Present Value of Future Cash Flows

[Ves]

Don’t worry about the sticky – the few that will value the content will find it.

I won't say "goodbye" - because it doesn't seem right. Like everyone else who has spent many hours posting to a forum community your footprint will still exist until it gets taken down for whatever reason.

On top of that, all of the ideas / values that you stood for will and still do persist for me (at least the parts my memory has cherry-picked).

Whilst, like many individuals, we can't glean much of another's life from posts on a forum, I have sensed that you came to a realisation somewhere in the past few years and started asking different questions of yourself. A lot of them about where investing actually fits into your life.

And I think you should keep doing it because it looks like you're getting some answers.

All the best.

 

[Huskar]

I echo everyone's sentiments Craft and perhaps the forum is +ve in this way: just the like the markets (or life for that matter) there is dross and there is gold about but it is your perspective that really matters and it sounds like yours has continued to grow for the better.

 

[luutzu]

....
Worst advice I have ever seen. But it’s typical of the fight, fight, fight forum culture.

....

Maybe. But being "impolite" doesn't mean fight and argue for the sake of it. It mean being direct - give people what you think in as straight a manner as you can.

While that would insult people, it might make them think and maybe learn something or see things from a different perspective. Then they can either ignore your pov or take some or grow stronger in their thinking.

Being as polite and sociable on forums and we'll all be talking about the weather and how's the weekends and looking forward to that weekend and thanking god it's Friday.

Anyway, wishing you the best craft. Come back whenever you're bored and want to share with us your thoughts.

 

[Newt]

Take care and all the best for you and your family craft.

I must also thank you for one the greatest gifts I've personally gleaned from what you've shared here on ASF - to focus on longer term returns and performance. Maybe I'm just getting to be an old fart, but moving out to longer timeframes in trading, work and life in general has worked well for me over the last couple of years. Making sure you're not missing the big picture while tied up in all the short term challenges (or trades).

Should I ever feel I've learned enough, and have sufficient years positive returns under my belt, to feel qualified to leave some nuggets here for others, then suggesting people revisit your many thoughtful posts would definitely be on the list.

So long, and thanks for all the fish....

 

[hiddencow]

Hey craft, I'm sad that you won't be posting on here anymore. All the best with everything else in your life. You've already won this investing game and your posts have been an inspiration and a wealth of knowledge for me. I hope you come back every know and then even just to check and post in this thread only.
I don't often check these forums, I only log on every now and then to check the high quality posts from contributors like you and others. It doesn't take much time and adds a lot of value.

 

[craft]

I’ve done a little more thinking on this rebalancing issue. Please critique, because I am not sure I have got it right and its hard to see the trees for the forest inside my own thoughts.

The decision (or lack of decision) to date has been to let the profits run. I have now decided to limit the mark to market exposure to 25% of an account. If it goes above I will trim it back to just under.

MTU was one of the companies that had climbed in % and it has had a fair impact on my final decision. One morning I looked at the screen and seen a little icon in the announcement field. A little icon that meant MTU wanted me to invest a big chuck of money at short notice at a price over 4 times my average cost – It was renounceable and the price held up early allowing options but it gave me a jolt as to the difficulties around this weighting issue.

MTU was trimmed during the rights period and got another haircut yesterday as did MMS. The gut still doesn’t quit feel right selling for weighting issues rather than business performance reasons. Still not a totally settled issue for me – more a work in progress probably awaiting some lessons to be learnt the hard way.

In the process of reviewing SRX trade.

One of the things this investment has done is throw a sharp light on the position sizing rules adopted and discussed in previous posts here.


My maximum exposure rule is 25% based on mark to market capital value.


My purchase position size rule is based on cost price capital value.

The portfolio where SRX is held now holds between 7 and 10 stocks which means I can invest between 10% and 14% of at cost capital into a stock.


The interplay of these rules and volatility of SRX made for a much better outcome than otherwise would have been (something I didn’t envisage when putting sizing rules in place) and in some ways saved me from myself. (the thing they were designed to do)


I’m happy with these rules now especially after the stress testing SRX has given them.


