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Thought Bubble

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frugal.rock said:
How to spot the next big thing
https://www.asx.com.au/education/in...ter/201604-how-to-spot-the-next-big-thing.htm
Click to expand...
FR, I've never warmed to Woger the Wabbit, from the days when he was learning from John Abernethy at Clime and even less now he has his own shingle, (he's had some shockers of tips but would adamantly stick with them if the 'intrinsic value' method said so) but he has some use in bringing stocks to others' attention. At least he has discipline in an approach.

There is quite a bit of happy hunting in the information, the metadata, proffered by fund managers. Taking the view that a ten bagger that pays dividends will most likely be found among small to medium caps, there are a few managers, listed and unlisted, that throw up useful stuff. As a long term holder of Mirrabooka MIR, I align with their style, which is investing for the medium to long term, looking at formulation and execution of the business strategy; and analysing key financial indicators, including prospective price earnings relative to projected growth, sustainability of earnings and dividend yield and balance sheet position including gearing, interest cover and cash flow.

Other players worth following include Naos (NAC and NCC), Thorney (TOP more than TEK) and Sandon (SNC) plus the WAM stable. The unlisted include Bronte Capital and ideas from managers through FGX. (And of course ASF)

Because, after all, the Next Big Thing is what will make the difference.
 
frugal.rock said:
I don't know why, but many stocks I have watched for unhealthy lengths of time, trigger memories of events experienced in nature.
I have shared some, but here's another one...
Your in the tinny to go fishing on the bay, you notice a bit of choppy surface in-between current flows.
Looks interesting, so you putt over and drop anchor, throw a handful of chum or 2, and then cast the light weight hook and tackle.
Bang, your on immediately. You reel in your garfish, and take it off the hook.
Quickly bait the hook again, cast, bang! Brilliant.
Repeat over and over with an occasional handful of chum.
You know it's time to go home when you have a good feed, but ooh boy, it's lovely to be grabbing easy fish.
The message sinks in that the fish have picked up on the game as your next cast doesn't get a bite.
Time to go and do the fiddly gutting, as no amount of chum or baited hooks are successful.
Wait another day, different spots, same scenario or not.
Click to expand...

Perhaps a link between nature and the stock market. Complex Adaptive Systems is a place to start in this area with a particular focus on Starling murmuration and fractal systems within nature:
 
Yo Frugal, like that Fishing analogy. Problem is, as always, spotting that bit of choppy surface in-between.
For the past six weeks or so, I have been down at Malacoota whiles Mrs Mull has been working a locum.
Spent as much time as possible looking for those spots. Only found one, and got a heap of good sized bream in the lakes.
Alas, the rest was only so so.
Bought myself a fishing drone, and spend a more than a few hours trying it out of the surf beach.
Apart from a a few small Oz Salmon and a couple of port Jackson sharks, things didn't go to plan.
Have a bit to learn yet.
 
This is an issue that has been exercising the minds of many. I read somewhere that the rotation from 'growth' to 'value' last week was a 15 Sigma event, whatever that means.


Asset management is in turmoil. So does value investing still work?

THE ECONOMIST


For a moment this week investors could afford to ignore stockmarket superstars like Amazon and Alibaba. As news of a vaccine broke, a motley crew of more jaded firms led Wall Street higher, with the shares of airlines, banks and oil firms soaring on hopes of a recovery. The bounce has been a long time coming. So-called value stocks, typically asset-heavy firms in stodgy industries, have had a decade from hell, lagging behind America’s stockmarket by over 90 percentage points. This has led to a crisis of confidence among some fund managers, who wonder if their framework for assessing firms works in the digital age. They are right to worry: it needs upgrading to reflect an economy in which intangibles and externalities count for more.

For almost a century the dominant ideology in finance has been value investing. It has evolved over time but typically takes a conservative view of firms, placing more weight on their assets, cashflows and record, and less on their investment plans or trajectory. The creed has its roots in the 1930s and 1940s, when Benjamin Graham argued that investors needed to move on from the pre-1914 era, during which capital markets were dominated by railway bonds and insider-dealing. Instead he proposed a scientific approach of evaluating firms’ balance-sheets and identifying mispriced securities. His disciple, Warren Buffett, popularised and updated these ideas as the economy shifted towards consumer firms and finance in the late 20th century. Today measures of value are plugged into computers which hunt for “factors” that boost returns and there are investors in Shanghai loosely inspired by a doctrine born in Depression-era New York.

