sooner or later, and in the meantime, they have some other income to get them through tougher times.


----------



## Sir Osisofliver

Hi KTP,

Thought I would pop in and say G'day and have a chat about how things are going. I see from your last post that you are doing all right...good to know.

Ok so I also thought I would take this opportunity to talk about CAB. *Disclaimer* I currently hold CAB* I wrote the below on the 31st of July last year for you...



Sir Osisofliver said:


> I'm not wanting to sound critical here, just trying to demonstrate the differences in how people (and therefore the market) think, using myself in the role as a commentator/analyser on the stocks you've selected as "good" companies. So far you've indicated that you have purchased CAB, SDL and LYL. Ok let's take a look at one of them and I'll choose CAB because it was the first you purchased and you mention it below. (I haven't looked at CAB for a while - so this should be interesting). This is the normal process I go through, (and for this example will be somewhat superficial - I just want to tell you what I'm thinking)... *NOTE - I DO NOT HOLD CAB. THIS IS NOT ADVICE...DON"T MAKE ME GET THE DISCLAIMERS OUT. I MEAN IT. DYOR.*
> 
> CAB - Mcap 523M 120 Million shares on issue  Average of broker consensus - Sell recommendation price target $4.49  current price $4.43  (Ok so with that MCAP the stock is well outside the top end of the market. As such in terms of how I would categorize the stock it does not meet my criteria for a "Blue Chip" portfolio. (It does meet a couple of the requirements, but it fails for me to class it as blue chip {and therefore be prepared to hold the stock on a longer-term - across market cycles - basis}). It would therefore fit into one of the other categories I use to determine the appropriate time to invest in the this type of stock. Income, Growth, Cyclical or Defensive. These are dominant categories - frequently stocks possess attributes across categories. Looking at the stock it would appear to have income characteristics (nominally due to the high payout ratio), but have significant growth/cyclical characteristics. It's greatest optimal entry for a capital growth objective (as opposed to an income objective) would therefore *tend* to occur in a late cycle of the broader market cycle. Prior to late cycle it would be suitable as a trading position.  *Are you intending to hold this for yield or growth?*
> 
> Earnings 0.48
> Market 0.98
> Sector 0.68
> 
> Actual NPAT fall in 2012 Forecast NPAT fall in 2013 2014  Ouch! errr that's not attractive, that's catching a falling sword. There would need to be a significant announcement on the 22nd of August when it releases it's Prelim Report. Taking a look at those numbers immediately turns me off the stock and makes me wonder if there is a short position to be had at the end of August depending upon the prelim report.... we'll see.
> 
> Top five shareholders hold 48.94% of issued capital Hey that's not half bad...hope none of them pull the pin. In fact I think I might see if any of them have been adjusting their holdings (Looking for either an overhang or predatory behaviour)... Hmm So UBS Australia has been been selling down but UBS London have been buying up as has Aberdeen (based in Singapore) in the last few months....in fact hold about 14% of issued capital... I see them doing this for yield in comparison to yields in their home countries - confirmation of the income characteristics I spoke above.
> 
> Hmmm ok so a purchase now would seem to be a contrary to *popular* opinion but overall Institutions seem keen under an income basis to acquire. On one hand you have an obvious headwind in the short term time-frame you are working against. On the other hand the Insto's tend to be sticky holders and 14% holding isn't insignificant). But I do want to ask.....how does the above match up with...
> 
> My bolds.
> 
> It would seem that the market, superficially at least, does not agree with your assessment. But, this is the art of stock selection, finding good companies that are sold well below their intrinsic value, and then allowing the market time to recognize the intrinsic value. *I would have said that (without doing any TA) that you were early in your purchase if your objective is capital growth, as an upwards trend of sentiment does not yet exist, but that early signs are there for the possibility, but it may be six to 12 months away.* I would start looking at the announcements from here on looking for fundamental stability and news flow. It is at this point I would normally go do TA to see if the tech and fund align or if I just got it wrong - but you aren't interested in that. (One quick look tells me that the stock has been neutrally trending since 2009 and in a negative trend since May 2012.....a period of time where the market went from 4088 to +5000... It's trending *against* the market).  Given that you have said that you are benchmarking against the index....*How do you feel about that? (given that expectation is fundamental to financial risk).*
> 
> Cheers
> Sir O




The bit I would like to focus on is in the last paragraph that I highlighted in bold. You're now up...about $0.90 or 23.82% on your original purchase, but take a look at the chart below...




Ok so I was two weeks out and it started it's capital growth in Mid July...

*So as I usually do...it's question time!*

I didn't hold for almost a year..a year in which I was able to find other stocks, for Eg I'm on record as holding JBH during that period of time and getting a ~20% price movement before exit in November. *Does this help explain why previously I have said that I attempt to time my entries and exits?*

At various points in the first quarter you were positive and negative on the stock.  *How did you feel about this?* 

You've also said.... 







> I also think you misunderstand my approach - it is not buy and hold forever. I will sell things on a regular basis and I have clear price targets + trigger points when I will do so. I also do use position sizing and timed entries.




*So what's the thinking with CAB at the present time? What do you think will happen to the share price in...the immediate term and the longer term?*

*What caused the price movement?*

Here's a longer term look at the price chart...




*Have you decided upon a profit target? *

That's all for now, I'll come visit again and check out your responses.

Cheers

Sir O


----------



## KnowThePast

Sold all of my CAB, 500 @ $5.39, for a profit of 36% ($753).

Sir O posted the question at a very convenient time, I can explain my reason for selling and answer his post in one go.



Sir Osisofliver said:


> Hi KTP,
> 
> Thought I would pop in and say G'day and have a chat about how things are going. I see from your last post that you are doing all right...good to know.
> 
> Ok so I also thought I would take this opportunity to talk about CAB. *Disclaimer* I currently hold CAB* I wrote the below on the 31st of July last year for you...
> 
> 
> 
> The bit I would like to focus on is in the last paragraph that I highlighted in bold. You're now up...about $0.90 or 23.82% on your original purchase, but take a look at the chart below...
> 
> View attachment 59111
> 
> 
> Ok so I was two weeks out and it started it's capital growth in Mid July...
> 
> *So as I usually do...it's question time!*
> 
> I didn't hold for almost a year..a year in which I was able to find other stocks, for Eg I'm on record as holding JBH during that period of time and getting a ~20% price movement before exit in November. *Does this help explain why previously I have said that I attempt to time my entries and exits?*
> 
> At various points in the first quarter you were positive and negative on the stock.  *How did you feel about this?*
> 
> You've also said....
> 
> *So what's the thinking with CAB at the present time? What do you think will happen to the share price in...the immediate term and the longer term?*
> 
> *What caused the price movement?*
> 
> Here's a longer term look at the price chart...
> 
> View attachment 59113
> 
> 
> *Have you decided upon a profit target? *
> 
> That's all for now, I'll come visit again and check out your responses.
> 
> Cheers
> 
> Sir O




Looking back, your prediction of when the price may go up was spot on, incredibly so. 

My previous attempts to time entries and exits have conclusively proven that I have absolutely no ability to do so. My current reluctance to venture into it is not because I think it is not possible, quite the contrary. Rather, it is because doing so will often, if not most of the time, be at exact contradition to my current strategy. There may be a perfectly good way of combining fundamental and technical, but I don't see how my strategy would fit. As my strategy is essentially to buy beaten down stocks that are mostly on the way down, it will not be often that technical analysts will agree with my decisions. I would say that lots of fundamentally oriented investors will not agree with me either.

I make zero effort in trying to predict what will happen with the price. I buy when the price is substantially below my valuation and leave it at that. Along the way, I usually collect better than average dividends (6.5% with CAB). I find this method to be more effective in protecting against losses. There's some studies that show this, looking at my current portfolio - I only have 2 stocks out of 22 that fell more than 3%. Both of these, incidently, were my early purchases when I didn't yet buy solely on statistical cheapness (LYL and CKL).

CAB has been a stranger in my portfolio. Together with my other early purchases, it didn't quite fit my statistical portfolio, although it wasn't far off. So, in a way, I was eager to get rid of it, if the opportunity presented itself.

While most of my buy decisions are now automated, I do usually need to make a choice between several opportunities. That is mainly a limitation of my once a month rule, I am not yet convinced this adds value. Neverthless, one of the things I consider is a catalyst that could either improve businesss performance, or change perception of the company. No matter how undervalued a company may be, the price usually does not increase until something happens. CAB has been strange in that respect, I cannot see any reason why the price started to move. The report was pretty much was expected, no other news of any significance. So, my opinion on it now is no different to what it was a year ago.

I have an automated price target for all my shares, but that is when I think the company is grossly overvalued. Usually, I will manually evaluate it and decide whether it makes sense to sell now. With CAB, I think it is still trading at a very reasonable valuation and is a good investment case even at the current prices. But, I think I see better opportunities elsewhere.


----------



## galumay

KnowThePast said:


> Sold all of my CAB, 500 @ $5.39, for a profit of 36% ($753).
> 
> .... With CAB, I think it is still trading at a very reasonable valuation and is a good investment case even at the current prices. But, I think I see better opportunities elsewhere.




Considered selling CAB myself, i am up about 40% on paper also. After consideration I decided to hold on, like you I think they are still reasonably priced. I dont need the capital for other opportunities so less incentive to sell for me!

I suspect the reason they have recovered so well is that the updated financials show the impact of the legislative changes have been less than expected - and certainly less that the repricing implied. Hence the price is realigning with our valuation. 

I am happy to pick up the very handy yield and see where the SP goes over the medium term.


----------



## Sir Osisofliver

KnowThePast said:


> Sold all of my CAB, 500 @ $5.39, for a profit of 36% ($753).
> 
> Sir O posted the question at a very convenient time, I can explain my reason for selling and answer his post in one go.
> 
> 
> 
> Looking back, your prediction of when the price may go up was spot on, incredibly so.
> 
> My previous attempts to time entries and exits have conclusively proven that I have absolutely no ability to do so. My current reluctance to venture into it is not because I think it is not possible, quite the contrary. Rather, it is because doing so will often, if not most of the time, be at exact contradition to my current strategy. There may be a perfectly good way of combining fundamental and technical, but I don't see how my strategy would fit. As my strategy is essentially to buy beaten down stocks that are mostly on the way down, it will not be often that technical analysts will agree with my decisions. I would say that lots of fundamentally oriented investors will not agree with me either.
> 
> I make zero effort in trying to predict what will happen with the price. I buy when the price is substantially below my valuation and leave it at that. Along the way, I usually collect better than average dividends (6.5% with CAB). I find this method to be more effective in protecting against losses. There's some studies that show this, looking at my current portfolio - I only have 2 stocks out of 22 that fell more than 3%. Both of these, incidently, were my early purchases when I didn't yet buy solely on statistical cheapness (LYL and CKL).
> 
> CAB has been a stranger in my portfolio. Together with my other early purchases, it didn't quite fit my statistical portfolio, although it wasn't far off. So, in a way, I was eager to get rid of it, if the opportunity presented itself.




Interesting. You're essentially using a strong dividend yield to cushion potential downside risk until capital movement is in your favour.

Another question. *What now for CAB? When will you look at it again? *


> While most of my buy decisions are now automated, I do usually need to make a choice between several opportunities. That is mainly a limitation of my once a month rule, I am not yet convinced this adds value. Neverthless, one of the things I consider is a catalyst that could either improve businesss performance, or change perception of the company. No matter how undervalued a company may be, the price usually does not increase until something happens. CAB has been strange in that respect, I cannot see any reason why the price started to move. The report was pretty much was expected, no other news of any significance. So, my opinion on it now is no different to what it was a year ago.
> 
> 
> 
> 
> 
> 
> 
> 
> Everything has a reason. Sometimes we can only see that reason in hindsight, which is why evaluation is important after the fact. I encourage you to revisit CAB in six months time to see if you can figure that out.
> 
> 
> 
> 
> 
> I have an automated price target for all my shares, but that is when I think the company is grossly overvalued. Usually, I will manually evaluate it and decide whether it makes sense to sell now. With CAB, I think it is still trading at a very reasonable valuation and is a good investment case even at the current prices. But, I think I see better opportunities elsewhere.
Click to expand...



Another question. *How will you feel in six months time if CAB was trading at $8 ish dollars?*


----------



## KnowThePast

Sir Osisofliver said:


> Interesting. You're essentially using a strong dividend yield to cushion potential downside risk until capital movement is in your favour.




Actually, not really. It's just that the type of shares that I buy tend to produce better dividend yield historically. It is not intentional. The part that protects from the downside is buying companies that are at the bottom value-wise, compared to the rest of the market.



Sir Osisofliver said:


> Another question. *What now for CAB? When will you look at it again? *




The two big questions are how the company will be affected by change in regulations and change in competitive landscape by Uber and the like. These, I think, will take years to play out and I don't have strong views on these. I think there's a better than 50% chance that CAB will remain the dominant player and its profitability will be not much different from what it is now. In addition to that, add the bus segment which is unaffected by these issues, and I get a valuation well above current market price. But I am fully aware that there's also fully aware of the risk that CAB may no longer remain a dominant player, and there's all the scenarios in between. 

When will I look at again?
1. When price drops.
2. When there are changes that cause a change in my valuation.
3. Perhaps even at the current price, again, should there no longer be other opportunities.



Sir Osisofliver said:


> Another question. *How will you feel in six months time if CAB was trading at $8 ish dollars?*




I'd feel perfectly fine. I think that one of the biggest benefits of running an automated strategy like mine is that buy and sell prices are not manual decision. Furthermore, my strategy is essentially buying beaten down companies and waiting for them to revert to mean. After that, it's someone else's journey.

It is impossible to ignore just how right you were with timing on CAB. And so, I would really appreciate if you could share your thoughts on it as well?


----------



## KnowThePast

galumay said:


> Considered selling CAB myself, i am up about 40% on paper also. After consideration I decided to hold on, like you I think they are still reasonably priced. I dont need the capital for other opportunities so less incentive to sell for me!
> 
> I suspect the reason they have recovered so well is that the updated financials show the impact of the legislative changes have been less than expected - and certainly less that the repricing implied. Hence the price is realigning with our valuation.
> 
> I am happy to pick up the very handy yield and see where the SP goes over the medium term.




Hi galumay,

You will most likely be proven right, in my opinion.

For me, chance of further price appreciation in the future is well above 50%.

I am selling because (discount to valuation) X (chance of it happening) is not as attractive as some other opportunities I see. But it's mainly because the discount on other opportunities is a lot greater, the chances are a lot worse. So I am well aware of the fact that this decision will probably look stupid in the future.

I think it fits a lot better to your strategy than mine, I wish you well.


----------



## Sir Osisofliver

KnowThePast said:


> The two big questions are how the company will be affected by change in regulations and change in competitive landscape by Uber and the like. These, I think, will take years to play out and I don't have strong views on these. I think there's a better than 50% chance that CAB will remain the dominant player and its profitability will be not much different from what it is now. In addition to that, add the bus segment which is unaffected by these issues, and I get a valuation well above current market price. But I am fully aware that there's also fully aware of the risk that CAB may no longer remain a dominant player, and there's all the scenarios in between.
> 
> When will I look at again?
> 1. When price drops.
> 2. When there are changes that cause a change in my valuation.
> 3. Perhaps even at the current price, again, should there no longer be other opportunities.




*How much of a drop is required?*
*What if doesn't drop the required amount?*


> I'd feel perfectly fine. I think that one of the biggest benefits of running an automated strategy like mine is that buy and sell prices are not manual decision. Furthermore, my strategy is essentially buying beaten down companies and waiting for them to revert to mean. After that, it's someone else's journey.




This is a great attitude to have (in my view). Many of the mistakes of new investors/traders is to agonize over the decision process of when to buy and sell, when is the right time to take profit....  But you did say this...


> So I am well aware of the fact that this decision will probably look stupid in the future.




There is no stupid. You booked a nice profit on a stock that was in line with your chosen methodology. Congratulations, you made money...put it in the winning pile, put money aside to pay the tax man for your diligent effort....and at an appropriate time in the future *evaluate* the trade against against your expectations and methodology in the absence of emotive factors.  Only by doing the right evaluation will you get *better*.







> It is impossible to ignore just how right you were with timing on CAB. And so, I would really appreciate if you could share your thoughts on it as well?




*Disclaimer I hold CAB. The following is NOT advice, DYOR
At the time we were discussing it I did not hold CAB. Currently I do. Although I may not for too much longer. I also need to be careful because I am a Licencee Representative and I am not comfortable in giving an opinion that may be construed as advice. That said I am happy to give you my thoughts at this time. This will be technical in nature, you already have a good handle on the fundamental issues. Much of this will be beyond you if something interests you, please ask.

*Background*
I entered on the 4th of July at $4.1457 for 18,000 units, in accordance with a positional sizing model I use. At that time my target from a technical perspective was $4.50, the point of significant horizontal resistance. This is not a take profit level, merely where I anticipated that the stock would find some price resistance. (You'll notice that I'm being flexible here, waiting for an *emergent* pattern). When I say emergent I am talking about...this.




When the share price found support against what was resistance and continued its impulsive move up I placed a secondary target at $5.41 (Share reached $5.40 yesterday). Once again this is not a take profit level, but an area of potential price resistance. (Still flexible). *However*, the share price is exhibiting an unsustainable compounding curve. (This is a function of a chaotic growth model and hence the emergent pattern is revealed over a *short-term time frame.*) Why is the short-term important? Chaotic models show in micro what they exhibit in macro...IE there is now the *potential* for the stock to exhibit over the longer-term time frame an upwardly compounding price movement. I estimate at this time a three to four year horizon for this compound structure to play out. (If you would like to see what that might look like....there's one in the CAB chart already, the move from 2003 to 2007). *If this is accurate*..then the price target over that time frame would closer to ~$14.00 (lets look back at this in three-four years and see if I got close  ) 

In the immediate term however I still have a short-term unsustainable compound curve...meaning that I *anticipate* a retracement or consolidation in the share price...but only in the short-term. I am therefore faced with a choice. I can take my profit now and then attempt to purchase once again at the bottom of the retracement level, or I can anticipate a retracement will occur, set an appropriate stop level and look to see whether the longer-term emergent pattern is revealed.

Question *Which would you do?*

Cheers

Sir O


----------



## KnowThePast

Sir Osisofliver said:


> *How much of a drop is required?*
> *What if doesn't drop the required amount?*




The latest report didn't change my valuation of CAB, so my buying point remains roughly the same. Whether I buy it or not again, if it drops, will mainly depend on other opportunities available that compete for a spot in my portfolio.



Sir Osisofliver said:


> This is a great attitude to have (in my view). Many of the mistakes of new investors/traders is to agonize over the decision process of when to buy and sell, when is the right time to take profit....  But you did say this...
> 
> 
> There is no stupid. You booked a nice profit on a stock that was in line with your chosen methodology. Congratulations, you made money...put it in the winning pile, put money aside to pay the tax man for your diligent effort....and at an appropriate time in the future *evaluate* the trade against against your expectations and methodology in the absence of emotive factors.  Only by doing the right evaluation will you get *better*.
> 
> *Disclaimer I hold CAB. The following is NOT advice, DYOR
> At the time we were discussing it I did not hold CAB. Currently I do. Although I may not for too much longer. I also need to be careful because I am a Licencee Representative and I am not comfortable in giving an opinion that may be construed as advice. That said I am happy to give you my thoughts at this time. This will be technical in nature, you already have a good handle on the fundamental issues. Much of this will be beyond you if something interests you, please ask.
> 
> *Background*
> I entered on the 4th of July at $4.1457 for 18,000 units, in accordance with a positional sizing model I use. At that time my target from a technical perspective was $4.50, the point of significant horizontal resistance. This is not a take profit level, merely where I anticipated that the stock would find some price resistance. (You'll notice that I'm being flexible here, waiting for an *emergent* pattern). When I say emergent I am talking about...this.
> 
> View attachment 59189
> 
> 
> When the share price found support against what was resistance and continued its impulsive move up I placed a secondary target at $5.41 (Share reached $5.40 yesterday). Once again this is not a take profit level, but an area of potential price resistance. (Still flexible). *However*, the share price is exhibiting an unsustainable compounding curve. (This is a function of a chaotic growth model and hence the emergent pattern is revealed over a *short-term time frame.*) Why is the short-term important? Chaotic models show in micro what they exhibit in macro...IE there is now the *potential* for the stock to exhibit over the longer-term time frame an upwardly compounding price movement. I estimate at this time a three to four year horizon for this compound structure to play out. (If you would like to see what that might look like....there's one in the CAB chart already, the move from 2003 to 2007). *If this is accurate*..then the price target over that time frame would closer to ~$14.00 (lets look back at this in three-four years and see if I got close  )
> 
> In the immediate term however I still have a short-term unsustainable compound curve...meaning that I *anticipate* a retracement or consolidation in the share price...but only in the short-term. I am therefore faced with a choice. I can take my profit now and then attempt to purchase once again at the bottom of the retracement level, or I can anticipate a retracement will occur, set an appropriate stop level and look to see whether the longer-term emergent pattern is revealed.
> 
> Question *Which would you do?*
> 
> Cheers
> 
> Sir O




Thanks Sir O, for the kind words, and a detailed explanation of your trade.

Fundamentally, I do not see how CAB could be worth anywhere near $14 in the next few years. But it certainly could get halfway there.

What I would do would depend on position sizing. If it's a small position, I would leave it until it fully plays out. For a larger position size, I would sell half, or keep a tight stop loss on that half.


----------



## KnowThePast

A monthly update:




It's been a very good reporting season for me, with most of my companies announcing a better than expected result. My portfolio has increase in value by $1,264 (4.3%) for the month of August. For the first 2 months of the year, profit was almost 19%. Based on latest dividends announced, my portfolio now yields over 5.5% in dividends based on my purchase price.

Despite the good result, I think the improvement in fundamentals has been greater than the rise in share price. I've sold CAB, but for most others, I still consider them to be significantly underpriced. 

This has been a very pleasant first year's reporting period for me, but with my average holding period expected to be around 3 years, these are still early days.


----------



## KnowThePast

New purchase - TCN, 15302 @ $0.083

A small group that owns three software companies. I like the fact that all of them are in small niches. There's no expectation that they will make it big, but they all have potential to achieve excellent returns in their markets. 

These niche markets, while small, still have potential for products achieving 10's of millions in sales, rather than current millions.

Similar to my purchase in ICS, this is a punt on future growth. It does, however, fit into the statistical filters in my software, so this one is an automated trade for me.


----------



## KnowThePast

Monthly update.

My portfolio fell $1,692 (5.8%) this month, about the same as XAO. No major news in any of my holdings.


----------



## KnowThePast

Bought ARI, 3600 @ $0.355.

I then looked at financials and outlook, it looks pretty horrible.


----------



## galumay

KnowThePast said:


> Bought ARI, 3600 @ $0.355.
> 
> I then looked at financials and outlook, it looks pretty horrible.




LOL! Very candid ARI. I am sure we have all done it at some point! I rushed in and filled my bags about a week early with a range of companies on my watch list - the only consolation i have is that i had looked at the financials first!!

EDIT - Sheesh! Just had a look at ARI, thats scary! I never touch resource companies for a start, but not much is pretty in there! Lets hope its a successful contrarian play for you KTP!

To add some further thoughts, it is a good illustration of why mining companies are so dangerous for investors, reading their annual report everything looks pretty rosy, they have had a good year with record profit, but the drop in iron ore prices has now basically wiped out everything, looks like there will be no dividend next year EPS slashed, cash flow will take a massive hit, and then the nexus of cyclic commodity prices and high debt will combine to wreak havoc.


----------



## skc

KnowThePast said:


> Bought ARI, 3600 @ $0.355.
> 
> I then looked at financials and outlook, it looks pretty horrible.




I am assuming that you are looking at the financials post the mega capital raising?

The outlook is horrible, but the balance sheet is somewhat repaired.


----------



## KnowThePast

I should of put of smiley at the end of my last post, my attempts at humor are sometimes too subtle, in addition to not being very funny.

I did actually spend some time researching the company, even though the purchase was primarily motivated by a statistical filter. More and more, I come to the conclusion that I should invest with eyes closed, when it comes to individual picks. My brain power needs to mainly come in at portfolio level, keeping an eye on diversification, cycles, etc. But as far as individual picks now, I just buy what comes up in my scan. At roughly 4% per stock, bought gradually over a long period of time, a bad stock here and there is not going to hurt me much.

The research that I do on the stocks I buy are mainly for my own curiosity. 



galumay said:


> LOL! Very candid ARI. I am sure we have all done it at some point! I rushed in and filled my bags about a week early with a range of companies on my watch list - the only consolation i have is that i had looked at the financials first!!
> 
> EDIT - Sheesh! Just had a look at ARI, thats scary! I never touch resource companies for a start, but not much is pretty in there! Lets hope its a successful contrarian play for you KTP!
> 
> To add some further thoughts, it is a good illustration of why mining companies are so dangerous for investors, reading their annual report everything looks pretty rosy, they have had a good year with record profit, but the drop in iron ore prices has now basically wiped out everything, looks like there will be no dividend next year EPS slashed, cash flow will take a massive hit, and then the nexus of cyclic commodity prices and high debt will combine to wreak havoc.




Generally agreed. But timing is important. When in the cycle you buy and most importantly, at what price, plays a larger role.



skc said:


> I am assuming that you are looking at the financials post the mega capital raising?
> 
> The outlook is horrible, but the balance sheet is somewhat repaired.





Yes, of course. Makes things slightly more complicated.

One of the few good things about share dilutions in these situations is that they dilute with cash


----------



## galumay

KnowThePast said:


> I should of put of smiley at the end of my last post, my attempts at humor are sometimes too subtle, in addition to not being very funny.




Too harsh! It was funny.



> I did actually spend some time researching the company, even though the purchase was primarily motivated by a statistical filter. More and more, I come to the conclusion that I should invest with eyes closed, when it comes to individual picks. My brain power needs to mainly come in at portfolio level, keeping an eye on diversification, cycles, etc. But as far as individual picks now, I just buy what comes up in my scan. At roughly 4% per stock, bought gradually over a long period of time, a bad stock here and there is not going to hurt me much.
> 
> The research that I do on the stocks I buy are mainly for my own curiosity.




Interesting, i have gone more the other way! I am doing even more research on individual companies that make it into my watchlist (based on my filters). I also have much bigger position sizes - both in my investment and SMSF portfolios, so more exposed to a bad choice!



> Generally agreed. But timing is important. When in the cycle you buy and most importantly, at what price, plays a larger role.




Its also a point of difference, of course I would like to pay as little as possible, but with my strategy it doesnt matter so much where we are in any given cycle, i am in for the long haul and as long as my research is up to scratch and the companies i buy into are good enough I will ride out the cycles of the market in the long run.