Maybe I would think differently if SRX only ever went smoothly up and had different trial outcomes as the rules would have been detrimental under that scenario. There is defensible arguments about letting winners run and less (or more) diversification but I I’m happy that these numbers suits me. I’m likely to increase numbers of stocks held and decrease max exposure % slowly over time, but do it strategically in response to age and risk appetite rather than as a response to any given situation.


Only 5 years to fully think through these sizing issues – I'm getting faster.

 

[craft]

SRX investment review part 2

I first started buying SRX in 2006. The investment story was a self-funding biotech with a promising blue sky potential. Because of an Intellectual Property court case against founder Dr Gray and later the GFC I had the chance to get fully set at a value where I believed I wasn’t paying for the blue sky. My determination was to see the investment through to the major trial outcomes which would have facilitated the first line treatment blue sky if successful. Apart from Soramic (HCC) those studies have now reported to an extent that I now consider my investment thesis completed and time to review. I can no longer justify a to the moon or bust investment course of action awaiting trial outcomes.


It’s safe to say at times SRX has had a lot higher expectations for the trial outcomes baked into the price than the trials are currently seen to have delivered. On that basis, the trials are a bust and my failing to sell the stock I still hold today at the highs is a million dollar+ misjudgement.


Hope – I really hoped the progression free survival in the liver that Sir Spheres gives would translate to an overall survival benefit in a wide population of sufferers – which is what the trials were designed to show. Turns out the cancers they are dealing with are just god awful systemic beasts and at best SIR-Spheres can help some sub-groups but it can’t help everybody. From my understanding my bottom line was that if I had liver cancer I would want SIR-Spheres as quickly as I could get my hands on it. I somewhat have changed that mindset to I would want to immediately consult the best in the field to see if SIR Spheres would benefit my situation. I think I’ll also double down on healthy living and keep hoping I stay lucky because there’s no easy answers out there for these cancers.


So I’m calling this investment to an end – and putting the results on paper because I’m actually not selling out just yet, rather doing what I consider the hardest thing not to stuff up with biases and coming up with another investment thesis - preliminarily the numbers seem to stack up on adopting SRX as a cash flow investment – though a very high risk one and it has some near term targets to jump through as it rights a ship that is somewhat off kilter at the moment.


Finalising the to the moon or bust investment thesis outcome.

Average holding cost $3.706

Sell $11.77

Income over holing period 44% of current cost base (varying number of shares held at different dividend dates)

NET Realised profits from numerous buys and sells since first held. 177% of current cost base.


Whilst the SRX investment feels a bit disappointing just at the moment as I seem to be drawn to consider the failure of selling out at the top – which I shouldn’t because even attempting that was not my game, but I like to kick myself anyway.


What I need to remind myself of as failure this outcome is good and not to forget that SRX did a lot to seed other investments in the portfolio as it was trimmed at times along the way to stay under portfolio risk limits.

IF you have somehow managed to read all this and feel so inclined to comment on anything I might not be seeing as I reconsider my SRX investment thesis please do comment - I know I'm at risk of being blind sided by biases generated by a decade involvement in this investment.

 

[Triathlete]

Whilst the SRX investment feels a bit disappointing just at the moment as I seem to be drawn to consider the failure of selling out at the top – which I shouldn’t because even attempting that was not my game, but I like to kick myself anyway.

At least you made money on the investment.....I guess my question to you now is how will you approach similar situations going forward?

 

[craft]

At least you made money on the investment.....I guess my question to you now is how will you approach similar situations going forward?

Exactly the same - why wouldn't I?

Although I'm not sure I will always want a "to the moon or bust" speculative position in the portfolio. They're entertaining but on the whole I think boring cash flow is probably more profitable long-term unless you get that element of luck your way.

 

[luutzu]

Exactly the same - why wouldn't I?

Although I'm not sure I will always want a "to the moon or bust" speculative position in the portfolio. They're entertaining but on the whole I think boring cash flow is probably more profitable long-term unless you get that element of luck your way.

For next time.

 

[Triathlete]

Exactly the same - why wouldn't I?

Although I'm not sure I will always want a "to the moon or bust" speculative position in the portfolio. They're entertaining but on the whole I think boring cash flow is probably more profitable long-term unless you get that element of luck your way.

