I’m still trying to work out what happened yesterday with ThinkSmart (TSM). The rights issue price seems reasonable, but lets see what the SP does now, especially after they suspended their dividend for this year, after most comentators and analysts had them down for a double digit dividend yield this year AND next. Let see if the new investors who drove the price up after TSM was mentioned as one of “Money” magazine’s top 5 value picks for 2012 (discussed on the Today show also) will drive the price back down just as fast by selling out after only two weeks. If ThinkSmart are going to be in good shape in a year’s time (big “IF”), there might be a buying opportunity comming up real soon… I hold TSM, but it’s not one of my bigger holdings, and I’m undecided as to how I’ll play this one – probably watch and wait for a while, unless quick decisions need to be made. It would have been better if they were renounceable rights, like Cardno’s (CDD) are, which are each trading at $1.456 (under ASX: CDDR), so I can exercise the rights (buy my extra shares) or I could sell the rights on-market (556 x $1.456 = $814.41), and have $794.46 in my pocket (after brokerge) as a little compensation for the dilution of my holding. . That’s the sort of option that would have been nice to see with TSM. Not just a use it or lose it directive on the rights ussue.

As for the future IV of TSM… Any thoughts anyone?

Cheers!
John C.

This is a very good post indeed and I quite agree, but I am going to play devils advocate….

Unfortunately (or fortunately), I hold WEB and brought it quite early, one of my rare good stock selections. Based on the same criteria applied above, I decided to take half of my profits off the table and bank them. I only took half off becuause of the other company I invested in, mentioned below. I took half off when WEB was $2.00, and way above it’s intrinsic value as the graph correctly shows above. Alas, they are now over three and one of the best performing stocks on the entire stock exchange – doh. So I delved a little bit further to find out why it has run so hard, and it is the expansion they are undertaking in hotel rooms as well as expanding overseas, especially the announcement the company made only two weeks after I sold half. Whilst for many companies this can be the death nell, WEB has one major advantage, to do so costs them very little in asset terms. The major cost is marketing/advertising. If their advertising and marketing can pay for itself and they gain some small market share in other countries, the rate of return for the money invested is still going to be a lot higher than those that need physical assets to conduct business. This is why I believe the stock has a lot further to go, maybe not in the shorter term, but certainly in the longer term (3-5 years).

It reminds me of another stock which I bought in at 14 cents and sold at 28 cents. They have traded over $14, oh the shame of it all. If only I held those REA shares, I would have done quite nicely for myself indeed.

There will always be some stocks that will be hard to evaluate using intrinsic value only. REA is one example where the share price was in front of its intrinsic value for almost its entire life, whilst it’s share price was appreciating in value. Using only intrinsic value you would have never bought the share, and you would have missed out on some great returns. Roger, you correctly point this out in your book, intrinsic value isn’t everything, and if you can pick the stocks that have great growth potential sometimes that is far more important. WEB could be one of those shares.

Seany Biel

SGH is trying to expand in Europe. Anyone have thoughts about this.
Do you think the stock offers long term value or becoming a value trap if they paid to much for the business’s for growth?

I am waiting with enthusiasm for Skaffold to include US markets.

The market often prices in a so-called “growth premium” and when the day comes that they signal the growth is disappearing or even slowing, the “growth premium” gets stripped away in a heartbeat.

Applying strong discipline and ensuring an adequate margin of safety can protect against this.

You speak of the risks of going offshore. Risky indeed when you consider the target markets likely have businesses that have also reached a degree of saturation themselves, and who are also looking elsewhere.

The growth versus profitability conundrum you speak of often sees business leaders head down the wrong track, I suspect, at least partly due to one being a more glamorous option than the other. After all, which of the following do you think the mainstream would find more impressive on a resume?

“In my time as CEO I…

…expanded operations into 3 new countries”

…bought back 20% of the stock”

I’m away from home at the minute so can’t post it.

It would be good to get it up here for everyone to read.

