Tuesday 30 December 2014
Thursday 25 December 2014
Some books worth mentioning
A few weeks ago i finished a book i was reading called "Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors." Which was a great book to come across by, especially if you're intrigued by deep value/contrarian investing styles.
The next book I've just finished and is one of the value investing classics is Seth Klarmans's "Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor." If you can get a copy of it, well done (it's out of print and costs over $2,000).
The book i am now reading is also thought provoking and helps bridge gaps between modern day value investing and the old school way, is Joseph Caldandro Jr's book "Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett's Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution." If you're familiar with Bruce Greenwald, there is strong correlation between their styles of valuation. Greenwald teaches value investing at Columbia Business School and is also directly associated with the investment management industry.
Next on the list is Mohnish Pabrai's book "The Dhandho Investor: The Low - Risk Value Method to High Returns." I'd recommend reading all of them, but Klarman's book is a must as it is a classic, despite how troublesome it might be to get hold of one!
Most of my spare time is spent reading the literature and has been for the past year. This is because i believe it's extremely important to get a strong foundation before applying it (although i have dabbled in the market, because what's theory with no application? The application itself teaches you things books and the like cannot.)
Happy holidays to you all!
The next book I've just finished and is one of the value investing classics is Seth Klarmans's "Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor." If you can get a copy of it, well done (it's out of print and costs over $2,000).
The book i am now reading is also thought provoking and helps bridge gaps between modern day value investing and the old school way, is Joseph Caldandro Jr's book "Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett's Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution." If you're familiar with Bruce Greenwald, there is strong correlation between their styles of valuation. Greenwald teaches value investing at Columbia Business School and is also directly associated with the investment management industry.
Next on the list is Mohnish Pabrai's book "The Dhandho Investor: The Low - Risk Value Method to High Returns." I'd recommend reading all of them, but Klarman's book is a must as it is a classic, despite how troublesome it might be to get hold of one!
Most of my spare time is spent reading the literature and has been for the past year. This is because i believe it's extremely important to get a strong foundation before applying it (although i have dabbled in the market, because what's theory with no application? The application itself teaches you things books and the like cannot.)
Happy holidays to you all!
Monday 22 December 2014
The secret formula to getting wealthy
The secret formula is that there is no formula. So discard all your subscriptions to websites stating that they can make you rich in "just in 3 months" or get quick schemes. The real secret, and it's no secret at all, is that it takes discipline and self sacrifice. More specifically, it entails one to spend less than you earn and invest the residual. After many, many years, you can't help but be wealthy. Emphasis is on the time here that is involved. You must invest the money for long periods of time to allow the magic of compound interest to work. Let's illustrate a few points of how this works with an example.
Let's assume we invest $1, and this dollar earns 10% per annum. The only variable which changes here is the time period for which it is invested in.
1(1.1)^5 = 1.611 (1)
1(1.1)^10 = 2.594 (2)
1(1.1)^45 = 72.890 (3)
1.(1.1)^50 = 117.391 (4)
There are a few things to notice here apart from the aforementioned. Firstly, compound interest has little impact on the value of the dollar over a short period of time, as illustrated by (1). Secondly, as you increase the time period, from 5 to 10 years, i.e. the time period doubles, it's effect, as it is still a short time period, is minimal. For example, the percentage change in the value of the dollar from 5 to 10 years is only 61%.
Fast forward the same dollar, however, now it's invested for 45 years and we've turned it into roughly $73. A huge difference. Lastly, while the time period has changed by the same amount between (1) and (2), i.e. 5 years, the dollar has also grown by 61% but the nominal change is approximately $44.5. Which is much larger than the initial change of five years. One other thing related to this example, is that i used a difference of 5 years in both sets. This was intentional, as it illustrates that the first 5 years, i.e. from 5 to 10 years, represents a doubling of the time period. However, from the 45-50 year time period, it only represents an 11% change in time, but the result in relative terms, is both 61% (of the appreciation in the value of that dollar).
The key takeaway from this is that compounding works well, but only after long periods of time. This runs congruent with my initial reasoning that it takes many, many years for this process to work. Theoretically, this sounds easy but in practice this is a difficult task to adhere to.