Its so valuable to see your documentation of your investment strategy and your reasoning, its very helpful and makes me - and I am sure others, question their own strategies and think about why we do what we do. I dont update my thread much now because I am fully invested and wont be selling anything anytime soon so its a bit boring!


----------



## KnowThePast

galumay said:


> Too harsh! It was funny.
> 
> 
> 
> Interesting, i have gone more the other way! I am doing even more research on individual companies that make it into my watchlist (based on my filters). I also have much bigger position sizes - both in my investment and SMSF portfolios, so more exposed to a bad choice!
> 
> 
> 
> Its also a point of difference, of course I would like to pay as little as possible, but with my strategy it doesnt matter so much where we are in any given cycle, i am in for the long haul and as long as my research is up to scratch and the companies i buy into are good enough I will ride out the cycles of the market in the long run.
> 
> Its so valuable to see your documentation of your investment strategy and your reasoning, its very helpful and makes me - and I am sure others, question their own strategies and think about why we do what we do. I dont update my thread much now because I am fully invested and wont be selling anything anytime soon so its a bit boring!




Thanks galumay,

Something everyone says too often is that one needs to find an approach that works for you. But despite being overused, it is an important concept. While there may be a perfect strategy, the one that will work best is one that you are happy following. Without enjoyment of either the process or results, there will be no success.

I do not see myself becoming rich due to my share investments, although I hope it will help. At some point I realized that enjoying the process should be my number one priority. Everything else will fall into place at some point.

Documenting my progress in this thread has been invaluable. My brain does not seem to work to full capacity until I either write things down or discuss them with someone. Feedback on this forum has been of great value, but just writing things down activates some brain cells that would not have otherwise. 

Looking back at what I've written a year ago, my approach has significantly changed. But having it written down refreshes my mind on reasoning that prompted me to change, which has been very important as well.


----------



## galumay

KnowThePast said:


> Looking back at what I've written a year ago, my approach has significantly changed. But having it written down refreshes my mind on reasoning that prompted me to change, which has been very important as well.




Very good point, I find the same thing with my notes on my own strategy, i keep a document that is a record of my reasons for purchasing shares in each company, with regular updates about the performance of the company. I also keep a running commentary on my overall strategy, no doubt I also find that writing stuff down really helps with clarity and reassessment.

I also use it to go back and apply new learning, so the stuff I am learning about cash flow in another thread, I am taking back into my journal of strategy and checking against each company.

ASF is such a valuable resource for learning and sharing, we are very lucky!


----------



## KnowThePast

Another 2 purchases today. With some spare money from CAB purchase, the market in a decline, and very few opportunities remaining in my filters, I decided to abandon my once a month rule and fill up. 

Once I'm full, I would imagine a reduced activity on my portfolio, unless the market is "kind" enough to continue going down. While it is not pleasant seeing my portfolio reduce in value, having almost 50% of funds in cash makes it as much of an opportunity as a cost. Once I buy the remaining few, I will still have 30-40% in cash waiting for furher opportunities.

NWH went ex-div today, giving me a very nice, 5 cent dividend, but the price dropped even further. So, I've topped up by 1650 share @ $0.755. My average purchase price for the lot is now $0.88.


I've also bought CLT, 6720 @ $0.19.

Looking past the illiquid horror that it currently is, there is actually a business model that could result in a fantastic economy of scale if it ever grows to that point. Mind you, this is not my reason for investment here, merely an observation.


----------



## skc

KnowThePast said:


> I've also bought CLT, 6720 @ $0.19.
> 
> Looking past the illiquid horror that it currently is, there is actually a business model that could result in a fantastic economy of scale if it ever grows to that point. Mind you, this is not my reason for investment here, merely an observation.




Can you elaborate on this purchase a bit more? How does it meet your criteria?


----------



## KnowThePast

skc said:


> Can you elaborate on this purchase a bit more? How does it meet your criteria?




A quick way to describe it - it's cheap.
A more detailed way to describe it - it's very cheap.

Cash - Total Liabilities = $9.8m, it's almost a net-net.
For a market cap of $11m, you get some contracts that are bringing in $82m of revenue a year. It's low margin work, but the cost base would be fairly variable as well, I would imagine. 

If this business ever achieves consistent margins of 2%+, it will be a good investment. With economies of scale and a few good contracts, this could well be around 10%, but as I said, I don't take it into account. 

As I said, the cost base is relatively variable, they don't have much debt, management thinks that things are improving. And given its illiquidity and ugly past, noone is looking at them.

It's a high risk play that only makes sense in a diversified portfolio. Such as mine.

Have you been looking at them as well, skc? I didn't think they were your type.


----------



## McLovin

KnowThePast said:


> Cash - Total Liabilities = $9.8m, it's almost a net-net.




Where did you get the numbers for the calculation from?

From the 30 June accounts I see cash of $2,551 and total liabilities of $12,721.

Without knowing any better, and looking at their earn/burn of cash it looks to me like a cap raising is just around the corner.


----------



## KnowThePast

McLovin said:


> Where did you get the numbers for the calculation from?
> 
> From the 30 June accounts I see cash of $2,551 and total liabilities of $12,721.
> 
> Without knowing any better, and looking at their earn/burn of cash it looks to me like a cap raising is just around the corner.




Sorry, mistyped.

I meant Current Assets, not cash.

And yes, they may need cash if things don't improve.


----------



## skc

KnowThePast said:


> It's a high risk play that only makes sense in a diversified portfolio. Such as mine.
> 
> Have you been looking at them as well, skc? I didn't think they were your type.




I actually held them back in the days when they had heaps of cash on the balance sheet. This was my one line skinny on it from Feb 2011, when the share price was 36.5c



> Telecom resale. SOI 70m. HY profit $0.7m (without interest). Cash $18.5m (26.4cps). PE=10, target 48c.




The business was at least profitable back with cash cushioning the downside.

But these days CLT doesn't have any profit to show for it's revenue. It has also breached it's debt covenant (interest cover ratio) so it will need a real turnaround just to stay a going concern.

I have to say it fits your criteria of "ugly" but I can't say it fits your criteria of "cheap".


----------



## KnowThePast

skc said:


> I actually held them back in the days when they had heaps of cash on the balance sheet. This was my one line skinny on it from Feb 2011, when the share price was 36.5c
> 
> 
> 
> The business was at least profitable back with cash cushioning the downside.
> 
> But these days CLT doesn't have any profit to show for it's revenue. It has also breached it's debt covenant (interest cover ratio) so it will need a real turnaround just to stay a going concern.
> 
> I have to say it fits your criteria of "ugly" but I can't say it fits your criteria of "cheap".




There's a great episode of Fawlty Towers, where someone complains to Basil about the level of service they receive at the restaurant from Manuel. But rather than apologise about it, he just start complaining about him right back at them. "You think you've had it bad, you have no idea what it's like to work with him every day"!

I feel like doing the same with CLT. I fully agree with you and feel like mentioning plenty more ugliness myself. 

But, as I've written before, I think I do better if I just buy everything that meets my filter, rather than try and make individual picks. If there was already an announcement that the company is likely heading for administration, should something unlikely not happen, than I would exercise a manual override. 

When one looks for things priced as low, one doesn't expect to have much positive to say. Here's a list of companies on a lower Price/Sales than CLT:

API
CGR
NAM
COF
OPG
DGX

With the exception of API, the rest aren't any prettier than CLT. 

Does CLT deserve to be at the bottom of the valuation basket. Yes.
Does that bottom of the basket, as a whole, outperform the average historically? Yes.

It is not easy.


----------



## KnowThePast

Bought TTN, 2923 @ $0.43

Buying a falling knife, which fell a further 10% after I bought it. Nevertheless, it reached a price at which I am happy to take a risk.


----------



## skc

KnowThePast said:


> Bought TTN, 2923 @ $0.43
> 
> Buying a falling knife, which fell a further 10% after I bought it. Nevertheless, it reached a price at which I am happy to take a risk.




I bet you are buying WDS next


----------



## pinkboy

skc said:


> I bet you are buying WDS next




Read my mind when I read this earlier, after reading WDS thread earlier today!


pinkboy


----------



## KnowThePast

skc said:


> I bet you are buying WDS next




Thanks skc, you made me laugh.

And yes, it is looking very pretty today.

Having bought some more mining services stock lately, I am not sure how much more exposure I want.

But everything about WDS is a screaming buy to me, obviously.


----------



## skc

KnowThePast said:


> Thanks skc, you made me laugh.
> 
> And yes, it is looking very pretty today.
> 
> Having bought some more mining services stock lately, *I am not sure how much more exposure I want.*
> 
> But everything about WDS is a screaming buy to me, obviously.




Haha KTP, I enjoy your posts and love your attitude even though we rarely agree on your positions. If more people post and respond to critism like you, the world (or at least this forum) would be a much better place! Thanks for keeping up the effort on a great thread. I am happy to see you at least keeping an eye on the bold bit.

FWIW WDS has a stronger balance sheet than TTN... and TTN's revised guidance is still quite an optimistic forecast imo.


----------



## KnowThePast

skc said:


> Haha KTP, I enjoy your posts and love your attitude even though we rarely agree on your positions. If more people post and respond to critism like you, the world (or at least this forum) would be a much better place! Thanks for keeping up the effort on a great thread. I am happy to see you at least keeping an eye on the bold bit.
> 
> FWIW WDS has a stronger balance sheet than TTN... and TTN's revised guidance is still quite an optimistic forecast imo.




Thanks again skc.

Despite not agreeing with you on some of my positions, your critisicm has been very useful to me, and will be even more useful to look back upon in a couple of years when I will evaluate my current decisions against risks you so well describe.

On WDS, I fully agree with you that it is "better". Unfortunately, I've only seen it get pretty after executing the order for TTN. Had I known at the time, WDS would have been my choice. 

How the mining services sector will evolve over the next few years is extremely interesting, my bet, obviously, is that there will be some value in it left.


----------



## galumay

I see TTN hit 47c today, that would have made you smile?!


----------



## KnowThePast

galumay said:


> I see TTN hit 47c today, that would have made you smile?!




Yes, clearly proves my genius.

And did you see WDS, one that I said was better - up 23%.

I did a complicated projection, involving today's rise and a straight line, which forecasts with 100% certainty that I will be a millionnaire by Christmas.

Let me sit back and think about my brilliance.

Until the market open tomorrow morning, anyway.


----------



## KnowThePast

Sold SDI, 4000 @ $0.615 for a profit of $446 (22%).

This was one of my non-statistical purchases, which I was considering selling for a while now, especially after the 1 year mark passed. 

While I very much like this company, it was the likely rate of growth that tipped me to sell. For them to significantly appreciate in value, they will need to keep their margins substantially above their long term average. They would also need to grow their same currency sales at a much faster pace then what they have historically done. A potential leadership change in the near future further adds to uncertainty. 

This is far from a certain sell, but I think the odds of making money elsewhere are better.

In hindsight, I should have thought this out and acted on it many months ago. I got in because of favourable AUD and silver price movements. I ended up been perfectly right, and the share price increased to $0.77. I should have sold then, as it achieved my investment objective. The other metrics did not stand up to scrutiny, to hold longer at that price.


----------



## KnowThePast

Bought CND, 5128 @ $0.24

This was the worst timed purchase in my portfolio, dropped 20% immediately after I bought it.

It is another net-net, with $51.4m in cash and receivables and total liabilities of $23.8m. Market value of $21.5m. 

The outlook given for 2015 is the most optimistic given in years, there's even a remote chance of them making a profit. 

They are in the recruitment business, known for its high margins, customer loyalty and stability. </sarcasm>

Nevertheless, there are few fixed costs and no debt. The goodwill has been pretty much completely written off over the last few years and their cash flow looks significantly healthier than their P/L statement.


----------



## KnowThePast

Monthly update.

My portfolio fell a further $1,473, more so than the indexes, although I am I still comfortably ahead for the year.


----------



## KnowThePast

Bought FUN, 22786 @ 0.054.

A warning for those that are inclined to read annual reports and establish value based on earnings, etc - don't waste your time looking into this one.

What used to me a struggling wholesaler of toys is now a struggling manufacturer of toys. Because this super competitive industry was not difficult enough, management made some acquisitions, with an all too common result; years of terrible performance and write downs. 

But beneath that, I think there's a profitable, albeit low margin base. 

The current price is cheap enough for my filters, so this is an automated trade, although I've been following the company for many years.


----------



## KnowThePast

Another purchase, COF, 3873 @ $0.31.

My shopping basket is just about full.


----------



## deingesicht

I'm a bit confused at your investment strategy - you talk about preserving capital, but you are buying all these micro cap stocks.... I would have thought if keeping your capital was important, you would stay away from micro cap companies


----------



## KnowThePast

deingesicht said:


> I'm a bit confused at your investment strategy - you talk about preserving capital, but you are buying all these micro cap stocks.... I would have thought if keeping your capital was important, you would stay away from micro cap companies




Hi deingesicht,

Because micro caps, as a group, in small portfolio, excluding explorers and other speccies, is not really any riskier than large cap stocks. 

What makes you think otherwise?


----------



## Sir Osisofliver

Hi KTP,

You know I come in and have a bit of a look in your thread every so often, ask some (hopefully) thought provoking questions for you and then bunk off. So there is a couple of things I wanted to raise with you, and of course I'll do it by voicing a few questions... Remember these aren't for me, I come in here to try and assist you achieving clarity in your process.

I've said before KTP that it's very nice to see someone who laid out their thoughts and yet was still able to converse with those who had differing viewpoints. This appears to remain the same during your thread. It's important to never lose this, no matter how good you get at this thing called investing...we are forever learning...

So first question...*have you changed/tweaked anything in your rules due to your now +1 year of direct experience?*

This leads to what IMO is the most important aspect of investing....*evaluation*. Whether you were successful or not it is important to objectively evaluate our performance against some kind of standard. Would you please rate your performance against the following standards?

*Did you have fun?*
1) What is this thing called fun?
5) Wooh! All funned out.

*Did you learn and improve?*
1) What? er?
5) Nosce te ipsum to the max!

*Did you set correct goals?*
1) I didn't get my gold toilet seat!!!
5) I was within a hairs breath of where I thought I would be.

Let's talk about CAB, our last posts on the subject are back on posts 340-350 *Disclaimer: I currently don't hold CAB*

Ahh you can tell from the above I took my profit out of the trade...here were my words back then 
*Background*
I entered on the 4th of July at $4.1457 for 18,000 units, in accordance with a positional sizing model I use. At that time my target from a technical perspective was $4.50, the point of significant horizontal resistance. This is not a take profit level, merely where I anticipated that the stock would find some price resistance.

In the immediate term however I still have a short-term unsustainable compound curve...meaning that I anticipate a retracement or consolidation in the share price...but only in the short-term. I am therefore faced with a choice. I can take my profit now and then attempt to purchase once again at the bottom of the retracement level, or I can anticipate a retracement will occur, set an appropriate stop level and look to see whether the longer-term emergent pattern is revealed.

Ok so I exited the stock @ $5.7225 for a $28,382.40 profit or ~38% net profit (we had almost the same level of performance).

I asked you about the level of CAB before you'd consider it again...and of course we've also had some changes to the fundamental influences...

So as a little bit of a thought experiment...*what are your thoughts in relation to them now?*

BTW here's a chart...even though I now you don't like them.

Cheers

Sir O


----------



## KnowThePast

Hi Sir O,

Good to hear from you again and I am glad you've also made some money on CAB. 



Sir Osisofliver said:


> So first question...*have you changed/tweaked anything in your rules due to your now +1 year of direct experience?*




Yes, definitely. I've never really posted my full set of changed rules on my thread, but my approach is really nothing like what I started with a year ago.

Now, I use my software to generate a list of prospects that meet my criteria. My criteria came about from 2 things:
1. Backtesting using fundamental analysis to find approaches that work.
2. The succesful strategies were then validated against other studies/theories to make sure it was not just a one off fluke that happened to work in Australia for the last 10 years.

So, my buys and sells are now mostly automated decisions. I do research to make sure it's not a definite loser, and because I find it interesting. I also exercise manual overrides to my automated strategy for risk control - mainly making sure I am not overexposed to a single industry.

4% per trade, but I allow occasional averaging up/down.

A specific strategy/filter I use evolved and will continue to evolve over time. But at the moment, my concetration is mainly on small, cheap, ugly.



Sir Osisofliver said:


> This leads to what IMO is the most important aspect of investing....*evaluation*. Whether you were successful or not it is important to objectively evaluate our performance against some kind of standard. Would you please rate your performance against the following standards?
> 
> *Did you have fun?*
> 1) What is this thing called fun?
> 5) Wooh! All funned out.
> 
> *Did you learn and improve?*
> 1) What? er?
> 5) Nosce te ipsum to the max!




One answer to both questions - I greatly enjoy investing, and I enjoy it because of the things I learn. The process took me to many places I would not have otherwise learnt about that apply to everything in life, not just investing. I think it makes me a more interesting person. Another way to put it is that I enjoy the results, even though the process is sometimes difficult.




Sir Osisofliver said:


> *Did you set correct goals?*
> 1) I didn't get my gold toilet seat!!!
> 5) I was within a hairs breath of where I thought I would be.




Yes, I am so far happy with both goals set and results. My strategy is to hold a fairly diversified portfolio of stocks that I buy as a group, so I never had an expection of large outperformance. My expections are 2%-10%/annual outperformance in an average 3-5 year period, with 1/3 years underperforming. 

Out/under performance will mainly happen due to a significant change of fortunes of a company, these will be re-rated very quickly. I expect an average trade to last 3+ years, and I expect my portfolio to mostly move together with the index, until one of the re-ratings. 

Current result is so far in line with that. While the raw numbers show a large underperformance last year, it is misleading, as it doesn't include interest on a large cash balance, and time entry. Taking those things into account, I am so far a few percent above my benchmark, so things are tracking within my expectations. 



Sir Osisofliver said:


> Let's talk about CAB, our last posts on the subject are back on posts 340-350 *Disclaimer: I currently don't hold CAB*
> 
> I asked you about the level of CAB before you'd consider it again...and of course we've also had some changes to the fundamental influences...
> 
> So as a little bit of a thought experiment...*what are your thoughts in relation to them now?*




Exactly where they were a year ago - price changed, but fundamentals remain exactly the same. 

I am generally inclined to bet against disruptive technologies. Their success rate tends to be low, although the current threat to CAB I think is good enough, and progressed far enough to dislodge it. But, it is far from certain, and will likely to take at least a few more years before it is successful.

On the upside, CAB will continue making money and paying dividends and has a profitable bus division that on its own is worth a lot of money. There's also a perfectly plausible scenario of them partnering with one of the new companies and adapting.

Many possibilities. The worst one would be to value CAB just for their bus division, the best is that they will continue to go as is, or parternering with other without much of an effect on the bottom line. As well as everything in between.

I bought it at around $4, and I still like it at that price. Now, however, my focus and investment process changed to concentrate on different kind of companies, CAB is just not ugly enough for me, so it's unlikely it will be back in my portfolio.



Sir Osisofliver said:


> BTW here's a chart...even though I now you don't like them.




It's all magic to me 

Cheers

Sir O

View attachment 60213


Thanks again Sir O, for giving me another chance to express myself


----------



## skc

KnowThePast said:


> And did you see WDS, one that I said was better - up 23%.






KnowThePast said:


> On WDS, I fully agree with you that it is "better". Unfortunately, I've only seen it get pretty after executing the order for TTN. Had I known at the time, WDS would have been my choice.






skc said:


> FWIW WDS has a stronger balance sheet than TTN... and TTN's revised guidance is still quite an optimistic forecast imo.




Well.. what do you know. The better one revised guidance in 1 month from a small profit to a massive loss. Getting more and more ugly so it should suit you just fine...


----------



## KnowThePast

skc said:


> Well.. what do you know. The better one revised guidance in 1 month from a small profit to a massive loss. Getting more and more ugly so it should suit you just fine...




Boy, that was one bad call from me 

Good example to show the importance of luck.

It got more tempting, but I am resisting the temptation. As I said, I am mindful of how many stocks I have in this industry. The majority of ones I do own, also have a hand in other areas (civil, property, etc), they are not fully reliant on mining industry for survival.


----------



## KnowThePast

Monthly update: portfolio down $3,163 (9.5%).

With the whole market down, the mining services sector and small caps are down even more, which didn't help my portfolio which has large exposure to both. 

On the bright side, my non mining service stocks have done well so far this year, up 4.2%. I am also still ahead of my XSOAI benchmark by 3.4%.


----------



## KnowThePast

Bought VET, 6500 @ $0.20

Another beauty, just misunderstood.

The VET thread has some excellent discussion on the company, which I won't be able to add much to. I especially liked the comments from ROE, stating that it is a good business model, just some problems around it that need to be fixed.

Quite a spectacular fall from grace - it is very rare for a company to go from such highs as a newly listed company to such lows that even bottom feeders like myself are buying.


----------



## Ariyahn2011

KnowThePast said:


> Bought VET, 6500 @ $0.20
> 
> Another beauty, just misunderstood.
> 
> The VET thread has some excellent discussion on the company, which I won't be able to add much to. I especially liked the comments from ROE, stating that it is a good business model, just some problems around it that need to be fixed.
> 
> Quite a spectacular fall from grace - it is very rare for a company to go from such highs as a newly listed company to such lows that even bottom feeders like myself are buying.




Keep the updates coming mate.

Have you ever thought about exposing yourself to overseas markets as well?


----------



## Ariyahn2011

Ariyahn2011 said:


> Keep the updates coming mate.
> 
> Have you ever thought about exposing yourself to overseas markets as well?




Mate did you make a killing on ICS?


----------



## Ariyahn2011

I have also noticed you tend to invest in companies that have dividends. Is that because you like to get into companies that are actually making money?
Cheers


----------



## KnowThePast

Ariyahn2011 said:


> Keep the updates coming mate.
> 
> Have you ever thought about exposing yourself to overseas markets as well?




Thanks Ariyahn2011,

Yes, definitely thought about overseas markets, but I will keep this thread Australian only.



Ariyahn2011 said:


> Mate did you make a killing on ICS?




Unfortunately not, they did a 1:20 consolidation.



Ariyahn2011 said:


> I have also noticed you tend to invest in companies that have dividends. Is that because you like to get into companies that are actually making money?
> Cheers




No again, I give almost no consideration to dividends. The fact that most companies in my portfolio pay them is a coincidence.


----------



## luutzu

Ariyahn2011 said:


> I have also noticed you tend to invest in companies that have dividends. Is that because you like to get into companies that are actually making money?
> Cheers




I think it's a good idea to get into companies that are actually making money


----------



## Ariyahn2011

luutzu said:


> I think it's a good idea to get into companies that are actually making money




True..I read that in a book. No point investing in businesses that are not making money. 

Which is why I am a bit sus about all these new health stocks.


----------



## KnowThePast

luutzu said:


> I think it's a good idea to get into companies that are actually making money






Ariyahn2011 said:


> True..I read that in a book. No point investing in businesses that are not making money.




By that logic, companies that don't make money are not worth investing in and are therefore worthless?

Clearly, they are worth something if they can ever return to being profitable, or be acquired, or sell off assets and do a capital return. And as long as some of these loss making companies recover, there will be a price worth to pay for owning them through the bad times. For an investor, it may require different valuation tools and risk strategies, but they are certainly not worthless.


----------



## pinkboy

Are we going to see an updated spreadsheet soon KTP?


pinkboy


----------



## Julia

KnowThePast said:


> By that logic, companies that don't make money are not worth investing in and are therefore worthless?
> 
> Clearly, they are worth something if they can ever return to being profitable, or be acquired, or sell off assets and do a capital return. And as long as some of these loss making companies recover, there will be a price worth to pay for owning them through the bad times. For an investor, it may require different valuation tools and risk strategies, but they are certainly not worthless.




Depends on your reason for investing.  If you need to generate a living from your capital, it's less than reasonable to have funds tied up in some "might be good one day" company when there are plenty of profitable alternatives.


----------



## luutzu

KnowThePast said:


> By that logic, companies that don't make money are not worth investing in and are therefore worthless?
> 
> Clearly, they are worth something if they can ever return to being profitable, or be acquired, or sell off assets and do a capital return. And as long as some of these loss making companies recover, there will be a price worth to pay for owning them through the bad times. For an investor, it may require different valuation tools and risk strategies, but they are certainly not worthless.




I don't think we said they're worthless. Just it's better if they do make money.

Leighton is a good example of a barely profitable business with way too much debt that does exactly as you said it would... and I did see that too but was hesitant and didn't buy when it was $16-$18. Bought MND instead and you know, ahem...


----------



## Ariyahn2011

KnowThePast said:


> By that logic, companies that don't make money are not worth investing in and are therefore worthless?
> 
> Clearly, they are worth something if they can ever return to being profitable, or be acquired, or sell off assets and do a capital return. And as long as some of these loss making companies recover, there will be a price worth to pay for owning them through the bad times. For an investor, it may require different valuation tools and risk strategies, but they are certainly not worthless.




G'day KTP. I never said they are worthless. I guess it just depends on your investment strategy and preferences. Typically, I do like to get into companies that make money. But is not always possible if you like them and envision them doing well once they discover/or develop what they need to generate revenue. I am a bit sus about oil explorers that are not generating actual income, or biotech stocks (only because they are not proven and I have personally lost alot with these types of companies). Just my opinion ofc


----------



## TPI

KnowThePast said:


> By that logic, companies that don't make money are not worth investing in and are therefore worthless?
> 
> Clearly, they are worth something if they can ever return to being profitable, or be acquired, or sell off assets and do a capital return. And as long as some of these loss making companies recover, there will be a price worth to pay for owning them through the bad times. For an investor, it may require different valuation tools and risk strategies, but they are certainly not worthless.




KTP, how do you go about valuing these companies, do you use things like price to sales ratios? Sorry if it's already been discussed earlier in the thread.

I have a speculative portion of my portfolio in stocks like these and am not sure what is the best way to value them.


----------



## KnowThePast

pinkboy said:


> Are we going to see an updated spreadsheet soon KTP?
> pinkboy




I've been away for a few days, so this month's update is a little late, apologies.

December has been another negative month for me, with my portfolio falling a further $1,023 (2.95%). I am now below my XSO benchmark for the year as well. I've been hurt by my large exposure to mining services sector, the rest of the portfolio is doing much better.


----------



## Ariyahn2011

KnowThePast said:


> I've been away for a few days, so this month's update is a little late, apologies.
> 
> December has been another negative month for me, with my portfolio falling a further $1,023 (2.95%). I am now below my XSO benchmark for the year as well. I've been hurt by my large exposure to mining services sector, the rest of the portfolio is doing much better.
> 
> View attachment 60980




I like your SBB hold. I hold SBB myself. Good luck!!


