Robusta fundamental, leveraged investments

[craft]

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.

V

Here is a scenario for you to contemplate using FGE as an example.

Say it met all your criteria and you brought it on 1/7/08 at 70 cents. 5 Months later on the 1/12/08 the market is valuing it at 15 cent. That’s near an 80% drawdown on your purchase price. These are the time you realise the significance of question 4. Today FGE is priced by the market at $4.50, that’s something like an 80% CAGR on your 70 cent buy price – so long as you made it through the 80% drawdown without locking in an actual loss.

You recently purchased DTL, the market could easily take its price 50% below your purchase price in spite of nothing materially changing to the long term outlook of the business, this sort of drop occurred in 2008. Now is the time to be considering question 4 – not when the market is showing you the relevance of the question and trust me, one day it will.

“Can I hold this stock for as long as it takes” – It’s the implications of this question that need to be considered. Am I Psychologically prepeared to hold no matter what the market is saying. Do I have the financial position to hold no matter what. (Loss of employment, loans recalled, source of alternative available cash flow etc etc)

If you can’t stick to the investment discipline in the darkest of days and they will come, then you are better off recognising that now and putting in place a strategy that you can live with under worst case scenario’s, for most that will mean limiting drawdown’s through controlling market price risk.

Sorry Robusta to clog up your thread but I hope addressing the questions Oddson proposed has some relevance for you.

 

[Ves]

I understand the importance of the question, especially if you make one off purchases and do not add to your position (at least not regularly). However, if you are drip-feeding capital into the market, and are still confident with your analysis, would you not see this as an additional opportunity to add to your position? I suppose that that too is a testament to the original question, "if I am to add to my position would I hold for as long as it takes...?" This shows the importance of always making sure that you have cash flow in your portfolio and room to move on future opportunities. It's a good question, but every value investor should have already explicity answered when adopting his or her strategy. I guess that's all that I am trying to say. After that cognitive dissonance is the only enemy.

Edit: I am currently holding a stock, purchase price of $0.825 that touched $0.38 in August. Pretty scary times, but you have to grit your teeth and remember why you purchased it. It is currently sitting in the mid 60s again.

 

[So_Cynical]

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

I could easy find 20 or 30 that i would put everything into...in fact i have found 24 stocks that i have 95% of my net worth in....22 of them great business the other 2 have issues.

---------------

“Can I hold this stock for as long as it takes” – It’s the implications of this question that need to be considered. Am I Psychologically prepeared to hold no matter what the market is saying. Do I have the financial position to hold no matter what. (Loss of employment, loans recalled, source of alternative available cash flow etc etc)

If you can’t stick to the investment discipline in the darkest of days and they will come, then you are better off recognising that now and putting in place a strategy that you can live with under worst case scenario’s, for most that will mean limiting drawdown’s through controlling market price risk.

Exactly.

Many don't understand that the above is actually an "edge" its a huge advantage to be blessed with that personality or learn that discipline, a massive advantage to have over others (the uncomfortable/sellers), holding and buying thru the dark days combined with good stock selection, a little vision and no leverage worries...is an awesome combination of "market edges".

 

[robusta]

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.

Still not sure with the information available at the time I made the incorrect decision, the fault IMO is with portfolio management or in my case mismanagement.

I probably did not articulate it at the time but my original strategy was to keep ~ 30% of capital available to take advantage of future opportunities.

My impatience has cost me, as the market was falling I was picking up decent companies at decent prices with no consideration buying these same companies in the future at even larger discounts.

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.

Excellent points Craft, while I have been buying high and selling low , the only silver lining I can find is the realised tax losses and the potentual to redeploy the capital into FGE or another business at a more attractive price.

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 would have to say yes to question 4 despite all the evidence to the contrary, but I definately need to sort out my portfolio management and make a whole lot less and better decisions in the future.

V

Here is a scenario for you to contemplate using FGE as an example.

Say it met all your criteria and you brought it on 1/7/08 at 70 cents. 5 Months later on the 1/12/08 the market is valuing it at 15 cent. That’s near an 80% drawdown on your purchase price. These are the time you realise the significance of question 4. Today FGE is priced by the market at $4.50, that’s something like an 80% CAGR on your 70 cent buy price – so long as you made it through the 80% drawdown without locking in an actual loss.