Let's assume we invest $1, and this dollar earns 10% per annum. The only variable which changes here is the time period for which it is invested in.
1(1.1)^5 = 1.611 (1)
1(1.1)^10 = 2.594 (2)
1(1.1)^45 = 72.890 (3)
1.(1.1)^50 = 117.391 (4)
There are a few things to notice here apart from the aforementioned. Firstly, compound interest has little impact on the value of the dollar over a short period of time, as illustrated by (1). Secondly, as you increase the time period, from 5 to 10 years, i.e. the time period doubles, it's effect, as it is still a short time period, is minimal. For example, the percentage change in the value of the dollar from 5 to 10 years is only 61%.
Fast forward the same dollar, however, now it's invested for 45 years and we've turned it into roughly $73. A huge difference. Lastly, while the time period has changed by the same amount between (1) and (2), i.e. 5 years, the dollar has also grown by 61% but the nominal change is approximately $44.5. Which is much larger than the initial change of five years. One other thing related to this example, is that i used a difference of 5 years in both sets. This was intentional, as it illustrates that the first 5 years, i.e. from 5 to 10 years, represents a doubling of the time period. However, from the 45-50 year time period, it only represents an 11% change in time, but the result in relative terms, is both 61% (of the appreciation in the value of that dollar).
The key takeaway from this is that compounding works well, but only after long periods of time. This runs congruent with my initial reasoning that it takes many, many years for this process to work. Theoretically, this sounds easy but in practice this is a difficult task to adhere to.
Saturday 20 December 2014
Heads i win, tails i don't lose much
A brief introduction for the time being.
The past month has been an exciting time for myself. It is the most volatility I've experienced since i first begun investing. Falling markets should put smiles on the serious value investors mind as it provides opportunity. One of the most important lessons I've learned is that allocation of funds, in particular, how much to allocate to a particular stock and how much not to allocate is a puzzling idea.
The post will be about a stock I've deemed undervalued and in my opinion, provides protection of principal. Contrasting my idea that this is a low risk play, with the common market, which deem this a high risk play is striking, but doesn't phase me. People disagree with me all the time. Every time you buy a stock, the person selling it, most likely has the opposite view of the stock to you. There shouldn't be a problem with this. This stock may fall 45% tomorrow or it may not. But remember, as the price falls, it becomes more attractive (in this specific example).
I'll post more details later but the company is called WDS Limited (ASX: WDS). It mainly operates in the mining and energy markets. Despite deteriorating fundamentals driven by the mining service sector, WDS's multifaceted earnings stream might provide some light. However, this isn't the reason for purchase. I'll write more on this when i get more free time. Happy hunting over the holiday period :)
The past month has been an exciting time for myself. It is the most volatility I've experienced since i first begun investing. Falling markets should put smiles on the serious value investors mind as it provides opportunity. One of the most important lessons I've learned is that allocation of funds, in particular, how much to allocate to a particular stock and how much not to allocate is a puzzling idea.
The post will be about a stock I've deemed undervalued and in my opinion, provides protection of principal. Contrasting my idea that this is a low risk play, with the common market, which deem this a high risk play is striking, but doesn't phase me. People disagree with me all the time. Every time you buy a stock, the person selling it, most likely has the opposite view of the stock to you. There shouldn't be a problem with this. This stock may fall 45% tomorrow or it may not. But remember, as the price falls, it becomes more attractive (in this specific example).
I'll post more details later but the company is called WDS Limited (ASX: WDS). It mainly operates in the mining and energy markets. Despite deteriorating fundamentals driven by the mining service sector, WDS's multifaceted earnings stream might provide some light. However, this isn't the reason for purchase. I'll write more on this when i get more free time. Happy hunting over the holiday period :)
Friday 5 December 2014
G8 Education (ASX: GEM) has this week released an EBIT guidance for the financial year. Furthermore, it has also lifted its dividend. While they have said they will exceed the consensus estimates by less than 5% be mindful that they have said this in the past and it hasn't happened. So extrapolating these uncertain figures using the guidance might not over the long run be optimal and may lead to drastic differences resulting from only a small change in the EBIT.
