My Investment Journey

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.

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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.

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OK so long as you are satisfied that you have valid reasons for your actions its probably best not to dwell.

Cheers

Sir O

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.

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.

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I think an effective distribution network is a pretty decent competitive advantage to have..!

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.

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.

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.

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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.

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.

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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.

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.

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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.

VSntchr said:

I think an effective distribution network is a pretty decent competitive advantage to have..!

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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.

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.

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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.

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.

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.

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.

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.

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)

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These numbers look wrong. Are these revenue instead of profit?

skc said:

These numbers look wrong. Are these revenue instead of profit?

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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.

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.

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Perhaps we should just share our shopping list to save time

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.

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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).

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).

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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...

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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.

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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.

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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.

A monthly update:

March has been another bad month for me, and my portfolio is now performing worse than XAO, for the first time: