For those who may not know, Value.able Graduate Scott wanted to know just how useful this A1 to C5 quality rating stuff, that my team and I talk about so much, really is. With our next-generation A1 service not far away, its a worthwhile question.
A1 is the highest quality rating a company can receive. A company that earns an A1 has the lowest chance of catastrophe, a C5 the highest chance. Of course it is possible that something bad could happen to an A1, but the probability is a lot lower. As a Value.able Graduate you may, like many, consider A1 companies the truest of ‘Blue Chips’.
Take for example the recent announcement of an impairment charge by Transpacific (ASX: TPI). ‘Impairment charges’ are a loss in any other language. TPI is another example of the process working – Transpacific has long received a score of C4 or C5. The shares have fallen 50 per cent recently, but more importantly, are now at or close to all time lows.
Our Quality and Performance Rating is applied without any subjectivity. That means there is no human intervention. There is no ‘tinkering’. All companies are judged according to the metrics they generate. A1s have the lowest probability of a liquidity event and C5’s have the highest. A liquidity event includes a capital raising, debt default or renegotiation, administration, receivership, etc.
Another way to test the efficacy of our approach is to track the performance of the A1’s against, say, the ASX/S&P 200. The following chart, first published here, shows that sticking to A1s and avoiding C5s should, over time, produce better returns. The chart shows the performance of a portfolio of the 20 largest companies listed on the ASX rated ‘A1′. The red line is the poor old ASX/S&P 200.
Back to Scott… he came up with a third way to test the approach. He’s been watching a portfolio of A1s and comparing it, in real time, to a portfolio suggested by a large investment bank. Take it from here Scott!
For new readers to the blog, welcome. Here at Roger’s Insights blog we are conducting a 12-month exercise measuring the performance of a basket of 10 stocks recommended by Goldman Sachs, against a basket of 10 A1 or A2 businesses that were selling for as big a discount to Intrinsic Value as we could find.
The original story that inspired this study can be found here.
The first chapter of our story was published earlier this year – Will David beat Goliath?
Six months has passed since our twin brothers each invested their $100,000 inheritance. The first quarter saw the ASX 200 (XJO) grow 2.0% and the two portfolios performed very differently to each other. At the end of the second quarter, the XJO is now 2.9% below the start of the year, and the impact of this sell off on the brothers, has been as stark as the impact on their portfolios.
Our Queensland regional accountant decided it was time to help his flood ravaged community and took six weeks annual leave. He went over to Grantham and helped rebuild the lives of so many flood ravaged families. Whilst physically taxing, it was an enormously rewarding experience, and reminded him of what life is really about. Upon arriving home six weeks later, in mid June, he was surprised to discover that the market had continued the decline it had begun before he left. Whilst his portfolio had taken a bit of a beating, he was very pleased to see it had outperformed the Index, and was still in the black.
His brother, on the other hand, was not feeling so grounded. Every morning he found himself starring at the CNN web page and shaking his head in disbelief… the Dow was down AGAIN (that almost inevitably led to a poor performance of his portfolio that day). Six weeks later, he found himself sitting in the office of the Departments Deputy Secretary, with a Human Resources specialist, being asked, “Is every thing alright at home?” There was a litany of concerns raised about the sudden deterioration in his performance, from missed meetings to reports that looked like someone very distracted wrote them. Having not really understood the quality of businesses he was invested in, nor understanding the importance of turning the market off, he was turning a market sell off into a major personal crisis.
In summary, for the six months to 30 June 2011:
The XJO is down 2.9%
The Goldman Sachs Portfolio is down 6.2%
The A1 and A2 Portfolio is UP 1.8%
Here are the portfolios in detail, including cash dividends received in the first half. (click to enlarge)
We will visit the brothers again at the end of September.
All the Best
Scott T
Thanks for that Scott.
Have you checked your portfolio for C5s? Are all the stocks in your portfolio worthy of the A1 rating? According to one Value.able Graduate, Charles Munger said; “If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount.”
Sticking to quality is vitally important. That’s what my team and I do here at Montgomery Inc, and its what our amazing next-generation service is all about. We will invite Value.able Graduates to pre-register soon.
Good investing to everyone… including Goldmans.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 5 July 2011.
There has been much suggestion of using an index against which to measure your investment return, indeed this is the widely accepted wisdom.
However, consider whether an absolute return measure might be more appropriate. Personally I prefer to use a straight 15% as my comparison benchmark. If I jump this hurdle every year I’m quite satisfied, even if that means i don’t do as well as the whole market every so often (and I fully expect that to happen)
I’m inclined to agree to an extent.
I’m keeping an eye on ANZ, BHP, JBH, CAB, ILU, IPL and MGX at the moment.
For most of them I’m waiting for earnings.
I have read a few comments regarding Monte Carlo simulation and really it’s no more complicated than playing what if’s like any method (even MOS) just a whole lot faster. It’s the values you use for your ranges and the assumed distributions that are the key to any risk evaluation strategy. Any user should ask what is the likely variation EPS or ROE or dividend payout and hence looking at history can offer some values as to the “reliability” of the company (and believeability of the forward forecasts).
There are quite a few free excel add-ons that can do this sort of analysis and if like me you have your own home grown special Rogers valuation spreadsheet(s) the results of moving values by just a few % can be quite illuminating.
…and potentially very confusing, which is why a very big margin of safety is so much easier and equally successful.
Hi Martyn,
Unfortunately, the most likely outcome is that we would plug in unrealistic probability distributions or ignore key variables and come up with an answer that was unrealistic.The alternative, using historical data, is very time consuming to construct and not always a great indicator of what will happen next – especially when we don’t have a lot of historical data to go on.
Interesting to see the blogs about measuring performance against the various ASX indexes (or indices if you are a Latin scholar!)
I used to measure my portfolio against the All Ords index but for the last six years I’ve measured it against the All Ords Accumulation index. The values at 30 June for this index are:
2005 24146.3
2006 29988.8
2007 39069.8
2008 34336.4
2009 26732.3
2010 30415.2
2011 34117.5
Total return 41.29%
By way of comparison the ASX 200 Accumulation index shows a return of 28.26% over the same period.
The All Ords Accumulation, being a broader based index, provides a better indicator for the types of stocks I hold. The fact that it generally outperforms the ASX 200 Accumulation index is a further benefit in my book.
Thanks Grant,
thats 5.9% per annum compounded ( a little higher if franking is taken into account). Overall, not much in my book.
Spot on, Roger and I would be unhappy if my portfolio capital return (ex dividends) had been as poor as the index. To be totally transparent my CAGR over the same period is 13.8% – not Buffet-like, but respectable. With the added help of Value.able, for which I again express my gratitude to you, I hope to compound at a far higher rate.
I hope so too Grant. Only after many years will we be able to agree with those who came decades before us and have proffered the same approach.
Well done on beating the index Grant. I’m not trying to pick on you, but perhaps this six year period is slightly arbitrary? I imagine you’ve been investing over this period so this is why you chose it.
For the sake of another view, if you go back to the formation of the XAOAI (4 Jan ‘88?), I think you’ll get a CAGR that’s close to 9.9% p.a.
I thought this was a decent mark to use as a cost of equity or the opportunity cost of your capital if your other option is to invest your cash into an index fund, fees and tracking error aside. I think Buffett has mentioned 10% as a Ke, probably only hypothetically, somewhere.
Obviously, your portfolio will have a different level of risk to the index, I would argue that if you carry out your analysis and valuations properly, you might expect your risk to be lower than the overall market.
Cheers,
Dan
Hey Dan,
I will be a monkey’s uncle if you can find anything complimentary said by Buffett or Munger about Ke!
Hi Peter another note i should have mentioned is if a company is rated in the A category,this does not guarantee that it will double or triple in value over a few years,it is just less likely of a capital raising and/or going down the gurgler if things go bad. Thats how i interpret the MQRs and hope i am on the right track here.
Thanks Grant
Hi Grant, you are correct here. It represents the chances fo a liquidity event happening. Whilst not stating so directly it is a measure of quality as quality companys will have the less chance of these events happening. It does not represent value at all, that is what the MOS measures. Quality companys there for are more likely to be profitable and stable which will help the value of the company increase and there for when the market price meets up with value a capital gain is likely.
As for the doubling/tripling in a few years, anyone looking for that will be thoroughly dissapointed as these type of events are very few and far between and not the norm.
Hi Peter RE-CAB without checking any IV figures back to 2006 as it is clearly spelt out in Value-Able,price is what you pay,value is what you get. And as the price back then was around the $6 mark,this does not mean that it was anywhere the IV. Even though its price near doubled at a later date the value of this company could have been around the $2 figure, as i said i have not done the figures but this is just one of the huge benefits of Value-Able investing. Thanks hope that makes sense.
Thanks Grant. I did use to invest in the smaller companies before the GFC. From memory I had CAB, Bradken, Babcock and Brown, ABC Learning Centre, maybe 50% of my portfolio.
The pain I affect after the GFC is still there. :-)
Hope to learn from my mistakes with value.able.
Hi Scott,
Although I don’t give too much weight to the results after only 6 months, I look forward to watching the story unfold over time, so don’t be discouraged with any negativity.
Thanks for your efforts.
Hi Craig,
Thanks for your thoughts. I’ll enjoy delivering the story to you as it develops over time, your encouragement is greatly appreciated.
All the best
Scott T
I laugh at the fund managers who pick BHP and RIO. Look at our Aussie market by market cap, its dominated by financials and resources, you follow the resources route like that and you won’t out perform. Putting money in a large cap manager is a waste of money and time- etfs are the way to go if you want that kind of exposure.
Remember MOS, RIO last year at $67 seemed to be value “slapping me in the face”.
Hope that helps, Matt
Hi Roger,
Newbie questions again about Cabcharge. Not sure where this company ranks on your system but it seems to be in the A’s.
If I had bought the company in July 2006, I would have got it for $6.27, it rose to a peak of $14.25 in June 2007 and is now $5.40. I know that the early $10’s were when there might have been selling signals to get out but even with the end of the GFC, the share price hasn’t come back at all, it has stayed in the $5 to $6 range since late 2008 while other companies (eg BHP have bounced back from about $20 to the current mid-$40’s).
Is this a sign that CAB is not a good company or is it just that it is unvalued and underappreciated? It seems to be a monopoly business.
Thanks,
Peter
Hi Peter,
I had an uncle who owned a few taxi licenses and drove them part time in Sydney and put in $10,000 @ 10cents each to purchase cabcharge (private equity at the time) in the late 80s. At the end of each annual meeting he chose to the reinvest the dividends each year, and put in another $20,000 to purchase off fellow shareholders throughout the 90s. finally when it floated in 1999 he had 90,000 shares but was converted to 900,000 shares at for around $2.00 for the IPO and was put in the top 20 shareholders. He ended up selling half before the GFC and the latter half after the GFC. The rest is history.
As for cabcharge now, I think they have matured, but the important part of value investing is to ensure that the company can expand at a decent rate, with the capital it generates.
Thomas.
This kind of historical perspective offers investors value.able insights into what can happen to intrinsic value when you capture a quality company with bright prospects, early. Thanks for sharing Peter.
I take a lot from this blog and am rarely in a position to give anything back although yesterday I purchased a few shares in a company called Anteo Diagnostics (ADO) and I thought I’d share in very compressed form a summary of my two months of research into the product and the people. This was not two months of continuous research! Although I have been reading all I can over the last two months.
I will also say before going any further that although the company has signed two agreements with different companies to supply their product (a surface coating technology which binds antibodies without damaging them for pathology tests) this is purely a speculative purchase and should be of little interest to many readers of this blog who are value investor purists.
ADO has invented a surface coating technology called Mix&Go that both quantitatively (by making the tests cheaper) and qualitatively (by making the tests more accurate and faster) improves existing pathology tests. ADO has already signed agreements with Bangs Laboratories and Merck KGaA and are in discussions with around 60 other medical companies in different fields many of whom are testing ADO’s technology in-house. No company which has ever tested ADO’s product has ever said no.
Geoff Cumming the CEO and Joe Maeji the Chief Scientific Officer enjoy distinguished reputations within the industry.
ADO’s competitive advantage lies in its technology and its Mix&Go product which is far superior to existing products currently on the market. Most significantly any company not using this product will be at a competitive disadvantage to its peers who are, incentive enough to enter into a partnership with ADO.
Thanks for sharing Nick.