The main topic i wish to talk about is Mount Gibson Iron (ASX: MGX) which on Friday resumed trading after one of their main mines flooded late last month. Upon recommencement, the shares closed down about 50%. This is not the main point i want to get across. The main point is that when i talked about buying MGX a few posts ago, i mentioned i cancelled as i believe the cash balance could diminish rapidly, and, indeed it is. Over $100m has been spent and only about $360m remains. This sounds like a lot and it is, but what is concerning is the rate at which the cash is evaporating. I'm still interested in buying into the business, however, my price is now revised all the way down to about $0.08-0.10. This is the margin of safety i now require, as i will not be including much of the cash in my net-net calculation.
A subtle but important note to make is that in my original post, i mentioned wanting to buy in at a price of $0.43, and now I'm talking about buying into the same company only weeks later for a price of $0.10. This is a worrying difference on my part, which is something that is gradually being addressed.
Vita Life Sciences (ASX: VSC) has also updated the market on its expansion into Indonesia, whicb has now started. It will interesting to see the numbers they provide us over the coming year. I also noticed a contarian New Zealand based fund manager which goes by the name of Pie Funds Management also hold a position in VSC, although I'm not sure if they still do. After a brief review of their investment philosophy/ track records and the like, it's strikingly interesting to see they have bought into VSC (however, i would like to know when they bought in).
On the other hand, I've stumbled across a very small market cap company (trading with a market cap of less than $50m) which is in a tight situation, but an attractive one (in my opinion). It also has an identified catalyst (although i wont say it's guaranteed, as nothing really is) which may boost value realisation to shareholders. More on this later on.
Lastly, I'd like to point out that my first year of holding a portfolio is approaching. I will detail a post on this in due course. In it, i will mostly be talking about my positions and the risks which i believe they entail, which is something that is extremely important.As some of my positions are in contradiction to my underlying philosophy it may be confusing to read these posts as it may seem I'm all over the place in terms of what I'm saying and what I'm actually doing. A long, and detailed post will address this in the near future.
The main topic i wish to talk about is Mount Gibson Iron (ASX: MGX) which on Friday resumed trading after one of their main mines flooded late last month. Upon recommencement, the shares closed down about 50%. This is not the main point i want to get across. The main point is that when i talked about buying MGX a few posts ago, i mentioned i cancelled as i believe the cash balance could diminish rapidly, and, indeed it is. Over $100m has been spent and only about $360m remains. This sounds like a lot and it is, but what is concerning is the rate at which the cash is evaporating. I'm still interested in buying into the business, however, my price is now revised all the way down to about $0.08-0.10. This is the margin of safety i now require, as i will not be including much of the cash in my net-net calculation.
A subtle but important note to make is that in my original post, i mentioned wanting to buy in at a price of $0.43, and now I'm talking about buying into the same company only weeks later for a price of $0.10. This is a worrying difference on my part, which is something that is gradually being addressed.
Vita Life Sciences (ASX: VSC) has also updated the market on its expansion into Indonesia, whicb has now started. It will interesting to see the numbers they provide us over the coming year. I also noticed a contarian New Zealand based fund manager which goes by the name of Pie Funds Management also hold a position in VSC, although I'm not sure if they still do. After a brief review of their investment philosophy/ track records and the like, it's strikingly interesting to see they have bought into VSC (however, i would like to know when they bought in).
On the other hand, I've stumbled across a very small market cap company (trading with a market cap of less than $50m) which is in a tight situation, but an attractive one (in my opinion). It also has an identified catalyst (although i wont say it's guaranteed, as nothing really is) which may boost value realisation to shareholders. More on this later on.
Lastly, I'd like to point out that my first year of holding a portfolio is approaching. I will detail a post on this in due course. In it, i will mostly be talking about my positions and the risks which i believe they entail, which is something that is extremely important.As some of my positions are in contradiction to my underlying philosophy it may be confusing to read these posts as it may seem I'm all over the place in terms of what I'm saying and what I'm actually doing. A long, and detailed post will address this in the near future.