----------



## Ariyahn2011

Ariyahn2011 said:


> I like your SBB hold. I hold SBB myself. Good luck!!




PS how do you find all these companies? Do you get a list and go through each sector and see what sector you like? Interesting how you find some of these companies. Cheers.


----------



## KnowThePast

Julia said:


> Depends on your reason for investing.  If you need to generate a living from your capital, it's less than reasonable to have funds tied up in some "might be good one day" company when there are plenty of profitable alternatives.




No argument from me, this kind of investment strategy is not suitable for everyone. 



luutzu said:


> I don't think we said they're worthless. Just it's better if they do make money.






Ariyahn2011 said:


> G'day KTP. I never said they are worthless. I guess it just depends on your investment strategy and preferences.




I may have come across a little too harsh before, apologies. 

Yes, all things been equal, it's better to buy a profitable company. But things are never equal, are they?

Whenever comparing companies, it is always at least a two factor analysis - profitability and *price*. What I am saying is that it is incorrect to state that profitable company is a better investment without considering the price. 



TPI said:


> KTP, how do you go about valuing these companies, do you use things like price to sales ratios? Sorry if it's already been discussed earlier in the thread.
> 
> I have a speculative portion of my portfolio in stocks like these and am not sure what is the best way to value them.




Sales and Assets are a starting point. By estimating likely margins/ROC the company can achieve once recovered, you can calculate profitability. 

The estimate is nothing that can be done precisely - it can be based on historical averages, industry comparisons, etc.

I then consider the likelihood of recovery or bankruptcy and the time it may take. Time value of money is an important concept here. 

I consider how much assets and sales may be depleted by after restructure/sell offs/etc.

Almost every company will be different, with some unique challenges it faces, although most will fall into a few categories. 

Another way is to just play the numbers, and buy companies that fall in price below some threshold. Statistically, this has been shown to beat the market most years, this is closer to the approach that I am taking. They key is to understand that you are playing the odds that should provide a positive expactancy in the long term. Short term (< 3-5 years), your bets can go against the odds many times in a row. I hope I am right


----------



## KnowThePast

Ariyahn2011 said:


> PS how do you find all these companies? Do you get a list and go through each sector and see what sector you like? Interesting how you find some of these companies. Cheers.




Hi Ariyahn2011,

I wrote some software that allows me to run some fairly elaborate scans.

Commsec, I believe, has a feature to search on many values, I'm sure there's others too.

SBB is definitely my most exciting pick. I rate its chances of success quite low, but following it is good entertainment.


----------



## pinkboy

_Hope_ is not a strategy.

pinkboy


----------



## Ariyahn2011

KnowThePast said:


> Hi Ariyahn2011,
> 
> I wrote some software that allows me to run some fairly elaborate scans.
> 
> Commsec, I believe, has a feature to search on many values, I'm sure there's others too.
> 
> SBB is definitely my most exciting pick. I rate its chances of success quite low, but following it is good entertainment.




Oh really? Wow sounds quite beyond me regarding the elaborate scans.

I actually felt SBB has a good chance of success given it has no debt and its sales have been growing. Its ROE its crazy. It is my only penny stock within the ASX. 

New appointed management who can speak chinese to put the Aussie investors in the light. Pays a divi, and still has cash in the bank. And has shops in China which has a population of 1.357 billion approx. I feel SBB is in a good spot. I believe the financials are out in Feb. So let us wait and see .


----------



## McLovin

Ariyahn2011 said:


> Oh really? Wow sounds quite beyond me regarding the elaborate scans.
> 
> I actually felt SBB has a good chance of success given it has no debt and its sales have been growing. Its ROE its crazy. It is my only penny stock within the ASX.
> 
> New appointed management who can speak chinese to put the Aussie investors in the light. Pays a divi, and still has cash in the bank. And has shops in China which has a population of 1.357 billion approx. I feel SBB is in a good spot. I believe the financials are out in Feb. So let us wait and see .




I saw the announcements the other day of the directo resignation and the director appointment. I thought, before I looked, what's the best it's one of the Australian directors resigning and a Chinese director being installed. I wasn't wrong. Check out the SBB thread.


----------



## KnowThePast

Ariyahn2011 said:


> Oh really? Wow sounds quite beyond me regarding the elaborate scans.
> 
> I actually felt SBB has a good chance of success given it has no debt and its sales have been growing. Its ROE its crazy. It is my only penny stock within the ASX.
> 
> New appointed management who can speak chinese to put the Aussie investors in the light. Pays a divi, and still has cash in the bank. And has shops in China which has a population of 1.357 billion approx. I feel SBB is in a good spot. I believe the financials are out in Feb. So let us wait and see .





Financials, as reported, are excellent.

The reason for the depressed share price, however, are serious suspicions of either complete fraud, or significant fudging of the numbers. On top of it, Chinese companies tend to usually trade on half the valuation of Australian companies even without these concerns. 

The seed investors have all sold out at the first opportunity which doesn't look good.

For the share price to re-rate, they will need to show good performance and pay dividends for a few years. The CEO will need to hold on to his shares once they come out of escrow as well.

I've written on SBB before, I believe the appropriate risk/reward is there, but the chances of the reward are under 50% IMHO.



McLovin said:


> I saw the announcements the other day of the directo resignation and the director appointment. I thought, before I looked, what's the best it's one of the Australian directors resigning and a Chinese director being installed. I wasn't wrong. Check out the SBB thread.




That's what I mean by the excitement of this stock, every little detail is discussed from every angle ad nauseum.

Director resignation/appointment would go completely unnoticed for just about all companies, but once suspicions are there, this attracts attention. 

My speculation, while I place no value on it, is:
Positive: it is better to have a director who doesn't need a translator to speak to the CEO. 
Negative: sure does look odd for a company that tries to improve its image with investors.


----------



## Ariyahn2011

KnowThePast said:


> Financials, as reported, are excellent.
> 
> The reason for the depressed share price, however, are serious suspicions of either complete fraud, or significant fudging of the numbers. On top of it, Chinese companies tend to usually trade on half the valuation of Australian companies even without these concerns.
> 
> The seed investors have all sold out at the first opportunity which doesn't look good.
> 
> For the share price to re-rate, they will need to show good performance and pay dividends for a few years. The CEO will need to hold on to his shares once they come out of escrow as well.
> 
> I've written on SBB before, I believe the appropriate risk/reward is there, but the chances of the reward are under 50% IMHO.
> 
> 
> 
> That's what I mean by the excitement of this stock, every little detail is discussed from every angle ad nauseum.
> 
> Director resignation/appointment would go completely unnoticed for just about all companies, but once suspicions are there, this attracts attention.
> 
> My speculation, while I place no value on it, is:
> Positive: it is better to have a director who doesn't need a translator to speak to the CEO.
> Negative: sure does look odd for a company that tries to improve its image with investors.




Some valid points. I would hope its not a fraud. But your right, lets see what happens with those divis.


----------



## galumay

Ariyahn2011 said:


> Some valid points. I would hope its not a fraud. But your right, lets see what happens with those divis.




I hope for your sake its not a fraud, but I looked at them and decided there is definitely something really wrong with them, whether its straight out fraud or not remains to be seen. If you read through the SBB thread you will get a good idea of what all the issues are. 

IMO, at best they are a highly speculative company that should attract a very small poroportion of your capital given the risk, i dont believe they are an investment grade company.


----------



## KnowThePast

Bought PHG, 2851@ $0.435.

Pulse Health manages private hospitals and day surgeries. It is in fairly early days; the strategy is to acquire more facilities to get benefits of scale. They concentrate on regional and specialist hospitals, rather than compete directly with the big boys.  

I looked at them a year or two ago, at that point, they were running at a loss, raising shares and acquiring more facilities to scale up, I felt they were too risky. Now that they are profitable and started paying a dividend, I feel a lot more comfortable, even though this is still a higher risk, higher reward play. 

The industry itself provides a form of competitive advantage. It is a necessary service, growing over time. Cost and complexity means it is rare for a couple to popup on the same corner and compete for foot traffic. Once established, there tends to only be a few in the area that are enough to service the population. 

A lot of the admin function of running a hospital is the same, whether you are running 1 or 20. Supplies and logistics are also cheaper with scale. So, while the ROC at the moment is quite poor, I see it increasing substantially with more scale. Utilisation rates and capacity should also improve over time.

They own land and property of some of their facilities and have no debt, giving them some extra breathing room in difficult times.

The strategy is to grow by further acquisitions, which I think is definitely the right strategy. However, even after subtracting share issues and acquisitions, existing assets have been growing consistently as well, with 20% EBIT growth expected in 2015 from existing assets. 

Assuming this kind of growth for a few years, the price does not seem expensive. My main target however, is not just sales growth, but the margin expansion that should come with scale and utilisation/capacity increase.


----------



## galumay

KnowThePast said:


> Bought PHG, 2851@ $0.435.




Hey KTP, just some quick questions if you dont mind, I had a scan of PHG and I cant understand why their numbers are so erratic, given the business.

Looking at sales/revenues they were 0 in 2011 & 2013 and $40m in 2012! Cash flow and earnings have also been very bumpy.

Another thing i found odd was very low debt, but high interest, (coverage ratio of only 2.41), I assume without digging deeper, this is because they paid off debt with the capital raising, but interest for the previous period was still an expense?

As you say the ROE - and the ROC - are on the low side.

The earnings growth expectations for this type of company seem a little optimistic to me, but maybe I am missing something in the bigger picture?


----------



## galumay

Also i am confused about reported earnings, the annual report lists eps as 0.73c, which would give them a P/E of around 59! But Commsec reports eps as 1.9c which would seem to be the earnings excluding one off items. 

Given that the reproted NPAT is $875K and therefore the eps 0.73c I am not sure why Commsec have chosen to report what is basically an unaudited NPAT of $1.85m giving the higher eps.

Is this a normal practice?


----------



## KnowThePast

galumay said:


> Hey KTP, just some quick questions if you dont mind, I had a scan of PHG and I cant understand why their numbers are so erratic, given the business.
> 
> Looking at sales/revenues they were 0 in 2011 & 2013 and $40m in 2012! Cash flow and earnings have also been very bumpy.




Hi galumay,

I have revenues against them as:
2008 - $12m
2009 - $31m
2010 - $34m
2011 - $37m
2012 - $39m
2013 - $52m
2014 - $52m

I got these directly from their reports. Looking at commsec, they do have zeroes, looks like data issues on commsec platform. 

Profit is not linear growth, but for a company in their stage of development, I think it's perfectly normal. Taking away abnormals, it is a lot less erratic. Their strategy is to acquire existing facilities, change them to their systems and build capacity. This isn't a smooth process and will have its stops and starts. At this point, I want to see growth in revenue and profitability with dividends, but it doesn't have to be perfectly smooth just yet.



galumay said:


> Another thing i found odd was very low debt, but high interest, (coverage ratio of only 2.41), I assume without digging deeper, this is because they paid off debt with the capital raising, but interest for the previous period was still an expense?




Yep, that's it. At the end of 2013, they had $20m in debt. They've paid it all off in 2014, but had to pay interest in the meantime.



galumay said:


> As you say the ROE - and the ROC - are on the low side.
> 
> The earnings growth expectations for this type of company seem a little optimistic to me, but maybe I am missing something in the bigger picture?




I generally agree with you there about earnings growth. 20%/year organic growth will not be achievable for long. The bigger opportunity I see is margin/ROC expansions that will come with scale.



galumay said:


> Also i am confused about reported earnings, the annual report lists eps as 0.73c, which would give them a P/E of around 59! But Commsec reports eps as 1.9c which would seem to be the earnings excluding one off items.
> 
> Given that the reproted NPAT is $875K and therefore the eps 0.73c I am not sure why Commsec have chosen to report what is basically an unaudited NPAT of $1.85m giving the higher eps.
> 
> Is this a normal practice?




I am not sure, I always take all numbers directly from reports.


----------



## galumay

KnowThePast said:


> I am not sure, I always take all numbers directly from reports.




On that basis they are running with a p/e of 59, while I dont normally use p/e as a metric of value, if its that far out of whack with market p/e i like to see some evidence of the massive growth that would be required to return it to mean.

You would need growth of 35% compounding for 5 years to return it to market average!

On another note its frustrating to find those sort of errors in Commsec, with the amount of companies I research and the detail i record, having to download say 5 annual reports for each company is a PITA, but if Commsec data cant be relied on i guess i have no choice!


----------



## KnowThePast

galumay said:


> On that basis they are running with a p/e of 59, while I dont normally use p/e as a metric of value, if its that far out of whack with market p/e i like to see some evidence of the massive growth that would be required to return it to mean.
> 
> You would need growth of 35% compounding for 5 years to return it to market average!




Only if you think their abnormals are not really one-offs. Otherwise, you should use their underlying profit to calculate PE. 

The number then is still high, but a lot more reasonable considering their growth forecasts and size.



galumay said:


> On another note its frustrating to find those sort of errors in Commsec, with the amount of companies I research and the detail i record, having to download say 5 annual reports for each company is a PITA, but if Commsec data cant be relied on i guess i have no choice!




Yes, it's definitely frustrating. I've encountered it before and have since made it a habit to grab all the data myself when I started researching a new company.


----------



## galumay

KnowThePast said:


> Only if you think their abnormals are not really one-offs. Otherwise, you should use their underlying profit to calculate PE.
> 
> The number then is still high, but a lot more reasonable considering their growth forecasts and size.
> 
> Yes, it's definitely frustrating. I've encountered it before and have since made it a habit to grab all the data myself when I started researching a new company.




Fair enough, even when I use the unaudited numbers with the abnormals backed out I have to assume growth that is unrealistic to get an IV around current price. 

Its an interesting exercise to keep track of companys like this and to see what unfolds, I have saved all the data I generated on PHG and I will be interested to revisit them and see how my assumptions bear up. I am starting to realise that its nearly as important to track the companies you dont buy as the ones you do!

For that reason I am starting to save all my working out and documenting the reasons I *didnt* purchase shares in a company that made it to my watchlist. I think there is much learning to be had there!


----------



## KnowThePast

galumay said:


> Fair enough, even when I use the unaudited numbers with the abnormals backed out I have to assume growth that is unrealistic to get an IV around current price.
> 
> Its an interesting exercise to keep track of companys like this and to see what unfolds, I have saved all the data I generated on PHG and I will be interested to revisit them and see how my assumptions bear up. I am starting to realise that its nearly as important to track the companies you dont buy as the ones you do!
> 
> For that reason I am starting to save all my working out and documenting the reasons I *didnt* purchase shares in a company that made it to my watchlist. I think there is much learning to be had there!




Hi galumay,

It depends on the assumptions doesn't it. 

I am not looking so much for revenue or profit growth, but EBITDA margin. If that gets to 15%+, as it is for other similar companies, then they are cheap even without any growth. Any growth that happens is a bonus. 

I am not arguing with you, just throwing notes and numbers out here for future reference and discussion


----------



## galumay

KnowThePast said:


> Hi galumay,
> 
> It depends on the assumptions doesn't it.
> 
> I am not looking so much for revenue or profit growth, but EBITDA margin. If that gets to 15%+, as it is for other similar companies, then they are cheap even without any growth. Any growth that happens is a bonus.
> 
> I am not arguing with you, just throwing notes and numbers out here for future reference and discussion




Absolutely! It all depends on the assumptions, and there can be no analysis without assumptions - despite the risk of the old truism - "When you assume, you make an ass out of U and me!"

I use EBITDA margin as a metric in my analysis, I am generally happy if its over 8% taking the overall analysis into consideration, with PHL i have it as 9% - so it didnt raise any concerns there, but neither was it a stand out number.

It was certainly attractive on some of the other metrics i look at, but the dependence on very significant growth in earnings to deliver an IV above its current price worried me, I also wonder how quickly and how much debt they will add back on the balance sheet.

BTW, I certainly didnt get the impression you were arguing, I am very grateful that you should share your thinking and analysis around a specific company, its such a good learning opportunity and is invaluable IMO. Someties its even the little things, you used the term EBITDA margin, I had to do a quick check of what the definition was and then realised that I track what I call "Operating Margin" which uses the same inputs.


----------



## skc

galumay said:


> BTW, I certainly didnt get the impression you were arguing, I am very grateful that you should share your thinking and analysis around a specific company, its such a good learning opportunity and is invaluable IMO.




Thansk for the robust discussions on PHG. I've looked at it myself and I think KTP has a solid investment thesis at current prices.


----------



## KnowThePast

Thanks guys,

It is super useful for me to be able to discuss it with you, clarifies my thinking tremendously.


----------



## TPI

Re. PHG, I had a brief look at this a couple of months ago, and from what I can recall now they operated a lot of smaller sized hospitals, many in regional areas (except one new and larger one in the Gold Coast I think), with generally lower bed occupancy and utilisation, each small hospital was also planned to have it's own general manager, and some of their general surgical focused hospitals were not doing as well due to many cases in these regional areas being day cases and being more suited to day procedure units with bigger operations being better suited to larger and better resourced hospitals in general (I think this line of thinking may have shifted their focus to day surgeries from what I can remember reading). Although the same tailwinds are present as per other private hospital operators, I didn't feel they had the same potential and scale benefits as RHC or HSO. I got lucky and bought into HSO at the absolute low point on listing of $2.09 (listing price was $2.10 I think) so I decided to add to this rather than add PHG. Though it's not inconceivable that they could be gobbled up by a larger operator like RHC or HSO down the track.


----------



## KnowThePast

TPI said:


> Re. PHG, I had a brief look at this a couple of months ago, and from what I can recall now they operated a lot of smaller sized hospitals, many in regional areas (except one new and larger one in the Gold Coast I think), with generally lower bed occupancy and utilisation, each small hospital was also planned to have it's own general manager, and some of their general surgical focused hospitals were not doing as well due to many cases in these regional areas being day cases and being more suited to day procedure units with bigger operations being better suited to larger and better resourced hospitals in general (I think this line of thinking may have shifted their focus to day surgeries from what I can remember reading). Although the same tailwinds are present as per other private hospital operators, I didn't feel they had the same potential and scale benefits as RHC or HSO. I got lucky and bought into HSO at the absolute low point on listing of $2.09 (listing price was $2.10 I think) so I decided to add to this rather than add PHG. Though it's not inconceivable that they could be gobbled up by a larger operator like RHC or HSO down the track.




Thanks for the detailed feedback, TPI.

I agree with you that potential profitability of PHG's facilities is second rate to some of the bigger players. Nevertheless, I think it it still a very profitable business in the long term, just not as great as what some others are achieving. 

As for some holspitals underperforming - certainly. They are on an acquisition path, some will work out, some won't. It will not be a smooth ride all the way. 

Other than a radical healthcare reform in the country, the business provides revenue that is more stable than average and normally at quite good margins.

Entering the market via a niche area and staying under the radar, rather than taking on big players head on is a good way to do it. Once they grow, I wouldn't be surprised to see them compete more directly with the gorillas.

Thanks for the post again, TPI. You've highlighted a risk that their niche may not compare to other companies, even if they are all hospital operators. We'll see how it plays out. As I mentioned in my first post, I still see this as a higher risk, higher reward strategy. As such, I've used my normal, small position size for it.


----------



## Ves

Don't know much about PHG.... and granted that we may have different time-frames and investing methods you may not be interested in the questions I would ask,  but here they are:

How reliant on their operations is their relationship / contracts with private health insurers?   (For instance,  HSO & RHC derive a very large proportion of their revenue & competitive positions from their strong bargaining power over the insurers -  ie. they own infrastructure in key areas).  What contracts are already in place?

How essential is their infrastructure?  Where are the nearest competing hospitals?   Do the private health insurers give their clients a choice of other alternatives? 

What potential is there for their key staff (surgeons / doctors) to bargain higher wages and cause margin pressure?   It is often said that doctors want to work for the places with the best facilities etc. This is especially relevant in regional areas.   See next question as they are related to an extent.

What is the capex profile like going-forward?  Is it lumpy or fairly smooth? How accurate do you think their depreciation calculations are? How does capex (or depreciation) / revenue (or OCF)  compare to HSO / RHC?

What is the break-even occupancy level for their beds?   I think I read it was 40%. What is the average occupancy level over the longer-term? How would this react to further brownfield expansion?

As you have already mentioned legislation is a risk,  and always will be,  but you may also want to consider the risk of litigation and how this would effect the company  (especially if they have limited facilities vs the bigger players). Hospitals can be sued for negligence if they take on patients and operate in areas outside of their specialisation / capabilities (sounds like a no-brainer,  but you would be surprised what can happen).

I find that in light of the Medibank Private IPO there is an interesting dynamic between the private hospital operators and private health insurers...  they are both pushing for margin expansion,  but they cannot both win at the same time.


----------



## KnowThePast

Ves said:


> Don't know much about PHG.... and granted that we may have different time-frames and investing methods you may not be interested in the questions I would ask,  but here they are:
> 
> How reliant on their operations is their relationship / contracts with private health insurers?   (For instance,  HSO & RHC derive a very large proportion of their revenue & competitive positions from their strong bargaining power over the insurers -  ie. they own infrastructure in key areas).  What contracts are already in place?
> 
> How essential is their infrastructure?  Where are the nearest competing hospitals?   Do the private health insurers give their clients a choice of other alternatives?
> 
> What potential is there for their key staff (surgeons / doctors) to bargain higher wages and cause margin pressure?   It is often said that doctors want to work for the places with the best facilities etc. This is especially relevant in regional areas.   See next question as they are related to an extent.
> 
> What is the capex profile like going-forward?  Is it lumpy or fairly smooth? How accurate do you think their depreciation calculations are? How does capex (or depreciation) / revenue (or OCF)  compare to HSO / RHC?
> 
> What is the break-even occupancy level for their beds?   I think I read it was 40%. What is the average occupancy level over the longer-term? How would this react to further brownfield expansion?
> 
> As you have already mentioned legislation is a risk,  and always will be,  but you may also want to consider the risk of litigation and how this would effect the company  (especially if they have limited facilities vs the bigger players). Hospitals can be sued for negligence if they take on patients and operate in areas outside of their specialisation / capabilities (sounds like a no-brainer,  but you would be surprised what can happen).
> 
> I find that in light of the Medibank Private IPO there is an interesting dynamic between the private hospital operators and private health insurers...  they are both pushing for margin expansion,  but they cannot both win at the same time.




Hi Ves,

Thank you very much for the feedback and questions, very astute.

I don't go into as much detail as you - my investment criteria and timescales are different. I take of an "average out" approach. The number of stocks I invest in, it's not really feasibly to be thourough on each one. So, take my opinion with a grain of salt. 

Relationship with insurers and essential infrastructure - I suspect they don't have strong bargaining power yet, but it will improve with size. Given that their facilities are either in regional areas, or are for specialized services,  it is unlikely there is much competition nearby. The fact that the market is too small to attract much competition is not good, but on the flipside, it improves PHG's competitive position.

They mention in the report that private health cover is quite high (47%). This is possibly a risk if the economy deteriorates sharply and less people opt in for it. 


Staff - No doubt, it will be more difficult to source medical staff in regional areas. There are, however, two categories of people that would fit. Those that prefer the lifestyle, and those who recently arrived to the country. I believe certain occupations, such as doctors, are allowed to come to Australia on a condition that they spend the first 2-3 years working in a rural area. While this would create higher turnover, it will also increase the number of available recruits, improving bargaining power in wages negotiation.


Capex/Depreciation - Their depreciation expense has been relatively constant over the last 6 years, ranging between $700k-$1.1m. Capex has grown up to $3.5m, but most of it would be for growth, not maintenance. I don't know the industry well enough to say whether their depreciation allowance is appropriate. 

Depreciation/Revenue is 1.5%, which is much lower than RHC and HSO (3.5-4%). So, yes, they are potentially understating it based on these numbers. It does look like a low capex business in all 3 cases, which is a plus.

Also, the fact that operate in niche areas, with mainly single purpose facilities, I think it is quite plausible that their capex really is substantially less than all in one hospitals. Their 3 mains areas of focus are - surgery, rehabiliation and mental health. Rehabilitation and mental health in particular, I would imagine have very litle capex requirements.


Occupancy - Each facility would have its own break even level, and as they are scaling up, this number will change quickly. Also, it also not the only measure. They also have a lot of day procedures that don't require a hospital stay. 


Insurance - yes, it is a risk. Margin of safety, etc...


----------



## KnowThePast

Bought CGR, 5909 @ $0.22

A quick, thoughtless buy on my part. They meet my statistical filter and have been on my watchlist for a while. I saw a very good update from them yesterday, decided to get in, then do some more research later.


----------



## galumay

KnowThePast said:


> Bought CGR, 5909 @ $0.22
> 
> A quick, thoughtless buy on my part. They meet my statistical filter and have been on my watchlist for a while. I saw a very good update from them yesterday, decided to get in, then do some more research later.




On a quick scan, sounds like an interesting little business!


----------



## robusta

galumay said:


> On a quick scan, sounds like an interesting little business!




Yes, very interesting, I just added it to my hot list.


----------



## tinhat

This came up in an end of week scan for me. I know nothing about this mob. Is there any reason for the lumpy jump in revenue in their result? Have they been working on a big contract (that may only be short or medium term)?


----------



## Triathlete

tinhat said:


> This came up in an end of week scan for me. I know nothing about this mob. Is there any reason for the lumpy jump in revenue in their result? Have they been working on a big contract (that may only be short or medium term)?




Introduction
 CML Group Limited (CGR, formerly Careers Multilist Limited) is a franchised business operating in recruitment industry, payroll management and migration services. CGR operates in Australia and has over 52 recruitment franchise. Services offered by CGR include, payroll solutions, financial services and employment related services.

for more, see https://www.stockdoctor.com.au/company/CGR

PS (Moderator's comment)
If you don't have access to advisory sites, such as Stockdoctor, Morningstar, Phat Prophets, ... there is a free and rather comprehensive site that allows you to form your own opinion. It's Yahoo: https://au.finance.yahoo.com/q/ks?s=CGR.AX


----------



## pixel

Triathlete said:


> Introduction
> CML Group Limited (CGR, formerly Careers Multilist Limited) is a franchised business operating in recruitment industry, payroll management and migration services. CGR operates in Australia and has over 52 recruitment franchise. Services offered by CGR include, payroll solutions, financial services and employment related services.
> 
> [...]



Hi trathlete,

While your reply is appreciated, the setup and layout makes it appear to be lifted from another site, thus subject to copyright. In cases like that, please be aware of our responsibilities wrt the Law and provide a link to the source, rather than pasting without reference.

