Robusta fundamental, leveraged investments

[VSntchr]

Nice update Robusta, I've followed your journey from day 1 and I cant believe its coming up on 3 years in a couple of months.
The overall performance of your portfolio has been very impressive, and it seems that its building momentum.

After reading the above I can say that I am certainly jealous over some of your investments and regret not adding them to my portfolio at the times you have.

You have copped a lot of flak in this journal but you've taken it all constructively and come out of it far better off, and so have many others reading it (me for one).

Thanks!

 

[nomadic1970]

Robusta,

Well done. I have one question (and apologies if you already posted) but curious as to what you look for (criteria) in the companies you invest in.

For example, IPP now (from Commsec) has a PE of 300+, no PEG, no dividends, ROE?. Please note that I am in no way critical... So you must obviously looking at something else. I am just wanting a see if I can learn a little something from you. (Though I do note that Consensus had target price updated on 3/3/2014 to $2.95)

Regards

 

[VSntchr]

Robusta,

Well done. I have one question (and apologies if you already posted) but curious as to what you look for (criteria) in the companies you invest in.

For example, IPP now (from Commsec) has a PE of 300+, no PEG, no dividends, ROE?. Please note that I am in no way critical... So you must obviously looking at something else. I am just wanting a see if I can learn a little something from you. (Though I do note that Consensus had target price updated on 3/3/2014 to $2.95)

Regards

I'll give you my best shot at answering that before Robusta chimes in.
One thing that always annoyed me about a popular Valueable Investment expert was that he touted that you cannot value a company that is not earning money. Whilst this is true if you take it literally, I believe that value investors are looking to value the present value of all future cash flows of any investment.

A true value investor that has researched an investment deeply and has a good understanding of the business, its advantages, its value-drivers and its future earnings capacity will have the ability to derive a rough valuation of this business. This is possible with companies that are currently loss making, or companies that are already in a period of mature and stable growth.

As for IPP I'll let Robusta fill you in.

 

[robusta]

Hi Robusta, looks like you have learnt a lot by holding some of these businesses and generally from being an active participant in the market (investing / trading with real money) rather than a passive observer (ie. just reading books and watching).

I have enjoyed watching your journey unfold. Despite a lot of earlier criticism and doubt about your method, it seems to have turned out quite well!

Early days yet Ves but fairly happy at the moment. I think this thread shows if you concentrate on buying the best businesses you can find at a reasonable price and give it enough time positive results will follow. Much of the criticism was deserved there were a lot of blunders along the way.

Nice update Robusta, I've followed your journey from day 1 and I cant believe its coming up on 3 years in a couple of months.
The overall performance of your portfolio has been very impressive, and it seems that its building momentum.

After reading the above I can say that I am certainly jealous over some of your investments and regret not adding them to my portfolio at the times you have.

You have copped a lot of flak in this journal but you've taken it all constructively and come out of it far better off, and so have many others reading it (me for one).

Thanks!

Yes time does fly when you are having fun. You along with many others have taught me too many lessons to count. Yes there is some nice momentum at the moment and it is being helped by the leverage, if there was a major correction soon all my equity could vanish in a puff of smoke.

 

[robusta]

Robusta,

Well done. I have one question (and apologies if you already posted) but curious as to what you look for (criteria) in the companies you invest in.

For example, IPP now (from Commsec) has a PE of 300+, no PEG, no dividends, ROE?. Please note that I am in no way critical... So you must obviously looking at something else. I am just wanting a see if I can learn a little something from you. (Though I do note that Consensus had target price updated on 3/3/2014 to $2.95)

Regards

Sorry a bit pushed for time nomadic I will give a fuller answer later. The truth with IPP is there were no DCF, ROE method or any other traditional valuation methods used. The one question I asked was does this business have a sustainable competitive advantage. The answer was not yet but there was a better than even chance they would build one.

 

[craft]

if there was a major correction soon all my equity could vanish in a puff of smoke.

