FGE IMO is a excellent company with bright prospects that is undervalued. The decision to sell FGE was based on the macro economic factors of the European Debt Chrisis and my belief that the "miracle" Chinese economy can not continue to grow indefinately. Hopefully the funds invested in FGE can be reinvested back into FGE or a similar company at a much more attractive price sometime in the future.
Robusta fundamental, leveraged investments
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FGE IMO is a excellent company with bright prospects that is undervalued. The decision to sell FGE was based on the macro economic factors of the European Debt Chrisis and my belief that the "miracle" Chinese economy can not continue to grow indefinately. Hopefully the funds invested in FGE can be reinvested back into FGE or a similar company at a much more attractive price sometime in the future.
skc
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Robusta... so you are now trading? You think FGE will fall further and want to buy back in lower... What happened to long term investing? What's your average holding period on closed positions? 2 months?
You need better planning and discipline in both entries and exits. Write down your investment plan with actionable, measurable, quantitative steps and look at it before you buy and sell. Do that until it becomes "intrinsic" to you. Get the process right first and worry about the methodology and returns later.
With regards to FGE... NWH released a bumper profit last week, and ABS released some very good figures on mining construction and capital investments. They point to business as usual and continued growth for the mining services sector... at least for another 3-6 months. I was actually going to do a swing trade lol...
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SKC, do you have an example of an investment plan with actionable, measurable, quantitative steps? Or perhaps just part of a plan? I think the investment plan would help me (as well as Robusta), I'm just wondering how to construct it?
I agree with your constructive criticism of Robusta. He says he is "value investing" but some of the recent moves seem to be trading. FGE is a great company and is currently "cheap" in what seems to be a good industry right now. Meanwhile, I expect the aussie market (along with FGE) to rally today after the recent central bank action.
Anyway, this thread has been very good so far - there are some great insights here!
Robusta,
trading or investing, please keep the thread going. It has certainly helped me think about some of my investment decisions.
On the www.gurufocus.com website there is a poster called Geoff Gannon who also happens to have his own website. On his website he points outs that there are four questions that need to be answered before you buy a stock. I found these four questions have helped me greatly. The four questions are below:
1.Is it safe?
2.Is it a great business?
3.Am I getting a great price?
4.Can I hold this stock for as long as it takes?
The importance you put on questions #1 to #3 really depends on your style. My importance ranking over the last couple of years has gone from 1,2,3 to 3,1,2. I am starting to obsess about 3 more and more, the stock just has to be cheap. No need for DCF, complex spreadsheets, and so on, the stock should be dirt cheap.
Question 4 is very important and I really should have thought about it some more when I first started buying into DWS. I had a 2 year holding period in mind, I have held for well over a year now and am coming conclusion that I am not willing to hold onto the stock for much longer, other opportunities are presenting themselves. IT companies like DWS (and others listed in this thread) I thought would be trading round 12-15 P/E ratio yet they do not and my feel is they will never be priced with growth taking into account in the current market. The dividends have been well received though .
In the future for my investment decisions I will be using the following:--
3.Am I getting a great price?
1.Is it safe?
2.Is it a great business?
4.Can I hold this stock for as long as it takes? I will start using a 1 year holding period maximum or bad results announcement.
The majority of my focus will be on 3 and 1.
I am keen to start my own thread about a strategy I want to implement and hopefully will get round to it one day as I think it would greatly help my investment decision making. The strategy will be based screening for companies with low price to sales, decent revenue growth and a reasonable net profit margin. Max 10% of capital per company with a holding period of 1 year. The due diligence limited to forum searches, back issues of AFR Smart Investor and a cursory glance at the latest annual report. The plan being to keep the investment decision down to 1 hour rather than the numerous hours that it is at the moment.
Cheers
Oddson.
skc
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I don't have an example off the shelf but it's pretty simple.
You may have an overall investment thesis that says... I will buy companies with high ROE and growing profits at a substantial margin of safety to intrinsic value. To make it measurable, quatitative and actionable, you will need to add actual details and numbers to that.
High ROE = 25%+ for the last X years.
Growing profits = 10%+ for the last Y years.
Substantial margin of safety = >40%.
Intrinsic value = using Roger Rabbits method with a RR of 15%.
Do the same for position sizing, position monitoring, exit criteria etc etc.
The test is, if someone else picks up this plan, will they make buy and sell decisions similar to yourself? If a reasonable competent person can do that, then I would deem the plan as being objective, quantified, measureable and actionable.
