Agree. Risk is permanent loss of capital.
My mind has been working overtime about 'market darlings'. I keep asking myself is it easier to calculate the likelihood of a market darling failing/PE rerate than it is to calculate the likelihood of a 'market darling' performing to perfection for the next 20 years?
Cheers
Oddson
I agree totally with this. COH is a good company but far too rich for my blood looking forward.
V's exercise was interesting. But the assumption was that you saw the value back in the early days. The exercise was about how much you finesse the entry at the risk of blowing the opportunity.
The opportunity for COH in the next 18 years is not the same as the last 18 years. But the lesson is applicable as we consider current opportunities.
For what it’s worth there is a mountain of academic research suggesting that buying and rebalancing to the lowest percentile P/E (or low P/B or P/S or whatever metric you want to use to show cheapness) will result in higher returns over extended time frames.
The converse is that the highest percentiles underperform. Ie on average market darlings don’t live up to their hype.
Agree, that is my research to date. However for the fail/rerate to happen you need a catalyst to happen. I suspect it turns into a game of patience, looking for the correct combination of extreme overvaluation by the market and a high likelihood of fail/rerate/business hiccup.
As well as all the academic research that points to mean reversion valuations metrics in the longer term there is another fairly strong theme coming out, that is, that in the shorter term momentum plays a role in market behaviour. Ie it takes time for the big trends to roll over and gravitate back towards a valuation peg. Your catalyst point is the key.
I have an observation regarding COH. The EPS (TTM) is 1.27 AUD according to ft.com.
Do you not think that perhaps it would be wiser to use a period that doesn't include the product recall?
Good point. Using 2011 data, purchase at $72 implies 10 year growth at 13.5% or 20 year growth at 10%. Priced for perfection not absolute perfection
Which is why I purchased at around $50.
The growth in this is going to come from APAC and LATAM.
I was looking for $40 before even thinking about accumulating.
Oh well, wrong again – but there’s no rush.
For what it’s worth there is a mountain of academic research suggesting that buying and rebalancing to the lowest percentile P/E (or low P/B or P/S or whatever metric you want to use to show cheapness) will result in higher returns over extended time frames.
The converse is that the highest percentiles underperform. Ie on average market darlings don’t live up to their hype.
craft, recently had the opportunity through work to go listen to some nobel prize winners in finance talk about what they have studied in relation to shares and managed funds. The basic gist of it is that value stocks and small cap stocks outperform the broader market over an extended period of time. They don't necessarily outperform at the same time but in general they do at some point (Value outperformance is gradual and takes time, small cap outperformance comes in spits and purts and happens quickly).
If you look at this in the most basic sense then you can see how it can hold true. In terms of value, it's not often a company will remain 'undiscovered' if they have no issues, are growing cashflow and carry a P/E of 6,7,8. In terms of smaller caps, medium/bigger companies have to start somewhere and the ASX200 doesn't stay the same forever. Where do the new entrants come from to the ASX200/300 - smaller companies who have grown faster then the bigger companies and hence outperform.
I'm not saying don't invest in bigger companies, but you can understand how buying value in the smaller end provides a lot of reward potential (and of course greater risk) then buying these wonderfully ran businesses such as COH that are priced for perfection and already in the big end.
Note: When I say smaller companies, i'm not referring to micro's with $10mill market cap, I mean the $100 mill to $500 mill companies who have room to expand in our constrained Australian market.
Kermit and Craft,
Setting up a simple screener to look for undervalued in the $100million to $500million market cap range makes perfect sense to me, so much sense I have done it since I started investing. The problem lies with the execution of this type of strategy on the ASX. Firstly, to get any decent discount you need a business trading beneath a fair value range. Secondly, the business model also needs to lend itself to being valued simply, some business models are nigh on impossible to value due to the lack of earnings visibility. Once you remove any companies where earnings visibility is low you are left with less than a handful to select from – the investor now has high exposure to valuation risk as well as business risk. However logic dictates that if you are going to hold only a few stocks you should hold only the very best business irrespective of market cap, the problem then lies in getting some meagre discount, serious patience is required.
IMO for the asx, active management of a few small caps is the only choice to keep the odds firmly in the investors favour. Except in times of market panic when the ASX will provide a smorgasbord.
I think about this a lot. Probably too much.
Cheers
Oddson.
Didn't know what to make of this thread, but had some spare time on my hands.... unless I want to pay double brokerage.
...
As well as all the academic research that points to mean reversion valuations metrics in the longer term there is another fairly strong theme coming out, that is, that in the shorter term momentum plays a role in market behaviour. Ie it takes time for the big trends to roll over and gravitate back towards a valuation peg. Your catalyst point is the key.
I'm not aware of any in the fundamental field that actually
Show longterm profitability on valuations.
Simply because most valuations vary.
Any analysis is subjective and must be walked forward.
Didn't know what to make of this thread, but had some spare time on my hands.
It was an easy read.
All the while I expected the detractors and naysayers to appear.
I guess you have parried them somehow!?
Just an observation if I may.
If any of your picks was to treble you would be looking good, would you not?
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