I am glad you can sit through a 71% decline from the all time high, I certainly could not....I thought you might of added in a strategy to lock in some of your profits when a stock has had such a good run.....

 

[VSntchr]

I am glad you can sit through a 71% decline from the all time high, I certainly could not....I thought you might of added in a strategy to lock in some of your profits when a stock has had such a good run.....

I don't want to reply for Craft, but just to save a bit of time.. I think he has already added in a strategy which does so. Whilst it has been done in the name of risk management, the 25% rule effectively achieves the effect locking in some profits after a big run. Craft did this on a few occassions with SRX which he documented at the time and which can also be seen in the review post above (the bit about net realised profits)...

 

[VSntchr]

Great to read your review and thoughts on your investment in SRX Craft.
We all struggle with biases at times, but I think you being aware of when they may start to creep in is a big part of what separates you from the herd

 

[Triathlete]

I don't want to reply for Craft, but just to save a bit of time.. I think he has already added in a strategy which does so. Whilst it has been done in the name of risk management, the 25% rule effectively achieves the effect locking in some profits after a big run. Craft did this on a few occassions with SRX which he documented at the time and which can also be seen in the review post above (the bit about net realised profits)...

Yes I can see that and no doubt he has done very well out of his investment.
I was making a reply based on part of his comment where he says:

"Whilst the SRX investment feels a bit disappointing just at the moment as I seem to be drawn to consider the failure of selling out at the top"

Obviously if he had brought his portfolio position down to the 25% level at the $41 level then from that point onwards he would have lost whatever was his position at the time a loss of over 71%.

It seems to me that he has managed his risk and taking profits accordingly on the way up but not so on the way down.......This seems to be a common theme that I see on ASF...IMHO...eg AKP,SGH to name just two....

 

[skc]

Hope – I really hoped the progression free survival in the liver that Sir Spheres gives would translate to an overall survival benefit in a wide population of sufferers – which is what the trials were designed to show. Turns out the cancers they are dealing with are just god awful systemic beasts and at best SIR-Spheres can help some sub-groups but it can’t help everybody. From my understanding my bottom line was that if I had liver cancer I would want SIR-Spheres as quickly as I could get my hands on it. I somewhat have changed that mindset to I would want to immediately consult the best in the field to see if SIR Spheres would benefit my situation. I think I’ll also double down on healthy living and keep hoping I stay lucky because there’s no easy answers out there for these cancers.

Thanks for the review... I think this may be the only mistake you have made. You hoped that SRX can help more people (which is not a bad thing) but perhaps that clouded your judgement of the risk:reward? Clearly, cancer sufferers also hoped that SRX would work out for them... and from memory you interacted/took their views into account in your research. Did that also influence your judgement? If Sirtex wasn't about life saving cancer treatment, but something else, say a self-funded mining operation + exploration upside, (ignoring commodity cycle for this thought exercise), would you have acted any differently due to different emotions involved? Perhaps you would have sold more when the market priced it with a higher-than-risk-adjusted chance of success? I am fully aware that it's easy for me to make qualitative statements like these in hindsight of the actual trial outcomes.

Fear, greed and hope are often cited as emotions that are detrimental to investing decisions... but when that hope is anchored on something much bigger than money, perhaps it's harder to deal with?

So I’m calling this investment to an end – and putting the results on paper because I’m actually not selling out just yet, rather doing what I consider the hardest thing not to stuff up with biases and coming up with another investment thesis - preliminarily the numbers seem to stack up on adopting SRX as a cash flow investment – though a very high risk one and it has some near term targets to jump through as it rights a ship that is somewhat off kilter at the moment.

I think this is actually the part that caught lots of people out. SRX even without elevation into first line treatment is still a very worthy business. But the issues with the corporate governance and faltering sales (be it execution and/or competition) were not something I would have expected if I entered with a moon or bust thesis years back.

Finalising the to the moon or bust investment thesis outcome.

Average holding cost $3.706

Sell $11.77

Neither the moon or bust... I think it landed some where like a low altitude orbit.