The bit I loved goes something like this:

“Virtually nobody on Wall Street knows who he is. He rarely, if ever, visits companies, and the small office he shares at Tweedy Browne with his son has no computer.”

I think I also recall reading that he paid out nearly all of the years earnings annually so the money he was managing didn’t grow too large.

Sixteen percent a year – on average – for 50 odd years.

I just worked out what that would mean for my family come retirement time (twenty years for me, assuming I make it that far) and the south of France will be getting a long visit!

Speaking of quality and Margins of safety, what are your thoughts on Apple (AAPL) ?

Operating margins, Net Profit margins, ROE & ROA are all looking good, however I am having difficulty in valuing the company and forecasting what the future ROE and ROA will look like 3, 5, 10 years down the track.

Can you start a discussion on this? Its been around a year since you touch base on AAPL .

Thanks Roger

What resource related stocks will do well if China takes a tumble?

We are in a resources boom and demand has exceeded supply leading to higher prices. This has been great for resource companies and mining services.

However, supply will catch up with demand eventually (are we already there?). Volume will still be huge but prices will drop.

In this environment who does well? Resource companies, mining services, someone else, nobody?

We will certainly see which companies have competitive advantages. I don’t think it will be the shipping companies if the recent reports are true that you can not only hire a 45,000 tonne “Supramax” ship for free but the shipping company will also subsidise your fuel (http://www.businessweek.com/news/2012-02-14/glencore-gets-free-ship-with-fuel-discount-on-rates.html).

I’m asking this question because “it is very difficult to make predictions, especially about the future” and if you wanted to maintain upside while protecting your downside where would you invest?

Completley agree with your comment about the best time to get into the market. It may seem all kinds of wrong logically especially for the beginning investor, but as long as you get into very high quality companies than the worst times prevent the best opportunities.

For those interested, do a few quick Google searches on Walter, there are some great resource collections about Walter out there. He was an amazing man with a great story to tell. Putting his client’s first and without all the fanfare.

But with resource stocks, the largest single asset of the company is usually the underground
ore. One million ounces of insitu gold is potentially worth around one billion dollars. There
is no other single asset that comes close. It would be like an industrial car assembly line
with 30 years worth of sales in an underground warehouse. PE ratios only capture next
years sales, not the next two to three decades of production. The rate that the gold will be
dug up at is only a minor part of the entire valuation. Investors who value gold shares as if
they were a ball-bearing factory miss the point of owning gold shares in turbulent economic
times.
Even compared to other mining stocks, gold is in its own class. Unlike any other
commodity, gold is not consumed. It’s barely used for any industrial, medical or research
purpose. Paradoxically, it’s this inedible, unreactive, non-catalytic quality that makes it the
ideal choice as a form of currency. Gold is money. (Paper money can’t be eaten, used for
transport, fertilizer or fuel either.) Because gold is a currency, and almost all the gold ever
mined is still in a tradeable form, its supply is very dependent on its price. Total yearly mine
production only increases world supply of gold by around 2% per year. In theory, if the
price rose far enough, all 150,000 tonnes ever mined would be ‘up for sale’. Platinum and
silver, in comparison, are mostly consumed, and much of the past production is now spread
thinly amoung roadside dirt (in the case of platinum) or a billion photo albums (in the case
of silver).
Because the price of gold moves for different reasons to prices of every other mineral or
commodity, gold stocks too, may move in the opposite direction to every other stock in the
market. While almost every other sector of the market has had a boom since 1980, gold has
languished, something that makes it more appealling as an investment now than if it had
kept up with inflation. There is more upside.
Gold companies tend to be the most extreme of resource stocks. Because silver has
historically also been used as currency, we include silver resources as gold-equivalent (at
the ratio of their prices), but we do not consider any other metal to be equivalent to gold.

It gave me a slightly different perspective.

MIN is increasingly becoming a miner, rather than a service provider to miners. This means that to be confident of their future revenue / profits, you also have to be confident about the future prices of commodities.

Something to think about.