Whether the plan works or not, that's a completely different matter again.
Still intending to long term invest, the execution however.....
Still happy with my plan but have found myself reacting to market volatility - albeit slowly
As I said FGE is a excellent company with bright prospects and at the time I was happy with my entry @ $5.35
Great questions, when I bought FGE I would have answered yes to all four. The change of heart is due to question 3. I underestimated how far this stock could fall in such a short time. My normal answer would be to buy more of a good thing at a even better price but in this envirement I would like to keep my options open (and capital available) with the chance of the market retesting the lows of 2008/2009
This is interesting, I have not been very successful so far but I would like to put #2. Is it a great business on top this would include #1. is it safe? then if I can answer #3, #4 should follow.
That would be a very interesting strategy, however for me I would like to take more time on the investment decision not less.
In answering question two "is it a great business?" do you consider sustainable competitive advantages (ie. barriers to entry)? If so, how do you assess Forge in this area?
In my opinion it doesn't have any, it's a cyclical business at the peak of its cycle hence the growing share price up until recently. The mining / engineering services industry had an excess demand for work and contracts consequently had large margins because of this. But as with any industry when demand shrinks, and other entrants come in to try and gain market share, margins start to close. There are no shortage of firms fighting for the same contracts. How is Forge more likely to gain business and maintain it's margins in this environment? Does it have a competitive advantage in this respect? Again, I would say no. I'd be curious to see if you think differently.
In my opinion it doesn't have any, it's a cyclical business at the peak of its cycle hence the growing share price up until recently. The mining / engineering services industry had an excess demand for work and contracts consequently had large margins because of this. But as with any industry when demand shrinks, and other entrants come in to try and gain market share, margins start to close. There are no shortage of firms fighting for the same contracts. How is Forge more likely to gain business and maintain it's margins in this environment? Does it have a competitive advantage in this respect? Again, I would say no. I'd be curious to see if you think differently.
+1.
The large industrial construction cycle might still have some legs though, there's plenty in the pipe line if it materialises. But cyclical it is.
Interesting how we all come at things different ways. My ordering of the questions would be the complete reverse of yours. A useful way to think about things when putting in place the strategies that suit us.
So_Cynical
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I've thought about it and i cant separate them other than on price...price/entry is so important, something that Robusta hasn't paid enough attention to IMO.
1.Am I getting a great price?
2.Is it safe?
2.Is it a great business?
The majority of my focus will be on 1 and 2...Its a given i can hold as long as it takes.
1.Am I getting a great price?
2.Is it safe?
2.Is it a great business?
The majority of my focus will be on 1 and 2...Its a given i can hold as long as it takes.
Honestly I think question two and three are the only ones worth answering. I don't think that you need to answer question three at all if the company isn't what you consider a "great business." The most important question of all is "is this a great business?" A "safe bet" or in other words a two-inch putt is a necessary conclusion of this, so it's much in the same line of questioning and does not need to be answered on its own merits. Although some investors / traders may say that this is more in "reading the sentiment of the market" but I think that this is irrevelant given the timeframe required. You don't need to buy anything if nothing is being offered that fits your criteria.
The valuation and / or future assumptions are a secondary tool for deciding a possible entry point after you are satisfied that a business has sustainable competitive advantages. If it does not it will achieve long-term growth that is never in excess of the cost of capital. Buying a great business at a great price (or even fair value) mitigates the need to ask "Can I hold for as long as it takes?" provided that you are not buying for speculative growth to vindicate the success of the investment decision.
The valuation and / or future assumptions are a secondary tool for deciding a possible entry point after you are satisfied that a business has sustainable competitive advantages. If it does not it will achieve long-term growth that is never in excess of the cost of capital. Buying a great business at a great price (or even fair value) mitigates the need to ask "Can I hold for as long as it takes?" provided that you are not buying for speculative growth to vindicate the success of the investment decision.
Also, it may be my lack of knowledge, but I don't see how these businesses are scalable. They do not seem to have a high-degree of fixed costs, therefore economies of scale seem to be out of the question? It's not the be-end all of everything, but it can be very important source of competitive advantages.
So_Cynical
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A "safe bet" for me has multiple considerations with the most important consideration being, is now an appropriate time to buy? am i buying at the bottom of the price cycle thus giving the greatest potential for profit?...if i don't believe im buying a bottom then im not buying.