Entire articles are not permitted to be reproduced in full on ASF as it is in violation of copyright law. The accepted standard is 10% or, in the case of very short articles, a couple of paragraphs at most. Please note that any content reproduced from other websites must be accompanied by a link to the original source.
You can find our official policy on copyright here: https://www.aussiestockforums.com/for...ad.php?t=10373


----------



## Triathlete

pixel said:


> Hi trathlete,
> 
> While your reply is appreciated, the setup and layout makes it appear to be lifted from another site, thus subject to copyright. In cases like that, please be aware of our responsibilities wrt the Law and provide a link to the source, rather than pasting without reference.
> 
> Entire articles are not permitted to be reproduced in full on ASF as it is in violation of copyright law. The accepted standard is 10% or, in the case of very short articles, a couple of paragraphs at most. Please note that any content reproduced from other websites must be accompanied by a link to the original source.
> You can find our official policy on copyright here: https://www.aussiestockforums.com/for...ad.php?t=10373





Thanks PIXEL,
                      I did not think of that....I will remember that in future.!!


----------



## KnowThePast

CGR is a company that used to be in recruitment, but is now making a bigger push into payroll management and commercial factoring. Some sites still list recruitment as their main operation, which is no longer the case. 
Both finance and payroll segments provide about the same amount of revenue and profit. Both are also very capital intensive, the company intends to use debt and equity markets as a source of funds and try to not rely on leverage too much. 

Payroll – they make money by employing people on behalf of their clients. While the worker works at the client site, they handle payroll, administration, insurance, etc. They also have the means to organise foreign worker on 457 visas. 

Finance – factoring, or receivables finance, is buying of accounts receivables from companies. CML buys up to 80% of client’s receivables, then collects the balance 30-60 days later. The key here is to assess the risk of those receivables and not to overpay for them. While I do not know the industry well enough, I would assume the rate of default is lower here than consumer personal loans. Trade credit insurance is also in place against all their receivables.

Both business lines should benefit greatly from economies of scale. The finance one is where growth is mainly expected from. 

A few other debt related companies were able to negotiate wholesale non-recourse loans from banks once they reached certain size. The same should happen here eventually and will greatly reduce the cost of capital. I was pleasantly surprised to read about exactly this plan in their latest report. 

The price is very modest considering their growth plan. I do not think it factors in neither the benefits of scale that will come in, nor the reduction in cost of capital in the future. A 0.5% reduction in interest will have a very large effect on their current profit.


----------



## galumay

KnowThePast said:


> The price is very modest considering their growth plan. I do not think it factors in neither the benefits of scale that will come in, nor the reduction in cost of capital in the future. A 0.5% reduction in interest will have a very large effect on their current profit.




The thing that struck me when i dug a bit deeper was their operating margin was just about non-existent, this should also improve greatly with scaling, especially as the other metrics look pretty good. 

I kept it on my watchlist, but there are other more attractive opportunities with my strategy. Good luck with this one KTP, i think it could be a goer!


----------



## KnowThePast

Topped up on TCN, 6000 @ 0.091.


----------



## KnowThePast

Monthly update, an increase of $484 (1.3%) for the month.


----------



## KnowThePast

Bought MCP, 4000 @ $1.18
Sold MCP, 4000 @ $1.20

I was expecting a bigger price increase after a good (considering the price) earnings guidance. Hasn't quite happened, but I squeezed out a $20 profit.


----------



## KnowThePast

Sold CDA, 1677 @ $0.83, for a $141 (10.87%) profit.

Bought MWR, 1035 @ $1.27.


----------



## KnowThePast

Sold my parcel of SBB for $0.059, at a loss of $292 (24%).

The more I followed it, the less I liked it. I then further considered how big the upside can be and decided that there are other opportunities with similar upside, but less risk.


----------



## galumay

KnowThePast said:


> Sold my parcel of SBB for $0.059, at a loss of $292 (24%).




Will be interesting to see how it plays out, its a good one to chalk down to experience anyway. I think trying to price these sort of speccy investments is quite a challenge.

Sometimes I think we are all guilty of letting the potential blind us to the _consequence_ of the risk.

I remember my dad always used to say, "dont worry about the risk of something happening, work out whether you can live with the consequence if it happens." It applies to buying shares as much as drug trafficking.


----------



## KnowThePast

galumay said:


> Will be interesting to see how it plays out, its a good one to chalk down to experience anyway. I think trying to price these sort of speccy investments is quite a challenge.
> 
> Sometimes I think we are all guilty of letting the potential blind us to the _consequence_ of the risk.
> 
> I remember my dad always used to say, "dont worry about the risk of something happening, work out whether you can live with the consequence if it happens." It applies to buying shares as much as drug trafficking.




Yep, definitely will continue watching this one with interest.

I don't think buying it was a mistake. I should have sold, however, when they didn't pay, or explain the dividend in September. I took a few months to think it over instead.

If at the end of the month they announce a large dividend, well, I'll be an idiot twice then.

But I am 90% confident there will be no dividend, as cash will be needed for further investment in stores/refurbishments.


----------



## Wysiwyg

I notice that stock choice and risk management is way off for an optimum investment portfolio. Holding onto down trending stocks or stocks that have business issues (reason for downtrend?) is just crazy.


----------



## KnowThePast

Wysiwyg said:


> I notice that stock choice and risk management is way off for an optimum investment portfolio. Holding onto down trending stocks or stocks that have business issues (reason for downtrend?) is just crazy.




Yes, there is one and only one way of doing things. Every other way is crazy. 

Is it that time of the year that techies and fundies peacefully torture each other over their religion? Keep me out of it, please.


----------



## Wysiwyg

KnowThePast said:


> Yes, there is one and only one way of doing things. Every other way is crazy.
> 
> Is it that time of the year that techies and fundies peacefully torture each other over their religion? Keep me out of it, please.



I use all data available. Charts, numbers and words. Even some smart advice from ASF members helps.


----------



## galumay

KnowThePast said:


> Yes, there is one and only one way of doing things. Every other way is crazy.




You do get a bit of that here! A finely tuned filter to sift the 'noise' is required at times.


----------



## tech/a

KnowThePast said:


> Yes, there is one and only one way of doing things. Every other way is crazy.
> .






galumay said:


> You do get a bit of that here! A finely tuned filter to sift the 'noise' is required at times.




It's about profit---not method---if you can't make a profit with *YOUR* method change it!!

Doing the same thing day in and day out and expecting a *DIFFERENT* result is crazy.
The noise here is from *THEORISTS* who adhere to beliefs without an ounce of practical application
And profit.
Their only addition to the forum is constant grumbling and moaning without anything of value to ad.
*NOISE*


----------



## galumay

tech/a said:


> ....
> *NOISE*....




How about for once not derailing a thread with your dogma, duck?


----------



## tech/a

galumay said:


> You do get a bit of that here! A finely tuned filter to sift the 'noise' is required at times.




Hahaa a talking Kettle!!


----------



## KnowThePast

tech/a said:


> It's about profit---not method---if you can't make a profit with *YOUR* method change it!!
> 
> Doing the same thing day in and day out and expecting a *DIFFERENT* result is crazy.
> The noise here is from *THEORISTS* who adhere to beliefs without an ounce of practical application
> And profit.
> Their only addition to the forum is constant grumbling and moaning without anything of value to ad.
> *NOISE*




Agreed.

As I continuosly explained in over 20 pages of this thread, my method is to invest in statistical niches, that tend to outperform in most 3-5 year periods. It's not a theory, it is based on real numbers from backtesting over long period in different markets. Yes, there are plenty of faults with that data, it is not exact science.

Any risk mitigation strategies, position sizing, stop losses, etc. need to be considered as they apply to my method, not someone elses.

I am running a similar strategy in my super for about 10 years. That had its bad years too, but overall produced an excellent result. That has taught me to not overeact if things don't go my way for a year or so. 

As for changing the method when it doesn't work - agreed again. I've made big changes since I've started this thread, I'm sure I will make many more. Given that my investments have 3-5 years expected timespan, small underperformance after 1-2 years is not cause for panic quite yet.

I strarted off using a variation of Low Value strategies. A large part of it was that these strategies were proven to work over many decades. The fact that I could confirm it with my own backtests gave me extra comfort (tolerence for temporary underperformances). I am now switching over to something quite different, I think I found a statistical edge that hasn't been too widely publicised yet. Whilst it is now a smaller part of my portfolio, it will eventually take over, as I sell my low-value stocks and purchase these instead.

So yes, a change of strategy is occurring, just at a very slow pace, as is usually the case with me.


----------



## craft

tech/a said:


> It's about profit---not method---if you can't make a profit with *YOUR* method change it!!
> 
> Doing the same thing day in and day out and expecting a *DIFFERENT* result is crazy.
> The noise here is from *THEORISTS* who adhere to beliefs without an ounce of practical application
> And profit.
> Their only addition to the forum is constant grumbling and moaning without anything of value to ad.
> *NOISE*





How many posts?

How old are you?

What are you doing in life Now?

Is it what you really want to do?

How wealthy has your involvement in the market 'actually' made you as opposed to how rich you are 'going' to with your 'latest' endeavour?

ps

I don't care enough to be seeking answers to the questions - just wondering if you should quietly/privately consider your own advice.


----------



## tech/a

craft said:


> How many posts?
> 
> How old are you?
> 
> What are you doing in life Now?
> 
> Is it what you really want to do?
> 
> How wealthy has your involvement in the market 'actually' made you as opposed to how rich you are 'going' to with your 'latest' endeavour?
> 
> ps
> 
> I don't care enough to be seeking answers to the questions - just wondering if you should quietly/privately consider your own advice.




*Craft*

There are a few here who have met me and know me.
A few have been to my home.
A few have stayed in my apartments.
A few have been privy to my trading and research.

Ask them if they think I'm happy with my lot---if they'd be happy with my lot!!

Perhaps perception is best satisfied face to face.
When in Adelaide look me up.

The advice is from experience and with meeting many who wish to make a better lot of/for their life--Friends--acquaintances---business associates---employees---forum members----but struggle
mainly from-----

_"Doing the same thing day in day out and *EXPECTING* an *DIFFERENT* result"_

Sorry to deflate your balloon Craft but I'm here to help not for any gain.
I like giving back-----and from the mails I get my posts have struck a cord with many and a few have leap't forward.

Off to Clipsal.


----------



## tech/a

KnowThePast said:


> Given that my investments have 3-5 years expected timespan, small underperformance after 1-2 years is not cause for panic quite yet.




With the XJO up 20% in the same period as your exercise
I don't know that I agree with the above.

But having said that anyone who puts their trades up for public scrutiny should be commended.
I'm sure those who do learn far more than those who don't.


----------



## notting

tech/a said:


> But having said that anyone who puts their trades up for public scrutiny should be commended.




Sharing trades is open and indicates credibility, especially if you follow through on it!!!

However I wouldn't recommend it in general.

It can put a moz on you, make you react to opinions that seem plausible but contradict your sense of it and make you lose the flow of how it was appearing to you.
The market is not often rational in the short to medium term so money is often made doing things that contradict fundamentals in the shorter terms.

I find it's better to be very quiet and introverted about your trading, you can get a much better rhythm for what you are doing and what is going on.

If you want to share something that you think will be helpful for others then definitely do that, that's great! What goes around comes around and you will definitely get it back one way or another.

It's also good to try to offer a contrary opinion to someone who could be making a big mistake because they have missed something important.  So sharing can be helpful, but in general with your trades, stick with your plan if it works and think about something else until it's played out, don't second guess or invite support!


----------



## KnowThePast

tech/a said:


> With the XJO up 20% in the same period as your exercise
> I don't know that I agree with the above.
> 
> But having said that anyone who puts their trades up for public scrutiny should be commended.
> I'm sure those who do learn far more than those who don't.




Hi tech,

These numbers aren't too meaningful at the moment for a few reason.

1. My benchmark is XSO accumulation, which is 14%.
2. Most of the gain was in the first few months of my portfolio. Due to my rule of investing once a month, I had minimal amount of money invested during that time.
3. I do not count interest on my cash balances, which made up the bulk of my portfolio up until very recently.
4. It doesn't reflect the very low risk my portfolio was exposed to, given the large cash balances.

There's no good way to calculate my return the first year or two given these parameters. My personal evaluation is that I am underperforming by a few percent. 

I will probably try and put in my cash interest into my return for the last year to make it clearer. But these anomalies in the results should no longer be an issue from next year.


----------



## KnowThePast

notting said:


> Sharing trades is open and indicates credibility, especially if you follow through on it!!!
> 
> However I wouldn't recommend it in general.
> 
> It can put a moz on you, make you react to opinions that seem plausible but contradict your sense of it and make you lose the flow of how it was appearing to you.
> The market is not often rational in the short to medium term so money is often made doing things that contradict fundamentals in the shorter terms.
> 
> I find it's better to be very quiet and introverted about your trading, you can get a much better rhythm for what you are doing and what is going on.
> 
> If you want to share something that you think will be helpful for others then definitely do that, that's great! What goes around comes around and you will definitely get it back one way or another.
> 
> It's also good to try to offer a contrary opinion to someone who could be making a big mistake because they have missed something important.  So sharing can be helpful, but in general with your trades, stick with your plan if it works and think about something else until it's played out, don't second guess or invite support!




Hi notting,

You raise a very good point.

I do often catch myself thinking that I need to justify my decision here, definitely not something one with a contrarian bend wants to do. The forum is a great place to clear your thoughts, get other opinions, and keep yourself honest for fear of ridicule. But it is certainly no a place to seek group approval of your decisions. 

My strategy now is semi-automated, so it is not as big an issue as for others, but I am well aware of this tendency.


----------



## KnowThePast

I've mentioned that I am switching over to a new strategy, I thought I should expand on that a little.

I've started off investing in quantitative value strategies. They were proven to work by many studies and being able to backtest it myself, which gave me an extra comfort factor. I was always aware that because this was such a well known strategy, it could only result in small alpha and kept searching for something not as well known where a bigger edge could be found.

My focus is now on small, mostly growing companies. I use a few factors to filter this universe, which I will keep to myself. My latest purchases of PHG, CGR, TCN, MWR are part of these strategies. My slightly older holdings of ICS and BYI and to some extent DTL also fit. 

Only a few studies were ever done in this area, so I am painfully aware of the fact that I could just be looking at noise. I am taking it slowly to switch over my investing completely to this approach, but I am quietly confident that I am on to something.

Momentum/technicals I do not look at. I think it is a crowded field, with many systems developed there. I do not see how I can contribute anything there that hasn't been done by thousands of others. I do, however, see a big hole in what is available for retail investors in terms of quantitative analysis tools and do not expect this to change in the near future either.

Retail investing without institutional constraints, but with instituition level software, I think has a lot of potential. My focus is just as much about developing my system as it is to make money from the porfolio. These are early days, but as I said, I am quietly hopeful that it will result in finding an unexploited statistical edge in the coming years. This is an exciting stage for me now, as I am slowly turning over my portfolio to a strategy that is somewhat unique, rather than a variant of widely publicised value strategies it was before.


----------



## Ariyahn2011

KnowThePast said:


> I've mentioned that I am switching over to a new strategy, I thought I should expand on that a little.
> 
> I've started off investing in quantitative value strategies. They were proven to work by many studies and being able to backtest it myself, which gave me an extra comfort factor. I was always aware that because this was such a well known strategy, it could only result in small alpha and kept searching for something not as well known where a bigger edge could be found.
> 
> My focus is now on small, mostly growing companies. I use a few factors to filter this universe, which I will keep to myself. My latest purchases of PHG, CGR, TCN, MWR are part of these strategies. My slightly older holdings of ICS and BYI and to some extent DTL also fit.
> 
> Only a few studies were ever done in this area, so I am painfully aware of the fact that I could just be looking at noise. I am taking it slowly to switch over my investing completely to this approach, but I am quietly confident that I am on to something.
> 
> Momentum/technicals I do not look at. I think it is a crowded field, with many systems developed there. I do not see how I can contribute anything there that hasn't been done by thousands of others. I do, however, see a big hole in what is available for retail investors in terms of quantitative analysis tools and do not expect this to change in the near future either.
> 
> Retail investing without institutional constraints, but with instituition level software, I think has a lot of potential. My focus is just as much about developing my system as it is to make money from the porfolio. These are early days, but as I said, I am quietly hopeful that it will result in finding an unexploited statistical edge in the coming years. This is an exciting stage for me now, as I am slowly turning over my portfolio to a strategy that is somewhat unique, rather than a variant of widely publicised value strategies it was before.




I think people need to keep it simple and try remain humble. I think its a solid effort considering your sharing your P/L with everybody. Too many egos in this world.


----------



## KnowThePast

Ariyahn2011 said:


> I think people need to keep it simple and try remain humble. I think its a solid effort considering your sharing your P/L with everybody. Too many egos in this world.




Thanks Ariyahn2011.


----------



## tech/a

> I think people need to keep it simple and try remain humble. I think its a solid effort considering your sharing your P/L with everybody. Too many egos in this world.




Why post your results if you don't want or expect feed back?

I traded "TechTrader" Live on "The Chartist" for 7 years.
In that time the Full Code was posted and a thread continued for the full 7 yrs.

That System was tested by 100s of people all tried to break it.
There was copious amounts of feed back. This lead to a number of improvements.
Some shared on the site others people have kept for themselves and to this day trade hybrids of the method.
Returning over the market average many fold.

The method is one of 5 in Radges book 'Un Holy Grails"

So I've been on the end of "Egos"

Get over it.
*If your under performing you need to change something.
Particularly if the markets improved 20% and you've stayed stagnant.
Its not ego---its in your face FACT!*


----------



## systematic

tech/a said:


> With the XJO up 20% in the same period as your exercise
> I don't know that I agree with the above.






tech/a said:


> *If your under performing you need to change something.
> Particularly if the markets improved 20% and you've stayed stagnant.
> Its not ego---its in your face FACT!*




...not a fan of tracking error, then?


----------



## notting

tech/a said:


> Why post your results if you don't want or expect feed back?
> 
> I traded "TechTrader" Live on "The Chartist" for 7 years.
> In that time the Full Code was posted and a thread continued for the full 7 yrs.




Posting up the results of a third party trading system that worked well for a period is hardly seeking feedback for your trading ideas, perceptions, doubts or technical prowess in the real market. 
More like promoting something.


----------



## tech/a

notting said:


> Posting up the results of a third party trading system that worked well for a period is hardly seeking feedback for your trading ideas, perceptions, doubts or technical prowess in the real market.
> More like promoting something.




What are you on about. THIRD PARTY?????
I designed it!!
Worked well!!! 30K to $386K in 7 yrs peaked at $450K
There were 1000s of posts around 15 threads.
Heaps of feedback all sorts of great discussion.

What the hell is there to promote.

It was and still is free to anyone who wants it.


----------



## notting

Oh sorry, I thought it was something Radge offered and you used.


----------



## tech/a

notting said:


> Oh sorry, I thought it was something Radge offered and you used.




Read the book. Page 109-113 from memory.


----------



## KnowThePast

Monthly update for February.

I've now included my cash balances and interest in the calculations. It is still a pretty inaccurate picture, as most of my portfolio was in cash for the first year.


----------



## Ves

Hey mate,

I found this paper on my travels.  It is from 2005,  but some of it still might be relevant to the discussion we had on PHG.

Thought someone would be interested,  so will post it here.   It is an academic's  Porter's Five Forces analysis of the Australian Private Hospital industry.

https://opus.lib.uts.edu.au/research/bitstream/handle/10453/3083/2005002529.pdf?sequence=1


----------



## KnowThePast

Ves said:


> Hey mate,
> 
> I found this paper on my travels.  It is from 2005,  but some of it still might be relevant to the discussion we had on PHG.
> 
> Thought someone would be interested,  so will post it here.   It is an academic's  Porter's Five Forces analysis of the Australian Private Hospital industry.
> 
> https://opus.lib.uts.edu.au/research/bitstream/handle/10453/3083/2005002529.pdf?sequence=1




Hi Ves,

A very interesting read and definitely relevant today.

They key points for me are:
- industry condition are favourable and are likely to remain so for a long time.
- it is very difficult for a competitor to enter the industry by building a new hospital (prohibitive costs), entry is much more likely via acquisitions of existing hospitals.


----------



## KnowThePast

Sold VET, 6000 @ $0.088, for a loss of $787.90 (-57.94%).

I wanted to sell this one earlier, but I had an unmarketable parcel. Today's good news (first since listing?) pushed the price up enough for me to be able to sell it. The $15m sale they achieved will not be enough to get them out of the hole, but it's a good start.

My filter is based on buying cheap companies, which VET fit into perfectly. But it has since deteriorated to what will possibly a negative equity balance sheet. It no longer fits my filter, so it's out.


----------



## ottg

tech/a said:


> Read the book. Page 109-113 from memory.




Assume you talk about the 20% Flipper method. I'm confused as it states that the momentum trade was derived from Martin Zwieg.



tech/a said:


> What are you on about. THIRD PARTY?????
> I designed it!!




Did you improve and refine the method described. Please refer me to your thread were I can go and learn about it?



tech/a said:


> Worked well!!! 30K to $386K in 7 yrs peaked at $450K
> There were 1000s of posts around 15 threads...........
> 
> It was and still is free to anyone who wants it.




With those results of approx 47% compounded over 7 years... I want to learn and replicate that?
This is more than just a method so please point me to those threads.


----------



## pinkboy

KnowThePast said:


> Sold VET, 6000 @ $0.088, for a loss of $787.90 (-57.94%).
> 
> I wanted to sell this one earlier, but I had an unmarketable parcel. Today's good news (first since listing?) pushed the price up enough for me to be able to sell it. The $15m sale they achieved will not be enough to get them out of the hole, but it's a good start.
> 
> My filter is based on buying cheap companies, which VET fit into perfectly. But it has since deteriorated to what will possibly a negative equity balance sheet. It no longer fits my filter, so it's out.




Looks like a premature exit. Has jumped up recent days.

1. How is 6000 shares 'unmarketable'? Not a huge parcel really.
2. Why are you still holding 500 VET shares?
3. Are you starting to learn a lesson with your current strategy and do you think you will morph to a 'safer' strategy?


pinkboy


----------



## galumay

pinkboy said:


> 1. How is 6000 shares 'unmarketable'? Not a huge parcel really
> 
> pinkboy




Because it would have been worth less than $500 so unmarketable.


----------



## Habakkuk

ottg said:


> Assume you talk about the 20% Flipper method. I'm confused as it states that the momentum trade was derived from Martin Zwieg.
> 
> Did you improve and refine the method described. Please refer me to your thread were I can go and learn about it?
> 
> With those results of approx 47% compounded over 7 years... I want to learn and replicate that?
> This is more than just a method so please point me to those threads.





He was talking about Techtrader, not 20% Flipper. You will find 3 threads here if you do a search.
This is the main one, I think.

https://www.aussiestockforums.com/forums/showthread.php?t=1560


----------



## ottg

Habakkuk said:


> He was talking about Techtrader, not 20% Flipper. You will find 3 threads here if you do a search.
> This is the main one, I think.
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=1560





Thanks for the pointers Habakkuk. Just reread the rules in "Unholy Grails". It mentioned the period 1997 to 2011 with a compounded average growth rate of 21.3% Now from the post below improving that to 44% sounds very worthwhile learning. Were others able to emulate those results?


----------



## KnowThePast

pinkboy said:


> Looks like a premature exit. Has jumped up recent days.
> 
> 1. How is 6000 shares 'unmarketable'? Not a huge parcel really.
> 2. Why are you still holding 500 VET shares?
> 3. Are you starting to learn a lesson with your current strategy and do you think you will morph to a 'safer' strategy?
> 
> 
> pinkboy




Hi pinkboy,

Apologies for the late reply, life has been a little busier than normal lately.

1. They were under $500, so I couldn't sell them. Thanks galumay for a quicker reply 
2. An excellent pair of eyes you have! It was a type, I should have said sold 6500 shares. None left.
3. I've posted before that I am changing my stategy slowly. As far as VET trade goes, no lessons learnt here. Some work out, some don't. If I was to see another opportunity like that again, I would invest again.


----------



## pinkboy

KnowThePast said:


> Hi pinkboy,
> 
> Apologies for the late reply, life has been a little busier than normal lately.
> 
> 1. They were under $500, so I couldn't sell them. Thanks galumay for a quicker reply
> 2. An excellent pair of eyes you have! It was a type, I should have said sold 6500 shares. None left.
> 3. I've posted before that I am changing my stategy slowly. As far as VET trade goes, no lessons learnt here. Some work out, some don't. If I was to see another opportunity like that again, I would invest again.




So you could have sold @ .077?

And you would trade again at another opportunity to go -57%?

I still can't grasp your logic. It's like you go shopping at Woolworths and as you go down each aisle you grab whatever is on special, regardless if you need it or not. It's like you grab salami , cordial and dishwasher tablets (shares) - all might be on special,  but don't make a meal (strategy).

Why not try to buy some bread, milk, rice, and apples and consolidate your pantry, then lash out and buy some advocado and chocolate when the timing is right?

pinkboy


----------



## tech/a

> They were under $500 so I couldn't sell them




Buy enough to bring a parcel to $500 and sell the lot!

Not much thinking going on.


----------



## cynic

galumay said:


> Because it would have been worth less than $500 so unmarketable.






KnowThePast said:


> ...
> 1. They were under $500, so I couldn't sell them. Thanks galumay for a quicker reply
> ...




To the best of my current understanding, the $500 minimum applies to the buyer and not the seller.

Many years ago, I disposed of a parcel of Davnet (remember them?!) for less than brokerage costs, in order to realise and report the capital loss in that year's tax return.


----------



## skc

cynic said:


> To the best of my current understanding, the $500 minimum applies to the buyer and not the seller.
> 
> Many years ago, I disposed of a parcel of Davnet (remember them?!) for less than brokerage costs, in order to realise and report the capital loss in that year's tax return.




That's what I thought as well.



tech/a said:


> Buy enough to bring a parcel to $500 and sell the lot!
> 
> Not much thinking going on.




Never thought of that but it's pretty simple solution if the above isn't true. Probably shouldn't encourage beginners doing such as they are notorious of unwilling to sell even at a tick's loss.



pinkboy said:


> I still can't grasp your logic. It's like you go shopping at Woolworths and as you go down each aisle you grab whatever is on special, regardless if you need it or not. It's like you grab salami , cordial and dishwasher tablets (shares) - all might be on special,  but don't make a meal (strategy).
> 
> Why not try to buy some bread, milk, rice, and apples and consolidate your pantry, then lash out and buy some advocado and chocolate when the timing is right?




Refreshing analogy.



KnowThePast said:


> 2. An excellent pair of eyes you have! It was a *type*, I should have said sold 6500 shares. None left.




That would also be a typo. 



