Students of Roger Montgomery's (Buffett's) intrinsic valuation method

[New Stratos]

Re: Roger Montgomery's crazy intrinsic valuation method

Bufett does not value many tech companies because they are outside his circle of competence.

He has always said he sticks to what he knows and that in investing is doesn't matter how big your circle of competence is but rather how well you know it's boundaries

The question is - "what is the circle of competence?" Hagstrom reckons it's your ability to predict future earnings etc for a company with a reasonable chance of success - Buffett doubts if he can do so for some types of company, hence they are out of his circle of competence.

 

[New Stratos]

Re: Roger Montgomery's Crazy intrinsic valuation method

That's enlightening. Have you borrowed his approach to transparency as well?

Why are you so aggressive? This is an internet forum, the worst we can do to each other is 'upset' one another, so it's not like you can provoke a punch up. If you are seriously trying to convince people of your wisdom, how will insulting them help?

 

[New Stratos]

Re: Roger Montgomery's Crazy intrinsic valuation method

If the valuations were right and you could buy at valuation then you would buy at $1.70 and sell three years later at $2.58 whilst collecting 80.9 cents in dividends. This would actually give you a return of 29% yet you were only factoring in a required return of 12%?????

I know you think of the RR in other terms, but if Buffett and everyone else who thinks of it as the minimum ROE you require the company to return to be happy to invest in it, then everything above that in terms of ROE is a bonus - that's what you've just calculated.

 

[craft]

Re: Roger Montgomery's Crazy intrinsic valuation method

You don't understand NVT enough, do some more research
I have NVT for a long time now, I probably know more than the average person..

Most of your fear is justified if you don't know enough about NVT but if you do it's not a problem at all ....apart maybe valuation but valuation is a subjective unless
earning doesn't keep up or the business model is weak.

I can help allay your fears on other area.

NVT is debt free until they bought sae, the debt is not an issue for NVT they can easily fund it and I wrote to their management sometimes ago, they will pay down this debt from cash flow, not long before it knock it off....

If you know how NVT model works, you get between year with reduce cash flow because they need to open new school and require capital funding, once it's up and running it takes a very short period of time before it generate incredible earning for NVT.

Bad economy and High $A is not an issue for Asian and majority of NVT students are Asian, Immigration policy matter more to NVT than High Aussie dollar, if
the immigration policy is easy to get student into Australia, High $A dollar affect little...

Asian place very high emphasis on education, to them whatever it takes to educate their kids ..... High dollars mean they just cut back on other things rather than forgo education.... what sort of business get this sort of treatment? not many

You can even see it here in Australia, lot of Asian migrants, their parents works in
factories and low paying jobs and their kids go to private school and get top class tutor ...it's in their DNA....

what else NVT got other business doesn't? pre-paid fees
Fees are paid up front, from that NVT use to fund their teachers, equipment etc..

it's like you walk into HVN you give them and say here have $2000 of mine...
go pay your staff, your rents and give me my TV in 6 months time

Happy investing, my post is just for information not a buy call, it's your call

Thanks ROE - you saved me a post.

They might have a few current issues for management to work through, but that’s life. The business model however is compelling and that will stand them in good stead to surmount issues as they arise.

 

[craft]

I also find it curious that RM (as an investor who has criteria that favours companies who make high returns off limited working capital) uses a valuation formula that disadvantages such businesses.

Does he use it?

Maybe he doesn't realise

OR

Maybe he does realise, but he keeps hush because he is commercializing a valuation service based on the formula.

Slightly off-topic craft, but you mentioned broker / analyst forecasts. How much value do you put on these when making assumptions to plug into your own valuation formula? Or is it stating the obvious to say that this depends on how this reflects your own structural & competitive analysis of the company?

I'll pm you later.

 

[Macros]

ROE,

Well thought out points - everything you have said seems reasonable.

Personally, my view is that the education business model in Aus has been in a strong growth trend for some years, but this may not be the case moving forward. I'm in a defensive economic mindset.

My thoughts for the future are based on anecdotal information about more (Asian and Indian) students looking at the US and Canada as a viable alternative, which makes sense with currency parity plus our much higher cost of living and property. Once a perception change is made, I would think that it would last for some years.

