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My Investment Journey

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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.
 
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.
 
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.
 

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.
 
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.
 
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
Click to expand...
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...
 
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
Click to expand...

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.
 

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.
 

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.




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
 
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.
 
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.

 

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.
 
"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.
 
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.
 
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.
Click to expand...

Thanks Robusta!
 
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.
 
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