KnowThePast said:


> 3. I've posted before that I am changing my stategy slowly. As far as VET trade goes, no lessons learnt here.
> Some work out, some don't. If I was to see another opportunity like that again, I would invest again.




The lesson here was that you should have re-entered if you had the time to reassess. VET's annoucnement came on 26 Aug and it opened at 8.2c (granted you are not always in front of your screen)... so for those who's prepared that would have been the best time to act. I mentioned it on 19 Mar when the sale of Endeavour was first announced. 

There's another opportunity in a few weeks as revised guidance will be issued. It may or may not go up from there, but some preparations on what-if's may be warranted.


----------



## KnowThePast

pinkboy said:


> So you could have sold @ .077?
> 
> And you would trade again at another opportunity to go -57%?
> 
> I still can't grasp your logic. It's like you go shopping at Woolworths and as you go down each aisle you grab whatever is on special, regardless if you need it or not. It's like you grab salami , cordial and dishwasher tablets (shares) - all might be on special,  but don't make a meal (strategy).
> 
> Why not try to buy some bread, milk, rice, and apples and consolidate your pantry, then lash out and buy some advocado and chocolate when the timing is right?
> 
> pinkboy




Hi pinkboy, 

The trouble is knowing ahead of time whether it is going to be -57% or not. 

You shopping analogy is very good. I am essentially buying everything that meets my filter, in the belief that these filters outperform the average over the long term.


----------



## KnowThePast

cynic said:


> To the best of my current understanding, the $500 minimum applies to the buyer and not the seller.
> 
> Many years ago, I disposed of a parcel of Davnet (remember them?!) for less than brokerage costs, in order to realise and report the capital loss in that year's tax return.




Thanks for that, I didn't realize it was only for the buyer. Good to know.


----------



## KnowThePast

skc said:


> That's what I thought as well.
> 
> 
> 
> Never thought of that but it's pretty simple solution if the above isn't true. Probably shouldn't encourage beginners doing such as they are notorious of unwilling to sell even at a tick's loss.
> 
> 
> 
> Refreshing analogy.
> 
> 
> 
> That would also be a typo.
> 
> 
> 
> The lesson here was that you should have re-entered if you had the time to reassess. VET's annoucnement came on 26 Aug and it opened at 8.2c (granted you are not always in front of your screen)... so for those who's prepared that would have been the best time to act. I mentioned it on 19 Mar when the sale of Endeavour was first announced.
> 
> There's another opportunity in a few weeks as revised guidance will be issued. It may or may not go up from there, but some preparations on what-if's may be warranted.




Thanks skc,

I've spent almost no time in front of the screen last month, so things are pretty much on auto pilot for now. 

I am running an automated strategy and it no longer meets my filter. 

Making a typo in a typo just shows I am sleep deprived as well


----------



## KnowThePast

Monthly update. This has been the most profitable month I had in 6 and a half years; my second daughter was born a couple of weeks ago, a 3.5kg investment. The dividends are a little smelly, but high growth is expected. OK, enough puns, I am just very happy. But, I had almost no time to look at shares or respond on the forum. This will continue for some time but should gradually improve.

Portfolio has declined a further $1,038.60 (2.1%) for the month.


----------



## galumay

Congratulations, KTP. Best investment you will ever make, although at times you will wish you had invested elsewhere! (just had a day like that with my 11 year old!).


----------



## luutzu

KnowThePast said:


> Monthly update. This has been the most profitable month I had in 6 and a half years; my second daughter was born a couple of weeks ago, a 3.5kg investment. The dividends are a little smelly, but high growth is expected. OK, enough puns, I am just very happy. But, I had almost no time to look at shares or respond on the forum. This will continue for some time but should gradually improve.
> 
> Portfolio has declined a further $1,038.60 (2.1%) for the month.
> 
> View attachment 62193




congrats.


----------



## The Falcon

Great stuff KTP, just found out our second is a girl, due in October, that's two from two so the line ends with me.
All the best


----------



## KnowThePast

Bought ITD, 6191 @ $0.23

I posted about them over a year ago. I really liked the copany, but I though they were just a little too expensive at $0.30. I am much more comfortable at this price.


----------



## galumay

KnowThePast said:


> Bought ITD, 6191 @ $0.23
> 
> I posted about them over a year ago. I really liked the copany, but I though they were just a little too expensive at $0.30. I am much more comfortable at this price.




I bought them a year ago at 30c! They probably were at best fair value - in hindsight! They have had a good year and the new facility in Malaysia should bear fruit in the bottom line this year. They are well managed, have a solid business and now look cheap on all the metrics I measure.


----------



## KnowThePast

galumay said:


> I bought them a year ago at 30c! They probably were at best fair value - in hindsight! They have had a good year and the new facility in Malaysia should bear fruit in the bottom line this year. They are well managed, have a solid business and now look cheap on all the metrics I measure.




Hi galumay,

Yes, they've had a good year, and invested heavily as well, which should help drive growth next year and beyond.

I love their ongoing buyback, shareholders have benefited massively from it.

In 3 years, npat increased 215%, while eps increased 336%!


----------



## KnowThePast

Monthly update - portfolio fell by $61.25 (0.1%).





I want to ask for advice from everyone who is willing to share.

For most of the past 18 months, I was investing using a semi automated strategy, concentrating on deep value, unloved stocks. 

I have recently decided to change directions and instead look at small, mainly growth companies, with some other specific characteristics. My backtesting shows this to be a more promising area then deep value, both in terms of expected return, and hit rate.

This strategy usually has fewer opportunities available, there aren't enough opportunities right now to need all my portfolio in cash if I use the same position size. However, backtesting shows hit rate high enough for me to consider increasing my position size.

My dilemna is what to do with my current holdings. I still expect them to perform well over the long term. Many of them are in mining/construction and it makes me uncomfortable to sell them at what is likely the low point for the sector.

What are my options for existing, deep value stocks:
1. Sell all immediately
2. Sell in stages, in the same order that they were bought.
3. Sell in stages, use my judgement to decide which are best to sell first.
4. Sell all immediately, except for mining stocks.
5. Other?

What are your thoughts on what I should do?


----------



## galumay

KnowThePast said:


> What are your thoughts on what I should do?




I think what you should do is work out a path forward that YOU have confidence in. I would suggest writing up a decision tree or decision journal for the strategy. Consider what all the options are, what the possible risks are, the opportunity costs, the probability of varying outcomes, and what paths those options, once selected, lead to.

Define your predictions for what will happen in the case of each option, i.e. "I predict that company XYZ will be worth more than i paid for it within 12 months, because there will be a turnaround in the mining services business and as a financially healthy and well managed business XYZ will be one of the companies to benefit."

The power of the predictions is it gives you something to check your decisons agaonst going forward, you can analyse whether you were right because of a good decision, or right despite an incorrect decision - and vice versa!

I find when I write all my thinking down in a decision journal the answer becomes moe obvious and importantly I have a higher level of confidence in my decision.

I usually chuck in a worst case/best case scenario - if i cant live with what I think is the worst case scenario then its not the right decision, if i could be happy with the best case scenario, then it MAY be.

There is some more detail about decision journals here, http://www.farnamstreetblog.com/2014/02/decision-journal/

I believe the effort you have put into your portfolio strategy so far, and your willingness to learn will combine to make you a better investor going forward whatever path you choose.


----------



## qldfrog

my other advice would be to take into account any capital gain/loss against you tax position;
if you have any CG older losses, may be worth to balance them now;
if you expect lower/higher taxation next year, you may want to delay or not  profit sales etc etc
You got my point;
in 2 months we are in a new FY; Tax effect is really something you should consider in your decision


----------



## Miner

KnowThePast said:


> Monthly update. This has been the most profitable month I had in 6 and a half years; my second daughter was born a couple of weeks ago, a 3.5kg investment. The dividends are a little smelly, but high growth is expected. OK, enough puns, I am just very happy. But, I had almost no time to look at shares or respond on the forum. This will continue for some time but should gradually improve.
> 
> Portfolio has declined a further $1,038.60 (2.1%) for the month.
> 
> View attachment 62193




Congratulations ! You should know your priority now. Kids are precious.


----------



## Miner

galumay said:


> I think what you should do is work out a path forward that YOU have confidence in. I would suggest writing up a decision tree or decision journal for the strategy. Consider what all the options are, what the possible risks are, the opportunity costs, the probability of varying outcomes, and what paths those options, once selected, lead to.
> 
> Define your predictions for what will happen in the case of each option, i.e. "I predict that company XYZ will be worth more than i paid for it within 12 months, because there will be a turnaround in the mining services business and as a financially healthy and well managed business XYZ will be one of the companies to benefit."
> 
> The power of the predictions is it gives you something to check your decisons agaonst going forward, you can analyse whether you were right because of a good decision, or right despite an incorrect decision - and vice versa!
> 
> I find when I write all my thinking down in a decision journal the answer becomes moe obvious and importantly I have a higher level of confidence in my decision.
> 
> I usually chuck in a worst case/best case scenario - if i cant live with what I think is the worst case scenario then its not the right decision, if i could be happy with the best case scenario, then it MAY be.
> 
> There is some more detail about decision journals here, http://www.farnamstreetblog.com/2014/02/decision-journal/
> 
> I believe the effort you have put into your portfolio strategy so far, and your willingness to learn will combine to make you a better investor going forward whatever path you choose.




Galumy
While visiting this thread I read your advise.
It is indeed very inspiring for me as well.
Some times I felt shy to ask advise exactly the same way know the past asked.
I also inspired from his courage to display the losses. I often felt the guilt when I succumed with a very heavy losses from some of my scrips but never put my goals into writing as you described. 
 Many thanks for the post and God bless .


----------



## KnowThePast

galumay said:


> I think what you should do is work out a path forward that YOU have confidence in. I would suggest writing up a decision tree or decision journal for the strategy. Consider what all the options are, what the possible risks are, the opportunity costs, the probability of varying outcomes, and what paths those options, once selected, lead to.
> 
> Define your predictions for what will happen in the case of each option, i.e. "I predict that company XYZ will be worth more than i paid for it within 12 months, because there will be a turnaround in the mining services business and as a financially healthy and well managed business XYZ will be one of the companies to benefit."
> 
> The power of the predictions is it gives you something to check your decisons agaonst going forward, you can analyse whether you were right because of a good decision, or right despite an incorrect decision - and vice versa!
> 
> I find when I write all my thinking down in a decision journal the answer becomes moe obvious and importantly I have a higher level of confidence in my decision.
> 
> I usually chuck in a worst case/best case scenario - if i cant live with what I think is the worst case scenario then its not the right decision, if i could be happy with the best case scenario, then it MAY be.
> 
> There is some more detail about decision journals here, http://www.farnamstreetblog.com/2014/02/decision-journal/
> 
> I believe the effort you have put into your portfolio strategy so far, and your willingness to learn will combine to make you a better investor going forward whatever path you choose.




That's seriously good advice galumay, thank you very much.

I'll definitely give the decision journal a go from now on.


----------



## KnowThePast

qldfrog said:


> my other advice would be to take into account any capital gain/loss against you tax position;
> if you have any CG older losses, may be worth to balance them now;
> if you expect lower/higher taxation next year, you may want to delay or not  profit sales etc etc
> You got my point;
> in 2 months we are in a new FY; Tax effect is really something you should consider in your decision





An excellent point, qldfrog!

I usually ignore tax considerations completely in my investment decisions.

However, in this case, where I plan on selling all these stocks anyway, it may just make perfect sense to sell them in order of losses.


----------



## KnowThePast

For now, decided to sell some of my (mostly non-mining) stocks that are at a loss. I am still in the process of deciding what to do with others.

First sale: DCG @ 1.22. Loss of $351.62 (-33%).


----------



## skc

KnowThePast said:


> Monthly update. This has been the most profitable month I had in 6 and a half years; my second daughter was born a couple of weeks ago, a 3.5kg investment. The dividends are a little smelly, but high growth is expected. OK, enough puns, I am just very happy. But, I had almost no time to look at shares or respond on the forum. This will continue for some time but should gradually improve.




Congratulations, KTP. These babies... they do keep you busy don't they. I have 3 daughters myself so forum posting is on a much lower priority than before, unfortunately.



KnowThePast said:


> I want to ask for advice from everyone who is willing to share.
> 
> For most of the past 18 months, I was investing using a semi automated strategy, concentrating on deep value, unloved stocks.
> 
> I have recently decided to change directions and instead look at small, mainly growth companies, with some other specific characteristics. My backtesting shows this to be a more promising area then deep value, both in terms of expected return, and hit rate.
> 
> This strategy usually has fewer opportunities available, there aren't enough opportunities right now to need all my portfolio in cash if I use the same position size. However, backtesting shows hit rate high enough for me to consider increasing my position size.
> 
> My dilemna is what to do with my current holdings. I still expect them to perform well over the long term. Many of them are in mining/construction and it makes me uncomfortable to sell them at what is likely the low point for the sector.
> 
> What are my options for existing, deep value stocks:
> 1. Sell all immediately
> 2. Sell in stages, in the same order that they were bought.
> 3. Sell in stages, use my judgement to decide which are best to sell first.
> 4. Sell all immediately, except for mining stocks.
> 5. Other?
> 
> What are your thoughts on what I should do?




I think you should re-evaluate what you've done first. Why are you ditching your old strategy? Are you losing patience, losing confidence, admitting failure or really think you can do better with a different approach?

Tech/a often mentions the "beginners loop" (or something to that effect), where a new student in technical analysis change his methods every so often because the previous one didn't work out. They do back test and find new kickass indicators and re-write their trading plans and improve the expected expectancy on paper... yet in the end the new approach would fail again, and the trader goes back to square one and start all over with new plan, indicator, signals etc etc.

I am not saying that is what you are doing... but I can see the parallel. So it's up to you to ask yourself the honest and hard questions. Your portfolio underperformed XJOAI by 30%... that is not good. I bet you if you are up 30% you won't be looking to change strategy. 

If you are admitting failure... then sure, sell up and move on. But you should also lookback on why the strategy failed.

If you are losing patience... then I'd say stick with it. If your initial plan is indeed a 5-year (or however long) one and you are only 2-years into it... then you are doing yourself a dis-service by ending it prematurely. May be trim a thing or two that no longer fits your criteria today. But you are not allowing the strategy to work itself out in the fullness of time.

If you are just losing confidence... then stick with it and change nothing. We all lose confidence in our ability at one stage or another. It's no reason to change an otherwise correct course of action.

If you really think you can make better returns using a different approach... I'd test that assumption again. Will you have the patience and committment to stick with it over the intended timeframe? I'd also check and make sure that the return from your new approach is going to be better than the current starting point (namely, start of year 3 of a 5 year plan). 

Only you can answer these questions.


----------



## peter2

Good reply skc and I support your suggestions.

IMHO the portfolio doesn't have enough large winners and too many large losers. 

Review your selection criteria. The answers you need will be there in your results if you really what to find them.


----------



## galumay

peter2 said:


> Good reply skc and I support your suggestions.
> 
> IMHO the portfolio doesn't have enough large winners and too many large losers.
> 
> Review your selection criteria. The answers you need will be there in your results if you really what to find them.




It is a very good reply from skc, I obviously have no idea of the answers to the questions he poses as its not my portfolio, but I would be very wary of the view that "_the portfolio doesn't have enough large winners and too many large losers._" - without understanding the strategy and without intimate knowledge of the companies that really doesnt add much to understanding whether there is a 'fault' with the strategy or not.

As skc suggests, if the timescale for the success of the strategy is long term then dumping the strategy because its not performing in a certain way is dangerous. 

One of the things I have learnt is to be careful of using relative performance as a metric, for a long term invester it can be very corrosive to your discipline and strategy to be comparing your performance to say the the ASX200, its the same effect as the ability to check the price of your shares in real time, all the time. 

Its not easy to move with confidence to absolute measure of performance, but for a long term investor I think its important. Especially if you are a contrarian investor looking to unlock hidden value, you are likely to underperform on a relative measure almost by definition.


----------



## tech/a

peter2 said:


> Good reply skc and I support your suggestions.
> 
> IMHO the portfolio doesn't have enough large winners and too many large losers.
> 
> Review your selection criteria. The answers you need will be there in your results if you really what to find them.




I agree.
If the portfolio doesn't have more nett winners than nett losers
Or 
Much larger winners than nett losers 

It's never going to be profitable.

Regardless of whatever form of analysis you take up.

If you don't change anything you'll get similar results.


----------



## galumay

tech/a said:


> I agree.
> ....
> It's never going to be profitable.
> 
> ...




Well thats dependent on strategy and timescale. From a trader's point of view, no doubt thats true....


----------



## craft

skc said:


> I think you should re-evaluate what you've done first. Why are you ditching your old strategy? Are you losing patience, losing confidence, admitting failure or really think you can do better with a different approach?
> 
> Tech/a often mentions the "beginners loop" (or something to that effect), where a new student in technical analysis change his methods every so often because the previous one didn't work out. They do back test and find new kickass indicators and re-write their trading plans and improve the expected expectancy on paper... yet in the end the new approach would fail again, and the trader goes back to square one and start all over with new plan, indicator, signals etc etc.
> 
> I am not saying that is what you are doing... but I can see the parallel. So it's up to you to ask yourself the honest and hard questions. Your portfolio underperformed XJOAI by 30%... that is not good. I bet you if you are up 30% you won't be looking to change strategy.
> 
> If you are admitting failure... then sure, sell up and move on. But you should also lookback on why the strategy failed.
> 
> If you are losing patience... then I'd say stick with it. If your initial plan is indeed a 5-year (or however long) one and you are only 2-years into it... then you are doing yourself a dis-service by ending it prematurely. May be trim a thing or two that no longer fits your criteria today. But you are not allowing the strategy to work itself out in the fullness of time.
> 
> If you are just losing confidence... then stick with it and change nothing. We all lose confidence in our ability at one stage or another. It's no reason to change an otherwise correct course of action.
> 
> If you really think you can make better returns using a different approach... I'd test that assumption again. Will you have the patience and committment to stick with it over the intended timeframe? I'd also check and make sure that the return from your new approach is going to be better than the current starting point (namely, start of year 3 of a 5 year plan).
> 
> Only you can answer these questions.




Gee its nice to see this post.  Some important considerations well put. I wrote basically the same thing and then deleted it because I don't have faith I can communicate well enough on these types of hard questions even though they should be asked.

Only other point I had in my deleted post was that *if* moving on is the right answer - then I think you probably should sell all immediately. I think being a strong hand in the market is very important if you are not going to get shaken out at the worst of times - you can't be a strong hand on something you are unwinding to move on to something you believe in more. Don't need to be a strong hand if the price is moving in your favour so maybe consider some T/A to time the exits of of any stronger stocks at the moment, but consider your reaction to possible gap breakdowns of a trend if you go that way.


----------



## tech/a

galumay said:


> Well thats dependent on strategy and timescale. From a trader's point of view, no doubt thats true....




Regardless of timeframe
Exactly the same for an investor.
Regardless of strategy

In the end the strategy is to make a profit
I think your missing the simplicity in the complexity


Other than that which I just mentioned
More wins than losses
Or
Bigger wins than losses
How else can investor or trader make a profit?


----------



## galumay

tech/a said:


> Regardless of timeframe
> Exactly the same for an investor.
> Regardless of strategy
> 
> In the end the strategy is to make a profit
> I think your missing the simplicity in the complexity
> 
> 
> Other than that which I just mentioned
> More wins than losses
> Or
> Bigger wins than losses
> How else can investor or trader make a profit?




Not sure how much clearer I can make it, the timeframe being considered may not be appropriate. If the strategy is long term and contrarian then it will likely underperform any relative measure in the short term. 

Portfolio in the short term may have more losses than wins, may have bigger losses than wins, none of that matters if the timescale for the strategy is long term and the outcome ends up being more wins than losses or bigger wins than losses.

As I said, you seem only able to look at it from a short term trading perspective.


----------



## qldfrog

tech/a said:


> More wins than losses
> Or
> Bigger wins than losses
> How else can investor or trader make a profit?



To be more precise,[ I can not teach T/A anything he has not been already practising for years];
you can have more wins than losses and  still loose $, and you can have Bigger wins than losses and still bleed by many cuts;
how much $ do you loose per loss, make per win and then what is your overall results;
I have had bad learning experiences doing all the wrong things..
your winning ratio should be linked to your exit strategy (win or loss) to be able to make a profit at the end of the year


----------



## galumay

qldfrog said:


> ......to be able to make a profit at the end of the year




...and we are back talking about trading. (Hint, this thread is in the Medium/Long Term Investing Sub Forum.)

Anyway, thats it from me. Sorry ktp for once again causing your thread to be dragged off topic!


----------



## Wysiwyg

galumay said:


> Not sure how much clearer I can make it, the timeframe being considered may not be appropriate. If the strategy is long term and contrarian then it will likely underperform any relative measure in the short term.



Timeframe??? If you never sell for profit or loss in the long term what do you achieve?


----------



## galumay

Wysiwyg said:


> Timeframe??? If you never sell for profit or loss in the long term what do you achieve?




Where did I say a valid strategy was to never sell??!!


----------



## pinkboy

Wysiwyg said:


> Timeframe??? If you never sell for profit or loss in the long term what do you achieve?




DCA over time, some portfolios achieve a never ending stream of dividends, that regardless of price, continue to generate income.


pinkboy


----------



## tech/a

The word aggregate should be added to losses in my context
To generate a serious cashflow from dividends would need an 
Investment of 100s ok k with a strategy which at worst keeps
Your equity neutral

Even a 5 % decrease in equity and you've wasted a year

Finally you can invest in a losing strategy as long as you like
Won't change the out come just delay it
I often hear this mantra from those in long term drawdown

Question to KTP
how do you know your strategy has a positive out come
Either from past results or from what your doing to help
Give you the biggest chance to profit?
If you don't know then your just forward testing an idea
You have to make a decision based on what you know

Not on what could be!


----------



## galumay

pinkboy said:


> DCA over time, some portfolios achieve a never ending stream of dividends, that regardless of price, continue to generate income.
> 
> 
> pinkboy




Actually I hadnt even thought of it that way, (probably because its not relevant to ktp's holdings), a friend who is a fund manager with very strong above market performance for a number of years, mentioned how his grandmother, who held only shares in two, unpopular companies, had significantly out performed his fund! The dividends each year were now greater than her initial investments in the companies! (she had reinvested the divvys.).

Sort of blows any arguments about short term relative performance out the window!

(and yes, I know its like your great aunt who smoked a packet of winny reds every day and lived to 108 until a bus ran her over)


----------



## tech/a

galumay said:


> Actually I hadnt even thought of it that way, (probably because its not relevant to ktp's holdings), a friend who is a fund manager with very strong above market performance for a number of years, mentioned how his grandmother, who held only shares in two, unpopular companies, had significantly out performed his fund! The dividends each year were now greater than her initial investments in the companies! (she had reinvested the divvys.).
> 
> Sort of blows any arguments about short term relative performance out the window!
> 
> (and yes, I know its like your great aunt who smoked a packet of winny reds every day and lived to 108 until a bus ran her over)




So if granny gets a 5% dividend this year and her
Equity drops 7% I guess you think she's doing brilliantly.

Let's presume she paid $3 for the stock
They are now $35
And dropped from approx $38 over the year.


----------



## Wysiwyg

pinkboy said:


> DCA over time, some portfolios achieve a never ending stream of dividends, that regardless of price, continue to generate income.
> 
> 
> pinkboy



To do this as Tech/A mentioned one would need a large capital investment to make this strategy work. $2k worth of shares won't do it. On the ASX there are some stocks that have increased dividends, didn't get taken over and stood the time test. Obviously the major banks are standouts but what others? With an increasing dividend y.o.y. the share price would rise accordingly and in the longterm your equity would be greater than when the process began. Stock selection is critical for the long term investor.


----------



## tech/a

Wysiwyg said:


> To do this as Tech/A mentioned one would need a large capital investment to make this strategy work. $2k worth of shares won't do it. On the ASX there are some stocks that have increased dividends, didn't get taken over and stood the time test. Obviously the major banks are standouts but what others? With an increasing dividend y.o.y. the share price would rise accordingly and in the longterm your equity would be greater than when the process began. Stock selection is critical for the long term investor.




Boom Boom


----------



## galumay

tech/a said:


> So if granny gets a 5% dividend this year and her
> Equity drops 7% I guess you think she's doing brilliantly.
> 
> Let's presume she paid $3 for the stock
> They are now $35
> And dropped from approx $38 over the year.




As usual I have little idea what you are talking about, but her returns over many years are very good. The fund has returned over 16% annualised since inception and she has beaten that easily.

If you cant see that getting a dividend cheque every year that is larger than your initial investment is a good outcome then i give up!


----------



## tech/a

I'll type slowly

Regardless of open equity
If an investor suffers a loss greater
Than their return from dividends
They have had a bad year

That doesn't take a lot

You however are convinced that if your initial 
Investment was $3 and it's now worth $30
Then every years a great year

Open equity is YOUR money so it should be managed

Blindly collecting dividends while equity gets eroded
Is crazy
So back to wysiwigs point.


----------



## craft

tech/a said:


> So if granny gets a 5% dividend this year and her
> Equity drops 7% I guess you think she's doing brilliantly.
> 
> Let's presume she paid *$3 for the stock
> They are now $35*And dropped from approx $38 over the year.




Granny’s doing great I reckon. I suspect she wouldn’t give a rats about how the market is treating the price of her investment day to day or even year to year if she is comfortable with the business, probably more interested in which restaurant for Duck tonight.


----------



## tech/a

craft said:


> Granny’s doing great I reckon. I suspect she wouldn’t give a rats about how the market is treating the price of her investment day to day or even year to year if she is comfortable with the business, probably more interested in which restaurant for Duck tonight.




So management of open equity drawdowns are of
No importance provided you are in nett profit!


----------



## tech/a

You guys seem to think time is the panacea for
All
So holders of long term investments in banks
WOW or BHP or WES 
Should buy-- collect dividends and time will take care of
The rest

Back to WYSI's post


----------



## craft

tech/a said:


> So management of open equity drawdowns are of
> No importance provided you are in nett profit!






tech/a said:


> You guys seem to think time is the panacea for
> All
> So holders of long term investments in banks
> WOW or BHP or WES
> Should buy-- collect dividends and time will take care of
> The rest
> 
> Back to WYSI's post




I’m not sure what you are on about? Or why you're making assertions about what we think.

Is the WYSIWYG point that you are referring to 







> Stock selection is critical for the long term investor



If so I agree and ongoing monitoring of that selection decision is also critical. 

But reacting solely to open profit excursion based on mark to market is not important to me (or granny in the example I would dare say) – it would destroy an otherwise successful investment approach.