Hi Robusta

Such an occurrence is an opportunity if you have the right mindset and liquidity. Suspect you have the mindset down pat, so my question is about liquidity.

How much of the LOC is un-used

What is the liquidity arising from the strategy?
Ie what is your free cash flow to increase the quantity of your investments after you have accounted for: Dividends, Interest on LOC, monthly fees etc, weekly personal contributions, tax implications etc?

How sustainable is the dividend stream in a correction?
What is your portfolio’s current dividend return and payout ratio?

Nothing more frustrating then having no money available when everything is on special.

Cash is a crap return whilst you wait for the specials to come up – the right balance of opposing opportunity costs????

Liquidity from a robust dividend stream is valuable– especially to someone who can deploy it in the eye of a storm.

Just some thoughts.

 

[robusta]

Robusta,

Well done. I have one question (and apologies if you already posted) but curious as to what you look for (criteria) in the companies you invest in.

For example, IPP now (from Commsec) has a PE of 300+, no PEG, no dividends, ROE?. Please note that I am in no way critical... So you must obviously looking at something else. I am just wanting a see if I can learn a little something from you. (Though I do note that Consensus had target price updated on 3/3/2014 to $2.95)

Regards

When this portfolio was started the valuation method and criteria used was the Roger Montgomery "secret formula" outlined in his book Valuable. Since then I have discovered the formula has some massive shortcomings and had never been much of a secret either.

So after reading a whole heap of Graham, Buffet, Fisher and co I decided the most important investment criteria to me was that squidgy thing called a competitive advantage. PE ratios, charts and consensus targets are almost totally ignored. PEG ratios, high ROE and strong cash flows along with the ability to grow earnings over the long term are all attributes that are considered.

Would have to say Navitas was the business that changed it all for me, for ages it confused me. How could they pay out all earnings for such a long period of time and still grow? A study of the cash flow statements show there is something very special going on. People are lining up to pay them money for a service they will use in the future that costs Navitas comparatively little to produce. So when the price fell below $3.00 on some short term bad news and the dividend yield was almost double the best saving accounts there was no need to get the calculator out for the buying decision. Many smarter people than me bought for less than half the price a few short years earlier.

Probably sounds a bit simplistic but the main criteria would have to be the ability to grow at a decent rate compounded into the future compared to the price I have to pay.

I'll give you my best shot at answering that before Robusta chimes in.
One thing that always annoyed me about a popular Valueable Investment expert was that he touted that you cannot value a company that is not earning money. Whilst this is true if you take it literally, I believe that value investors are looking to value the present value of all future cash flows of any investment.

A true value investor that has researched an investment deeply and has a good understanding of the business, its advantages, its value-drivers and its future earnings capacity will have the ability to derive a rough valuation of this business. This is possible with companies that are currently loss making, or companies that are already in a period of mature and stable growth.

As for IPP I'll let Robusta fill you in.

Difficult to argue with you VSntchr while there is probably no way to get a accurate valuation of a business like this concentrating on a business that may have a sustainable competitive advantage it is possible to make a investment decision.

Taking a look at the revenues from fy2012 of 15.5m and compounding the growth over a nice period like ten years could give some interesting outcomes. (over the previous 4 years CAGR was around 40% organic growth plus acquisitions)

15.5m @ 20% over 10 years = $96m
@ 25% = $144m
@ 30% = $213m
@ 35% = $311m

This from a business with a then market cap of around $160m and a very high amount of operational leverage on small levels capital required to run the business.

All sounds a little crazy? You are probably right but REA have grown their revenue by a CAGR of arounf 33% over the last ten years.

 

[skc]

The portfolio started on the 20th of July 2011 with a $30,000 line of credit and no cash, $40.00 a week was initially deposited building up to the current $75.00 a week that is currently being transferred. It still surprises that in such a short time this now adds up to $7425.00. The debt on the line of credit is now $27,743.93 and at the close of trading today the portfolio has a market value of $52,047.99 so if liquidated right now with no brokerage there would be $24.304.06 of equity.