Pete

yesterday I discussed my nephew’s position with a man who is in a related line (he supplies trees to landscapers), and he said two of his Geraldton-based clients have the same problem. One is simply rejecting deals for the want of people to do the work, and the other is exploring the idea of flying to the Philippines to recruit employees to work in Geraldton.

BGL reported today,

Yes I think they are a good business but I don’t think VOC will buy them.

Cheers

Your review looks fairly similar to my findings but in a more comprehensive way. I also think SBM is worth a look too.

Also I found it interesting that the first few contributions to this post on misinformation and confusion last week “stepped over” the Greek bankruptcy and Australian unemployed and went straight for the market info. Hmmm…

For instance, RCR (Resource Capital Research) in their 4-Aug-11 report on Kingsrose Mining (KRM), have conservative valuations ranging from $1.19 for US$900/oz and A$/US$=0.82 with a 10 year mine life, rising to $1.45 for a 15 yr mine life. They then value KRM at $1.61 if the gold price remains at US$1600/oz or above, with A$/US$=$1.08, for a 10 year mine life, or $2.08 for a 15 year mine life.

That’s just one example. Such reports are usually linked from the websites of the company being analysed; there are usually a few of them (whose valuations vary), and they are useful in forming a view of the consensus value of a company under different commodity price scenarios.

Many of the analysts have disclosed vested interests in the companies they are analysing (they may have acted for them to help facilitate a capital raising for instance), so I would not reply on these reports alone. However, that’s an example of some ranges of valuations (from one analyst) and how they use varying inputs to come up with them. Hope that helps.

Another one to consider is RED (RED 5), who have just completed commissioning of their gold processing plant in the Philippines where Medusa has a very succesful mining operation (Co-O). RED is in very good shape, and should also have low costs in the future.

There must be a catch. Hopefully you will find it.

Thought this article from the Herald sun was an interesting one:
http://www.heraldsun.com.au/news/more-news/anz-has-slugged-your-mortgage-sacked-1000-workers-and-now-its-time-to-party/story-fn7×8me2-1226274231915

Basically the article is about ANZ boss (Mike Smith) taking 100 staff & their guests (200 passengers) on a luxury “cruise of a lifetime of Malaysia’s Langkawi islands”, with each of the guests having a personal butler at a total cost of $1.75 million just weeks after axing 1000 workers to save money. The Herald Sun article states: “I would like them to walk a mile in the shoes of their customers who have been told their interest rates have to go up because of their increased funding costs”. The “lucky” 100 staff are made up of ANZ’s CEO recognition program, which does not involve senior staff, the article states “the program recognises ANZ’s top 100 per-formers who are mostly junior staff who often get little recognition for the job they do”.

Roger, you mentioned in your article “Qantas (SQR: B3) reported underlying profit before tax was down 52 per cent”, maybe the 750k (estimated cost of return flights to Singapore for the cruise guests) may help out Qantas’s 2nd half results :)

I remembered this article about Mike Smith where in a previous position as chief of HSBC operations in Argentina, Smith implemented some personnel changes the locals didn’t like. The result was that he actually copped a bullet to his thigh!! Hopefully for his sake the Australian ANZ customers (& sacked ANZ staff) aren’t so emotive!
http://www.thepowerindex.com.au/money-movers/mike-smith

Interesting times in the banking industry!!!!
Kind regards Janette

Yes when people loose their jobs and its reviberates, it causes an issue. The other issue is complete lack of business and consumer confidence outside mining.

The market did not seem impressed. Not sure why, the result was in line with consensus. Perhaps it is the market you were disappointed with? Ignore it, unless it falls far enough to offer an opportunity to add to your holding.

Perhaps one surprise was Qantas, i wasn’t expecting it to make any profit at all. Can’t say i am really impressed, just surprised. As always though if you strip away the frequent flyer arm and look only at the airline operations it paints a different story.