You’re very welcome Roger. As I said, I can’t imagine this company will be of any interest to the majority of your readers although on the off chance that a couple might take something of benefit away from it I thought I’d put it out there.
I would just like to say well done Scott for keeping track of this, i seem to think reading the posts though that i have missed something as i have seen the exercise as a bit of inquisitive fun, whether or not the exercise is 100% accurate or proof of Rogers MQR’s being a good system, i don’t really care. I expect the proof will be in the pudding.
So keep up the good work Scott, look forward to hearing how the twins have went downt he track.
As for the response you are getting and not publishing Roger, I get the feeling some people won’t be happy until they know how MQR’s and Rogers IV’s are calculated and can there for analyse and critique it. I think this misses the point of what this blog and Roger’s book is for and also don’t think Roger really needs to prove anything about his method. His achievements and reputation speak for themself. Also, if you don;t understand why Roger keeps it a secret, perhaps re-read the competitive advantage chapter of Value.Able.
I can understand people being sceptical if i was promoting my own system as a great way for investing but not a guy who has as much experience in finds management and business as Roger. Sorry you have to put up with the keyboard rage of others.
Looking forward to the giant cull….sorry, reporting season. I have my “NN2V” stamp in the fire and ready to mark those companys i wish to leave to others and which ones i will allow to stay in my paddock and grow.
Thanks Andrew. I really appreciate the sentiments and I absolutely agree that Scott should keep it going. Not because it currently supports my approach (inevitably it will have periods where it won’t) but because it is a fun didactic exercise.
Hi Andrew,
Thanks for your comments. I am glad you are enjoying the story, which is of course, a bit of fun. I will keep putting the numbers out there every quarter, some people will love the results, others will spend countless hours looking for the rat they hope they can smell.
For anyone who is interested I chose the A1 stocks on December 8th last year, the day after the original story was published.
I too am looking forward to reporting season.
All the best
Scott T
Scott, great work with the ongoing comparison and story, this will hopefully provide an ongoing and very important lesson to those who believe in the great wisdom and benevolence of Wall st.
Hi Roger and Everyone
Specifically, this post is about the comparison of very good quality companies versus sub investment ones. I thought, especially given I have only done a few blogs, this is an ideal and opportunistic time to at least share with you all my return for Financial Year 11 ending 30th June
Firstly before stating my return Roger, I have mention before your book Value.able profoundly changed the type of companies I invest in. Consequently, my return for Financial Year 11 ending 30th June, I am sure, towers over what I would have only achieved if you hadn’t shared your knowledge with us.
Also, this site has influentially had a positive contribution to my return by the ongoing interesting and educational posts by you and many others who have submitted an immense amount of blogs.
The following stated return of mine is calculated on
1. Shares only before tax and dividends. The latter are ever considered in my appraisal, they are just a bonus to me
2. From early September – post the transformation period of dumping stocks after reading Value.able.
Return of 23.4% compared to
All Ords 1.8%
ASX 200 0.7%
Some points of note.
1. TSM, someone blogged this last year, sorry I forget who it was, before the blog I didn’t know it existed. I bought it after evaluating it
Had TSM not been mentioned, my return would be 22.3%
2. In early October last year, Roger generously advised us IV’s for MCE, FGE, DCG, followed by MLD. I bought MCE and FGE.
Excluding MCE, FGE and TSM my return would have been 17.8%.
Getting back to DCG and MLD, the reason for not buying them was purely based on my own self-risk rule of not being overloaded in one sector.
Several other good investments were mentioned by Roger, to name a few ACR, VOC, ZGL. I missed out on these, too lengthy to go into detail why.
My investing wasn’t all smooth sailing as I made a couple of poor investments with CAB and SFH. Both of them I sold at a loss.
My thoughts now on them,
CAB:
I think their expansion into the UK (more competition) and venturing into Buses (non core) has not gone well. Probably, this is best exhibited by the Debt/Equity increasing since 2006, and ROE declining from 2007.
Their real competitive advantage in Australia, core business – taxi eftpos/vouchers, has been eroding for a while and I think it will continue, particularly, as they incurred a hefty fine from the ACCC for anti-competitive behavior.
SFH:
Even though their ROE had been lumpy, I thought they were turning the business around after a large increase in ROE FY10.
Even though consumer sediment has been low since,
- I failed too recognise they have no Competitive Advantage
- If I have remembered correctly, their cashflow, using the Value.able method has been mostly negative over several years.
Essentially, they don’t have any demonstrated extraordinary business criteria, in fact they fail to reach the first appraisal base – investment grade.
Although I happy with my return and have recognised my mistakes, I still need to hone and refine my skills.
As I stated at the start the return I achieved would not have been possible without help from by many posts and replies from bloggers, too many to thank individually. But I would like to name some as they have been here virtually from the start, Ron Shamgar, a few Kens and last but not least our 2IC Ashley.
I do appreciate all the blogs and without under valuating them, I would like to say to Ashley you have helped many with your answers to their queries and pointed others back in the right direction when they have strayed from the Value.able techniques. This has been so beneficial to me.
Thank you to everyone who commented and blogged replies on array of companies, sincerely, they were also beneficial.
Roger, I still don’t know how to thank you enough for sharing your knowledge, your ongoing interesting posts, your generosity of stating your IV’s MQR,s especially the incredible investment opportunities in companies like MCE and others.
I can hear you saying seek your own professional advice. But, while I can understand the principles why, I do think back to awhile ago contrarian comments were made by others who like me have had misfortunate experiences.
I agree with Peter Switzer, you are the shrewdest investor in Australia and I am looking forward to your A1service, need I say anymore about seeking professional advice – my own individual opinion and of course everyone is entitled to their own, agreeable or not.
Regards
Ron F
Thank you Ron for sharing your results with us. I am delighted and encouraged. It does bring to mind for me the fact that some people viewing your post (or the many others that have been contributed in favour of the MQR and intrinsic value approach) will still be unconvinced. They will say the formula is not theoretically robust or that they cannot have faith until they see even more evidence. From early 2010 stocks like MCE at circa $3.00, Forge, Decmil, Oroton, CCP, ZGL, M2, MACA – there’s plenty of examples of the approach finding good opportunities for further investigation. Staying out of Myer and avoiding iSoft are examples of the quality and valuation approach working too. Meantime they continue to ask for my inputs. Seeking theoretical perfection in a formula rather than a really wide and practical margin of safety is a distraction.
Buffett himself suggested things would go a lot smoother for some investors if they lost a few IQ points.
Its not your job or mine to convert them. The wonderful thing about the market is that there is room for many approaches. I built mine for me and you are building yours for you. They can both work. We don’t rubbish anyone’s approach here, in fact I don’t really concern myself with them at all. Scott has simply set up a comparison in real time and for a bit of fun. Its also vastly more interesting than pages and pages of result tables from Monte Carlo simulations. I doubt anyone is going to bet the farm on its outcome but you want to see the angry rants that I haven’t published. Poor Scott. If I published these comments, I doubt Scott or anyone would ever post anything again. That is why I don’t publish the angry rants of the envious or prideful and why, for now, I won’t allow this blog to become a forum.
First of all thank you for fantastic invaluable blog.
it has changed my investing paradigm almost 180 degree. As I said in the email to you, before reading your book I was making huge lose (turst me, heart stops pumping when you see 33% of your hard earned wealth evaporates), but after understanding the investing philosophy I am having around13% profit. I know its very short time to judge the performance, but I am sureI am heading to right direction with the help of the knowledge you shared and insight bloggers are giving.
Delighted to hear it and with the benefit of 20 years market experience, I am not too surprised either.
Hi Roger
I thought the list Scott chose is without malice. Surely, self-control and investments funds have their own comparison lists of stocks and compare total returns against other funds, the latter, maybe, before fees and commissions.
I think you have been reasonable allowing others, who dispute your investing ideology and methodology, to blog their opinions. While I do think some of the opinions are individuality self-related blogs, I cannot help think some are affiliated with investment funds, merely protecting their self interest inherent gain.
I know you don’t get rattle with different opinions, but I think this needs to be clarified that you did not state in your book your formula is perfect and you never have. The concept of your book is the technique of identify extraordinary businesses and the consequences of choosing below par companies, continually both types are supported by actuality examples you blog, and not overlooking, your book contains similar examples.
You have taught us the margin of safety (MOS) is an integral part of valuable investing. As you have stated on occasions in similar words, the MOS chosen is an individual risk preference.
I prefer your proven investment strategy to those Monte Carlo systems that remind me of systems I have heard used for betting at casinos, on the race horses, etc. Or, another name one could give them “Sure thing systems”, supposedly.
I can understand why you don’t want insulting blogs on the site and neither do 99.9% of us. To allow it would circumvent the philosophies of the site and reinvent it to a so common insulting bigotry social network site.
Thank you again Roger for setting up this informative educational investment site.
Regards
Ron
Thank you Ron,
The oddest thing is being alerted to comments elsewhere that say; “Roger says he invented a formula” and then go on to dispute that claim or even disparage. Given the first page of the acknowledgements section of my book says “…everything you will find in this book is already widely available…” I am at a loss to understand precisely what on earth they are referring to. Thank you again for your supportive comments. Sincerely appreciated Ron.
Hi Ron,
Thanks for your feedback but you should feel really proud of yourself with what you have achieved
Hi Ron,
Amazing result. Agree with your comments and it is great to see an investor really looking at the business and their competitive advantage.
Hi Brad
Thanks your reply and compliment.
I have read your blogs, I think they have contained worthy information.
Sorry for not personally naming you in my blog, it was just too many to name.
Many thanks for your contribution to the site and I wish you all the best with your investing.
Regards
Ron
Hi Ashley
It was my pleasure to share my return.
Thanks for the compliment and again many thanks for your valuable contribution.
As always, I am looking forward to your future blogs.
Regards
Ron
Hi Ron,
My 2012 ., IV for Thinksmat ( TSM ) is $ 1.03 cents…. Considering this is one of Roger’s A1’s at its current price of .70 cents, it could be the best value stock out there at present
And cheaper than MMS. Some might suggest for a good reason.
The import of “The Eternal Golden Braid – Escher, Godel and Bach’ is complex. I certainly am not an expert in the area.
In my view, it has at least two themes. One is about what is intelligence, and if an ‘artificial’ version is possible. The second is about monotonic logic, and it’s inapplicability.
Godel’s theorem, the music of Bach , and the art of Esher, as well as the turtle and the gramaphones, play an essential role.
A very simplified, and probably incorrect, application of the work to the investment decision is – whatever the logic of a selection of stocks not all will be ‘better’ in the long run, nor, in general, can ‘past performance be a guide to future performance’.
All one can hope is that the choice is better than random. or another selection method. Theoretically this is Statistically testable but not simple. In the extreme Goedels Theorem even questions multiple statistic inference as, in a sense, this is monotonic logic
Hi Roger
Looking forward to your new information software.
Some time ago I seem to remember you said ‘the method used to value banks and insurance companies was different to other valuaton methods’. Could you show me where I might find this info please. I would like to look at including a bank in our investments.
Hi Gail,
Thats almost right but the information you are requesting is not something I disclose. The Value.able graduate class does have some very well developed views about the banks that I am sure they will be willing to share. You could also search the site for comments about banks by typing the following into Google; “Banks site:blog.rogermontgomery.com”
Hi Roger and all Value.able Grads,
Interesting to know the returns of different portfolios. I just started tracking my own portfolio in the past quarter against the ASX200 Accumulation Index, and outperformed it by 3.32%. Just wondering if anyone else is tracking their own portfolio? I think Roger’s fund did pretty well by staying majority cash as well.
The RBA website puts out monthly share market statistics including S&P/ASX 200 Accumulation Index.
http://www.rba.gov.au/statistics/tables/pdf/f07.pdf
hi jason,
Where is the data available for the accumulation index, i’m having a spot of bother finding it.
thanks, matt
thanks mike for the link.
I think you’ll find the RBA Chart Pack includes the Capital indices, not the Accumulation Indices. The latter are proprietary and subscription service only from S&P.
Hi Roger
I attended your presentation in Perth on Tuesday and found it very Value.able. I am comforted to see that I do have some A1s in my portfolio but in line with the theme of your presentation I also have some selling to take care of. Many thanks for coming over to Perth and delivering such a thought-provoking and entertaining presentation. I love Value.able (read it from cover to cover non-stop first time round) and it now graces your signature, thank you. I look forward to reading more of your blog and will tune into Your Money Your Call tonight.