Yes a rising tide does lift all boats and a nice improvement on the -$6000.00 equity of not too long ago. Now for a look at the investments.

Very nice Robusta. Congratulations on a great result and a great thread. Many people will learn a great deal by following your journey.

 

[robusta]

Still haven't found time to give craft's questions above the answers they deserve but on Friday.

Investment Sold

128x WDIV @ $16.19 = $2052.37

The main reason was to free up some capital for future investments. By the way just in case there was any doubt this is a real money portfolio here is the coarse of sales from Friday


Condition
12:52:11 PM 16.070 1,119 17,982.330
11:19:28 AM 16.040 1,150 18,446.000
10:36:07 AM 16.080 623 10,017.840
10:34:23 AM 16.190 7,970 129,034.300
10:33:51 AM 16.190 509 8,240.710
10:33:51 AM 16.190 128 2,072.320 ** minus the $19.95 I pay the broker.

 

[robusta]

Hi Robusta

Such an occurrence is an opportunity if you have the right mindset and liquidity. Suspect you have the mindset down pat, so my question is about liquidity.

Yes no drama deploying capital when I see opportunity, the question remains how disciplined I can remain during a bull market...

How much of the LOC is un-used

Currently $4460.35 out of the $30,000 limit

What is the liquidity arising from the strategy?
Ie what is your free cash flow to increase the quantity of your investments after you have accounted for: Dividends, Interest on LOC, monthly fees etc, weekly personal contributions, tax implications etc?

The dividends this financial year have just reached a point that is marginally above my expenses (interest on the LOC plus a yearly fee equal to about one months interest). The other way to look at it at the moment the weekly contributions ($75/week or $3900.00 p/a) is the main driver to either reduce debt or increase investments.

The tax implications are considered separately to the portfolio. Any franking credits, income, capital gains or losses all go against personal income and are paid from or received into personal income.

How sustainable is the dividend stream in a correction?
What is your portfolio’s current dividend return and payout ratio?

There is a core of very sustainable dividends (NVT, TGA, MTU and UOS)and a few that maybe a touch more volatile (EZL, SRX and IMF)

Nothing more frustrating then having no money available when everything is on special.

Cash is a crap return whilst you wait for the specials to come up – the right balance of opposing opportunity costs????

Currently paying 5.43% interest on the LOC, so hopefully that will help me keep some funds available in reserve in the future.

Liquidity from a robust dividend stream is valuable– especially to someone who can deploy it in the eye of a storm.

Just some thoughts.

There is high hopes of the dividends rising well into the future.

Thank you very much for your thoughts Craft

 

[skc]

Currently $4460.35 out of the $30,000 limit

The dividends this financial year have just reached a point that is marginally above my expenses (interest on the LOC plus a yearly fee equal to about one months interest). The other way to look at it at the moment the weekly contributions ($75/week or $3900.00 p/a) is the main driver to either reduce debt or increase investments.

The tax implications are considered separately to the portfolio. Any franking credits, income, capital gains or losses all go against personal income and are paid from or received into personal income.

Is your LOC against the equity of your PPOR? If so, is your $75/week going into equity of your PPOR? You should build up equity there and increase the LOC limit as you go. That way you make sure your debt remains tax deductible (as opposed to paying non-deductible interest on the home loan while holding shares with equity).

Also, by increasing a LOC you reduce the yearly fee payable in % terms. By paying 13month interest you are basically borrowing at 5.88%.

 

[robusta]

Is your LOC against the equity of your PPOR?

Yes

If so, is your $75/week going into equity of your PPOR?

No

You should build up equity there and increase the LOC limit as you go. That way you make sure your debt remains tax deductible (as opposed to paying non-deductible interest on the home loan while holding shares with equity).

Also, by increasing a LOC you reduce the yearly fee payable in % terms. By paying 13month interest you are basically borrowing at 5.88%.