You recently purchased DTL, the market could easily take its price 50% below your purchase price in spite of nothing materially changing to the long term outlook of the business, this sort of drop occurred in 2008. Now is the time to be considering question 4 – not when the market is showing you the relevance of the question and trust me, one day it will.

“Can I hold this stock for as long as it takes” – It’s the implications of this question that need to be considered. Am I Psychologically prepeared to hold no matter what the market is saying. Do I have the financial position to hold no matter what. (Loss of employment, loans recalled, source of alternative available cash flow etc etc)

If you can’t stick to the investment discipline in the darkest of days and they will come, then you are better off recognising that now and putting in place a strategy that you can live with under worst case scenario’s, for most that will mean limiting drawdown’s through controlling market price risk.

Sorry Robusta to clog up your thread but I hope addressing the questions Oddson proposed has some relevance for you.

Clog up the thread?? Keep it up please!!

Thankyou everyone

 

[Huskar]

One suggestion regarding capital management might be to determine prior to purchasing what your total capital position hopes to be in the relevant stock, eg $5k (or some percentage of total capital). Then rather than pulling the trigger all at once, to be disciplined and only purchase 25% of that position, eg $1250.

If the price subsequently goes up then you can congratulate yourself on getting a position. If the stock goes down a nominated amount however, say a further 10%, then you take your second position with 50%, eg $2500. Finally if the stock falls even further, say another 15%, then you make your final purchase of 25% of intended position.

This is in some ways similar to So_Cyn's averaging down strategy but I would argue is more objective with regard to position sizing (unless I have misunderstood his strategy).

Clearly this requires a solid confidence in your ability to select good businesses - and goes directly to q 4. It requires emotional discipline to continue to execute the strategy while the share price is falling as well as being able to change your mind if the reasons for your original purchase are no longer present.

 

[robusta]

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?

http://www.youtube.com/watch?v=vkEUd_aju8c

I think those four questions will help me in the future as well.

 

[skc]

The only question you need to ask is... Will this investment make me money for the risk I take?

While all 4 questions are thoughts provoking, in their current form they are not objective, quantitative, measurable or actionable. When does a company go from being "safe" to being "not safe"? Were the big 4 banks safe in Sept 2008? Without hard numbers to guide your decision making, you will reason your answer based on your emotions.

I probably did not articulate it at the time but my original strategy was to keep ~ 30% of capital available to take advantage of future opportunities.

This in not actionable... when you have 30% cash you are not allowed to invest anymore so how can you take advantage of future opportunities? What future opportunities can you take with that final 30%? Only really good opportunities? How would you determine that?

If you can’t stick to the investment discipline in the darkest of days and they will come, then you are better off recognising that now and putting in place a strategy that you can live with under worst case scenario’s, for most that will mean limiting drawdown’s through controlling market price risk.

The problem will always be that people bury their head in the sand in the face of deteriorating company financials and industry conditions. Price based stop loss may be illogical be it could be a small price to pay to prevent the stuborn mistakes made by plenty of value investors (particularly those who like to average down forever).

 

[Ves]

If someone has done a thorough research and analysis before buying a share in a company wouldn't you be able to argue that they are not reviewing the fundamentals of the company on a regular basis if they cannot see that the company performance is detiorating? Burying your head in the sand is an emotional reaction, not a systematic or technical fault of the investment philosophy. Exactly the same as a trader who buys into a position that does not agree with his system parameters.

I completely agree with you though, skc, you must define what significant events should they occur are to be perceived as a "deterioration in fundamentals" or otherwise should lead to a selling decision. This needs to happen before you buy into a position. You also have to, as you said, define an action plan for your latent cash reserves, and when they can and should be used.

 

[Intrinsic Value]

The problem with a company like FGE and I do hold quite a lot of FGE shares but i bought then at an average of about 3.50 is that it is largely dependent on contracts and the management of such contracts. That being the case things can turn nasty very quickly where contracts are lost or mismanaged.

At the moment the fundamentals are stiill good for FGE and I will continue to hold and I certainly think that even at 5.35 i would hold unless I needed the capital for what i thought was a better opportunity.

Another small cap in the engineering services area in WA RCR recently just won a big contract over 600 million and their share price has spiked accordingly. However their turnover last year was around 500 million so if this contract goes a bit sour their share price could tank drammatically.