Just back from attending a Jobs Expo on the Mid North coast in Rob Oakshotte land, I’m sure you know where that is, and the place was packed and humming. Job seekers of all ages looking very very hard.
My reason for being there – end of Federally funded contract this week. Two others from my office also out in the cold as well.

Ironically for the past two years have been working with young 17-24 year unemployed advising them how to get jobs.
It ain’t easy out there and particularly so in regional Australia

I am really pleased to see your commentary on the ABS definitions of employed and unemployed. It rarely gets much press and effective action on the issue is nil.
Nice work Roger… now how do we fix it?

Interesting documentary on why India loves gold. Keep in mind this is a very young country with ~35% of its people still under 20. Plenty of weddings to come.

http://www.cbsnews.com/video/watch/?id=7398482n

Wow, an investment newsletter sounds great. Skaffold is awesome, but to hear expert opinions, insights and research would be another piece in the puzzle. Keep up the good work Roger & team.

Only had a brief look so far but thought MIN was above average. ARP and FGE didn’t exactly knock me over.
COH appears good as does CBA. Would appreciate your thoughts

Cheers
Jim

Very disappointing result from FGE today, any thoughts????????????

first time poster long time lurker.

the whole gold thing has been of great interest to me lately. i mean if you bought at the top of the early 80’s you would probably feel the fool. but if you managed to ride the wild up trend and get out with a healthy profit. you would be quiet pround of yourself.

i mean with hind sight if i sold all my managed funds back in 07 and switched to gold i would be totally stoked now!

so my question is for roger, in an earlyer blog feb 6th with the abbott and costello skit. you say that you own gold companies that you have done quiet well on. but also at around christmas you brought more physical gold.

im just wondering what your rational for this was? and what is your point of view on both, holding physical gold and or just owning a golding producing company. where do you see it all headed?

thanks for your time, and i love what you have provided for us all here in the way of skaffold and your book.

regards adrian

During a boom or a bubble, everyone who already got on board has a vested interest in seeing it go higher. Everyone caught up in it in the middle also does. Everyone at the peak end of it still wants it to go higher, and everyone collectively is high or drunk or the emotion of greed.

Anyone who shouts down the mania (like Peter Schiff did versus Art Laffer on Youtube) is ridiculed and pilloried.

If it is in a bubble, it is poorly advertised, probably because people have no confidence in anything right now and so don’t know where to turn in case they lose money. “Gold’s in a bubble, gold is not. Safest thing to do is bed down into cash” but you’ll never hear that ‘cash’ is in a bubble. Top US companies are awash with cash that they cannot spend on M+A because of the climate of fear, China is also awash with USD.

I still remember the stupidity, 19 years ago, when European banks sold off huge amounts of gold to invest in….the Euro.

This article in relation to gold is very interesting, as we all know, European debt crisis is more severe than we all thought, I am thinking that when the crisis gets worsened (due to the talk of Greece leaving the Euro zone becoming more transparent), gold price will again appreciate significantly like last Aug, therefore, gold production company’s value will also appreciate. I am exploring some potential small cap gold mining companies and I found KRM, it sounds fairly promising to me based on their production, gold price appreciation and debt crisis, they all go hand in hand. I just wonder if you could comment on this.

“The budgetary assistance is currently running at $160,000 per worker per year, with total protection amounting to an average of $7000 per car.”

I’ve just started reading a book by Detlev Schlicter that you may be interested in. His book is called Paper Money Collapse.

If all the gold in the world dissapeared suddenly, would anyone really notice?

Perhaps jewellers and New Jersey based reality TV show contestents. I am no expert maybe there are many more uses of gold.

This is just my view personally, i get the arguements for gold as both a store of value and diversification measure but at the end of the day it just doesn’t fit with me. I would say it falls outside of my circle of competence. I can understand the risks of a business, the cashflows and the competitive environment, but those yellow bricks of metal just puzzle me. It doesn’t matter which way i look at it, it just sits there and does nothing.