Tuesday 25 November 2014
G8 Education And The Notion Of Arbitrage
On tonight's edition of Your Money Your Call Shares, a great investment analyst was on the show who talked about one of the companies i own. He proposed a situation which was very interesting. He mentioned how G8 education (ASX: GEM) is arbitraging the private sector's cheap side and bringing it to the public.
I'm not entirely sure if i understood him correctly or if I'm veering off on a different tangent but essentially, he hinted towards the business being able to buy private businesses (the childcare centres) which are cheaper and bringing them public in one form or another (which tend to be more expensive). For example, G8 education is paying approximately 4x forward EBIT for the centers. However, to buy one stock of G8, it is far more expensive than 4x EBIT on the market. This way, Chris Scott has used his entrepreneurial skill to raise his own personal wealth in an intellectually sound manner (which isn't a foreign strategy for Mr Scott). The pullback in G8 Educations price is triggering potential buys. Contrastingly, it's interesting to see that Citi Group has recommended a sell on the stock.
A common theme i hear about the company is that as they have used economies of scale to drive margins and the like, which in this case is a limited strategy as there is a quota on the ratio of children to teachers. Continuing with this logic, it makes sense to assume growth in margins driven by this method isn't sustainable. However, this doesn't stop them from buying more centres and to continue their roll-ups. Another problem here is that the deteriorating balance sheet as a result of this, which is incrementally increasing the risk of the business. Pricing potential is also an issue. It's important to note that, if you bought the stock when the company's EPS was about 11c and five years later the EPS has grown by a factor of five, the problem of questionable growth at a premium is reduced. For example, lets assume that in five years from now the company has EPS of $0.55 and is trading at 18x. If you bought in now, the downside is reduced (leaving aside the interim period). Another potential problem is that the business has a restricted organic growth business model which may be a cause for concern in the future. All aside, i still believe the company is good and to say the least, it's been a good learning experience.
I'd highly recommend watching the show if you're interested in stocks because it provides some good insight to various different analysts and their different ways of thinking about the market, but more importantly, about specific companies.
I'm not entirely sure if i understood him correctly or if I'm veering off on a different tangent but essentially, he hinted towards the business being able to buy private businesses (the childcare centres) which are cheaper and bringing them public in one form or another (which tend to be more expensive). For example, G8 education is paying approximately 4x forward EBIT for the centers. However, to buy one stock of G8, it is far more expensive than 4x EBIT on the market. This way, Chris Scott has used his entrepreneurial skill to raise his own personal wealth in an intellectually sound manner (which isn't a foreign strategy for Mr Scott). The pullback in G8 Educations price is triggering potential buys. Contrastingly, it's interesting to see that Citi Group has recommended a sell on the stock.
A common theme i hear about the company is that as they have used economies of scale to drive margins and the like, which in this case is a limited strategy as there is a quota on the ratio of children to teachers. Continuing with this logic, it makes sense to assume growth in margins driven by this method isn't sustainable. However, this doesn't stop them from buying more centres and to continue their roll-ups. Another problem here is that the deteriorating balance sheet as a result of this, which is incrementally increasing the risk of the business. Pricing potential is also an issue. It's important to note that, if you bought the stock when the company's EPS was about 11c and five years later the EPS has grown by a factor of five, the problem of questionable growth at a premium is reduced. For example, lets assume that in five years from now the company has EPS of $0.55 and is trading at 18x. If you bought in now, the downside is reduced (leaving aside the interim period). Another potential problem is that the business has a restricted organic growth business model which may be a cause for concern in the future. All aside, i still believe the company is good and to say the least, it's been a good learning experience.
I'd highly recommend watching the show if you're interested in stocks because it provides some good insight to various different analysts and their different ways of thinking about the market, but more importantly, about specific companies.