Best wishes, Evelyn
Thanks Evelyn,
I was delighted to see you and flattered you had brought Value.able along for a signature.
Yes also worries when arms of broking firms spruik certian shares without BOLD disclosures
I would be very careful with these recommendations. You can’t evaluate a performance of an investment over such a short time frame (give it 10 years).
If you give it a long enough timeframe you will see how (CCP) dropped from 12 to 0.7 in a few months (an example why you can’t overexpose yourself to a single stock).
You will see how some of the companies recommended here (FGE and MCE) are very cyclical ones and once the down cycle comes your money will be reduced to oblivion.
You can’t possible use a single system across the share market as it is attempted here, as mentioned above, some companies are cyclic and its margin of safety can’t be easily determined using normal valuation metrics (FWD a clear example).
Read what it is said but be very careful, you have been warned.
Thanks Mike and the cycle we should all be looking for is the one that takes a company’s shares from a big discount to intrinsic value to a big premium.
Hi Mike,
I often hear people discuss time in regards to investments. Most investors (even value investors) are advised to take a long term approach meaning approximately 10 years in terms of historical earnings or looking into the next 10 years. I consider this misleading at best. It is simply about price and value.
If I buy FGE or MCE at $4 (both companies with less than 10 years in history) then they rise to their intrinsic value which is currently much higher within 1 or 2 years, then I can sell if I want to. It would be silly to buy and hold because “I only hold for 10 year periods” or “I only buy a company with at least a 10 year history”. What about Telstra? Elders? QANTAS?
If you think money is going to be “reduced to oblivion” then Telstra et al, are more likely to take your money to oblivion than any small companies with a bright future (bought via the value investing methodology). It has been shown that earnings revert to the mean over about 5 year periods so, there is a higher probability that using a 10 year timeframe, you will watch earnings rise and then fall back to where you started. This is in part due to not considering the company’s intrinsic value.
Personally I think investing on a basis of a company’s history does not make the investment any more secure or certain. With a fast changing world it is more likely that 10 year old companies lose to the newer young companies.
Using a 10 year timeframe, you would have missed JBH”s rise but might now feel safe to buy it when they are maturing. In my mind it most likely means lower returns in the future because they are a mature business that in most cases probably pays dividends and has modest growth with their best days behind them.
You are correct in saying that “a single system” wont work in all cases, but my advice would be to read Buffett’s The Super Investors of Graham and Doddsville. In brief, the most successful investors over the past 50 or 60 years use value investing as a methodology.
regards
Steve
I agree Steve, I think the whole thing about time gets misinterpreted sometime. Should not overthink the often mentioned quote of time being a friend of a great company and enemy of the bad company.
It says it all right there, focus on quality businesses first. if you find them than time is a friend (for as long as that company is quality), if it is bad, doesn’t matter how long you stay in for.
I also think personally that in the Australian market it is very hard for a company to be quality for a really long period of time. Some have succeeded but alot will simply see them the maturity stage and see their quality dimininsh. The population isn’t enough to sustain this in most cases i feel and overseas expansion just doesn’t seem to be something aussie companies are good at on average.
I don’t think the results of this experiment was any surprise to anyone on this blog, however 6 months or even a year is an extremely short timeframe for value investing and provides inconclusive results at best.
Having said that, the last 6 months the markets have been extremely violatile and if this small result sample is ultimately a good representative of a larger sample, say 3-5 years, then you could say conclusively that Roger’s business picking method is superior.
Also regarding the small tidbits of information about the imminent A1 service, I actually feel abit of fear in anticipating how much this service will be priced at.
Like everyone else I am looking forward to the unveiling.
Good points Howards,
Of course six months is indeed short, but we have to start.
Thanks Howard,
On Sept 30 this year, I am going for my hat-trick, I reckon I’ll get it. From there I’ll just keep going.
All the best
Scott T
Has anyone looked at XRF Scientific (XRF)? Like the space they are in. Tried to factor in the purchase of businesses, release of shares, debt, capital raisings etc for this half year and came up with an IV a lot less than the current price.
I know some microcap managers are very bullish on this stock.
Cheers
Al
Hi Alan
I have had a look and decided to wait a bit and see how they go.
I might miss some of the expected return but I was thinking about Warren Buffet’s first and second rules
Good point Ash.
Has been a very busy balance sheet for the half year and they are still offsetting against prior years losses so be interesting to see how it all ties together in the June 30 accounts.
There is no doubt potential though.
Hello Bloggers
Have a question and hopefully one that perhaps Roger can shed some light on? As the release of company results gets closer and closer should we be looking at holding off purchasing any securities until we finalise our 2011 IVs and recalculate 2012.
I know there is a reel of data from analysts on what companies will report (bar those thinly researched) on which we can calculate IVs, but there are always surprises, so is it better to wait for the concrete figures to work with when they are only a month or so away?
Cheers
Al
We have held of making some purchases pending confirmatory data in the annual results. But its not a blanket prescription. It depends what you are looking for.
sign me up for your new a1 service Roger
already know it will be great
Will do Nevada.
Hi Roger
The impressive comparison lists done by Scott depicts the many find articles you have written on C class companies and so called blue chip companies. I don’t think there is any need to repeat any of the examples as I think Value.able investors would be attuned to C class/blue chip; I am sure now after viewing the chart.
Well done Scott and thanks for doing it and thank you Roger for posting it.
Scott, you deserve many accolades for taking 6 weeks annual leave and helping people who no doubt needed the physical and emotional support.
Regards
Ron F
Thanks Ron and thanks again Scott.
Thanks very much Ron, your kind words are greatly appreciated.
You are right to point out Rogers many articles of C Companies and how they are not really investment grade. I don’t know how many times I have heard Roger say, “You want to buy quality businesses whose IV is rising at a good clip”
It is pretty simple really
All the best
Scott T
It is simple but very smart people like to make simple things complicated. If their superior intellect cannot produce superior returns then what point the intelligence to which so much pride is attached?
Brian,
It seems to me to be a misnomer to lump all capital raisings in the same basket. While I realise there is merit in growing steadily and organically, in the case of a company like MCE or FRI, they have raised capital to take advantage of rapidly developing markets. While these expansions come with risks, there is the potential for both of these companies to grow while maintaining or improving their current ROE. In the case of a capital raising by a C4 or C5, it is often done for the purposes of survival, and consequently either its BV per share or ROE (if it has one) is most likely to decline. Consequently, a capital raising in the case of the former can potentially be value accretive, while in the case of the latter, a capital raising is often just ‘throwing good money after bad’.
