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Have to agree , not only are they in a risky environment but they also have little or no track record.
Students of Roger Montgomery's (Buffett's) intrinsic valuation method
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Have to agree , not only are they in a risky environment but they also have little or no track record.
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The point is how much did Roger Montgomery personally purchase before spruiking to anybody, before investing in a stock with other peoples money via the Roger - 'Follow me in Fund.'
I feel that if someone is going to spruik like he does and Rivkin did, they should be obliged to do it off market before they have entered the trade themselves. Much less room for corruption to creep in which unfortunately it tends to and does not end particularly well for anybody.
They should be obliged to do the same before they sell.
That would be transparent, trustworthy and truly putting your money where your mouth is.
Not going to happen.
I've never understood it to be an indication of future prospects, purely just a risk assessment in investing in the company. I understand that it is ratio analysis that generates the ratings, and RM has been pretty circumspect about what goes into generating the ratings.
From his blog:
Admittedly Roger will say things like:
But that's pretty heavily couched in 'aggregate' and 'long period of time' - I've certainly never taken it as an indication a specific 'A1' company had particular prospects.
Yeah, agreed. There are a few posts on his blog that talk about why he rates MCE as an 'A1', but I'm having difficulty digging them up. But as you say...
Completely agreed.
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Fair enough, I thought the purpose of the letter and number was to differentiate two factors. Still, even if it is just basic ratio analysis there must surely be some differentiation based on industry/business. The working capital requirements of a retailer will be very different to MCE by way of example.
So_Cynical
The Contrarian Averager
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27 pages of Roger worship and now 2 pages of hate and fear...the guy was selling a book and somehow everyone confused that with him being an infallible investment genius. 
Wysiwyg
Everyone wants money
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My buy and hold experience was painful. I could not reason why I held for years as the share price went down and I sat on a significant loss. I won't give the mongrel (stock market) stuff all nowadays. It will take your shoes and socks if you let it.27 pages of Roger worship and now 2 pages of hate and fear...the guy was selling a book and somehow everyone confused that with him being an infallible investment genius.
So_Cynical
The Contrarian Averager
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My low cost averaging / buy and build experience was somewhat (70% GFC unrealised loss) painful , and i feel that pain helped motivate me to maintain discipline and keep buying the lows, keep buying what i thought was cheap....i entered the market in 2007 just before the first warning market dip in July/august at arguably the worst possible time.
The flaw I see with value investing is buying and holding while all the while trusting the fundamentals are still strong and the falling price is all sector weakness, exchange rate issues, low oil price etc.
Unless you really have your finger on the pulse, the report comes out and you find they didn't do much business.. you don't have a 'wonderful business' anymore, the price is then too low to offload it and still be in front.
Unless you really have your finger on the pulse, the report comes out and you find they didn't do much business.. you don't have a 'wonderful business' anymore, the price is then too low to offload it and still be in front.
I think value investing works, you just need to actually be value investing ... and not merely relying on spending 5 minutes punching a couple of numbers and volla ! hey presto theres your intrinsic value ! You need to try to understand the cashflow in the business ... you need to understand what it is they actually do and what could go wrong.
IMO also, using value investing techniques such as roger montgomerys on companys like MCE and to the same extent forge ... are frought with real danger. These are not companies with strong histories of consistent earnings and earnings growth, these are cyclical companies that can very quickly ramp up profits, yet also very quickly ramp them down. They are not value investing companies imo. From a 'valuable' approach' I would much rather buy a business like CSL, CPU, WOW, Monadelphous if you want exposure to this particular sector. Its absolutely crazy that people can expect to value these two companies that are both what ? one our two years old in public listing with a simple formula.
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If I have understood what I have read correctly, the Letter gives you a quality rating and the number a liquidity event risk rating. An A1 is a high quality company (ie in the long run the group of A companies should, providing they stay solvent, produce better results than the B's and C's) with a very low (but not zero) risk of a 'liquidity event' occurring.
MCE is an A2 (was A1) despite the lumpy cashflow because it supposedly has good management, technology, facilities, market share etc and because it has about two years worth of cash.
You can't blame him.
He's out to make money like anyone else and if he has to spruik a few stocks to sell a few books he will
I dont think he did anything wrong, it's the people who chose to listen to him and not doing proper home work.
Like I said many times before he's good at selling old ideas and make it fashionable.
If there is such a formula to make money well would he be spruiking his book?
his best formular ever was to sell the books ...that a 100% guarantee return on investment
If you want to know a bit about his personality, read up on CCP debacle ...he spruik it on the way to glory
but on the way down he blame management for misleading him .... nothing sticks .... I take credit for stuff going up...I blame someone else for it when stocks fall ....