 

[craft]

Thanks for the review... I think this may be the only mistake you have made. You hoped that SRX can help more people (which is not a bad thing) but perhaps that clouded your judgement of the risk:reward? Clearly, cancer sufferers also hoped that SRX would work out for them... and from memory you interacted/took their views into account in your research. Did that also influence your judgement? If Sirtex wasn't about life saving cancer treatment, but something else, say a self-funded mining operation + exploration upside, (ignoring commodity cycle for this thought exercise), would you have acted any differently due to different emotions involved? Perhaps you would have sold more when the market priced it with a higher-than-risk-adjusted chance of success? I am fully aware that it's easy for me to make qualitative statements like these in hindsight of the actual trial outcomes.

Fear, greed and hope are often cited as emotions that are detrimental to investing decisions... but when that hope is anchored on something much bigger than money, perhaps it's harder to deal with?



I think this is actually the part that caught lots of people out. SRX even without elevation into first line treatment is still a very worthy business. But the issues with the corporate governance and faltering sales (be it execution and/or competition) were not something I would have expected if I entered with a moon or bust thesis years back.


Neither the moon or bust... I think it landed some where like a low altitude orbit.

Hey SKC - thanks for the thoughts.

Hope and emotion was part of the reason I entered the SRX trade – It must have been. Because I would not make a similar play in your example of a mining company with exploration potential. I would rather stick to my more normal cash flow investment scenario’s then a blue-sky scenario on something that doesn’t excite me on an emotional level.

However, it was not entirely a hope based investment. My objective is to take on risk where it is priced favourably to do so. My assessment when buying in was that I was paying very little to nothing for the upside. My commitment on entering was to see it through to the trial outcomes unless capital was raised in which case I would review. Perhaps that commitment was wrong but I knew I would face all sorts of forces to pre-guess the outcomes – something I knew I would never have the skills to do. The risk was bought at the right price to see it out. That was my plan – I executed my plan. (except the sell which is where I’m at now and mindful that transitioning the investment to a cash flow thesis whilst still invested is fraught with danger)

“higher-than-risk-adjusted chance of success.” Not that I would have acted on it with my trade plan – but I also never reached that conclusion in real time. If liver progression had translated to significant increase in overall survival SRX would have been a hundred-dollar stock in fairly short order with the eventual debate being what was the right number to put in front of the zero’s.


That SRX is a bit of a shambles operationally now gives rise to the pricing that can make the cash flow thesis viable so long as they can right(size) the ship. I’ve got the information to review the investment thesis. They have the information to review the business operation strategy – The governance and sales force leadership turmoil that accompanied the uncertainty of the trials (related? I suspect so) can’t be forgiven if they misstep going forward now they have some very good marketing data and a better understanding of the potential market population.

 

[craft]

Yes I can see that and no doubt he has done very well out of his investment.
I was making a reply based on part of his comment where he says:

Obviously if he had brought his portfolio position down to the 25% level at the $41 level then from that point onwards he would have lost whatever was his position at the time a loss of over 71%.

It seems to me that he has managed his risk and taking profits accordingly on the way up but not so on the way down.......This seems to be a common theme that I see on ASF...IMHO...eg AKP,SGH to name just two....

Triathlete

I put up some numbers that help understand my SRX outcome without specifying the exact dollar amount.

To make more sense of the numbers you need to assume a quantity of shares – let’s take 100,000.

Average purchase cost: $370,600
Theoretical Sell: $11.77 = $1,177,000
Un-realised capital gain: = $806,400
Dividend Income (44%) = $163,064
Previous Realised Profit from portfolio limit rules (177%) = $655,962

Profit on $370,600 investment: $1,625,426 - 438% over a decade.

That result is O.K but not great considering how long the money was invested for and what it could have been if the trials were an unmitigated success – it works out to something in the range of 15% CAGR.

I’m not going to deny to myself or anybody else the bit you highlight, a 71% drawdown hurts. Its very easy to think of what other meaningful things you could have done with the money that has evaporated.

SRX reached $41.33 at that price the mark to market valuation of 100,000 shares is $4,133,000 and I was hitting portfolio limits so my exposure was 25% of the portfolio.

Mark to Market drawdown = $ 2,956,000 which is nearly twice my actual outcome. If the remainder of my portfolio stands still it is a 18% (71% *25%) drawdown in the portfolio.