Cheers,
Bob
Thanks for posting Bob.
In the contrarian spirit, another perspective – hopefully constructive.
The GS portfolio was picked in Dec and I assume the A1 portfolio was put together at the time of the David & Goliath post back in Early April. The outperformance of the A1 portfolio occurred in the Jan – March period. (A look back period for the A1 portfolio). In the period Apr – Jun (A look forward period for both portfolio’s) the G&S portfolio (-6.1%) has lost less money than the A1 portfolio.(-9.3%)
The big question for me is how much hindsight bias (unintended) was there in the A1 portfolio selection and is that responsible for the Jan-Mar outperformance? In April, more was known about the companies and the market performance than In December. Perhaps a different 10 A1 stocks would have been put together in December with the then known information. A Monti-Carlo simulation of all possible combinations of 10 A1 portfolios would need to be used to ensure hindsight info hadn’t crept into the selection.
A start point of March 31 when both portfolios’ are on an equal look forward basis seems like a more appropriate comparison to me.
A value investing edge only reliably manifests itself over the long term. (One year is not long term to me.) If this exercise highlights short term underperformance and volatility then that’s probably a good thing because at some stage every Value Investor no matter how good they are (even Buffett) are going to have to deal with those outcomes. Actually being able to deal with those outcomes usually dictates who sticks with the value investing approach and pockets the long term gains.
Just to ease your concerns gavin, we have had a PHD in our office for several weeks (doctorate in data mining/interrogation) and he’s produced results that we are more than happy with. Monte Carlo simulation results fill several pages of the report. Of course it would only be fair to perform the same tests on the brokers picks…I hope Scott intends to monitor the portfolio for many years..
Hi Gavin,
Thanks for your post. The A1 list was selected on 8th December 2010, the day after the original article was published. If I had picked it in April, I sure wouldn’t have included ACR, ORL or FWD (which has just gotten worse).
Lets see how we go as the next couple of quarters results come in.
All the best
Scott T
Hi Scott
Sorry for the delay – Been away.
Thanks for clarifying when you selected the stocks. My assumption that you had picked them at the time of writing the original post was obviously wrong. It looks like the variability in perrformance between the two periods is just down to volatility.
I certainly wasn’t meaning to have a go at you when I posted my thoughts based on the assumption that you had put the A1’s together in March and the potential dangers of backward looking comparisons.
I too, look forward to many more instalments.
Great stuff Gavin,
I am delighted when graduates adopt a conciliatory approach. Different opinions about stocks are just that. There is no call for any heated remarks or judgement. If anyone fails to abide by this I will simply delete the comment without any explanation. ALmost without exception threads on those free-to-air forums, no matter how lofty their aims, descend into judgement, bullying and boasting because of the unwillingness to accept a simple truth. We can all buy different stocks and still all do well. See Buffett’s discourse on the Superinvestors of Graham and Doddsville http://www.beinvestors.com/wp-content/uploads/2011/06/superinvestors.pdf
Hi Roger,
I too am eagerly looking forward to your new A1 service with much anticipation. Can you advise if that service will include a ‘back of the envelope’ cash flow analysis or similar? I’m hoping it will as online systems are ideally suited to repetitive number crunching analysis of historical and current databases.
Cheers,
Raymond
Hi Roger,
Sorry to be behind the eight ball here but I have no details of this newsletter and software product and don,t know what you all are talking about.
Great Fred, Thats probably a good thing.
Scott T
Keep up the great work it is appreciated and looking forward to rogers new service
Thanks Kent, glad you like it.
All the best
Scott T
You’re a great salesman Rog! Teasing us with information about the A1 service over the past few weeks without releasing too many details. You have certainly got everyone’s attention. Looking forward to seeing what your team has come up with!
Hi Jonesy,
Now that is one thing I can admit to being very bad at. If I was a great salesman, I’d have a great story to actually tell you. I doubt there are any marketing courses being run today that are telling students to go out and tell everyone “something is coming”. Thanks for the support though. I genuinely look forward to hearing what you think.
I don’t think you do yourself justice, some of the best ad campaigns over the years start off with these “teasers” that tell you absolutely nothing about the product other than “you’re going to be blown away”, “this will do all you want and more”, implying that this is a product not to be missed out on and something you can’t live without. It’s not until later in the series when you actually find out what the product is and by that time, it’s too late, you’re hooked. I would be VERY suprised if there is a single graduate here who can honestly say that they will not even be taking a look at what you’ve come up with, let alone subscribe to it!
I see! Its not intended to ‘tease’. I just want to see everyone fully informed, before they go off and lock themselves into 1 year and 2 year contracts. I would not want anyone annoyed with me that I didn’t ‘tell’ them about something I had before they committed elsewhere.
Hello Roger,
You asked if I had checked my portfolio for C5s. There may not be any C5s but there are certainly a few that need to leave. Thought I would list my portfolio (with weightings). Stocks on the left are the remnants of advice from the stockbroking firm that helped set up my SMSF 12 years ago and my own pre-Value.Able days. Stocks on the right (with entry prices) have arrived since I have abandoned the voodoo of chart analysis and just concentrated on trying to find quality companies.
APN 2% ACR 7% ($3.29)
ASZ 4% CCV 13% ($.0.58)
BLD 2% DTL 12% ($8.00)
CAB 6% FGE 13% ($3.30)
SHL 6% MCE 18% ($3.35)
TLS 13% SAR 5% ($0.74)
APN and BLD definitely have to go along with SHL which I think is severely overpriced by Mr. Market. Not sure about SAR, however. I think it looks cheap at today’s price of 57 cents but as a gold producer that has only just become profitable, I may have missed something when trying to analyse its half year report. Look forward to seeing the full year report and wonder whether any other bloggers have had a look at it.
Regards
John
Thanks John,
Obviously we cannot give you any advice, however there will be no shortage of opinions for you to consider amongst the Value.able graduates. One observation I can make is the weighting (almost a third) to one sector.