----------



## tech/a

craft said:


> I’m not sure what you are on about? Or why you're making assertions about what we think.
> 
> Is the WYSIWYG point that you are referring to If so I agree and ongoing monitoring of that selection decision is also critical.
> 
> But reacting solely to open profit excursion based on mark to market is not important to me (or granny in the example I would dare say) – it would destroy an otherwise successful investment approach.




Less important if open profit is 100 s of % of initial capital outlay.

But if your just starting to develop your long term portfolio and you suffer 
An immediate drawdown are you suggesting then that this is not an issue
Or is it only open profit drawdowns

If so at what point if ever do you look at your portfolio if your
Suffering open profit drawdown

Are you saying a 20 or 30 % drawdown in a portfolio provided it's in 
Profit and returning dividends is fine?


----------



## KnowThePast

skc said:


> Congratulations, KTP. These babies... they do keep you busy don't they. I have 3 daughters myself so forum posting is on a much lower priority than before, unfortunately.




Thank you skc. 

Four women against 1 :1zhelp::1zhelp::1zhelp::1zhelp:


Back on topic, an awesome reply to my concerns, thank you very much.



skc said:


> I think you should re-evaluate what you've done first. Why are you ditching your old strategy? Are you losing patience, losing confidence, admitting failure or really think you can do better with a different approach?




This is my biggest concern about changing strategy. Am I over reacting to short term results? I've struggled with this for a few months now. Of course, just because I am aware of a bias, doesn't mean I can overcome it. But, I am fairly sure that I am making a switch for a good reason.

- The new strategy performs better in all backtests for all periods, as well as many of its variants, eg. I don't think it is a data fluke.
- it makes good sense of why it may outperform (and why others don't always take advantage of it).



skc said:


> Tech/a often mentions the "beginners loop" (or something to that effect), where a new student in technical analysis change his methods every so often because the previous one didn't work out. They do back test and find new kickass indicators and re-write their trading plans and improve the expected expectancy on paper... yet in the end the new approach would fail again, and the trader goes back to square one and start all over with new plan, indicator, signals etc etc.






skc said:


> I am not saying that is what you are doing... but I can see the parallel. So it's up to you to ask yourself the honest and hard questions. Your portfolio underperformed XJOAI by 30%... that is not good. I bet you if you are up 30% you won't be looking to change strategy.




The only thing worse is not changing, unless, of course, your first chosen strategy was an ideal one.

But yes, constantly chasing a better thing and giving up too early are common mistakes.



skc said:


> If you are admitting failure... then sure, sell up and move on. But you should also lookback on why the strategy failed.




No, I don't consider my current portfolio a failure. This is about moving on to something better, but I still believe in the current strategy. My dilemna is whether I make an immediate transition or a gradual one. 



skc said:


> If you are losing patience... then I'd say stick with it. If your initial plan is indeed a 5-year (or however long) one and you are only 2-years into it... then you are doing yourself a dis-service by ending it prematurely. May be trim a thing or two that no longer fits your criteria today. But you are not allowing the strategy to work itself out in the fullness of time.




skc, it is so helpful that you came up with a list of possible reasons. It helps me greatly to tick them off, questions my judgement and biases.

I don't think patience is an issue with me here.



skc said:


> If you are just losing confidence... then stick with it and change nothing. We all lose confidence in our ability at one stage or another. It's no reason to change an otherwise correct course of action.




It's hard not to lose some confidence when you are losing money. 

To test it, I throw all kinds of facts and numbers at it, to bypass my emotion, but the mind is a strange thing.

I would have much preferred to make this change while I am making a profit.



skc said:


> If you really think you can make better returns using a different approach... I'd test that assumption again. Will you have the patience and committment to stick with it over the intended timeframe? I'd also check and make sure that the return from your new approach is going to be better than the current starting point (namely, start of year 3 of a 5 year plan).
> 
> Only you can answer these questions.




Yes, only me, of course. 

But it is of great use for me to hear others' opinions and critisicm to sharpen up my thinking. Thanks again for the great post.


----------



## KnowThePast

tech/a said:


> I agree.
> If the portfolio doesn't have more nett winners than nett losers
> Or
> Much larger winners than nett losers
> 
> It's never going to be profitable.
> 
> Regardless of whatever form of analysis you take up.
> 
> If you don't change anything you'll get similar results.




Hi tech,

galumay has been very kind to respond for me on this and he is spot on. Different strategy and different timescales. 

I have always stated that I expect to outperform the index after a 3-5 year period. I am terminating the strategy early, the results are not in yet. Some lessons can be learnt from them, of course.

Firstly, I look at is whether the underperformance is within acceptable limits of the strategy. It is.
Secondly, as I've written a few times before, the biggest reason for underperformance was a decision to enter the market at a very slow rate (4% per month). But, now that I am fully invested, it will not be an issue again.

Another way to look at it that may be more familiar to you - if you developed a strategy that you believed had a positive expectancy after placing hundreds of trades, how much weight would you give to the result of the first 50 trades?


----------



## KnowThePast

craft said:


> Gee its nice to see this post.  Some important considerations well put. I wrote basically the same thing and then deleted it because I don't have faith I can communicate well enough on these types of hard questions even though they should be asked.
> 
> Only other point I had in my deleted post was that *if* moving on is the right answer - then I think you probably should sell all immediately. I think being a strong hand in the market is very important if you are not going to get shaken out at the worst of times - you can't be a strong hand on something you are unwinding to move on to something you believe in more. Don't need to be a strong hand if the price is moving in your favour so maybe consider some T/A to time the exits of of any stronger stocks at the moment, but consider your reaction to possible gap breakdowns of a trend if you go that way.




Another excellent point, thanks craft.

To be completely frank, I have 2 fears.
1. Admitting failure, or appearing to be.
2. Been proven wrong, again, later.

Both of these are greatly magnified by the fact that my portfolio is on a public forum. Still, probably not as much pressure as a fund manager would face if he was to contemplate such an action.

This is starting to feel like a visit to a psychologist.


----------



## KnowThePast

galumay said:


> ...and we are back talking about trading. (Hint, this thread is in the Medium/Long Term Investing Sub Forum.)
> 
> Anyway, thats it from me. Sorry ktp for once again causing your thread to be dragged off topic!




Thanks galumay for all the support.

And no worries about off topic, it seems to happen at regular intervals every five pages or so. Perhaps I should chart it..


----------



## KnowThePast

Sold my holding in BOL, a loss of $464.85 (-21.6%).


----------



## tech/a

I didn't know you had parameters or performance stats to compare with.
When you say it's within parameters--- what are they.
Can you post up the template of the strategy and the results blueprint.

I personally haven't seen a method that is profitable which after 50 trades 
Is negative.

If I had a method that after 2 yrs was negative I'd be seriously looking at my data set compared with now.
If it was only over 500 trades I'd not be trading It.
It's just a far too small sample size.

I ran my system for 7 yrs live on the net
I encourage you to keep at it. I know exactly how you feel
My method was fully published and dissected by 100s of people.
Many far more qualified than I.

Personally I find the ever extending time horizon --- hog wash
If you've got an underperforming or losing strategy it will still be under performing or losing
In 3/5/10/15 yrs time

If it can't display an edge in 2 yrs 
It doesn't have one.

I'm not going to give you warm fuzzy she'll be right mate give it time rhetoric
I find in your face --- stop wasting time and change your thinking--- radically---
A far more effective tool for helping traders.

Warm and fuzzy is nice
The markets not.
Enjoy the journey---join the crowd or stand alone.

Crowds supply us stand alone types lots of $$s
Not only that they stay warm and fuzzy while it happens.


----------



## KnowThePast

tech/a said:


> If it can't display an edge in 2 yrs
> It doesn't have one.





This is our main point of disagreement, that we will probably never get to agree on.

So, let's leave it at that.


----------



## tech/a

KTP

It's clear you don't have a tested method
Otherwise you'd post it up.

Your trading what you and others believe is
A logical method. Its an hypothesis an idea.
A common one.

Your results *are* what would be expected.

Can't see the point in you posting up your method
If when challenged you don't support your view
With the test results you say you have?


----------



## Triathlete

KnowThePast said:


> I have always stated that I expect to outperform the index after a 3-5 year period.
> 
> 
> Secondly, as I've written a few times before, *the biggest reason for underperformance was a decision to enter the market at a very slow rate (4% per month)*. But, now that I am fully invested, it will not be an issue again.




I have not looked at your stocks or when they were purchased but could some of the underperformance have been due to buying at the wrong time?

 In other words what direction was the stock moving in when it was bought e.g moving up, down or sideways and was the market behind the stock at the time?

These could also be issues of underperformance.


----------



## systematic

Great discussion.

On what you should do - you seem to have the answer.  *If* you are changing strategy, then why wouldn't you want to be invested in it fully, as soon as _practicably_ possible (tax considerations, opportunity availability of the new plan etc)?

The question of whether to change has been interesting to read.  You want to, because you think you've got something better.  But you don't want to abandon what you've got, because of emotion, bias etc.  Which is a great danger to be aware of.  We're all subject to it, even if we know about it.  Myself included.

Without details, and I admit I've not read this whole thread -  I can only surmise:

- Currently investing in a deep value strategy.  As long as you _really are_ (some people say they invest in cheap stocks when they really don't)...then you know it'll all be okay in the long run.  I haven't seen value do fantastically over the recent period, either.  That's not a reason to abandon.

- I'm not sure whether you're looking to move into (a) a different strategy altogether (you mentioned growth and other things) that ignores value altogether....or (b) whether you are looking at quality / growth factors...but you will still stick to value stocks?  Momentum/growth strategies aside...I wouldn't blame you for looking at adding in quality measures.  This has been a big area for me, I've been loathe to incorporate quality...but would not blame any value investor for doing so.  

For example, we know that the Piotroski method (small cap value with quality measures) works in Australia.  The Aussie market has enough companies that some good (or rather, financially stable) companies do become under priced.

As I look at your list, I see only 9 of 24 that qualify as a decent stocks under Piotroski.  Those 9 would be a profit of 3.2% (although that's a bit meaningless, since its hard to know what they would have been when you bought them.  Still, I couldn't resist a look).

Anyway, my opinion (just an opinion)...is - that as long as you are sticking to the, "factors that work" you should be okay.  If it's something esoteric (or even something, "new") - well, you'd know I'd be hesitant.  Even with a 10 year solid back test, I'd be hesitant.  

tech/a of course, is simply wrong. Even the name of Nick Radge can be called upon to quash the silly comment about a 2 year under performance meaning there is no edge.  Most of us realise that.  However, _pure_ value investing, with its tracking error, really will test anyone.

I think any investment plan goes tweaking.  Even though my philosophy on the markets, and the general factors used are fixed and always will be...minor tweaks happen as the plan evolves.  Colin Nicholson talks a lot about that.  But a major change definitely needs good reason.  Either the current plan is wrong (for you, personally) - and that's fine.  Or the new plan is definitely better (with all the robustness issues resolved).

Just some random thoughts.  All opinion, of course.


----------



## tech/a

Some good comment systematic.

Notably the ever increasing time horizon is a convenient argument. You can underperform indefinitely.
In the absence of meaningful strategy test results there is no benchmark other than
The index.

Happy to be completely wrong.
I am on a daily basis.
Has served me well.
Lots of little wrongs
The odd very big right.

To quote Radge
" it's fine to be wrong it's how long you stay wrong that's important."

One of my favorites
" insanity---- doing the same thing day in and day out and --- expecting a different result.


----------



## So_Cynical

peter2 said:


> Good reply skc and I support your suggestions.
> 
> IMHO the portfolio doesn't have enough large winners and too many large losers.
> 
> Review your selection criteria. The answers you need will be there in your results if you really what to find them.




Agree - too heavily skewed to mining, services and construction / too many big losers and not enough big winners.  - KTP needed to take head of the negative sector sentiment and steer away.

-----------------

And what's done is done, i would sell some losers and take the tax loss and average into some of the better losers...spread your self a bit more next time.


----------



## craft

Hi KTP

Your last update had a total figure for XSOAI since 2014 of 29.26% how do you arrive at that?  More like 4ish % on my figures.

Really not sure why the discussion has diverged into the merits of the original strategy - it hasn’t met the time frame so no conclusions can be drawn. .   

You can look at a portfolio return as Alpha + Beta * market return.  

I would expect your deep value approach to have a beta of less than 1 and a slight positive movement in the XSO; the index that best matches your universe leaves you with a pretty flat market component. But that still leaves you with some negative alpha at this particular point in time.   I’m sure this possibility doesn’t surprise you.   Here’s the thing – achieving consistent negative alpha is actually as difficult as achieving consistent positive alpha and if you’re not trying for negative alpha it’s even more an awesome feat – so extrapolating as per the current snapshot is unjustified.  Again I guess you understand that but it seems many don’t. 

Random negative alpha at some point in time, now that’s easy to achieve, actually inevitable without being an omniscient investor/trader.    

If people just stuck consistently to one method its very unlikely they would produce enough alpha – either positive or negative to differ much from the market over the long run unless they bring some real judgement or skill to the table. It’s the chopping strategies because psychology steps in at a point of negative randomness which causes people to sell up, lock in the loss and abandon the strategy – and do it repeatedly until they reach their point of financial or that psychological ruin. This is why SKC’s questions about the right reason for changing are so important. With all that said you are right in saying that the only thing worse than changing is not changing – so long as it is for the right reason and I’m not questioning your response to SKC  – more just putting this post out there to counter Tech’s rubbish about needing to change because of current underperformance.

Ps 
Not endorsing KTP’s deep value strategy either – don’t know enough to know if his approach to it has any alpha. But the research overall does provide evidence of value, small cap and illiquid alpha albeit hard to harvest.


----------



## So_Cynical

craft said:


> Really not sure why the discussion has diverged into the merits of the original strategy - it hasn’t met the time frame so no conclusions can be drawn. .




KTP's deep value strategy has proven to be a failure, with time the results will keep changing but the facts as they are clearly show that his timing/entry on many stocks has been somewhat disastrous.

I buy falling stocks! - i know that my results are much better as far as % winners losers go, KTP's  timing is terrible, stock selection i wont get into, its the entry timing that has clearly disappointed....deep deep value can only be found at the bottom.


----------



## DeepState

Can I suggest that you take a look at Dimensional Fund Advisers.  Their style is tilting towards small and value companies (amongst other matters).  They too have had a rough time of it in recent years.  

The Value style has performed well for as far back as data is available to analyse it.  The rationales seem plausible enough.  Importantly, for whatever reason, it can go through bad patches.  If it didn't, there would likely be no premium to Value.

In order to make an informed choice, perhaps it is worth going through some stuff from Dimensional and RAFI as well to see what they have to say about the recent dry spell on this concept.  From that, you can make an assessment as to whether the well has been drained or whether it is just having a rough spell.

You may draw inspiration from Pzena. 

It is legitimate to question your strategy in light of outcomes.  You know that the stats are unlikely to yield anything material with the sample size, so it is just a call.  It is also reasonable to come up with a better idea and run with that.  Whatever you decide, it is well accepted that to be a Value investor requires a lot of patience.  Perhaps the idea works, but you are simply unable to tolerate the pain that must be accepted.


----------



## Triathlete

DeepState said:


> The Value style has performed well for as far back as data is available to analyse it.   Whatever you decide, it is well accepted that to be a* Value investor requires a lot of patience*.  Perhaps the idea works, but you are simply unable to tolerate the pain that must be accepted.




One thing I find hard to accept with value investing is why do you want to have your money invested in stocks that may do nothing for say 12 months or even longer before the market decides it is time to push the stock higher. Would it not be better to wait until the stock actually starts to move up before putting your money in?


----------



## systematic

Triathlete said:


> One thing I find hard to accept with value investing is why do you want to have your money invested in stocks that may do nothing for say 12 months or even longer before the market decides it is time to push the stock higher. Would it not be better to wait until the stock actually starts to move up before putting your money in?




It's not the individual stock itself, it's the strategy.  Value can and does, disappoint.  When it performs poorly and the rest of the market is doing well (which will probably includ momentum and growth investors), value then looks _really_ bad.  Kind of like in the late 90's - when Warren Buffett was a,'has-been' and value just got left behind.  Of course, after the dot com crash...

Having said that - value, like any strategy - has periods of poor performance.  Momentum certainly does.  Yield does.  Trend following periodically has a protracted poor period as well.  I've not heard of a medium-long term trend follower say otherwise.  Even short-term trading has the same type of periods of underperformance.  For an Australian public record of that, see Brent Penfold's (of indextrader) results in 2014.  I want to meet the trader that out performs every single year over a couple of decades.  Some (even on this forum) seem to give out the impression that it's possible.  Well, hmmm...

Back to the above.  Personal opinion: I think it's possibly values sometimes underperformance when the market is doing well that makes it look really bad, and makes it hard to trade.  Trend following, for example, is going to do poorly in whipsaw conditions.  But at least the trader can feel like they are in the same bad boat as everyone else.  Value just makes you look silly, from time to time.  That's more personal view, by the way, though it is based on reasonable assumptions founded uponfacts.


----------



## Triathlete

systematic said:


> It's not the individual stock itself, it's the strategy.  Value can and does, disappoint.  When it performs poorly and the rest of the market is doing well (which will probably includ momentum and growth investors), value then looks _really_ bad.  Kind of like in the late 90's - when Warren Buffett was a,'has-been' and value just got left behind.  Of course, after the dot com crash...
> 
> Having said that - value, like any strategy - has periods of poor performance.  Momentum certainly does.  Yield does.  Trend following periodically has a protracted poor period as well.  I've not heard of a medium-long term trend follower say otherwise.  Even short-term trading has the same type of periods of underperformance.  For an Australian public record of that, see Brent Penfold's (of indextrader) results in 2014.  I want to meet the trader that out performs every single year over a couple of decades.  Some (even on this forum) seem to give out the impression that it's possible.  Well, hmmm...
> 
> Back to the above.  Personal opinion: I think it's possibly values sometimes underperformance when the market is doing well that makes it look really bad, and makes it hard to trade.  Trend following, for example, is going to do poorly in whipsaw conditions.  But at least the trader can feel like they are in the same bad boat as everyone else.  Value just makes you look silly, from time to time.  That's more personal view, by the way, though it is based on reasonable assumptions founded uponfacts.




Thanks for your explanation systematic makes sense.

I guess I look at things a bit differently.


----------



## KnowThePast

systematic said:


> Great discussion.




So many quality posts, all I needed to do was ask.



systematic said:


> On what you should do - you seem to have the answer.  *If* you are changing strategy, then why wouldn't you want to be invested in it fully, as soon as _practicably_ possible (tax considerations, opportunity availability of the new plan etc)?




I am leaning towards selling a large portion of my losses for tax purposes.

The new strategy does not currently have enough stocks available for all my capital. So, I will keep my existing stocks, but sell them as soon as there's an opportunity in the new strategy.



systematic said:


> - Currently investing in a deep value strategy.  As long as you _really are_ (some people say they invest in cheap stocks when they really don't)...then you know it'll all be okay in the long run.  I haven't seen value do fantastically over the recent period, either.  That's not a reason to abandon.
> 
> - I'm not sure whether you're looking to move into (a) a different strategy altogether (you mentioned growth and other things) that ignores value altogether....or (b) whether you are looking at quality / growth factors...but you will still stick to value stocks?  Momentum/growth strategies aside...I wouldn't blame you for looking at adding in quality measures.  This has been a big area for me, I've been loathe to incorporate quality...but would not blame any value investor for doing so.
> 
> For example, we know that the Piotroski method (small cap value with quality measures) works in Australia.  The Aussie market has enough companies that some good (or rather, financially stable) companies do become under priced.
> 
> As I look at your list, I see only 9 of 24 that qualify as a decent stocks under Piotroski.  Those 9 would be a profit of 3.2% (although that's a bit meaningless, since its hard to know what they would have been when you bought them.  Still, I couldn't resist a look).





Just finished reading "Quantitative Value", which talks about this precisely. I am doing something similar, but while the book advocates automating the quality/fraud filtering, I've decided to make it a manual process. 

I am also working backwards - instead of looking for value, then checking quality, my new automated strategy is about finding quality, growth, small companies, then checking for value. 

Looking over backtest results of this universe, it is clear that the vast majority of winning trades, including outliers are companies that have a viable, profitable business model and a valuation that is not too excessive. I couldn't find any satisfactory way to automate this check and so decided to commit the sin of adding manual work into an automated process.

This does now mean that I will be spending more time then before going through the reports and studying the businesses. In addition to the constraints of capital and opportunity, I will be constrained by the time I have available to study new investments. Thankfully, there aren't that many that qualify in ASX.



systematic said:


> Anyway, my opinion (just an opinion)...is - that as long as you are sticking to the, "factors that work" you should be okay.  If it's something esoteric (or even something, "new") - well, you'd know I'd be hesitant.  Even with a 10 year solid back test, I'd be hesitant.




It's nothing fancy or obscure, but is certainly not widely published.

"Quantitative Value" had a good chapter on the topic of data mining as well - If you run enough backtests, you will find that dairy prices in Bangladesh had a direct corelation with the daily closing price of the DOW, with 90%+ degree of confidence.

One of the ways to combat it is to always start with a theory that makes economical sense and why it will continue to have an edge. Then you backtest that theory from every angle and go through all the individual trades to check for various possible errors.

I am comfortable that I've done enough of that.

Thanks again for a great contribution.


----------



## KnowThePast

craft said:


> Hi KTP
> 
> Your last update had a total figure for XSOAI since 2014 of 29.26% how do you arrive at that?  More like 4ish % on my figures.




I started 03 June 2013, when it was 4855. Today it is 5664, up 16.7%. I've mistyped it in my update, it seems I've switched XAO and XSO columns.

It's the first few months that killed relative performance, at a time when I had less then 20% of my portfolio invested. Starting just 4 months later, in Oct, when I switched to deep value strategy, XSOAI was 5590, for a total performance of just 1.3%.

I always include the index from the date of inception, but as I've written before, it is a really poor indication of my relative performance in the first 1-2 years.

Underperformance is there, but as you kindly picked up, it is much smaller then raw figures show.



craft said:


> Really not sure why the discussion has diverged into the merits of the original strategy - it hasn’t met the time frame so no conclusions can be drawn. .
> 
> You can look at a portfolio return as Alpha + Beta * market return.
> 
> I would expect your deep value approach to have a beta of less than 1 and a slight positive movement in the XSO; the index that best matches your universe leaves you with a pretty flat market component. But that still leaves you with some negative alpha at this particular point in time.   I’m sure this possibility doesn’t surprise you.   Here’s the thing – *achieving consistent negative alpha is actually as difficult as achieving consistent positive alpha and if you’re not trying for negative alpha it’s even more an awesome feat* – so extrapolating as per the current snapshot is unjustified.  Again I guess you understand that but it seems many don’t.
> 
> Random negative alpha at some point in time, now that’s easy to achieve, actually inevitable without being an omniscient investor/trader.




The bolded part especially, has always been a comforting thought for me to justify the use of automated, diversified strategy. 



craft said:


> If people just stuck consistently to one method its very unlikely they would produce enough alpha – either positive or negative to differ much from the market over the long run unless they bring some real judgement or skill to the table. It’s the chopping strategies because psychology steps in at a point of negative randomness which causes people to sell up, lock in the loss and abandon the strategy – and do it repeatedly until they reach their point of financial or that psychological ruin. This is why SKC’s questions about the right reason for changing are so important. With all that said you are right in saying that the only thing worse than changing is not changing – so long as it is for the right reason and I’m not questioning your response to SKC  – more just putting this post out there to counter Tech’s rubbish about needing to change because of current underperformance.




I am well aware of this limitation and this probably was the question I was trying to ask - how do I know I am making the change for the right reasons? Hearing all the opinions, including criticism has been very helpful.

Has anyone done any research or has experience with a strategy that deliberately changes from value to growth and back? Buy when when it underperforms, sell when it is doing well, ditto for growth. Not locking yourself into a strategy, but switch between several over time, as part of a master plan.

This is not at all my current intention, but another fear (again) of mine, is that I am very likely selling at exactly the wrong time for a value strategy. And, possibly switching to growth-like strategy and a high point, to make it worse.

As I said in my post above, the current plan is to keep my holdings, selling them as soon as capital is required in the new strategy. So, for a few months at least I will get the benefits and/or losses from both strategies, while it all unwinds.


----------



## KnowThePast

DeepState said:


> Can I suggest that you take a look at Dimensional Fund Advisers.  Their style is tilting towards small and value companies (amongst other matters).  They too have had a rough time of it in recent years.
> 
> The Value style has performed well for as far back as data is available to analyse it.  The rationales seem plausible enough.  Importantly, for whatever reason, it can go through bad patches.  If it didn't, there would likely be no premium to Value.
> 
> In order to make an informed choice, perhaps it is worth going through some stuff from Dimensional and RAFI as well to see what they have to say about the recent dry spell on this concept.  From that, you can make an assessment as to whether the well has been drained or whether it is just having a rough spell.
> 
> You may draw inspiration from Pzena.
> 
> It is legitimate to question your strategy in light of outcomes.  You know that the stats are unlikely to yield anything material with the sample size, so it is just a call.  It is also reasonable to come up with a better idea and run with that.  Whatever you decide, it is well accepted that to be a Value investor requires a lot of patience.  Perhaps the idea works, but you are simply unable to tolerate the pain that must be accepted.




Thanks DeepState,

Running out of time today, but will take a look tomorrow.


----------



## KnowThePast

Sold ARI @ $0.19, for a loss of $653.90 (-48.9%).


----------



## systematic

Thanks for sharing, KTP, and it all sounds good...sounds like your strategy going forward is a progression from, an evolution of, your current strategy - not a denial of.  That happens!



KnowThePast said:


> I am also working backwards - instead of looking for value, then checking quality, my new automated strategy is about finding quality, growth, small companies, then checking for value.




Totally get what you're saying.  That should work fine, then.  Quality (growth, profitability, stability etc) first, before looking at (but still looking at) value, is well within, "what we know to work" - and again, not a complete divergence from what you were doing.  You are now looking more for a true bargain than cheap trash.


----------



## KnowThePast

Bought ICU, 10370 @ $0.14

They build enterprise mobile apps, specialising in mobile banking, mobile micro payments, more specifically. In that way, they are similar to MBE, but at a fraction oftheir valuation.

They've done a backdoor listing after being spun off Donaco, so they are fairly unknown and their numbers look terrible in commsec,they aren't related.

Large director ownership, who continue to accumulate. Price decline since listing is most likely explained by Donaco share holders selling shares in the new company that they didn't invest in.

Their revenues are growing faster then costs, margin expansion is occurring on top of growth.