The trouble is that value investing has led to poor results. If you had bought value shares worth $US1 a decade ago, they would fetch $US2.50 today, compared with $US3.45 for the stockmarket as a whole and $US4.65 for the market excluding value stocks. Mr Buffett’s Berkshire Hathaway has lagged behind badly. Despite its efforts to modernise, value investing often produces backward-looking portfolios and as a result has largely missed the rise of tech. The asset-management industry’s business model is under strain. Now one of its most longstanding philosophies is under siege, too.

Value investors might argue that they are the victims of a stockmarket bubble and that they will thus be proved right eventually. The last time value strategies did badly was in 1998-2000, before the dotcom crash. Today stockmarkets do indeed look expensive. But alongside this are two deeper changes to the economy that the value framework is still struggling to grapple with.The first is the rise of intangible assets, which now account for over a third of all American business investment — think of data, or research. Firms treat these costs as an expense, rather than an investment that creates an asset. Some sophisticated institutional investors try to adjust for this but it is still easy to miscalculate how much firms are reinvesting — and firms’ ability to reinvest heavily at high rates of return is crucial for their long run performance. On a traditional definition, America’s top ten listed firms have invested $US700bn since 2010. On a broad one, the figure is $US1.5 trillion or more. Intangible firms can also often scale up quickly and exploit network effects to sustain high profits.

The second change is the rising importance of externalities, costs that firms are responsible for but avoid paying. Today the value doctrine suggests you should load up on car firms and oil producers. But these firms’ prospects depend on the potential liability from their carbon footprint, the cost of which may rise as emissions rules tighten and carbon taxes spread.

Value investing’s rigour and scepticism are as relevant as ever — especially given how frothy markets look. But many investors are still only just beginning to get their heads round how to assess firms’ intangible assets and externalities. It is a laborious task, but getting it right could give asset management a new lease of life and help ensure that capital is allocated efficiently. In the 1930s and 1940s Graham described how the old investing framework had become obsolete. Time for another upgrade.
 
Your company needs you: why companies need engaged shareholders
Firstlinks | December 16, 2020
‘A lot of people die fighting tyranny. The least I can do is vote against it’. Carl Icahn.
Capital markets have been wonderful inventions. Freed from self-interest and patronage, they allow Adam Smith’s ‘invisible hand’ to unemotionally allocate scarce capital around the economy – investing where it will be most productively used. Society as a whole reaps the benefits. Greater economic output raises living standards for all. Better investment returns mainly benefit those most in need: retirees and those planning for retirement.
These days capital markets are heavily regulated affairs. They should be. Despite their capacity to turbo charge economic growth, capital markets have significant flaws. Some of these shortcomings are plain to see. Wealthy and compassionate societies don’t let market forces decide whether an ambulance arrives. We set the boundaries that markets operate within because we know there are many problems that markets on their own can’t solve. For the problems we do want them to solve, however, capital markets can still fall well short of what we want them to achieve, often at the great expense of investors.

The Agency Problem
The original sin within our model of capitalism, is that it separates the ownership of companies from their management. Few family owned businesses can attract the capital or talent necessary to build a BHP. Thus, by separating the ownership of a company from its management, businesses are able to grow – and create wealth and jobs – in ways few private firms can replicate. In doing so we create what economists call an ‘agency problem’. Investors, who put up their hard-earned savings and own the company, must rely on their agents, management, to run the business with their best interests in mind.
Managers on the whole are an honourable breed. But, as Paul Keating liked to say, ‘in the race of life, always back self-interest’. Time and again, left unsupervised, managers have demonstrated a terrible tendency to run companies in ways that suit them, not their shareholders.
Our solution to this agency problem is supposed to be robust and independent company boards. Shareholders appoint directors and pay their salaries. They are there to act as the guardians of our capital and to stand up to managers on our behalf.