Thanks for the reply. The weighting was not originally that biased. I guess that’s what happens when A1s are severely underpriced and move quickly towards their IV, although I think there is no reason to sell at this stage.
john, my advice is to think about whether companies with high ROE and very low payout ratios can keep sustaining these for ever…..
good luck.
Hello Ron, you are probably right. Nonetheless, FGE,for example, has forecast another excellent result for 2010/11 with revenues of around $400m (up from $246m) and NPAT of around $39m (up from $31m). There is some concern that they have not yet won any “big” contracts but a continuation of this sort of growth in 2011/12 should augur well for any investment in the company in the short term. Their annual report should be interesting.
Agreed John. Look for any cooments about the rel’ship with Clough is aiding growth.
Incredible! This surely proves sticking to the best businesses (A1’s) and not to the good ol’ blue chip businesses (many of which can be C5’s) makes a difference.
Looking forward to the results in the next installment.
Me too Phil.
Thanks for your support Phil.
All the best
Scott T
Six months does not a symphony make.
Do you propose we hold off publishing the results until we have ten years or would you prefer we publish as we go?
No, but there seemed to be people applauding already. Too soon, though I’m confident Scott’s thesis will be proven correct over a longer, and more suitable, investment time frame.
Thanks Craig,
I think you are right, lets give it time and just see if we are right. 1 quarter, 2 quarters, 9 quarters, 34 quarters, time will indeed prove our point, or not.
All the best
Scott T
What a great job Scott has done to show the benefit of ValueAble
Also a thanks to Roger for publishing it
I think its even better than what Scott shows us, II believe we must add in franking credits,
You can adjust for your tax (credits have value to every investor)
Reworking the last column the ” % Gain/Loss”
Goldman was -6.23% with Frk Crd -6.06%
ValuAble was 1.84% with Frk Crd 2.42%
We also appear to have an aberration with ACR the biotech Accrux. It had a 100M payment for the rights to of sole distribution of a drug ACR has patent rights to: They also receive royalty payments as well
My rough figures for this year are a Div Payout of 166% of earnings & a ROE of 138% This is unlikely to be repeated.
If we exclude ACR & adjust the figures to the $100,000
ValueAble becomes 0.63% plus Frk Crd 1.28%
Another minor point to be fair to the Index
You should use the Accumulation index
if you take Dividends into account
Which ever way you look at it ValueAble Wins
Macca
Hi Macca,
Thanks for your great comments. I agree with every thing you say, however there are as many ways to do this comparison, as there are blog contributors.
Last quarter I compared to the XJO, and many posters reminded me to include dividends. I don’t pretend this is a definitive result, nor am I too precious to receive excellent contributions from fellow bloggers.
I love your last line, Which ever way you look at it Value.Able Wins.
All the best
Scott T
Great post Roger and Scott, very entertaining.
Very pleased with my own portfolio over the past couple of weeks, it’s starting to reap the rewards of me trying to disconnect the emotional centre of my brain during May and June and topping up on what I thought were great quality companies at more attractive prices. Really looking forward to the new A1 service (haven’t looked forward to something this much since the lead up to Christmas when I was 6!) I think it’s so important to be able to assess the merits of a company and invest / not invest in that company by taking an objective view and not letting emotions cloud the decision either way. Anything that can help with that will be invaluable. Waiting with baited breath…
Hi Jonesy,
I would be delighted to sign it for you….
Hi Jonesy,
I am very glad you are enjoying the latest instalment of the twins investing adventure.
All the best
Scott T
Absolutely Scott, enjoy your posts, keep them coming
“…A1s have the lowest probability of a liquidity event ”
So what happened to FRI & MCE & TGA ?
Gee Brian,
I thought it was clear. “Lowest probability” doesn’t mean ‘No chance’.
There are liquidity events and liquidity events.
Comparing MCE raising money to say NMS raising money is ridiculous, although both are liquidity events (as an example).
Circumstances change everything and each capital raising should be examined individually and judged on its own merits.
Brian, TGA bought a business and are being conservative by using equity rather than lots of debt.
I would also argue the type and severity of liquidity event is different for A1’s than C5’s.
MCE for example had a capital raising to invest in a project which should bring in long term benefits to the company, where as a C5 will more than likely be raising capital to stay in business.
A1’s may and probably will have a capital raiasing but the reasons for this will likely be drastically different than those at the bottom of the MQR scale.
Capital raisings are not necessarily a bad thing if they are used for projects that increase company value.
Hi Roger. TIS Tissue therapy is said to be the next CSL. Do you agree?
I was just wondering if you could please allude as to what you do to account for the drop out of A1s? ie say a business initially comes out as an A1 but a string of bad moves leaves being a B3.. is it then stricken from index and another one stuck in?
Indeed @Ben, I’d want to understand the A1 index construction used in that chart better. Index construction is extremely susceptible to survivorship bias and datamining. For example perhaps the 20 A1s were selected at the chart endpoint dates that were also A1s at the chart inception date. You would also want to know what the discount to calculated IV was for inclusion and if there was internal index adjustment to cheaper A1s during the period. I’m not suggesting that this has happened here but without understanding how A1’s are handled during -ve transitions and when/if there was internal A1 index adjustment then you would need to understand how this was trigged and when the trigger occurred for adjustment in relation when data was publically available (for example when PR event was released or when actual financials published). Without understanding these points there is serious risk of trusting an index that looks like a ‘sure-bet-can’t loose-strategy’ when the results look good due to data-mining and survivorship biases – i.e there is no statistical validity behind the back tested returns. To get an idea on how to look at it correctly look at the book ‘What works on wall street’.
Having said that, the selection of high ROE companies, with strong competitive advantages at a reasonable price is a sound strategy. If A1s measure these qualities then the strategy should do reasonably well.
Kisses, LL
Fortunately Lindy, “survivorship” is not something A1s have to worry about! Pun intended.
Things that make you go Hmmmmm.
Roger, is that really your only response to Lindy Lu’s points?
yep. This blog is free. My IP has a much higher intrinsic value.
Hi Ben, thanks for your comment. I addressed your question in the fist chapter of this story when I said:
For this 12-month exercise, running for a calendar year, we shall assume that neither brother is able to trade their position. One brother has no inclination to, and his regional twin is fully invested, and more inclined to hold long anyway.
I hope this helps
All the best
Scott T
Hi Roger,
I can provide a personal example that helps validate your example, as I know that theer is scepticism from some in this portrayal.