Hi ROE, do you have any links for the CCP debacle?
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When Montgomery was MD of Clime Capital, which also publishes a web based valuation tool called StockVal, some of his top value stock picks during the latter part of the Clime era were CCP and TRS.
With CCP Montgomery had overexposed Clime funds and his own portfolio to this stock. In spite of his research and meetings with senior executives, CCP surprised the market and announced two consecutive profit downgrades that decimated the share price. Roger and Clime sued for millions and I think this is still ongoing. From memory the tally was a $15 million plus loss to Clime and over $1 million for Montogomery himself (he stubbornly held onto CCP until the second downgrade).
This is a core problem for the value investor who likes to buy and hold for long periods - a valuation is only as good as the information that goes into calculating it and only lasts until the next company report or market announcement.
A key component of any investment strategy is when to sell. A good example is a stock like TRS. A Montgomery favourite for years, it's now in the doldrums down over 40% since December. Such a price collapse was not foreseen by previous forecasts and valuation modelling but when it was trading well above intrinsic value it should have been sold down.
I might agree with you but this is not the usual Buffet way which RM was spruiking. Has the leopard changing its spots? - as RM is now also talking about "when to sell" versus his old Buffet catch-cry "turn off the market noise".
There are too many inconsistencies and black holes to RM for my liking.
- ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.
- ditto - re. his "formula" giving added valuation weight (to power of 1.8
) where ROE is greater than RoR - by definition means that sustainable earnings growth for companies with high ROE must be higher than companies with lower ROE. This is a bold and bogus assumption (as of course is not always true) and takes the important analysis out of people's hands. A company like JB-Hi-Fi had an IV of $30 about now per RM about 18 months ago because it is not a capital intensive business and had high ROE. This has nothing to do with sustainability of earnings. - ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio.
Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>RoR and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.
- ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate RoR for a company - and in not conveying to the audience the high risk in the RoR number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. RoR can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.
I might add a caveat to my post, in case it comes across as someone who has followed RM advice and had sour grapes after losing money. Whilst I have been interested in RM's following, and I have read his book, I have personally never followed his advice or valuation methods for the reasons / reservations I have stated.
I might agree with you but this is not the usual Buffet way which RM was spruiking. Has the leopard changing its spots? - as RM is now also talking about "when to sell" versus his old Buffet catch-cry "turn off the market noise".
There are too many inconsistencies and black holes to RM for my liking.
- ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.
- ditto - re. his "formula" giving added valuation weight (to power of 1.8
- ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio.
Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>RoR and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.
- ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate RoR for a company - and in not conveying to the audience the high risk in the RoR number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. RoR can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.
I might add a caveat to my post, in case it comes across as someone who has followed RM advice and had sour grapes after losing money. Whilst I have been interested in RM's following, and I have read his book, I have personally never followed his advice or valuation methods for the reasons / reservations I have stated.
Amen
+1
Be careful.
I might agree with you but this is not the usual Buffet way which RM was spruiking. Has the leopard changing its spots? - as RM is now also talking about "when to sell" versus his old Buffet catch-cry "turn off the market noise".
There are too many inconsistencies and black holes to RM for my liking.
1. - ditto - when RM says with strong conviction that P/E is not appropriate to value a company when in fact his "ROE/RoR x Equity per share" is of course P/E restated - do the math. That he gets away with this beats me.
2. - ditto - re. his "formula" giving added valuation weight (to power of 1.8
3. - ditto - his assumption of linking a company's sustainable earnings growth to its div. payout ratio.
Rather than bogus methods for estimating, let's get directly of what we are trying to measure. i.e. sustainable earnings and sustainable earnings growth. The derive this from ROE>RoR and div. payout is frankly bogus - and to derive this without enlightening the audience (who might be investing real money) of the limitations and risks in this very basic approach (in the interests of selling a book) is a charlatan.
4.- ditto - is RM's lack of depth in his book (because a difficult topic) of selecting an appropriate RoR for a company - and in not conveying to the audience the high risk in the RoR number itself and the consequences of getting this wrong (sensitivity of values derived) - which is easy to get wrong for all but the bluest of blue chips. For an "A1" to be an "A1" it should have strong prospect of remaining an "A1" for the next 10 years. Otherwise its not an A1. RoR can vary substantially from company to company based on its risk profile and only professionals and those with an in depth knowledge of the business can really assess this. The reason perhaps that Buffet's RoR's are reportedly constant at around 10% is perhaps because there is equally little risk in the companies in his selection portfolio. i.e. he has already picked companies he can understand (he admits to not understanding and not being interested in most) with a long proven record, large moats and excellent management.
