My Investment Journey

[KnowThePast]

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.

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.

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]

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]

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]

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]

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]

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]

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]

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.

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.

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]

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]

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]

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]

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.