I began investing in March last year. I purchased 2 portfolios. One of ASX20 shares for my daughter (4 years old) and one of ‘high quality’ businesses (of which many are A1s).
As of today, the ASX20 portfolio is 1% ahead of the purchase price. The ‘high quality’ portfolio is 25% ahead. Taking into account that my ‘high quality’ portfolio receives less dividends, there is still a 20% differential.
Note, this is only a one year analysis so far, however I can only hope for the same or similar performance in future.
My experience may not align with others, but so far the strategy of picking value.able businesses is working.
Hi David,
Thank you for sharing and thank you for the support. I am delighted to hear of how your own stock selections have performed. Don’t worry about sceptics. There are even people who rubbish Warren Buffett’s track record. Its not our job to convert the sceptics. In fact it will be financially better for us if we encourage them to go and follow something else.
Sceptics are very important!! If we did not have them, then the price of A1’s may not go below their respective IV’s And we could not buy them!
PS. I trust you were in Perth Time with an unadjusted PC clock. I hate to think that you were up til ‘the wee hours’ of the night answering Blogs! (2:19 am)
PeterB
Unfortunately that was AEST. Thanks for caring.
I agree Peter, if everyone agreed with us than how on earth are we going to get discounts, everyone would be buying the same thing and we would have no national airline as no-one would be tipping money into it.
I still laugh at part of TISM’s song “BFW” where they say the stock market is just a group of people trying to rip eachother off.
I think it has merit, however i would say that the stock market is a group of people trying to prove they are smarter than the other. Same concept, just worded a bit differently. personally, i have my method and i stick to that, others have theirs, good on them. Hope it gives them good returns.
On that point Roger do you think that we also benefit as value investors from the huge amount of money pouring into super funds whose managers seem to invest in standard type blue chop portfolios or so called diversified portfolios?
Yes I do and I have left Blue Chops in your comment because I think its more appropriate than Blue Chips
“blue chops”, I think you’ve just created a great new way to categorise particular companies.
Great Story David V, looks like you are getting a similar result to the twins, well done on your own A1 portfolio.
All the best
Scott T
Hi Roger,
Just wanted to ask how we you deal with companies that have significant equity accounted assets i.e. property groups with joint ventures, resources/oils companies? Reason I ask is that some companies may have large off balance sheet assets/debts. This would obviously affect the calculation of book value and also ROE, and therefore has implications for calculating intrinsic value.
Cheers
mike
generally cautious on the item “equity accounted ” when it appears in balance sheets
A great article by Scott. Also, a great photo. Perhaps we should see a photo of the “Hare and the Tortoise” which seems to relate more closely to the A1 versus C5 classifications, and the book “EGB; The Eternal Golden Braid – Escher, Godel and Bach”.
Finally, it would probably be better for Valuable Graduates to have an A1-A5 index and a C1-C5 index that replaces the ASX 200 Index and the Allords Index!
Cheers,
PeterB
I was talking about that very idea in perth earlier today.
Hi PeterB,
Thanks for your comment. I think that is a great idea, we could do something like chart, over the long term. the performance of A1 to B2 companies V’s the performance of B5 to C5 companies. In fact this might be the first thing I set up after Roger launches the new A1 system.
All the best
Scott T
Scott,
Many thanks for your reply, comments and ideas.
Due to the great blogs, insights and information that is now available in this blog, plus the invaluable list of classified stocks (A1 ….. C5), I find that I do not pay attention to anything other than those stocks that are in the (A1….B5) set. And that is quite a workload too.
To me there is no point in wasting valuable time reading or researching the C set. Particularly when the remainders (A1…B5) are of more interest. I don’t even read any newspaper article on the C set. So long as there is this Blog and Roger’s classifications, I shall continue with this approach.
BTW Scott, approximately, how many of the 2000 odd stocks fit into the A, B and C sets of classifications?
Cheers
PeterB
56 A1s, 112 A2s…and on and on it goes…
Hi Roger,
It would also be interesting to see on your chart a comparison of the top 20 (by market cap) C5’s.
cheers
mike
Nice idea Mike. Watch them for long enough and there will be fewer and fewer on the list.
If you are including dividends then you should be comparing the portfolio returns to the Accumulation index (which includes dividends) rather than just the ASX 200 capital returns. (Not that it will make much difference!)
cheers
mike
Mike – Yes the ASX-200 should add in something like 1.8% dividends for the 6 months so far. But to be fair Roger just showed the dividends for Goldman and A1s and didn’t seem to include them in the 6 monthly returns for comparison purposes.
Kisses,LL
Thanks Lindy,
Scott prepared the data, and we are posting his work.
Sheesh Lindy! Who is Scott? Looks like you may have read the whole post a little too fast.
I always find it frustrating when I see certain fund managers etc. appear on Your Money Your Call talking up “a diversified portfolio of blue chip stocks”. When asked about certain smaller quality companies they mention that they only stick to the big end for “safety and security of their clients funds” and suggest “sticking to RIO or BHP”. What an easy job for them! I could do that and get paid hundreds of thousands per year just for picking all the usual “blue chips”! Very little research required!
In regards to the A1 service, I am hoping it may free us up to do a bit more research into the quality of companies, competitive advantages and prospects going forward. I’m assuming it will allow us to focus less on calculating IV’s and financials so that we can use the blog for discussing other important factors. Of course not saying that I will definitely sign up yet – but looking forward to seeing the offering
Hi Steve and everyone,
It will indeed do all that you ask.
UNDER NO CIRCUMSTANCES WILL THERE BE ANY FREE TRIALS. You can get free 21 day trials to all the existing newsletters and software products. But let me assure you of something now, no investor that takes up the A1 service will ever have to worry that they are sharing the information with other investors who are enjoying it for free. Not even for an hour!
Thats comforting, Thanks Roger
“A1s have a lower probability of a liquidity event”
I think we also need to look at what the liquidity event is for. If it’s for the future benefit of the company such as a capital raising to buy more equipment which in the long run will improve the company -then no problem
If it’s a capital raising to pay down debt then beware ( I got burnt with TSE – transfield services in this way ) – shareholders just keep pouring money in to keep the company afloat
Good points Peter.
Hi Roger,
Will the new service be limited to listed companies, or will it include upcoming IPO’s?
Will keep you posted Ray…Stay tuned.