Thursday 6 November 2014
A general update on recent activity and portfolio performance
The past month has seen both my personal portfolio and my ASX sharemarket game portfolio surge. First, I would like to update my personal one before moving on to the game. My portfolio has seen a rapid surge in value in the past month solely due to one stock, Sirtex Medical (ASX: SRX). Unfortunately, i wasn't able to attend the 2014 annual AGM, however a recording will be put up on the website soon. I'd like to see if something was mentioned there which I've missed out on, maybe a dosage sales update or something of the sort. Contrastingly, most of my other stocks have remained relatively idol and my weightings haven't changed.
In terms of the ASX sharemarket game, I've also seen a rapid appreciation in market value. Mostly driven by Sirtex, TPG and more recently, NextDC. The portfolio also consists of a large cash holding. With the game coming to an end very soon, it is unlikely i will do anything with the cash surplus.
In other news, Sirtex's rapid appreciation also saw me rank third in the 2014 Bell Direct Stock Challenge. I've also begun reading a great book called Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors written by Wesley Gray and Tobias Carlisle. Mr Gray is someone i hadn't heard of prior however, Tobias is a somewhat familiar name. Tobias is a well-known deep value investor who is originally from Australia but operates a investment management firm in America. The book is highly recommended but a word of warning is that the book has a "text-book" feel to it albeit, it blends academic research and how it can relate to investment management nicely. Moreover, i also get the vibe that the book in isolation, would take many years to write. This is because it seems that it articulates many years of research into a neat book. Once again, highly recommended.
In terms of the ASX sharemarket game, I've also seen a rapid appreciation in market value. Mostly driven by Sirtex, TPG and more recently, NextDC. The portfolio also consists of a large cash holding. With the game coming to an end very soon, it is unlikely i will do anything with the cash surplus.
In other news, Sirtex's rapid appreciation also saw me rank third in the 2014 Bell Direct Stock Challenge. I've also begun reading a great book called Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors written by Wesley Gray and Tobias Carlisle. Mr Gray is someone i hadn't heard of prior however, Tobias is a somewhat familiar name. Tobias is a well-known deep value investor who is originally from Australia but operates a investment management firm in America. The book is highly recommended but a word of warning is that the book has a "text-book" feel to it albeit, it blends academic research and how it can relate to investment management nicely. Moreover, i also get the vibe that the book in isolation, would take many years to write. This is because it seems that it articulates many years of research into a neat book. Once again, highly recommended.
Monday 27 October 2014
Qantas (ASX: QAN)
Qantas' share price has soared over the past week. Does this yield a solid reason to be buying? I don't seem to think so. If you buy a bottle of water for $2 and you come back tomorrow and it's $2.2 is there now more of an incentive to buy the water? Probably not. Higher share prices reduces return, or equivalently, lower share prices increase future returns.
Well, maybe the quality has improved overnight. This may be the case for the bottle of water, but the long-term structural economics of the airline industry suggest otherwise. Focusing on Qantas' ROE over the past 10 years, you can see for yourself that it has declined, markedly. While revenues have only risen by about 20% (over the same period.) This isn't sounding like a great long-term investment to me. Maybe if you dig deeper you may find something which i haven't but with the number of analysts covering a stock like Qantas, chances are probably slim. Yes, they've come out saying that profits next year are meant to do this, or do that, but this shouldn't tempt the intelligent investor who invests on the basis of value over long periods of time. Airlines are a bad investment and this is due to the bad economics of the industry. The only exception i can think of is NetJets (owned by Buffett) but the business model is different.
My point is not to buy into companies solely on basis of price appreciation, you won't win in the long-run by doing so. The most important aspect should be valuation. Many people tend to forget this, including myself at times. You may come across an outstanding business but if you pay a too high price, you can make it a bad investment. So the bottom line is, pay attention to valuation and over the long-term, not the valuation of tomorrow.This is how you will win in the long term (where valuation is a reflection of rigorous analysis.)