The ‘Wall Street walk’
The entire premise of shareholder capitalism rests on the notion that a board is there to represent shareholders. When the relationship is working well, a company’s corporate governance framework should look like the healthy model below. Shareholders appoint directors who, in turn, oversee management. Boards are there to offer advice to management when it is needed, and to hold them to account when it is necessary. Management then have a clear guiding principle to work towards – prioritise shareholders and shareholder returns.
Picture1.png
Well-functioning corporate governance models look great in textbooks. In the real-world, modern capital markets have left shareholders increasingly separated from the boards that are supposed to represent them. Firstly, shareholders come and go today with incredible speed. In the 1960s, the average share holding period for a US share market investor was six years. By the 1990s this had fallen to just two years. Today it sits at six months. While a company’s owners come and go every few months now, boards and managers work together hand-in-hand for years, sometime decades. Given this arrangement, it is easy to see how boards can become co-opted by their management teams. Adding to the process of shareholder and board alienation, almost all ‘shareholder feedback’ today comes to boards through the manager and the manager’s investor relations team (when was the last time you directly spoke to the board of a company you owned). Even with the best of intentions, boards are at risk of receiving curated shareholder feedback, feedback that fits with managements’ own agenda.
In the real-world, the most common corporate governance failing at a company is that its board slowly becomes entwined with its management team. Managers then begin to set their own priorities for the company and their own vision for the future. Sometimes these overlap with what is best for shareholders. Too often they do not.
When this occurs, shareholders – who are the owners of the company – are left with two options. Accept the outcomes that management deliver or sell your shares and move on. In market parlance this second option is referred to as the ‘Wall Street walk’.
The passive problem
Exacerbating the agency problem in recent years has been the explosive growth of passive investing and the exchange-traded fund (ETF) industry. The premise behind passive investing is hard to fault. ‘Efficient market theory’ argues that everything you could ever know about a stock is already in its price. Given that, don’t bother trying to analyse companies. Instead, let others do the hard work of figuring out what a company is worth and passively invest into the markets as a whole. (This logic is certainly boosted by the fact that, after fees, the average fund manager underperforms the market over time).
While ETFs have provided many investors with a great low-cost way to invest in the market, they have badly amplified the agency problem that already existed in the stock market. As the share of companies owned by passive investors has increased exponentially, fewer and fewer shareholders today are actually involved in the process of holding managers and boards to account.
Vote with your hands, not your feet!
When shareholders feel that the Wall Street walk is the only way to escape an underperforming company, the entire premise of how capital markets are supposed to work has broken down. The point of public companies is that public scrutiny and shareholder democracy is there to shine a light, to hold the people working for us to account. If shareholders do not exercise those rights, self-interest and cronyism very quickly sets in. Worse, the cycle becomes self-fulfilling. When shareholders vote with their feet and not their hands, vested interests learn a very dangerous lesson. Once learnt, the problems tend to get worse over time, not better.
All of this means that it is more important than ever that shareholders pay attention to what is going on at their companies these days. If you are a shareholder in a company, you are the owner of the business. Make a point of engaging with your board – they are there to represent you. Most importantly, take the time to vote at shareholder meetings, and if you’re unhappy, vote with your hands, not your feet! You own the companies that you invest into. The people running them are supposed to be working for you.

Miles Staude of Staude Capital Limited in London is the Portfolio Manager at the Global Value Fund (ASX:GVF). This article is the opinion of the writer and does not consider the circumstances of any individual
 
45 Investment Ideas for the Next Five Years

www.firstlinks.com.au

400th Edition Special: 45 of the best investment ideas

Over eight years since February 2013, Firstlinks has become a leading financial newsletter, publishing thousands of articles from hundreds of writers. To mark this milestone, 45 experts have joined the celebration for our 400th edition bringing their best investing ideas for the next few years.
www.firstlinks.com.au www.firstlinks.com.au

I'd be very happy for newbies to be directed here.
 
Howard Marks (Oaktree) has a few points I'd like to save
  • Value investing doesn’t have to be about low valuation metrics. Value can be found in many forms. The fact that a company grows rapidly, relies on intangibles such as technology for its success, and/or has a high P/E ratio shouldn’t mean it can’t be invested in on the basis of intrinsic value.
  • Many sources of potential value can’t be reduced to a number. As Albert Einstein purportedly said, “Not everything that counts can be counted, and not everything that can be counted counts.” The fact that something can’t be predicted with precision doesn’t mean it isn’t real.
  • Since quantitative information regarding the present is so readily available, success in the highly competitive field of investing is more likely to be the result of superior judgments about qualitative factors and future events.
  • The fact that a company is expected to grow rapidly doesn’t mean it’s unpredictable, and the fact that another has a history of steady growth doesn’t mean it can’t run into trouble.
  • The fact that a security carries high valuation metrics doesn’t mean it’s overpriced, and the fact that another has low valuation metrics doesn’t mean it’s a bargain.
  • Not all companies that are expected to grow rapidly will do so. But it’s very hard to fully appreciate and fully value the ones that will.
  • If you find a company with the proverbial license to print money, don’t start selling its shares simply because they’ve shown some appreciation. You won’t find many such winners in your lifetime, and you should get the most out of those you do find
 
Yeah, I feel I missed out on Xero (XRO) years ago because I couldn't see past more simple valuing measures based on current and near earnings. The chart was suggesting a buy too; it was forming a rounding low under $20 on a monthly chart.
 