Robusta paid $5.35 for FGE which has proven to be to much...he's out of the trade because he paid to much, not because its a bad business or wasn't a safe business...time is important, the time you can commit to the trade and the timing of the trade at both ends.
What about question 4? “Can I hold this stock for as long as it takes”
I think this is the question that distinguishes an investor from a trader. If you are an investor you are looking at the returns the underlying investment can deliver and be damned with the market. If the market offers to pay a generous price you might choose to commute the future cash flows but if it doesn’t you are prepared to sit and reap the return generated by the asset itself.
It is way way to early to know if FGE was a good investment at $5.35 based on all its future cash flows. So you can’t point the finger at price being Robusta’s mistake. You can say he incurred an opportunity cost by buying at $5.35 (hell everything in the market is an opportunity cost, else we would all make a million bucks a day) but had he held for the life of the company he may have made a decent return on his investment – we don’t know it’s too early. Robusta doesn’t seem to be saying he has lost faith in the company but he has now converted his opportunity cost into a real cost because he wasn’t prepared to hold for as long as it takes. This is the biggest trap I see people calling themselves investors getting into. They can’t hold in the face of the market and end up wilting under the pressure and selling at inappropriate times.
I honestly think if you can’t say you are prepared (and have the financial position) to back your judgment on what the underlying asset will return and be prepared to hold it for its natural life if that’s what it takes to get that return then you should not be investing but trading and implementing the full armory of risk measures based on PRICE. When the pressure comes on everything you think you believe about fundamentals and valuation will count for naught if you have mis-answered question 4.
So Robusta what's your answer to 4? there's no wrong or right answer but it has a huge impact on how you should approach the market and what risk control strategies you should put in place.
I think this is the question that distinguishes an investor from a trader. If you are an investor you are looking at the returns the underlying investment can deliver and be damned with the market. If the market offers to pay a generous price you might choose to commute the future cash flows but if it doesn’t you are prepared to sit and reap the return generated by the asset itself.
It is way way to early to know if FGE was a good investment at $5.35 based on all its future cash flows. So you can’t point the finger at price being Robusta’s mistake. You can say he incurred an opportunity cost by buying at $5.35 (hell everything in the market is an opportunity cost, else we would all make a million bucks a day) but had he held for the life of the company he may have made a decent return on his investment – we don’t know it’s too early. Robusta doesn’t seem to be saying he has lost faith in the company but he has now converted his opportunity cost into a real cost because he wasn’t prepared to hold for as long as it takes. This is the biggest trap I see people calling themselves investors getting into. They can’t hold in the face of the market and end up wilting under the pressure and selling at inappropriate times.
I honestly think if you can’t say you are prepared (and have the financial position) to back your judgment on what the underlying asset will return and be prepared to hold it for its natural life if that’s what it takes to get that return then you should not be investing but trading and implementing the full armory of risk measures based on PRICE. When the pressure comes on everything you think you believe about fundamentals and valuation will count for naught if you have mis-answered question 4.
So Robusta what's your answer to 4? there's no wrong or right answer but it has a huge impact on how you should approach the market and what risk control strategies you should put in place.
I simply do not see the need for this question in my approach. A better question is "For what purpose am I holding the stocks in my portfolio"? Psychologically if you have conceded that you will only hold great companies at a great (or fair) price then you should see no need to sell them unless you are going against your initial conditions or your analysis was wrong about them being a "great company." The market is a weighing machine in the long run, the cream always rises to the top. Consistently improving metrics over a number of years (be it cash flow, profit, income stream etc) cannot be ignored forever.
So_Cynical
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While we are scrutinizing Robusta's FGE trade its probably appropriate to bang up a chart of his entry and subsequent price movements etc.... personally i can see my self buying based on the price action, however i would of been looking for the bottom of the channel at the time (around 5.15) and would of taken at least 1 average down as the SP fell away...either digging myself a deeper hole or helping me out of the hole i was in. 50/50
However based on the quality of the business i wouldn't of brought it anyway...i only own 1 service company.
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However based on the quality of the business i wouldn't of brought it anyway...i only own 1 service company.
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What are the top 5 great businesses on the ASX? By great, take it to mean the business is so great that you are willing invest all your net worth in those 5 for the next 5 years. I cannot name 1 business on the ASX that i consider that great.
In my opinion there are approximately 20 to 30 OK businesses that are worth investing in if the price is right.
Cheers
Oddson
In my opinion there are approximately 20 to 30 OK businesses that are worth investing in if the price is right.
Cheers
Oddson