 

[odds-on]

The problem with a company like FGE and I do hold quite a lot of FGE shares but i bought then at an average of about 3.50 is that it is largely dependent on contracts and the management of such contracts. That being the case things can turn nasty very quickly where contracts are lost or mismanaged.

At the moment the fundamentals are stiill good for FGE and I will continue to hold and I certainly think that even at 5.35 i would hold unless I needed the capital for what i thought was a better opportunity.

Another small cap in the engineering services area in WA RCR recently just won a big contract over 600 million and their share price has spiked accordingly. However their turnover last year was around 500 million so if this contract goes a bit sour their share price could tank drammatically.

FGE is on my watchlist, still needs to fall further before i will buy. IMO any valuation of forge should be based on revenue growth, profit margin sustainability and a survival factor. Playing around with those three variables should produce a reasonable valuation. At the current price it is still to close a call for me, so i am willing to wait till it drops below a price to sales ratio of 0.7.

Cheers

Oddson

 

[robusta]

One suggestion regarding capital management might be to determine prior to purchasing what your total capital position hopes to be in the relevant stock, eg $5k (or some percentage of total capital). Then rather than pulling the trigger all at once, to be disciplined and only purchase 25% of that position, eg $1250.

If the price subsequently goes up then you can congratulate yourself on getting a position. If the stock goes down a nominated amount however, say a further 10%, then you take your second position with 50%, eg $2500. Finally if the stock falls even further, say another 15%, then you make your final purchase of 25% of intended position.

This is in some ways similar to So_Cyn's averaging down strategy but I would argue is more objective with regard to position sizing (unless I have misunderstood his strategy).

Clearly this requires a solid confidence in your ability to select good businesses - and goes directly to q 4. It requires emotional discipline to continue to execute the strategy while the share price is falling as well as being able to change your mind if the reasons for your original purchase are no longer present.

This strategy has does sound logical. My original idea was to position size relative to my estimate of intrinsic value, the minimum investment would be $3000 (or 10%) if I thought the stock was at a 20% discount to IV with a extra $1000 for a further 10% discount and so on.

As you can see this strategy had me throwing capital into the market very quickly and also had no regard for the final position size. MCE being the hard lesson learnt.

 

[robusta]

The only question you need to ask is... Will this investment make me money for the risk I take?

Good point, if you answer yes to all 4 questions the answer will by default be yes.

While all 4 questions are thoughts provoking, in their current form they are not objective, quantitative, measurable or actionable. When does a company go from being "safe" to being "not safe"? Were the big 4 banks safe in Sept 2008? Without hard numbers to guide your decision making, you will reason your answer based on your emotions.

I would argue that it is quantitative, measurable or actionable by looking at deby/equity, capital management, earnings history, reoccorring revenue, competitive advantages, growth in book value... Some if these indicators may be grey but you can definately make rational decisions based on them.

This in not actionable... when you have 30% cash you are not allowed to invest anymore so how can you take advantage of future opportunities? What future opportunities can you take with that final 30%? Only really good opportunities? How would you determine that?

30% cash is not a hard and fast rule, my view is the market and more importantly the stocks I am interested may be offered at more attractive prices in the near future (within the next couple of years) and I want to have capital available to take advantage of that.

"It's the vibe of the thing" - Dennis Denuto

Prices may drop 10% and I may decide all the bad news is priced in or they may drop 30% or rally 30% who knows?

The problem will always be that people bury their head in the sand in the face of deteriorating company financials and industry conditions. Price based stop loss may be illogical be it could be a small price to pay to prevent the stuborn mistakes made by plenty of value investors (particularly those who like to average down forever).

True, also some people buy at the peak of bull markets and sell in the depths of bear markets, I have trouble working out where markets are going so would prefer (despite past performance) to buy when prices are attractive and hold good businesses through the economic cycle.

 

[robusta]

NEW INVESTMENT - SORT OF

"There's an old saying in Tennessee ”” I know it's in Texas, probably in Tennessee ”” that says, fool me once, shame on ”” shame on you. Fool me ”” you can't get fooled again." - George W Bush

Bought 837 x MCE @ $3.08 = $2577.96

Probably jumped in too early again however position size is about right this time IMO.