Dona Ferentes said:
I was kind of hoping this could be my thread. Why don't you set up your own? . ...
Click to expand...

Sorry... :cautious: I was trying to find a suitable place to put this story up and thought that the "thought bubble" seemed a good fit.
The question of investment in the basic tools of of an electronic society seems on song. And I think the thread has attracted a range of constructive responses.
And my contribution was not meant to be anything else.

Cheers:)
 
Thought Bubble #8 or is it 9
​
A thoughtful friend sent me this link... It is worth sharing

www.johnkay.com

Robust and Resilient Finance - John Kay

Support for this paper was gratefully received from the Korea Institute of Finance. Abstract The development and growth of the financial sector within the last 50 years has been justified on the grounds that new instruments and greater levels of trade result in a more efficient allocation of...
www.johnkay.com

Robust and Resilient Finance​
Abstract
The development and growth of the financial sector within the last 50 years has been justified on the grounds that new instruments and greater levels of trade result in a more efficient allocation of risk. The experience of the Great Financial Crisis punctured this narrative, but much of the policy response has focussed on establishing new and more complex regulations. This misunderstands the nature of risk and uncertainty in the financial system and the real problems of complexity that arise in these types of systems. An analysis of the history of financial development highlights where socially harmful approaches have grown into destabilising practices.

... and after a random walk over the economic landscape, visiting Adam Smith, Lloyds versus gesellschaft (laying bets on the interpretation of incomplete information Vs the socialisation of individual risks), Rajhuram Rajan at Jackson Hole, too big to fail Vs too complex to fail, unplanned growth of networks Vs planned network development, in a series of chapters, and written in a way most layfolk could understand:
The rise of modern finance

Why we trade

The rise of derivatives trading

Trouble in the Teton Mountains ( that infamous 2005 Fed meeting)

The problems of complexity

Robustness and resilience

Conclusions
Lehman – an ill-managed purveyor of unneeded products – represented exactly the kind of business that should fail in a well-functioning market economy. The view that it was a mistake for the US government to permit Lehman to collapse is expressed, not by people who miss the services that Lehman provided, but by people who regret the consequences of its failure. The lesson is not that policymakers should try to prevent such failures but that public processes should ensure that similar failures are more easily contained. This requires reintroducing to the financial sector the modularity and redundancy which characterise robust and resilient engineering systems and which recent decades have foolishly sought to characterise as inefficiency.

@mullokintyre , you'll like this last chapter !
 
a bit of a cut and paste, part of a bigger opinion piece : https://www.firstlinks.com.au/investing-goes-water-hell-water

" Everyone is looking for the next Amazon, and access to capital for startups has never been easier. This has no parallels in history, and ass The Economist says:
" ... something astonishing is going on in fintech. Much more money is pouring into it than usual. In the second quarter of the year alone it attracted $34bn in venture-capital funding, a record, reckons CB Insights."
Click to expand...

"That's AUD45,000,000,000 in three months, just for fintech startups. It's no wonder older companies are facing unprecedented tech disruption. Business has never seen so much capital available to so many smart people.

Tech%20funding.jpg​


The wonderful Non-Profitable Tech Index​

"Goldman Sachs produces an index of listed US tech companies which are not making a profit. The chart below (from Bianco Research) shows how this index remained flat for the period 2014 to sometime in 2020. As companies benefited from a quick adoption of tech during COVID, the index reached a peak of 433 on 12 February 2021. It has since fallen to the current level of 328 which some might call a reality check, but who knows when to calculate a P/E, you need an E, and none of these companies have one.

gh-fig2-gs-non-profitable-technology-index.png


...---... ...---... ...---...​


The Law of Diminishing returns tells me they're not "smart people". Big time dice throwers, yes, and happy to put their hand out the window, because it's raining money. But smart. Nope. Not most of them.