I haven't had a good look at NVT and have only performed a few cursory overviews - it just doesn't interest me in this market. There is also the potential that the price action has been saying that the earnings won't be as strong moving forward (I realise that this is against value investment philosophy however I think price can sometimes be informed of future earnings). I could be completely wrong, it could just be the price moving back towards fair value. This is the way I perform my top-line filter - superficial financial data overview + my economic viewpoint.

I guess that overall I'm just bearish. I mentioned some time back on Roger's blog (when it was more useful) that I thought retail would struggle significantly and that although JBH for example is a great business, it is in a poor economic environment. When the economic dust settles, and it could be a few years away, I'll be seriously looking at companies like JBH and NVT. The macro trends are just too powerful and structural for a company to do well fighting against these headwinds.

At the moment I'm focused on gold producers. I know that many value investors either see this as silly or that it isn't not true value investment. However, it fits my economic framework and my strategy is working very well. My strategy is to move away from these sorts of companies when I see signs that the economic issues have started to be addressed and that we can have some sustainable economic growth again.

 

[craft]

Re: Roger Montgomery's Crazy intrinsic valuation method

Why are you so aggressive? This is an internet forum, the worst we can do to each other is 'upset' one another, so it's not like you can provoke a punch up. If you are seriously trying to convince people of your wisdom, how will insulting them help?

A pretty graph with some dotted lines was put up and the explanation of how they are derived is given as

The dotted lines are driven by my interpretation of the formula

How does this add to the discussion? I was making a point aggression was unintended.

Wisdom – Ha, If I was wise I wouldn’t bother. I’m stupid enough to care. I don’t want to convince anybody I’m just putting it out there in case some (not necessarily current posters) with an open mind might come looking for some opposing points of view that they are not necessarily getting anywhere else.

I’ve had my say so maybe it is time I did show some wisdom and leave this thread to the pro Montgomery clan I'm sure I could be utilizing my time better for my own benefit.

 

[Macros]

Craft,

I'm not sure where you are coming from because you started a thread including the following words:

"I have read plenty of books but I would be interested to see what else could be learned through a more interactive dialogue.

So who’s out there that’s interested in discussing this or similar approaches."

I have my investment strategy and philosophy figured out - it is unimportant but since this has happened my actual rate of return and expected rate of return is around 100%pa (expecting a decline). The reason why post on these forums isn't to learn, but to question myself and to share my views. I would change my whole strategy on a dime if I came to the conclusion that I was wrong - and I'm prepared to accept that I may be wrong.

If you have it all figured out, why are you questioning and also dismissing any alternative viewpoint simultaneously.

 

[McLovin]

My thoughts for the future are based on anecdotal information about more (Asian and Indian) students looking at the US and Canada as a viable alternative, which makes sense with currency parity plus our much higher cost of living and property. Once a perception change is made, I would think that it would last for some years.

This is generally along the lines of why I have stayed away from NVT. A lot of hard work has gone into building Australia up as an education destination, but the cost of living/property/AUD are eroding its competitive advantage v places like Europe and NA.

Once there is a shift away from Australia how hard, and more importantly expensive, will it be to lure students back to Australia?

 

[Tysonboss1]

Re: Roger Montgomery's crazy intrinsic valuation method

The question is - "what is the circle of competence?" Hagstrom reckons it's your ability to predict future earnings etc for a company with a reasonable chance of success - Buffett doubts if he can do so for some types of company, hence they are out of his circle of competence.

Everyones circle of competence is different, it comes from a deep understanding of the fundamentals of a business and the industry it operates in. you can't know every thing.

A dairy farmer of 20years would be extremely qualified in valueing another dairy farm. He could look at it and instantly have an idea of the number of cows it can sustain, come to an opinion on the running costs of the operation, he has experiance of past price flucuations of the product etc etc.

But that dairy farmer would be out of his depth trying to value a company that makes womens shoes.

He is buffett explaining the concept, He starts talking about it at the 2 min mark.

 

[Muschu]

This is generally along the lines of why I have stayed away from NVT. A lot of hard work has gone into building Australia up as an education destination, but the cost of living/property/AUD are eroding its competitive advantage v places like Europe and NA.

Once there is a shift away from Australia how hard, and more importantly expensive, will it be to lure students back to Australia?

If you look at NVT's website and announcements you will see just how many University partnerships they have established in the USA, Canada and the UK. Some are well established and others in their infancy. They offer many destinations in addition to Australia.