The sector is still a young one, with lots of consolidations failures likely to come. But this is now one of the bigger players, profitable, with access to capital to acquire other players, and has two other segments (enterprise mobility and content/services) to fall back on, as well as recent acquisition of Arte Mobile. Importantly, they hold first mover advantage in their markets.


----------



## KnowThePast

Sold HNG @ $0.34, for a loss of $410.90 (-38.8%).


----------



## Triathlete

KnowThePast said:


> Has anyone done any research or has experience with a strategy that deliberately changes from value to growth and back? Buy when when it underperforms, sell when it is doing well, ditto for growth. Not locking yourself into a strategy, but switch between several over time, as part of a master plan.
> 
> *This is not at all my current intention, but another fear (again) of mine, is that I am very likely selling at exactly the wrong time for a value strategy. And, possibly switching to growth-like strategy and a high point, to make it worse.*
> 
> As I said in my post above, the current plan is to keep my holdings, selling them as soon as capital is required in the new strategy. So, for a few months at least I will get the benefits and/or losses from both strategies, while it all unwinds.




What has helped me was learning about Technical analysis and incorporating it into my decision making along wih a companies fundamentals

I use a combination of Price ,Pattern ,and Time analysis to pinpoint my trades for my short term or long term portfolios.This has helped me elimate many of the failings you have described above.

Prior to taking any trade or investment I have a target price on the upside and also the downside (if my analysis is wrong) so my exit strategy is also in place before I trade or invest,this allows me to manage myself if things go pear shape.I do not really have a value or growth strategy but just looking for stocks to move up in price and take a position based on my analysis.


----------



## Ariyahn2011

Thanks for the ongoing posts KTP. 

Have you ever considered changing from penny stocks to mid/large caps that offer both growth and perhaps smaller dividends? 
I found risk is reduced greatly and you can still make big gains. When things get expensive, sell, and find another stock. 
At least that is what I do now. I am always tempted to buy small caps to get that almighty 10 bagger, but I realise, I dont have the talent to pick the dogs from the pearls. 
My new strategy of investing in good companies with market caps of minimum 500MIL with a few exceptions (small caps). 
Basically, the ASX200. 
I read a fellow beat the market consistently just sticking with the ASX20. 
All imo.
Good luck and thanks again.


----------



## TPI

KTP, from reading some of your posts you come across as someone looking to develop a quantitative, rules-based and automated/mechanical investing process, that doesn't require too much time and too much in depth analysis of companies, and that has been backtested... would that be right?

If so, why don't you just invest in a smart beta ETF? Eg. RAFI as has already been mentioned here.

The hard work has already been done for you by people much smarter than you or I.

Why reinvent the wheel by spending ages experimenting with different strategies yourself to find the perfect strategy?


----------



## KnowThePast

TPI said:


> KTP, from reading some of your posts you come across as someone looking to develop a quantitative, rules-based and automated/mechanical investing process, that doesn't require too much time and too much in depth analysis of companies, and that has been backtested... would that be right?
> 
> If so, why don't you just invest in a smart beta ETF? Eg. RAFI as has already been mentioned here.
> 
> The hard work has already been done for you by people much smarter than you or I.
> 
> Why reinvent the wheel by spending ages experimenting with different strategies yourself to find the perfect strategy?




Hi TPI,

That's spot on, exactly what I am trying to do, although I don't necessarily rule out more in depth analysis then normally recommended in these kind of strategies.

I don't have a good answer to your question. Something in between enjoying it and arrogance, probably.

I also think the funds do no propertly cover the smaller, illiquid companies, where I see an opportunity.


----------



## KnowThePast

Ariyahn2011 said:


> Thanks for the ongoing posts KTP.
> 
> Have you ever considered changing from penny stocks to mid/large caps that offer both growth and perhaps smaller dividends?
> I found risk is reduced greatly and you can still make big gains. When things get expensive, sell, and find another stock.
> At least that is what I do now. I am always tempted to buy small caps to get that almighty 10 bagger, but I realise, I dont have the talent to pick the dogs from the pearls.
> My new strategy of investing in good companies with market caps of minimum 500MIL with a few exceptions (small caps).
> Basically, the ASX200.
> I read a fellow beat the market consistently just sticking with the ASX20.
> All imo.
> Good luck and thanks again.




Hi Ari,

I do not think I can do better than average in ASX 200, so if I go down that route, I would just invest in an index. 

My super is 40% in index funds, so I see merit in your idea.

This portfolio is about finding something better and developing my software. I am still confident that I am onto something good, despite small underperformance so far.

Regarding risk, I do not think small caps are significantly riskier than large caps, if at all.


----------



## Triathlete

KnowThePast said:


> Hi Ari,
> 
> I do not think I can do better than average in ASX 200
> 
> Regarding risk, I do not think small caps are significantly riskier than large caps, if at all.




My beliefs are that anyone can do better then average with the right knowledge and experience but it is not an easy road.

To do this you will also need a good understanding of technicals. This will give you more understanding of when to be in a stock and when not to be. 

Having good fundamentals, value etc is one thing but having it supported by technicals is another.

In other words your probability of being successful has just increased significantly.

Remember you do not need to have money tied up in the markets 24/7 if a stock shows it makes a move for 9 months and you where able to be on it and stops then goes sideways take your money out and wait for another opportunity if you believe it will not rise further for a while.

There is a reason why they are small caps....they have not proven themselves.

Look at stocks such as CSL they have grown greater than 26%pa over the last 5 years this has beaten the average.

Do not risk your total portfolio on small stocks trying to find the big winner they are few and far between....!!


----------



## KnowThePast

Sold LYL, 500 @ $1.36 for a loss of $1,394.90 (-63%). It no longer fits my investment strategy and I need to free up funds for my next purchase.

Bought AKG, 1890 @ $0.79.

A smaller version of VET, but with good quality teaching, 100 year old reputation and little debt.

Up until recently, they also owned a fasteners business that they have recently sold. With cash, they've bought more colleges, a business that has generated very good returns in previous years. 

The recent shake up of the industry and reputation damage to the sector caused by VET hurt AKG this year, with profit halved. But, they are still profitable and revenue is growing nicely.

They have a good mix of courses for both international students and local vocational/trade.

Long term, I think Westen style education will continue to be in demand, and Australia's standard of living, climate and location will make it appealing to many international students. Having established colleges that have been around for many decades and have good reviews is a good competitive advantage.

Share price has dropped about as much as their profit for the year. Directors have been busy buying on market and own a large chunk of the company.


----------



## Triathlete

KnowThePast said:


> Sold LYL, 500 @ $1.36 for a loss of $1,394.90 (-63%). It no longer fits my investment strategy and I need to free up funds for my next purchase.
> 
> Bought AKG, 1890 @ $0.79.
> 
> A smaller version of VET, but with good quality teaching, 100 year old reputation and little debt.
> 
> Up until recently, they also owned a fasteners business that they have recently sold. With cash, they've bought more colleges, a business that has generated very good returns in previous years.
> 
> The recent shake up of the industry and reputation damage to the sector caused by VET hurt AKG this year, with profit halved. But, they are still profitable and revenue is growing nicely.
> 
> They have a good mix of courses for both international students and local vocational/trade.
> 
> Long term, I think Westen style education will continue to be in demand, and Australia's standard of living, climate and location will make it appealing to many international students. Having established colleges that have been around for many decades and have good reviews is a good competitive advantage.
> 
> Share price has dropped about as much as their profit for the year. Directors have been busy buying on market and own a large chunk of the company.




KTP,

Thought you might  be interested in the comments from www.lincolnindicators.com.au

AKG exhibits unacceptable levels of financial risk due to a below benchmark Financial Health score. Investors need to be aware such companies pose risks and warrant a speculative investment only. Any prospective investment should be managed with tight stop losses implemented.


----------



## KnowThePast

Triathlete said:


> KTP,
> 
> Thought you might  be interested in the comments from www.lincolnindicators.com.au
> 
> AKG exhibits unacceptable levels of financial risk due to a below benchmark Financial Health score. Investors need to be aware such companies pose risks and warrant a speculative investment only. Any prospective investment should be managed with tight stop losses implemented.




Thanks Triathlete,

I do not have a subscription to them so I am not sure what "Financial Health" score is.

It does score lower then average on Alt Z and Piotroski F score, but I expect these to improve greatly after another profitable year takes retained earnings above zero.

Sorry if it seemed like I was ignoring your posts. The topic of incorporating technical analysis and stop losses has been discussed more then enough here and elsewhere, no way I am reviving those topics again.


----------



## KnowThePast

Monthly update. Portfolio went up $1,681.51 (3.4%) for the month.


----------



## KnowThePast

Sold MCP, 1540 @ $0.67, for a loss of $768.30 (-32%).

Bought 4361 share of CTE, another small growth company that specialises in storing stem cells and other biological material. They have been investing for growth in the last year, so their PE looks out of whack. On a cashflow, or underlying earnings potential, they are very cheap in my opinion.


----------



## KnowThePast

Sold TTN @ 0.077 for a loss of $1091.72 (-82.91%).
Sold FUN @ 0.02 for a loss of $834.62 (-64.68%)


----------



## AverageJoe

KnowThePast said:


> Sold TTN @ 0.077 for a loss of $1091.72 (-82.91%).
> Sold FUN @ 0.02 for a loss of $834.62 (-64.68%)




May I ask what type of strategy are you basing your entry and exist? 

I had a look at all the losers you posted and every single one except CTE are pointing down. In other words the weekly charts have a bearish price trend. CTE for instance lacks seriously any volume so the bid and ask spread would usually be huge?


----------



## KnowThePast

Hi AJ,

No strategy followed in the last few exits. I switching my portfolio over to a different long term strategy then one I originally started with. I am selling all stocks that don't meet the new strategy.

You'll have to read the many pages of my thread to get an idea of what I'm doing, but to describe it simply, I look for small, growth, quality, reasonable valuation. I will hold for long term, unless they no longer meet this criteria.

I do not look at charts and I will sometimes buy very illiquid stocks.


----------



## AverageJoe

KnowThePast said:


> Hi AJ,
> 
> No strategy followed in the last few exits. I switching my portfolio over to a different long term strategy then one I originally started with. I am selling all stocks that don't meet the new strategy.
> 
> You'll have to read the many pages of my thread to get an idea of what I'm doing, but to describe it simply, I look for small, growth, quality, reasonable valuation. I will hold for long term, unless they no longer meet this criteria.
> 
> I do not look at charts and I will sometimes buy very illiquid stocks.




The reason I look at charts is to get an instant snap shot of where money has been heading, either into or out of it. If the stock is consistently falling the first question I ask is "WHY". Iliquid stocks makes a mockery of the price or chart so agreed if looking at these, the chart is meaningless.  Length of term to hold is not not a healing process of price that has gone through a large phase of selling destruction of value. 

Take a look at the destruction of REITS such as SGP MGR from the GFC high 7 years ago or the gold sector or any of the commodities sectors. 

If you don't look at charts how do you know if the price has been falling or rallying. Most research you get hold off from the web are second, third and even last hand information that has already factored into the sentiment. You are either the last investor in or you found a gem that the market is ignorant of. Such cases are few and far between and usually involves some type of first or second hand "inside info". 

But I suppose if you are making money month after month then who is to say you have not got an profitable strategy. Good luck. 

I am not professing to be more knowledgeable, just applying some basic common sense when I search forums to keep learning what others are doing.


----------



## KnowThePast

Bought SDI, 2850 @ $0.52

I've owned them on several occasions before, both in this portfolio and in my super. 

Last time, I've bought them for $0.50 and sold for $0.615.

The price dropped back to my buy level, while sales and profits have since increased, although only by a few percent.

Their recent update says that profit will be down, however, on a pre-tax level, it is up on previous year. Sales are also up, and with more cash coming in, they are ramping up R&D again, which will pay off in the future.


----------



## KnowThePast

Monthly update - portfolio lost $2004.63 (4%) for the last month and finished they year underperforming the benchmark by over 7%.

I would normally do an annual review at this point, but given that I've just changed my investment strategy, I won't this year.


----------



## KnowThePast

Sold WTP, 2800 @ $0.805 for a profit of $431.10 (21.49%).

This was to free up funds for a purchase of ADA (1880 @ $0.80), a small company in a niche market that is predicted to grow strongly over the next few years. 

The price has jumped considerably after a recent profit upgrade, but it is still trading  well below fair value, in my opinion.


----------



## shouldaindex

Great thread, read it from start to finish.

I would just put "If the business makes more money because of that" onto every reason given to buy a stock.


----------



## tech/a

shouldaindex said:


> Great thread, read it from start to finish.
> 
> I would just put "If the business makes more money because of that" onto every reason given to buy a stock.




What have you learnt?


----------



## KnowThePast

shouldaindex said:


> Great thread, read it from start to finish.
> 
> I would just put "If the business makes more money because of that" onto every reason given to buy a stock.




Thanks shouldaindex!


----------



## KnowThePast

Monthly update - portfolio gained $1,339 (2.7%) for the month.


----------



## KnowThePast

Monthly updated - portfolio lost $2184.81 (-4.4%) last month.


----------



## KnowThePast

Monthly update - portfolio lost 1.07%, but pleasingly, keeps gaining ground on the indexes this year.


----------



## berrys

Nice and resourceful!
Any commentary on investing in commodities market please.


----------



## KnowThePast

berrys said:


> Nice and resourceful!
> Any commentary on investing in commodities market please.




Thanks Berry.

For commodities, I am not the right person to comment. Perhaps someone else can contribute?


----------



## KnowThePast

Sold COF, 3873 @ $0.405, for a profit of $308.04 (25.7%).

A takeover received at a premium of 236% to last trading price, a nice surprise for me in the morning. 

At this price, I don't think there's much of a chance of a bigger offer and the price is close enough to the offer to sell and not risk the deal not going ahead.

Previously, I sold most of my value stocks, changing strategy to small growth stocks. I am glad I kept this one.


----------



## KnowThePast

A new memo from Howard Marks, an excellent read.

http://www.oaktreecapital.com/MemoTree/Inspiration from the World of Sports.pdf


----------



## KnowThePast

Monthly update - portfolio has gained $4,175.01 (8.4%) for the month.

I've realised that I forgot to record my second TCN purchase, which is now corrected. Price hasn't moved much since I bought it, so the effect on prior periods is insignificant.


----------



## ThirtysixD

Great thread!

Without wanting to sound too negative I see you making many of the mistakes that I once made

Here are some questions that I would like to ask:

Have you tried quantifying value or growth? 
Could you tell me which one has performed better historically?
Are stocks mean reverting or trending?
Are there any sector patterns/trends?
If a strategy does not work as planned what makes you think that switching will do better?
I fell into similar sorts of traps where I would switch systems/styles too soon. My lack of consistency only went away once I had developed confidence in my methods.

I guess my takeaway is that we all go through similar stages in our investment journey (sounds cheesy i know!).

Why not take a step back and come up a clear definable framework for investing? You have said you want to target small, growth, quality stocks with a reasonable valuation but you have also admitted not to having a mechanism to determine entry's and exits. Whether you want to be discretionary, systematic a stronger set of rules will always come in handy.

p.s hope you stick to small caps as that's where the best opportunities are!


----------



## KnowThePast

ThirtysixD said:


> Great thread!
> 
> Thanks ThirtySixD!







ThirtysixD said:


> Here are some questions that I would like to ask:
> 
> Have you tried quantifying value or growth?
> Could you tell me which one has performed better historically?






There's been a large number of studies done on both with various definitions of each. Most point to value outperforming and growth underperforming.

In the last decade, combining value and quality factors produced good results. 

My approach if growth and quality plus a little bit of value, a less researched combination. I do very much focus on small caps - my universe is ordered by market cap and I buy the top 25, roughly speaking.



ThirtysixD said:


> [*]Are stocks mean reverting or trending?




Prices or financials? Financial performance of the company is mean reverting, as a broad average, but it isn't terribly useful on a small subset of stocks.



ThirtysixD said:


> [*]Are there any sector patterns/trends?




Don't know, I try to diversify over many sectors as a rule, but I don't time specific ones. Obviously, there are cyclical industries.



ThirtysixD said:


> [*]If a strategy does not work as planned what makes you think that switching will do better?
> 
> I fell into similar sorts of traps where I would switch systems/styles too soon. My lack of consistency only went away once I had developed confidence in my methods.
> 
> I guess my takeaway is that we all go through similar stages in our investment journey (sounds cheesy i know!).
> 
> Why not take a step back and come up a clear definable framework for investing? You have said you want to target small, growth, quality stocks with a reasonable valuation but you have also admitted not to having a mechanism to determine entry's and exits. Whether you want to be discretionary, systematic a stronger set of rules will always come in handy.




Some excellent points, ThirtySixD, thanks for that. 

The switch to the new systematic strategy, I still think was a good one and for the right reasons. It was about a better strategy, not because of a poor result from the old one. Although, no doubt, it is much easier, psychologically, to switch to something different when the performance is poor.

The one thing I've started doing since the switch, however, is to establish firm boundaries of what an acceptable range of results is for my strategy. I've used a five year backtest result as a base and I track it on a monthly basis. A 5 year backtest had:

Average monthly outperformance: 2.51%
Hit rate: 69.49%
Max consecutive losing months: 3
Biggest monthly relative loss: -8.28%

And here are my results for the new strategy, which now comprises most of my portfolio. Without dividends, compared against XAO.




Doing very nicely so far, up 16.79% on XAO. As luck would have it, the month that I switched was by far the worst and almost at the limit of acceptable boundaries! It sure didn't look like a great decision then.

I agree, it was important for me to quantify when I should start questioning my strategy. 

Regarding entries/exits, I am not sure where you got the impression that I don't have a mechanism for identifying those. I buy/sell on very specific fundamental measure that my software generates, with very rare manual intervention. 



ThirtysixD said:


> p.s hope you stick to small caps as that's where the best opportunities are!




That's the plan.


----------



## ThirtysixD

Whats the entry and exit trigger? I read 20 or so pages in one sitting so may have missed something. 

I got the impression that it was still fairly loose.



> Prices or financials? Financial performance of the company is mean reverting, as a broad average, but it isn't terribly useful on a small subset of stocks




Price mainly but fundamentals are relevant too.



> Don't know, I try to diversify over many sectors as a rule, but I don't time specific ones. Obviously, there are cyclical industries.




I say this because I know that all of your tech stocks have done well recently, but most of your past losses were from mining services. You can definitely sneak in some extra alpha by coming up with creative ways to balance your portfolio in terms of sectors


----------



## Nortorious

Just stumbled onto this thread. Great work KTP. Looks like a quality thread/journal that you have going here. Will continue to follow with interest.


----------



## KnowThePast

ThirtysixD said:


> Whats the entry and exit trigger? I read 20 or so pages in one sitting so may have missed something.
> 
> I got the impression that it was still fairly loose.




No, very rigid in fact. I don't disclose exactly what they are, but the vibe of it is - small, quality growth, some value.



ThirtysixD said:


> Price mainly but fundamentals are relevant too.




Price action is not my thing, I don't pay any attention to it. I haven't yet seen anything that convinces me it has strong predictive qualities.



ThirtysixD said:


> I say this because I know that all of your tech stocks have done well recently, but most of your past losses were from mining services. You can definitely sneak in some extra alpha by coming up with creative ways to balance your portfolio in terms of sectors




Definitely worth thinking about it, although it will take my strategy a little away from its automated direction. I've had thoughts of running more then one automated strategy, with capital allocation based around economical cycles and past performance. A similar model could be applied across multiple sectors. Is this what you mean?


----------



## KnowThePast

Nortorious said:


> Just stumbled onto this thread. Great work KTP. Looks like a quality thread/journal that you have going here. Will continue to follow with interest.




Thanks Nortorious!


----------



## KnowThePast

Bought JIN, 1521 @ $1.08.


----------



## Nortorious

HI KTP, hope all is well.

Just a quick question and you may have covered this so forgive my laziness (of not wanting to go through the entire thread to get the answer)... Have you considered concentrating on fewer stocks rather than being spread so thinly across a larger number of stocks?

The reason I ask is, yes diversification is good and risk on each trade will be low in a total portfolio sense, but for me, diversification like this limits profit potential also. 

Considering an averaging up strategy or "pyramiding" as some call it has enhanced my returns in trading/investing once I knew how to use it correctly. 

E.g. I'll purchase a stock, lets call it XYZ... I purchase XYZ with at $1.00 and the entry risk (where I would place my stop) is at $0.80.... Therefore, the entry risk on this trade is 20%. Using this, I combine it with my total portfolio value, again for illustration purposes, it is $10,000 total. If one of my trading rules or money management rules is not to trade any position risking more than 2% of my total portfolio, I could position size this to purchase $1k worth of stock.

Let's say the price advances steadily and is now at $1.30 (giving us a profit of 30% on an open position). At this point, my stop loss has been adjusted and is trailing the price. Now my stop level may be $0.95 or even at break-even $1.00. With the right action on the stock, I may choose to purchase more of this same stock whilst still keeping my risk levels in check... Then rinse and repeat until the time comes to sell out (in which I sell all my holdings at once).

Any thoughts on whether this would be of benefit to you?

As I said, I have found it very useful.

An example is my trades in SEN recently:

CODE Purchase Date	    Purchase Price    Disposal Price	Profit/Loss %

SEN	29/07/2015	                 0 .2	        0.18	                -10.00%
SEN	20/07/2015	                 0.16	        0.18	                 12.50%
SEN	4/05/2015	                         0.115	0.18                  56.52%
SEN	16/02/2015	                 0.091	0.18	                 97.80%

Net result was a 34% average profit on the four trades and I made double the money I would have if I had just stopped at the first purchase.

Not criticising by any means but just adding my two cents and getting your brain thinking about this possibility. 

It's a hell of a lot easier managing less positions too!


----------



## KnowThePast

Nortorious said:


> HI KTP, hope all is well.
> 
> Just a quick question and you may have covered this so forgive my laziness (of not wanting to go through the entire thread to get the answer)... Have you considered concentrating on fewer stocks rather than being spread so thinly across a larger number of stocks?
> 
> The reason I ask is, yes diversification is good and risk on each trade will be low in a total portfolio sense, but for me, diversification like this limits profit potential also.
> 
> Considering an averaging up strategy or "pyramiding" as some call it has enhanced my returns in trading/investing once I knew how to use it correctly.
> 
> E.g. I'll purchase a stock, lets call it XYZ... I purchase XYZ with at $1.00 and the entry risk (where I would place my stop) is at $0.80.... Therefore, the entry risk on this trade is 20%. Using this, I combine it with my total portfolio value, again for illustration purposes, it is $10,000 total. If one of my trading rules or money management rules is not to trade any position risking more than 2% of my total portfolio, I could position size this to purchase $1k worth of stock.
> 
> Let's say the price advances steadily and is now at $1.30 (giving us a profit of 30% on an open position). At this point, my stop loss has been adjusted and is trailing the price. Now my stop level may be $0.95 or even at break-even $1.00. With the right action on the stock, I may choose to purchase more of this same stock whilst still keeping my risk levels in check... Then rinse and repeat until the time comes to sell out (in which I sell all my holdings at once).
> 
> Any thoughts on whether this would be of benefit to you?
> 
> As I said, I have found it very useful.
> 
> An example is my trades in SEN recently:
> 
> CODE Purchase Date	    Purchase Price    Disposal Price	Profit/Loss %
> 
> SEN	29/07/2015	                 0 .2	        0.18	                -10.00%
> SEN	20/07/2015	                 0.16	        0.18	                 12.50%
> SEN	4/05/2015	                         0.115	0.18                  56.52%
> SEN	16/02/2015	                 0.091	0.18	                 97.80%
> 
> Net result was a 34% average profit on the four trades and I made double the money I would have if I had just stopped at the first purchase.
> 
> Not criticising by any means but just adding my two cents and getting your brain thinking about this possibility.
> 
> It's a hell of a lot easier managing less positions too!




Hi Nortorious,

Position size is certainly a consideration in my strategy, and depends on the results I expect to achieve from it.

Keeping in mind that most of my trades are expected to be 3+ years, no stop losses and hit rate of <70%, I would be uncomfortable with a smaller position size then the 15-25 I am running now.

One of the strategies in my super has a historical hit rate of over 80%, I am confortable holding 10-15 stocks there. 

With a more discretionary approach, I agree with you fully, I would have less then 10 stocks and I would average into them over time. For the current portfolio and forum thread, I prefer to stay closer to the systematic approach, I feel that higher concentration would be too risky here.

Thanks for the thoughts, it is very helpful to thing and write about these things.


----------



## Nortorious

KnowThePast said:


> Hi Nortorious,
> 
> Position size is certainly a consideration in my strategy, and depends on the results I expect to achieve from it.
> 
> Keeping in mind that most of my trades are expected to be 3+ years, no stop losses and hit rate of <70%, I would be uncomfortable with a smaller position size then the 15-25 I am running now.
> 
> One of the strategies in my super has a historical hit rate of over 80%, I am confortable holding 10-15 stocks there.
> 
> With a more discretionary approach, I agree with you fully, I would have less then 10 stocks and I would average into them over time. For the current portfolio and forum thread, I prefer to stay closer to the systematic approach, I feel that higher concentration would be too risky here.
> 
> Thanks for the thoughts, it is very helpful to thing and write about these things.




No problems. I thought there would be some rationale behind your approach and thinking but was just seeing if you had explored this consideration. Keep up the great work!


----------



## KnowThePast

Bought SNL, 800 @ $2.13


----------



## KnowThePast

Sold TCN, 45000 @ 0.07856.

I bought two parcels of these, one as part of my automated strategy, and a second, larger one, on an expectation of significant profit increase.

This hasn't happened, so my investment thesis was invalidated, hence I sold off a part of it, so it is now closer to my average position size.


----------



## KnowThePast

Sold SSM, 6350 @ $0.365, for a profit of $1,076.75 (81%).

It was one of the few remaining shares from my old value portfolio. Recent price raise moved it from being very cheap to just cheap.


----------



## Nortorious

KnowThePast said:


> Sold SSM, 6350 @ $0.365, for a profit of $1,076.75 (81%).
> 
> It was one of the few remaining shares from my old value portfolio. Recent price raise moved it from being very cheap to just cheap.




Nice result on your SSM trade KTP. A nice profit given what it looks like on the chart (a bit of noise above the current levels that may impede further progress...).


----------



## KnowThePast

Nortorious said:


> Nice result on your SSM trade KTP. A nice profit given what it looks like on the chart (a bit of noise above the current levels that may impede further progress...).




Thanks Nortorious.


----------



## KnowThePast

Bought IVO, 30557 @ $0.055.

I happen to work on a project at the moment that collaborates with a very similar company in UK market. I think this type of offering, let's call it data snooping, is going to grow massively in the future.