1. No. Its completely different. P/E ratio changes depending on the 'voting machine' - his formula for IV does not.
2. I partially agree with you. He assumes businesses are like bank accounts that earn interest depending on how much money you have in your account. This is too simplified but it does sort of make sense - if you have more equity, it means you probably have more stores/staff/resources and a bigger business - which means you are probably going to make more money that a business with little equity. It's the reason why Woolworths is making a lot more money today than 10 years ago.
3. It is a simplified assumption again but makes sense, see above comment
4. He does take all this into account and talks about it but probably emphasises the formula too much
He's a guy who has managed to find a sweet spot - teaching his phiosophy but at the same time making a lot of money from selling it. I reckon his strategy is best for people who don't mind buying a stock and selling it 5 or 10 years later. I personally believe that's too long to hold any stock so I don't follow his philosophy although admittedly I did get a bit sucked in earlier in the year when I saw his forecasts for companies like ORL and MCE working out, a lot of people made money from his recommendations.
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Yeah but they made money on 'follow Roger in rallies' as opposed to more fundamental market behaviour.
That's a play you can make.
You just need to know what you are doing and how it could suddenly end.
If Roger loses the belief of the devoted follow me in fans then the more obscure stocks like MCE, FGE will get slammed.
I liked him because he was conservative but the Lynas thing really threw the cat among the pigeons.
Even though you can put caveats on such massively optimistic recommendations people will still hear the numbers and jump like they used to with Rivkin, simply because Rivkin had the ability to maintain the illusion of being a great tipster simply because he had a loyal fan base who would follow him in and off she goes!!
Wow what a legend! 90% success rate.
The only difference in fact is that the market price (P/E derived) is based on a cap rate (1/RoR) which is different to yours. I'd take a lot of notice from the market rather than a static RoR which you place in the bottom drawer. To assume that the market is irrational is a RM assumption I don't like.
The market price by definition constantly updates and re-assesses a cap rate based on all the noise around. Granted - some of this noise is irrational but mostly it is not. i.e. the market by it's P/E is saying the RoR at a point of time is "1 / P/E" - your say the RoR should be something else. Why would I take your RoR versus what the market is saying given all available data which goes into assessing company risk and price? To deny the efficient market hypothesis (per RM) does require some arrogance, or more politely "balls".
I assume, maybe incorrectly, that Roger reads, or has access to, this thread. I also imagine he is in a position to reply to the comments made.
Are these inaccurate assumptions? [Noting that I am not suggesting that he would want to, or should, comment].
Are these inaccurate assumptions? [Noting that I am not suggesting that he would want to, or should, comment].
Amen to that. When I was reading Roger's book, I got to the point where I suddenly thought "hang on a minute!", and low and behold it is exactly as you say.
The nonsense of coming up with a standalone valuation based on ROE is that ROE is based on the Book Value. A stock might look like a really good buy on that basis. But you can't buy it for the Book Value - it's not available at that price. It's only available at "BV * P/B" (a metric known by the more common term "price"). So you're left with the question of how much over BV you're prepared to pay ... what your acceptable P/B is before you decide you're paying too much over the odds. Or take the reciprocal and it's ROR.
P/B and ROR are the same thing.
Ultimately, it comes down to a "buy/don't buy" decision, and since you can only buy at the price, it's self-evident that price becomes a factor.
When Roger says you shouldn't use price in producing a valuation, all he does is defer the introduction of price to the next step in the process. He's not removing it from the formula -- he's just changing where the brackets go.
McCoy Pauley
Get out of here Budweiser!
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To be fair to Roger, he did actually sell out of TRS near the top of its most recent high (ie., before its price was crunched after the Brisbane floods).
Also to be fair to him, he does devote a chapter in his book to selling a company holding. He isn't strictly a "buy and hold" type of guy, it's just that many people construe his strategy as a "buy and hold".
I've read his book a few times through, and I use some of the techniques outlined in his book for my own research into companies I'd like to buy into and sell out of. However, I'm not a slavish adherent to everything he writes and I no longer bother with his blog as it's basically full of subtle ramping of certain companies and subtle down-ramping of companies that have fallen out of favour with his disciples.
The ironic thing about Value.Able is that, at its heart is an exhortation to those reading it to think about their investments for themselves and to not be a sheep. However, through his constant self-promotion through various media outlets, Roger has gathered together a flock of sheep who do nothing except what he does, except at a time really of Roger's choosing.
I was quite annoyed when I read that Roger had purchased into a gold stock but wouldn't disclose the name until much later (ie., when Roger needed a rally to increase the value of his holding). That followed on the heels of Roger announcing that he had bought into a telco that appeared to violate his much-trumpeted rules.
Roger's actions in the past six months have left me feeling very cynical about him and his system he's peddling.