 

[McLovin]

If you look at NVT's website and announcements you will see just how many University partnerships they have established in the USA, Canada and the UK. Some are well established and others in their infancy. They offer many destinations in addition to Australia.

Thanks rick. Would I be wrong in assuming that the overwhelming majority of their revenue is still from Australia though?

 

[skc]

From what I understand the "Quality Score" is a measure of liquidity event?

He cannot seriously claim that ANZ (A3), BHP (B1) and WOW (B2) are ranked behind the likes of TSM, MCE, ONT and IRI.

 

[Ves]

From what I understand the "Quality Score" is a measure of liquidity event?

He cannot seriously claim that ANZ (A3), BHP (B1) and WOW (B2) are ranked behind the likes of TSM, MCE, ONT and IRI.

He made a blog post about this recently.

Fairly certain that the letter is the "chance of liquidity event" and the number is a rank referring to "investment quality" of some sort. It's ambiguous at best.

Agreed with what you posted.

 

[skc]

He made a blog post about this recently.

Fairly certain that the letter is the "chance of liquidity event" and the number is a rank referring to "investment quality" of some sort. It's ambiguous at best.

Agreed with what you posted.

I think he has a somewhat mechanical definition of these scores tailored for a particular industry.

But what is lacking clearly is a broader view.

If BHP, Woolies and ANZ are in trouble... what chances of all the other A1 companies?!

 

[McLovin]

From what I understand the "Quality Score" is a measure of liquidity event?

He cannot seriously claim that ANZ (A3), BHP (B1) and WOW (B2) are ranked behind the likes of TSM, MCE, ONT and IRI.

This is why I can't take his rating "system" seriously. As I understand, he has taken 30 or so ratios that he uses to create the rating, ignoring company specific factors like industry. This is how you end up with MCE being classed as A2 and WOW as B2. The uninitiated, and that is who the majority of his followers are, would infer that somehow a mining services contracting business is "safer" than one half of a consumer staple duopoly. In reality, you would expect a lumpy contracting company to have a more robust balance sheet than a grocer, especially a grocer with the market power of WOW.

 

[New Stratos]

SKC, Ves, and McLovin,
I may be wrong, but I'm fairly sure that the A, B or C is a measure of the 'quality' of the company ie (crudely) ability to produce high ROEs, and the number 1-5 is the likelihood of 'a liquidity event' - that doesn't mean bankruptcy, it may just mean having to borrow money short-term.

If that is the case, then he isn't saying MCE (for example) is 'better' than than ANZ, just that it is less likely to need to borrow money or sell more shares etc (which makes some sense).

As for the following "he has taken 30 or so ratios that he uses to create the rating, ignoring company specific factors like industry"; no, I distinctly remember reading him saying that he uses industry specific models. Again this makes sense - there is no sense in trying to compare debt-equity of say MCE with a bank like ANZ.

 

[Muschu]

Thanks rick. Would I be wrong in assuming that the overwhelming majority of their revenue is still from Australia though?

Sorry - only just saw this. Yes, I think you are right - Sydney in particular. It will be interesting to see how they go in the USA. I think it is either 4 or 5 partnerships in place now.

 

[McLovin]

SKC, Ves, and McLovin,
I may be wrong, but I'm fairly sure that the A, B or C is a measure of the 'quality' of the company ie (crudely) ability to produce high ROEs, and the number 1-5 is the likelihood of 'a liquidity event' - that doesn't mean bankruptcy, it may just mean having to borrow money short-term.

If that is the case, then he isn't saying MCE (for example) is 'better' than than ANZ, just that it is less likely to need to borrow money or sell more shares etc (which makes some sense).

As for the following "he has taken 30 or so ratios that he uses to create the rating, ignoring company specific factors like industry"; no, I distinctly remember reading him saying that he uses industry specific models. Again this makes sense - there is no sense in trying to compare debt-equity of say MCE with a bank like ANZ.

Good to know. Still far too opaque to be of any value, pardon the pun.

 

[Risk Chaser]

Hey guys,

interesting discussion here, I have a question when attempting to value gold companies, ie SLR or MML.

Using Roger's method on the above 2 will result in a very high IV, yet its based on the false assumption that those mines will continue to produce to infinity with unlimited reserves.

How does one discount this factor when Companies usually give guidance on expected reserves and mine life.