This is one of the many players without any competitive advantage, however, customers would be sticky and they are getting more and more of them. 

Shopping Ninja, I am not convinced about, but it also has potential. 

I am expecing a few more capital raisings along the way.

A very speculative play, this one.


----------



## KnowThePast

Monthly update - portfolio has gone up $1,182 for the month (2.3%). 




Also bought CAT, 988 @ $1.70 today.


----------



## peter2

I'm pleased to see that you're buy more stocks that are going up.  

Your performance will improve considerably and soon those benchmarks will be eating your dust.


----------



## KnowThePast

peter2 said:


> I'm pleased to see that you're buy more stocks that are going up.
> 
> Your performance will improve considerably and soon those benchmarks will be eating your dust.




Thanks Peter!


----------



## KnowThePast

A Happy New Year to everyone!

Monthly update - portfolio up $1,584 (3.2%) for the month. While a good result, this was the first month since March that I underperformed the benchmark.


----------



## KnowThePast

Monthly update - portfolio has lost $895.59 (-1.8%) in January, only just beating the index and avoiding two negative months in a row.


----------



## KnowThePast

Bought LMW, 2928 @ $0.60.


----------



## KnowThePast

Monthly update - portfolio has lost $501 (1%) for the month.

My main small cap growth portfolio underperformed the XSOAI by almost 5%. Interestingly, the last time I had significant monthly underperformance was also in Feb, last year, -8.8% then. 

Well within my tolerance parameters. My current triggers to start worrying are 3 underperforming months in a row, or relative monthly underperformance of over 10%.


----------



## KnowThePast

Monthly update - portfolio has lost $1152 (-2.3%) for the month, roughly in line with the index.


----------



## KnowThePast

Monthly update - portfolio has lost $364.09 (0.7%) for the month. It is now underperforming XSO for the third month in a row, which matches the worst result in a 10 year back test. Still well ahead of XAO, I will give it another month before reviewing the strategy. 

Following an automated system certainly doesn't generate much discussion and I've been too busy lately with a new job to write myself.


----------



## Trendnomics

KnowThePast said:


> _*Following an automated system certainly doesn't generate much discussion*_ and I've been too busy lately with a new job to write myself.
> 
> View attachment 66534




Agree 100% with that - I do check your monthly updates and look forward to seeing what your system can return in the next bull market.


----------



## KnowThePast

Monthly update - portfolio up $1,786.74 (3.6%) for the month, slightly ahead of the index.


----------



## KnowThePast

Annual update - portfolio is up 10.2% for the year, compared to XAOAI (0.93%) and XSOAI (13.36%). Most of my portfolio is now in a fully automated strategy, with a few stocks remaining from prior purchases. The automated portfolio performed better, with an almost identical return to XSOAI.

I will continue with the same strategy into the new year. My buy/sell triggers are mostly based on fundamental data, so I expect more actiivity after the reporting period.


----------



## KnowThePast

Monthly update - portfolio up $5,182 (9.78%) in July.


----------



## skc

KnowThePast said:


> Monthly update - portfolio fell by $61.25 (0.1%).
> 
> View attachment 62438




Been thinking about your stocks recently, KTP.

One big issue you had was an overweight in mining service stocks which led to under performance of the portfolio. This under performance may or may not have led you to change your investment strategy around 15 months ago. 

The mining services space have certainly come alive in the last 3-6 months... many of the names have rallied 50-500% off their lows (and they were very low lows). Perhaps semi-validating your initial long term strategy...

Do you know how the stocks you've sold have performed since? I haven't been keeping track and don't really want to go thru your thread looking for the transactions. So if you have a summary it would be interesting to see.

It feels like your new strategy is doing well... a combination of good stock picks and good momentum in the small Ords. So I am guessing you are much better off compared to a "keep holding" approach?


----------



## KnowThePast

skc said:


> Been thinking about your stocks recently, KTP.
> 
> One big issue you had was an overweight in mining service stocks which led to under performance of the portfolio. This under performance may or may not have led you to change your investment strategy around 15 months ago.
> 
> The mining services space have certainly come alive in the last 3-6 months... many of the names have rallied 50-500% off their lows (and they were very low lows). Perhaps semi-validating your initial long term strategy...
> 
> Do you know how the stocks you've sold have performed since? I haven't been keeping track and don't really want to go thru your thread looking for the transactions. So if you have a summary it would be interesting to see.
> 
> It feels like your new strategy is doing well... a combination of good stock picks and good momentum in the small Ords. So I am guessing you are much better off compared to a "keep holding" approach?





Hi skc,

Apologies for the late reply, been away on holidays where reading emails/forums was an activity forbidden by my family.

That's an excellent suggestion, one I've been meaning to do but never got around to do it.

The stocks that I've sold, would have returned 32.3% if I've kept them.
Stocks that I've bought instead have returned 35.5%.

This is without dividends, the newer strategy would have had a higher dividend yield as well.

So, in hindsight, keeping with my original strategy would have resulted in a return almost as good as the new strategy.

But, there's always a but!, the entire return was due to just one stock - SSM. 

It would have a been a flat result without that one stock, and the list included 3 bankruptcies. The new strategy resulted in a slightly better overall number, as well as much safer portfolio. In a way, this validates both my original strategy, as well as the decision to move away from it.

Thanks for asking!



Time for my monthly update too - portfolio returned $2,646 (5%) for the month. Excellent results for some of my holdings, although I haven't yet had a chance to read any annual reports.


----------



## skc

KnowThePast said:


> The stocks that I've sold, would have returned 32.3% if I've kept them.
> Stocks that I've bought instead have returned 35.5%.
> 
> This is without dividends, the newer strategy would have had a higher dividend yield as well.
> 
> So, in hindsight, keeping with my original strategy would have resulted in a return almost as good as the new strategy.
> 
> But, there's always a but!, the entire return was due to just one stock - SSM.




Interesting analysis. Thanks for your response.


----------



## KnowThePast

Sold PHG, 2851 @ 0.30, as it no longer meets my criteria.


----------



## KnowThePast

Sold CLT, 6720 @ $0.24, for a profit of $427.30 (32%). 
Sold AKG, 1890 @ $0.17, for a loss of $1,231.70 (-79%).


----------



## KnowThePast

Monthly update - portfolio gained $66.34 for the month.


----------



## KnowThePast

Monthly update - portfolio has gained $1,412.50 (2.8%) for the month.


----------



## KnowThePast

Sold SNL, 800 @ $1.93 for a loss of $147.90
Bought TSM, 6451 @ $0.315

A couple of buy orders pending on less liquid stocks as well - time to do some rebalancing.


----------



## KnowThePast

Realised that TSM is going to be delisted in the near future - silly me!

Sold TSM @ 0.315, $60 mistake.

Bought ASW, 2700 @ 0.75.

Two buy orders still partially complete/pending and I'll be mostly done with this flurry of trading activity for the year.


----------



## KnowThePast

Bought GLH, 4619 @ $0.44.


----------



## levin123

KnowThePast said:


> Bought GLH, 4619 @ $0.44.




I've been looking at GLH but was put off but the lack of liquidity. Would be interested to know your reasoning?


----------



## KnowThePast

levin123 said:


> I've been looking at GLH but was put off but the lack of liquidity. Would be interested to know your reasoning?




Hi levin,

Most of my trades are automated these days, I do a bit of research to override the system from doing something silly, but no more than that.

What triggered my filters to include it was the fact that it's revenue growth resumed and it is organic growth. 

They are a relatively new, niche software company - these often have EBITDA margin in excess of 35%, so this one could well become more profitable at existing revenue base. 

Liquidity is definitely a concern - I try and make sure I don't have too many stocks this thin.

There's also a very good thread on GLH on ASF - big thanks to Ves for doing some excellent analysis ~3 years ago. The conclusion at the time was that the company was valued too highly by the market at the time. Well, it is trading at the same price now as it did back then, but the business looks a lot better.


----------



## levin123

KnowThePast said:


> Hi levin,
> 
> Most of my trades are automated these days, I do a bit of research to override the system from doing something silly, but no more than that.
> 
> What triggered my filters to include it was the fact that it's revenue growth resumed and it is organic growth.
> 
> They are a relatively new, niche software company - these often have EBITDA margin in excess of 35%, so this one could well become more profitable at existing revenue base.
> 
> Liquidity is definitely a concern - I try and make sure I don't have too many stocks this thin.
> 
> There's also a very good thread on GLH on ASF - big thanks to Ves for doing some excellent analysis ~3 years ago. The conclusion at the time was that the company was valued too highly by the market at the time. Well, it is trading at the same price now as it did back then, but the business looks a lot better.




Thanks for the write up KTP


----------



## KnowThePast

Monthly update - portfolio has gone up $526.54 (1%).




In related news, I am now working in partnership with a new startup that will bring revolutionary new equity analysis tools to retail investors. The kind of things that normally only institutions have will be available on an affordable subscription basis. 

My backtesting engine will be part of it - users will be able to create their own backtests as well as run better known, pre-canned once. 

Stay tuned - more to come in the next few months..


----------



## KnowThePast

I wish everyone a Merry Christmas, a Happy New Year and I hope you enjoy the break.

That you for all the members of the site, as well as Joe and moderators for running it! I do not write much, but many of you have influenced me greatly with what you contributed.


----------



## galumay

...and you, us! Best wishes to you and your family too.


----------



## OmegaTrader

KnowThePast said:


> Monthly update - portfolio has gone up $526.54 (1%).
> 
> View attachment 68979
> 
> 
> In related news, I am now working in partnership with a new startup that will bring revolutionary new equity analysis tools to retail investors. The kind of things that normally only institutions have will be available on an affordable subscription basis.
> 
> My backtesting engine will be part of it - users will be able to create their own backtests as well as run better known, pre-canned once.
> 
> Stay tuned - more to come in the next few months..




Hi Know

Really in-depth post and long running too.

Well done for your dedication to improvement and also for sharing your experiences and issues.

Looking at the yearly figures given in a *Rudimentary analysis*

The geomean of your active portfolio is  ~4.9%
small cap is  ~6.8%
all ords is  ~7.38%

Standard deviation 
active portfolio  ~10.87%
small cap is  ~5.64%
all ords is  ~6.6%

It is good to see the improvement year on year.

But you are returning less than the market given these stats.

However to properly evaluate alpha, I was wondering whether you had more accurate  figures, such as lesser time frames and more details.. etc etc

1) Do your returns include bank interest?
2) Do your returns include brokerage
3) Do you returns include tax differences, e.g cgt 50% discount
4) Are dividends are adjusted for imputation
5) what is the volatility and or standard deviation of portfolio

As a side note how much time do you spend on managing your portfolio, 

Given the portfolio is $50,000

Say alpha you produce of 5%, which is very good.

 Then the additional gain would be $2500 increasing at 5% per year 

Which is not a lot for hours and hours of the effort and time.

But great if down in 2-3 hours a week.



However it is enjoyable as a hobby and the loss of  a couple of % here or there and time  is not a supremely expensive hobby.

Plus you have only a few years of data, in a long term 20-30 year horizon, that is quite small.

I hope I have not asked too much

cheers


----------



## KnowThePast

OmegaTrader said:


> Hi Know
> 
> Really in-depth post and long running too.
> 
> Well done for your dedication to improvement and also for sharing your experiences and issues.
> 
> <snip>
> 
> 
> However it is enjoyable as a hobby and the loss of  a couple of % here or there and time  is not a supremely expensive hobby.
> 
> Plus you have only a few years of data, in a long term 20-30 year horizon, that is quite small.
> 
> I hope I have not asked too much
> 
> cheers




Hi Omega and thanks for the feedback.

To properly evaluate my performance, there are two time period, that I think should be judged separately.
1. First 2 years, it was discretionary investing, holding mostly cash for a large period of time.
2. Last 2 years - semi-automated trading.

First 2 years, I have significantly under performed.

For the next 2 years, however, my automated portfolio (now ~80% of my stocks), have returned, as of 2 weeks ago, 49.78% vs XAO -1.5%. In terms of time taken to manage it, that has also drastically decreased in the last 2 years. Once, I do a quick scan with my software to see if anything needs to be sold/bought, usually not. Together with some record keeping, 1 hour/month is about right. 

I run a different, but also automated strategy in my super, which has doubled in the last 4 years. 

It has taken many, many hours to get to a point where I am comfortable doing this and get good results. The hourly rate, given the size of my portfolio is not good. But, you are quite right that it is an enjoyable hobby. As an aside, it led me to develop a back-testing tool, that I am now commercialising.

Also, 2 years is not much. 50% out-performance may not be sustainable. The goal is to keep learning and if I can keep up my rate of progress in knowledge and performance for another 5-10-20 years, I am sure the profits will more than make up for it.

To answer your specific questions:
Returns include bank interest, dividends and brokerage.
No tax or dividend imputation,
I do not calculate SD or volatility.

Cheers

KTP


----------



## OmegaTrader

KnowThePast said:


> Hi Omega and thanks for the feedback.
> 
> To properly evaluate my performance, there are two time period, that I think should be judged separately.
> 1. First 2 years, it was discretionary investing, holding mostly cash for a large period of time.
> 2. Last 2 years - semi-automated trading.
> 
> First 2 years, I have significantly under performed.
> 
> For the next 2 years, however, my automated portfolio (now ~80% of my stocks), have returned, as of 2 weeks ago, 49.78% vs XAO -1.5%. In terms of time taken to manage it, that has also drastically decreased in the last 2 years. Once, I do a quick scan with my software to see if anything needs to be sold/bought, usually not. Together with some record keeping, 1 hour/month is about right.
> 
> I run a different, but also automated strategy in my super, which has doubled in the last 4 years.
> 
> It has taken many, many hours to get to a point where I am comfortable doing this and get good results. The hourly rate, given the size of my portfolio is not good. But, you are quite right that it is an enjoyable hobby. As an aside, it led me to develop a back-testing tool, that I am now commercialising.
> 
> Also, 2 years is not much. 50% out-performance may not be sustainable. The goal is to keep learning and if I can keep up my rate of progress in knowledge and performance for another 5-10-20 years, I am sure the profits will more than make up for it.
> 
> To answer your specific questions:
> Returns include bank interest, dividends and brokerage.
> No tax or dividend imputation,
> I do not calculate SD or volatility.
> 
> Cheers
> 
> KTP





Discretionary period no alpha, getting better results which is good, your returns increasing which is extra good!!

Semi-automated period return is 49.78%.

Super strategy 200% in 4 years = .1892.....geomean

=18.92%  return each year

These  are both really high returns.

Unfortunately without risk or volatility it is pretty hard to judge the merits.

I could also gear my investments a lot to get high returns, but without the risk component the full story is not told.

Tax is also really important.

Unlikely scenario:
 buy and hold an you never sell or incur capital gain.Maybe you it will it. NO tax

More likely:
 you sell it after a long time for a 50% discount on the tax component.

Plus you are getting dividends with 30% refundable imputation


*It is pretty concerning if your analysis and back-testing tool does not include standard risk metrics*

STD, Alpha, drawdown etc etc 
*
Maybe you should look at implementing these.*

More volatility= greater chance of over betting = greater chance of ruin


Your hourly rate given 12 hours a year is actually astronomical!!



Hourly rate for 12 hours a year

$50,000 @ 50% alpha

$2083.33 an hour

$50,000 @ 25% alpha

$1041.66 an hour


$50,000 @ 10% alpha

$416.66 an hour

$50,000 @ 1% alpha

$41.66 an hour


good luck 

Omega


----------



## jjbinks

great thread KTP. Thanks for documenting your journey. Did you design your own software?


----------



## KnowThePast

jjbinks said:


> great thread KTP. Thanks for documenting your journey. Did you design your own software?




Thanks jjbinks,

Yes, I developed it myself.


----------



## KnowThePast

OmegaTrader said:


> Tax is also really important.
> Omega




I don't include tax in my forum postings, as everybody's tax situation is different. I do, of course, work it out for my own purposes, both tax return and measuring returns.



OmegaTrader said:


> *It is pretty concerning if your analysis and back-testing tool does not include standard risk metrics*
> 
> STD, Alpha, drawdown etc etc
> *
> Maybe you should look at implementing these.*
> 
> More volatility= greater chance of over betting = greater chance of ruin
> 
> Omega




My tool supports all these metrics, I meant I don't use them for this investment strategy.

I think it was Howard Marks, who said that you can't avoid all risk, you have to choose which one you are prepared to take. I invest in small caps, so almost by default, liquidity and volatility are risks I am prepared to take. Calculating volatility of less liquid stocks is not something that I feel benefits this strategy in any way.


----------



## OmegaTrader

KnowThePast said:


> My tool supports all these metrics, I meant I don't use them for this investment strategy.
> 
> I think it was Howard Marks, who said that you can't avoid all risk, you have to choose which one you are prepared to take. I invest in small caps, so almost by default, liquidity and volatility are risks I am prepared to take. Calculating volatility of less liquid stocks is not something that I feel benefits this strategy in any way.




Without risk or volatility you are not comparing apples with apples.


I will take on more volatility because I can't avoid risk.

and not include it in my calculations because I cannot avoid risk.

I don't think that is a proper interpretation of the quote.

I think the point of the quote is that you need to have some skin in the game to get returns and accept losses to some extent

Not to ignore volatility.

For a 50% return you are probably taking on a lot more risk.

So it looks great but is not telling the whole story.

There is a massive risk of over-betting and ruin

Volatility is one of the cornerstones of modern finance.....

The point is could you just gear a more passive strategy and get the same returns for the same risk.

50% return is an extreme number....


----------



## KnowThePast

OmegaTrader said:


> Without risk or volatility you are not comparing apples with apples.
> Volatility is one of the cornerstones of modern finance.....




Hi Omega,

There's plenty of controversy about using volatility as a proxy for risk.

Consensus amongst most well known fundamental, long term investors is that it is not the right tool for that kind of portfolio. 

We'll have to agree to disagree on this one. 

The risks I do look at:
Leverage - I do not have any, but may add it in the future.
Industry risk - I override my automated trading to make sure my stocks are concentrated in any one or a number of industries.
Liquidity risk - partially, this is a risk I am willing to take on. My personal circumstances are such that it is unlikely I will need to get cash out from this portfolio in the coming years. Still, I monitor my purchases to make sure that I still have most of my stocks to trade out of relatively quickly. Not too difficult given my portfolio size.
Bankruptcy - diversification. The type of stocks I buy, bankruptcy isn't too common and holding an average of 25 stocks is enough to offset that.


----------



## OmegaTrader

KnowThePast said:


> Hi Omega,
> 
> There's plenty of controversy about using volatility as a proxy for risk.
> 
> Consensus amongst most well known fundamental, long term investors is that it is not the right tool for that kind of portfolio.
> 
> We'll have to agree to disagree on this one.
> 
> The risks I do look at:
> Leverage - I do not have any, but may add it in the future.
> Industry risk - I override my automated trading to make sure my stocks are concentrated in any one or a number of industries.
> Liquidity risk - partially, this is a risk I am willing to take on. My personal circumstances are such that it is unlikely I will need to get cash out from this portfolio in the coming years. Still, I monitor my purchases to make sure that I still have most of my stocks to trade out of relatively quickly. Not too difficult given my portfolio size.
> Bankruptcy - diversification. The type of stocks I buy, bankruptcy isn't too common and holding an average of 25 stocks is enough to offset that.




Agree to disagree.

What is your corellation to the market?


----------



## KnowThePast

OmegaTrader said:


> Agree to disagree.
> 
> What is your corellation to the market?




I don't use it, so I don't calculate it.


----------



## KnowThePast

Monthly update - portfolio has gone up $771 (1.5%) for the month.


----------



## KnowThePast

Bought PNW - 6614 @ $0.3027


----------



## OmegaTrader

KnowThePast said:


> I don't use it, so I don't calculate it.



haha 

agree to disagree 

good luck


----------



## KnowThePast

Monthly update - portfolio has lost $1,137.46 (2.1%) for the month.


----------



## KnowThePast

Monthly update: portfolio lost $1,642.05 (-3.1%) for the month.


----------



## KnowThePast

Monthly update - portfolio has lost $21 over the month.

After getting off to a hot start, it has now under performed the index in 4 out of the last 5 months. If the next month is the same, I will look at changing strategy.


----------



## systematic

KnowThePast said:


> After getting off to a hot start, it has now under performed the index in 4 out of the last 5 months. If the next month is the same, I will look at changing strategy.




Curious about the comment, KTP.  I thought you were using a reasonably longer term approach?  Under-performing the index 4 of 5 months is well within normalcy, I would have thought?


----------



## KnowThePast

Hi systematic,

I backtest my strategy, and decide on the triggers when to change it. For this particular strategy, it has not under-performed more than 3 months in a row for more than 10 years. So, having 5+ of those months is a trigger for me.

I don't expect to find a long term automated strategy that will always work, adapting and changing strategy will be needed.

As part of revaluation next month, I will need to consider reasons for the under-performance. If the reasons established are reasonable, I may stick with it. As an example, there could be a re-pricing of small growth stocks..


----------



## systematic

KnowThePast said:


> For this particular strategy, it has not under-performed more than 3 months in a row for more than 10 years. So, having 5+ of those months is a trigger for me.




Got ya, thanks for clarifying.



KnowThePast said:


> I don't expect to find a long term automated strategy that will always work, adapting and changing strategy will be needed.




I agree with the first bit (I don't see how anyone could disagree!) but my conclusion from that is different to yours:  I'd say, 'but I stick with it' where you would say, 'adapt and change.'  It's interesting stuff, we're all different! Thanks for sharing KTP, as always


----------



## KnowThePast

Monthly update - portfolio has gone up $1,630 (3.1%) for the month.

The automated stocks outperformed by over 5% this month, so I am no longer going to re-evaluate that strategy this month.


----------



## KnowThePast

Monthly update - portfolio has lost $860.25 for the month, slight behind the index.


----------



## peter2

Thanks for the update. It shows your ongoing commitment. 

I was thinking that there must have been an indicator to exit some of those losers, but in some cases the divs offset the capital losses (reason to hold). There are a few that haven't paid any div though. Overall you might have been able to save 2K, but this doesn't make up the difference to the benchmark index (XSOAI). 

Cutting the losers (that don't pay any div) earlier is only part of the solution to beat your benchmark. How about adding to the winners with the cash from the losers? 

There's no easy solution as I think it's likely to require multiple small adjustments. It starts with cutting losers that don't pay a div, adding to winners in dips and then taking partial profits when the prices are too high (overbought) according to your model. 

Another view is that your under-performance in the first two years has you behind your benchmark and that it'll take another few years to make up for it. Your changes in strategy have improved your performance in the recent years.


----------



## KnowThePast

Thanks for feedback, Peter.

I have to admit I ignore dividends pretty much completely in my analysis, I just look at the total return. I've played around with dividends a lot in backtests, but never found anything to pursue further. 

Position sizing and adding to winners (or whatever other criteria), is something I would like to do. However, given the amounts I have on an average trade, the brokerage cost would be significant.

My sell criteria is the reverse of my buy criteria. In other words, I hold as long as my original buying logic continues to hold. For this strategy - irrespective of price. 

Yes. definitely have been catching the last 2 years, hopefully I an continue the trend.


----------



## Cam019

No July update @KnowThePast?


----------



## KnowThePast

Cam019 said:


> No July update @KnowThePast?




Sorry, forgot all about it.

I'll just post the July one in a few days.


----------



## KnowThePast

Apologies again for the missed update in June, which also happened to be the end of year one. Too much work.

I will count the last year as 13 months, to save myself the effort of tracing back all prices and interest.

For the year, portfolio returned 17.08%, compared to 14.55% (XAOAI) and 7.73% (XSOAI). First time that I have beaten both indexes in one year. 

It's been very quiet year for me, with very few trades. Existing ones keep ticking along without triggering my sell criteria. And there aren't a whole lot more stocks that tick my buy criteria either. This will probably change somewhat after the reporting period.


----------



## KnowThePast

Monthly update - portfolio has gained $90 (0.04%) for the month.


----------



## KnowThePast

Sold MWR, 1035 @ $0.37 for a loss of $964.48

There will be a few more stocks that will no longer meet my criteria after the reporting season, I will sell these off in the next month.


----------



## KnowThePast

Sold a few positions that no longer meet my criteria:

Sold NWH, 3750 @ $1.181 for a profit of $1,329.15
Sold CKF, 1068 @ $5.90 for a profit of $4,831.54
Sold ICU, 10370 @ $0.035 for a loss of $1,148.75
Sold TCN, 30302 @ $0.047 for a loss of $910.17
Sold BYI, 1050 @ $0.70 for a loss of $333.95

BYL has gone into liquidation in the meantime as week, so it's probably safe to mark it down to zero.


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## KnowThePast

Monthly update - portfolio dropped $613 for the month.


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## KnowThePast

Sadly, this is going to be my last monthly update on this thread.

We've decided to buy a house, which will require significant investment in extensions and renovations. So, I have now sold most of my holdings to free up the cash.

It's been a pleasure having all of you as my audience over the years, thank you for all the advice given. This has been an invaluable learning experience.

I may post random things here every now and then, who knows, I might even start another portfolio one day.

For now, I am also busy with a start-up called ForwardCaster, which will commercialise my back-testing engine in the near future.


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## noirua

My investment journey has been one of success and failure combined with stupidity, frustration and near self destruction and mixed in with a tiny bit of genius completely confused with not knowing what it was or is.

A robot would just invest or punt in shares with out the slightest reaction to making a profit or loss. So that is the way to invest. If after selling for $100 profit, two days later that could have been $1,000, so what - the robot would be completely non reactive to it. If I sell at a $800 loss only to see an announcement rocket the share 500%, so what. If a company goes bust on you and you lose $10,000, so what. If you lose everything or gain $1 million, so what. If you can be that robot you are part way to success.

Taking this to personal extremes it has taken me umpteen years to get over my ride.

Can you invest to take yourself to the brink and ignore profits and losses as in the poem 'IF'. https://www.poetryfoundation.org/poems/46473/if---


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## KnowThePast

Hi everyone,

Time to revive this thread!

As I mentioned before, I've been involved with a startup that uses my backtesting engine - www.forwardcaster.com. While development is still ongoing, lots of features are now ready and we have just done a soft launch of the first version.

As a short summary - you can create an automated strategy based on any fundamental factors, backtest it against different markets and time periods. Then, you can track it daily, share it with others, as well as subscribe to other people's strategies.

For all my readers, old and new, I'd love for you to try it and appreciate any feedback. If you like it, I'd love to have you as a user.

Anyone that has been an active participant in this thread, please send me a PM and I'll set you up with a free subscription. The site is here: www.forwardcaster.com

I hope to see you all there!

P.S.
I will be practising what I preach and start up a new portfolio that will be tracking a strategy on the site.


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