New contract signed

http://www.asx.com.au/asxpdf/20111220/pdf/423dqlbpzznz2b.pdf

 

[suhm]

I expected more of a lift from that announcement, seemed like a reasonably large contract. Not sure if they gave up some margin for it and will need to wait for results to come out but does seem that MCE may have turned the corner if it continues to win new contracts.

Its already a big fish in their niche so may need to look at expanding their offering for further growth.

 

[robusta]

I expected more of a lift from that announcement, seemed like a reasonably large contract. Not sure if they gave up some margin for it and will need to wait for results to come out but does seem that MCE may have turned the corner if it continues to win new contracts.

Its already a big fish in their niche so may need to look at expanding their offering for further growth.

They are looking to expand into the shale gas sector.

 

[skc]

NEW INVESTMENT - SORT OF

"There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again." - George W Bush

Bought 837 x MCE @ $3.08 = $2577.96

Probably jumped in too early again however position size is about right this time IMO.

New contract signed

http://www.asx.com.au/asxpdf/20111220/pdf/423dqlbpzznz2b.pdf

Lol... very apt quote. How many times did you call your ex-girlfriend after you broke up last time?

On a more serious note... they added ~$3.5m revenue per month, which brings them to $11m per month - still 1/3 below last year's pace.

https://www.aussiestockforums.com/forums/showthread.php?t=19952&p=671275&highlight=mce#post671275

Still a hold (i.e. not a buy) to me.

 

[LifeChoices]

NEW INVESTMENT - SORT OF

Fundamental Leveraged Investment or punt?

The way you buy and sell looks (to me) like you are taking another punt - nothing wrong with that. Just prefer you tell it how it is.

However, you write about these punts like you actually believe you are investing in the future - that's the thing that amuses/interests me about this thread.

The fact is six months on, your portfolio is looking pretty shabby. Looking back on your progress, do you think it was just your timing that was poor judgement?

 

[Intrinsic Value]

Fundamental Leveraged Investment or punt?

The way you buy and sell looks (to me) like you are taking another punt - nothing wrong with that. Just prefer you tell it how it is.

However, you write about these punts like you actually believe you are investing in the future - that's the thing that amuses/interests me about this thread.

The fact is six months on, your portfolio is looking pretty shabby. Looking back on your progress, do you think it was just your timing that was poor judgement?

To be fair thou how many value investors are ahead over the last six months?

Not many I would guess.

If you are a true believer then six months is not enough time to judge success or failure.

I am ahead on only one stock, SLR over the last six months. Two others are stable and the rest are well down.

 

[robusta]

Fundamental Leveraged Investment or punt?

The way you buy and sell looks (to me) like you are taking another punt - nothing wrong with that. Just prefer you tell it how it is.

We are all taking a punt mate, everytime we walk out the front door

However, you write about these punts like you actually believe you are investing in the future - that's the thing that amuses/interests me about this thread.

Hope you stay amused, I do actually believe I am investing for the future

The fact is six months on, your portfolio is looking pretty shabby.

The returns may be shabby but I am very happy with the stocks I hold.

Looking back on your progress, do you think it was just your timing that was poor judgement?

Not just timing, position sizing was also to blame and a lack of patience.

Way too much churn so far, every stock I have traded has been a mistake, the ones I hold time will tell.....

To be fair thou how many value investors are ahead over the last six months?

Not many I would guess.

If you are a true believer then six months is not enough time to judge success or failure.

I am ahead on only one stock, SLR over the last six months. Two others are stable and the rest are well down.

Cheers you could say there has been a fair bit of volatility, wish I was smart enough to pick up some SLR or NST however , I took a good look at both but decided to pass.

 

[robusta]

Lol... very apt quote. How many times did you call your ex-girlfriend after you broke up last time?

Yes well - breaking up is hard to do.

The main question for me with MCE was, am I buying just to recoup my losses?

My opinion has not changed, this is a growth company in a growth sector with lumpy returns that has been hammered by the market for hitting a soft patch.

On a more serious note... they added ~$3.5m revenue per month, which brings them to $11m per month - still 1/3 below last year's pace.

https://www.aussiestockforums.com/forums/showthread.php?t=19952&p=671275&highlight=mce#post671275

Still a hold (i.e. not a buy) to me.

Well I guess I have voted my opinion with my money, I still find it hard to believe over the medium to long term all the growth has gone from MCE.

Still a little nervous about the upcoming 1/2 results, the cash flow will be very interesting.