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My Investment Journey

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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.
 
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
 
+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.
 
Some great work here.
I too have only had a summary read but will
Spend the time it deserves later.

Thanks for sharing.
 
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.
 
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.
 
KnowThePast said:
What did I stuff up?

Or was that a whoosh..
Click to expand...

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...
 
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...
Click to expand...

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.
 
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!
 
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.
 

I use the WAM Capital monthly letter to get the Accumulation Index numbers for free.
 
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.
 
KnowThePast said:
If there's interest, I may post a more detailed write up on IRI later.
Click to expand...
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.
 
KnowThePast said:
If there's interest, I may post a more detailed write up on IRI later.
Click to expand...

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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