I know, i know, i am looking at it in the wrong way, i should be looking at it as a currency or store of value. But my belief is that an investment is something that has an intrinsic value, and until i can see the day where we are back to buying our groceries with gold and silver coins or bars than i will leave it to the rest of you.

We can both be right on this one. There is no definitive answer.

If you track back over his shareholder newsletters since the 1970s one thing Buffet has a problem with is when he gets it wrong he has serious troubles reversing and admitting mistakes quickly. His patience as an investor works against him in this respect. He rides the mistake into the ground (see: Conoco Phillips disaster — he bght at the oil price peak which demonstrated his ability to pick the direction of commodity prices (so this would imply he thinks oil will far exceed its inflation adjusted highs yet gold will struggle to go over its inflation adjusted highs?), and also not admitting the Berkshire aquisition was a disaster earlier). Granted Buffet has made many fantastic calls but his circle of competence is clearly not commodities. He has not made his fortune from commodities, but from stocks and buying businesses outright, so he is arguably biased. I would prefer listening to Jim Rogers or looking at a thorough analysis of commodity cycles since 1780 which statistically shows the commodity secular bull has at least 8 years to run.

I often hear the opinion that gold is currently in the bubble but I struggle to find any real evidence of this.

During the housing boom, everyone was buying houses. If they were not buying, they were talking about it. If they already owned a house, they were renovating or buying an investment property. Everyday folks were turning property developers and quit their jobs to become real estate agents. Shows like Current Affair and Today Tonight were full of stories about home renovators flipping houses for quick profit.

I don’t see anything remotely similar in the gold markets. Most people do not own any gold apart from jewellery. Most investors still shun gold in favour of other assets. In fact it seems to me that the “gold bubble” story is almost entirely driven by the folks that don’t own gold and don’t like gold.

Regards,
Ilya

You mentioned that as of last Friday, the ASX had just hit its ‘intrinsic value’.

Given the heavy weighting of resource companies in the ASX, out of curiosity what is your intrinsic value estimate for the ASX industrials?

Is the ASX industrials below or above its intrinsic value?

I have also watched with interest Jim Cramer on ‘are you diversified’. Someone with an exposure to gold as part of a top 5 positioned portfolio with gold is now considered diversified (i have never seen this from cramer before)

For myself i will stick with Buffett, pure and simple. There is no gold in my portfolio, nor will there every be. I will hold a mixture of cash and shares, the relative holdings will be governed by the attractiveness of equities as an investment class.

Gold does not suffer this problem. The quantity of gold is limited and therefore as the value of currency declines the price of gold must appreciate (supply and demand).

I find this sentence puzzling if not offensive – “Melted down all the gold in the world would amount to one 68 cubed foot of uselessness.” Gold is no more useful or useless than money. It is a store of value. But I rather have real money (gold) that has limited supply and is free from meddling politicians, than a bunch of paper notes that are being cranked out by central banks the world over.

In the end the question is this. Do you expect inflation or deflation? If one expects inflation, they would be prudent to keep at least some gold. I would also concede that because stocks have limited supply and are backed by real assets, stocks are also better than cash in inflationary environment.This said, for a regular Joe, owning gold is much easier and safer than picking stocks.

I own both assets and will continue to do so.

Lastly, it is impossible to compare US in the 70s to now. Back then US was still a creditor nation with massive trade surplus. Now it is not. It is day and night. Economically US is just not what it was in the 70s, which tells me that current situation cannot play out like the 70s.

“Don’t regret growing older, it’s a privilege denied to many”

PeterB

I would not argue that the price of gold has potentially developed into a bubble, and I would not argue that high quality business’s will outperform gold, however I still think there is a case for gold in an investment portfolio.

Gold should be considered a currency, rather than a commodity with limited industrial uses. Gold has a demonstaratble track record of maintaing value over many thousands of years. It has survived the fall of various currencies and governments and is desired across the globe.

As an investor you need to manage your risks, and for me that means other assets such as property and precious metals are in the mix.

Regards
Luke

Im interested in everyone elses opinions.