But here’s the thing – Yes it hurts but I’m not going to change what I do because it hurts. That immediate profit obsession and avoiding volatility at all costs is the game that everybody else plays because it’s emotionally easy – but it’s not a game that I think makes you rich over the long run.

SRX’s blue sky of uniform first line treatment didn’t work out. Sometimes investments don’t work out – that is risk – that is what we do, we bear the risk. But it could have worked out and I had a plan that allowed me to be exposed at full clip to the high-risk events. That’s what I wanted – I didn’t want to avoid them.

It’s easy to say they should have been avoided in hindsight – But I have yet to meet a rich hindsight warrior. And I don’t know of any other more pro-active risk management method (especially at size) that would have not cut you to pieces on the SRX gaps.

If I want to avoid 71% (or higher) drawdowns for emotional reasons, I will avoid making these types of investments altogether but I wouldn’t change how I execute the plan If I do take one again.

I think there will be room for other similar speculative positions in the portfolio and in my emotion bank again in the future - despite the potential drawdowns.

 

[craft]

Just to clarify one final thing on my thoughts on SRX

Whilst I’m saying the SRX trials failed in these last few posts– that is relation to my original investment thesis of success ie. meeting primary end points of overall survival.

There are some potentially good outcomes there for right sided colon cancers and quality of life for HCC treatment which expands their potential market quite considerably.

Whilst, I could have been in charge of marketing with an overall survival result in the armoury – the marketing job will now require more skill, effort and expertise to make sure the oncologist community is fully across where and when SIR Spheres work best. But there are no near-term limits on potential market size they just have to win market share. This is what underlies my new investment story.

 

[Triathlete]

Triathlete

I put up some numbers that help understand my SRX outcome without specifying the exact dollar amount.

To make more sense of the numbers you need to assume a quantity of shares – let’s take 100,000.

Average purchase cost: $370,600
Theoretical Sell: $11.77 = $1,177,000
Un-realised capital gain: = $806,400
Dividend Income (44%) = $163,064
Previous Realised Profit from portfolio limit rules (177%) = $655,962

Profit on $370,600 investment: $1,625,426 - 438% over a decade.

That result is O.K but not great considering how long the money was invested for and what it could have been if the trials were an unmitigated success – it works out to something in the range of 15% CAGR.

I’m not going to deny to myself or anybody else the bit you highlight, a 71% drawdown hurts. Its very easy to think of what other meaningful things you could have done with the money that has evaporated.

SRX reached $41.33 at that price the mark to market valuation of 100,000 shares is $4,133,000 and I was hitting portfolio limits so my exposure was 25% of the portfolio.

Mark to Market drawdown = $ 2,956,000 which is nearly twice my actual outcome. If the remainder of my portfolio stands still it is a 18% (71% *25%) drawdown in the portfolio.

But here’s the thing – Yes it hurts but I’m not going to change what I do because it hurts. That immediate profit obsession and avoiding volatility at all costs is the game that everybody else plays because it’s emotionally easy – but it’s not a game that I think makes you rich over the long run.

SRX’s blue sky of uniform first line treatment didn’t work out. Sometimes investments don’t work out – that is risk – that is what we do, we bear the risk. But it could have worked out and I had a plan that allowed me to be exposed at full clip to the high-risk events. That’s what I wanted – I didn’t want to avoid them.

It’s easy to say they should have been avoided in hindsight – But I have yet to meet a rich hindsight warrior. And I don’t know of any other more pro-active risk management method (especially at size) that would have not cut you to pieces on the SRX gaps.

If I want to avoid 71% (or higher) drawdowns for emotional reasons, I will avoid making these types of investments altogether but I wouldn’t change how I execute the plan If I do take one again.

I think there will be room for other similar speculative positions in the portfolio and in my emotion bank again in the future - despite the potential drawdowns.

Thanks Craft for your explanation and the numbers always help to explain the situation.
It is always good to see how others invests especially with large sums.
You have a plan and you stick to it.

 

[craft]

You have a plan and you stick to it.

A plan that works!

Sticking to it is only a good attribute in light of the plan itself.

Dog **** sticks - but treading in its not a good plan.