​

 
frugal.rock said:
How to spot the next big thing
Click to expand...
Ophir Asset Management, which positions itself a specialist small and mid-cap equities investment manager, has written this:

How not to miss the next 10-bagger: valuing early-stage growth companies.

https://www.ophiram.com.au/how-not-to-miss-the-next-10-bagger-valuing-early-stage-growth-companies/
.
We are in a period of unprecedented innovation and disruption globally. Exciting new companies are emerging every day. If investors can better understand how to value young, fast-growing companies, they will be much better placed to identify the next 10-bagger.

When DCF doesn’t work
For investors to grasp the challenges in valuing early-stage growth companies, they must first understand the mechanics of Discounted Cash Flow (DCF), a valuation method that all analysts are taught.

A DCF financial model projects the expected cash flows of a business into the future. Those future cash flows are then brought back to a value today by applying a discount rate to adjust for the level of risk and uncertainty faced in achieving those cash flows.

The DCF methodology is relatively easy to implement when investors value mature business that have years of consistent earnings and stable margins. But it is much harder to value a business using DCF when its earnings streams are less predictable, such as in an early-stage, fast-growing company. This can lead to potentially extreme mispricing of equities over time, as the likes of Amazon, Google and Afterpay all appeared overvalued but recorded spectacular growth.

Useless metrics
As with DCF, many of the stock standard valuation metrics such as P/E (price/earnings) or PEG (price/earnings to growth) can be completely useless when analysing immature companies.

Their P/E or PEG ratios can look astronomical, and change wildly, because their current earnings may only be a tiny sliver of their potential earnings when they mature. To achieve scale, these companies are often heavily reinvesting in themselves with high R&D costs. Revenues may grow rapidly, but it could take years to deliver profits....

The corporate lifecycle​

Many early-stage growth companies simply don’t have free cash flows that are used to value the worth of a share. So, investors must make assumptions about what these will look like in the future.

Turning to qualitative factors​

But how do you make those assumptions?

To evaluate young, high-growth companies, analysts must dive into the underlying business, and judge how long it will take to mature. They will need to refer less to financial ratios and income statements, and more to qualitative factors such as:
  • Recurring revenue
  • Scalability
  • Competitive advantage
  • Size of addressable market
  • Best-in-class leadership
  • Organisational culture
  • Track-record of success
  • Ability to create new revenue streams
Few of these traits can be meaningfully reflected in spreadsheets.

For legendary investors, such as Peter Lynch, Warren Buffett and Howard Marks, it is the quality of a company’s growth that determines its value, not revenue or even earnings growth per se. When they analyse the broad range of factors outlined above, they can make informed judgements on which businesses are most likely to be long-term successes.

Focusing on four factors
The study of early-stage companies should focus heavily on four key factors:

1. Identifying assets
Usually, the first thing to consider when formulating a valuation for an early-stage company is the balance sheet. List the company’s assets which could include proprietary software, products, cash flow, patents, customers/users or partnerships. Although investors may not be able to precisely determine (outside cash flows) the true market value of most of these assets, this list provides a helpful guide through comparing valuations of other, similarly young businesses.

2. Defining revenue Key Progress Indicators
For many young companies, revenue is initially market validation of their product or service. Sales typically aren’t enough to sustain the company’s growth and allow it to capture its potential market share. Therefore, in addition to (or in place of) revenue, we look to identify the key progress indicators (KPIs) that will help justify the company’s valuation. Some common KPIs include user growth rate (monthly or weekly), customer success rate, referral rate, and daily usage statistics. This exercise can require creativity, especially in the start-up/tech space.

3. Reinvestment assumptions
Value-creating growth only happens when a firm generates a return on capital greater than its cost of capital on its investments. So a key element in determining the quality of growth is assessing how much the firm reinvests to generate its growth. For young companies, reinvestment assumptions are particularly critical, given they allow investors to better estimate future growth in revenues and operating margins.

4. Changing circumstances
Circumstances can move or change quickly for early-stage companies. When a young company achieves significant milestones, such as successfully launching a new product or securing a critical strategic partnership, it can reduce the risk of the business, which in turn can have a big impact on its value. Significant underperformance can also result when competitive or regulatory forces move against a company.


.x.x.x.x.x.x.x.x.x.x

and , if you can't find a metric from those listed above that suits your growth trajectory, then look out for another one
 
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