That makes perfect sense skc, I had never thought of that and will have to work towards implementing that strategy.
Just a couple of confessions to explain why there will be a delay. My family (myself included) have a fairly long history of spending more than we earn. A couple of years ago after reading Rich Dad Poor Dad by Robert Kiyosaki I decided enough was enough. This portfolio is the pay myself first strategy, no more would I work hard with nothing to show for it every week. The debt reduction part of the strategy is still ongoing with varying amount's of success. There are still some credit card debt and a car loan to be paid down. Until the bad debt elimination has been achieved I don't want to confuse the issue by messing with the redraw facility or the line of credit limit. Much easier to announce with what little authority I have in the house "this $75.00/week is for long term investment and not to be touched for any other purpose"

 

[skc]

That makes perfect sense skc, I had never thought of that and will have to work towards implementing that strategy.
Just a couple of confessions to explain why there will be a delay. My family (myself included) have a fairly long history of spending more than we earn.

Well sounds like you are heading in the right direction

Just do it when the time is right.

 

[robusta]

The other thing that needs to be considered with your suggestion skc is, do I have the discipline to hold on to available capital during a bull market? The strategy requires liquidity to be held for future opportunities and for the most part the LOC has been if not fully close to fully utilised. Take today for example...

New Investment

CAM - Clime Capital Limited

Bought 1456 @ $1.03 = $1519.63

Recently I tried a few ETF's on for size looking for a nice diversified holding that could form a cornerstone for the portfolio and compound out into the distance. Hopefully CAM will fit the bill. First of all I like the holdings and for the most part the investment record, they have also recently announced a change of strategy to up to 30% of the portfolio in international equities. While the current dividend yield at a touch below 4% does not look that attractive quarterly payments along with the DRP should see some nice growth over time. There is also the bonus of 1456 options with a exercise price of $1.04 in October 2015 for those on the register on the 9th of April.

 

[robusta]

Well sounds like you are heading in the right direction

Just do it when the time is right.

Cheers it feels like three steps forward two steps backwards sometimes but we are getting there...

 

[robusta]

New Investment

ICQ - Icar Asia Limited

Bought 1220 @ $1.23 = $1520.55

Once again like my other related holding IPP there is not a lot as far as valuation metrics going for this business. They do seem to have first mover advantage and it would be nice if they could emulate major shareholder CRZ over the next ten years...

 

[CanOz]

New Investment

ICQ - Icar Asia Limited

Bought 1220 @ $1.23 = $1520.55

Once again like my other related holding IPP there is not a lot as far as valuation metrics going for this business. They do seem to have first mover advantage and it would be nice if they could emulate major shareholder CRZ over the next ten years...

Well done Rubusta, buying a pullback! You technical trader you!!

 

[robusta]

Well done Rubusta, buying a pullback! You technical trader you!!

Wow is that what my stumbling around hit on? So that line on you chart is some kind of moving average?

 

[CanOz]

Wow is that what my stumbling around hit on? So that line on you chart is some kind of moving average?

Yeah, nothing special (exponential moving average of the 45 day closing price), just a habit to put in on the chart so it shows the trend at a glance...

The price gapped higher, then came back to fill the gap, sometimes a good place to buy, as you did...or close enough to it. Really its just a good place to define risk if you wanted to get out of the position and use the capital someplace else...

Good luck with it!

Are there any of you fundy guys that use a chart to finesse your executions a little?

 

[Ves]

Are there any of you fundy guys that use a chart to finesse your executions a little?

Nope, I just set a buying day each month. The buying date itself is the same every month (which is obviously arbitrary in itself), but I found it keeps me from emotionally "snatching" at price action at all other times and helps focuses my decision on my valuation.

If it meets my valuation criteria I just buy it on this day. If there is not anything that meets my criteria I don't buy.

I found that trying to execute entries for long-term investments based on price action was not worth the additional effort, and allowing myself to buy at any time made the process more emotional, and based on "guess work" (is this a good time to buy?) that was separate from my actual strategy.