Well, maybe the quality has improved overnight. This may be the case for the bottle of water, but the long-term structural economics of the airline industry suggest otherwise. Focusing on Qantas' ROE over the past 10 years, you can see for yourself that it has declined, markedly. While revenues have only risen by about 20% (over the same period.) This isn't sounding like a great long-term investment to me. Maybe if you dig deeper you may find something which i haven't but with the number of analysts covering a stock like Qantas, chances are probably slim. Yes, they've come out saying that profits next year are meant to do this, or do that, but this shouldn't tempt the intelligent investor who invests on the basis of value over long periods of time. Airlines are a bad investment and this is due to the bad economics of the industry. The only exception i can think of is NetJets (owned by Buffett) but the business model is different.
My point is not to buy into companies solely on basis of price appreciation, you won't win in the long-run by doing so. The most important aspect should be valuation. Many people tend to forget this, including myself at times. You may come across an outstanding business but if you pay a too high price, you can make it a bad investment. So the bottom line is, pay attention to valuation and over the long-term, not the valuation of tomorrow.This is how you will win in the long term (where valuation is a reflection of rigorous analysis.)
Tuesday 14 October 2014
An amcedemic ratio which signifies a high quality business
According to Novy-Marx, we can use two simple line items from financial statements to aid us in our search for high quality businesses. One comes from the income statement and one from the balance sheet. Interestingly, Marx uses Gross profitability instead of the traditional EBIT, or NOPAT metric(s). Marx calls it the Gross profit to total assets ratio. Defined as:
GPA = (Revenue - COGS)/Total Assets
Marx argues that Gross Profitability is the "cleanest" measure of underlying economic profitability. He continues:
"The farther down the income statement one goes, the more polluted profitability measures become, and the less related they are to true economic profitability. For example, a firm that has both lower production cots and higher sales than its competitors is unambiguously more profitable. Even so, it can easily have lower earnings than its competitors. If the firm is quickly increasing its sales through aggressive advertising or commissions to its sales force, these actions can, even if optimal, reduce its bottom line income blow that of a less profitable competitor. Similarly, if the firm spends on R&D to further increase its production advantage, or invests in organizational capital that will maintain its competitive advantage, these actions result in lower current earnings. Moreover, capital expenditures that directly increase the scale of the firm's operations further reduces its free cash flows relative to its competitors. These facts suggest constructing the empirical proxy for productivity using gross profits."
I've used this ratio for the stocks not only that i hold but for the ones that are on my radar. One of the companies stands out from the pact, which is somewhat surprising.
GPA = (Revenue - COGS)/Total Assets
Marx argues that Gross Profitability is the "cleanest" measure of underlying economic profitability. He continues:
"The farther down the income statement one goes, the more polluted profitability measures become, and the less related they are to true economic profitability. For example, a firm that has both lower production cots and higher sales than its competitors is unambiguously more profitable. Even so, it can easily have lower earnings than its competitors. If the firm is quickly increasing its sales through aggressive advertising or commissions to its sales force, these actions can, even if optimal, reduce its bottom line income blow that of a less profitable competitor. Similarly, if the firm spends on R&D to further increase its production advantage, or invests in organizational capital that will maintain its competitive advantage, these actions result in lower current earnings. Moreover, capital expenditures that directly increase the scale of the firm's operations further reduces its free cash flows relative to its competitors. These facts suggest constructing the empirical proxy for productivity using gross profits."
I've used this ratio for the stocks not only that i hold but for the ones that are on my radar. One of the companies stands out from the pact, which is somewhat surprising.
Monday 6 October 2014
Mount Gibson (ASX: MGX) the net-net case
In my previous post i talked about buying into Mount Gibson on the basis of value. My investment thesis is straightforward: buy as it is trading near net working capital. Any other assets including the going concern of the business would be considered a bonus. As most of their net working capital comes in the form of cash, there is a slight problem which is lingering. MGX's break-even point is $75 with iron ore prices around $79 it's a small margin. The larger miners, mainly the likes of BHP and RIO are by far the lowest-cost producers and are attempting to over-supply the market to drive prices down and essentially drive competition out with it. As there are question marks over China's growth rates (more specifically, steel production) the problem is exacerbated.
What does this have to with anything you may be thinking. Well, to weather the potential storm if the prices of iron ore trade below Mount Gibson's break-even point, then they might have to draw on their surplus cash position to maintain business. As the cash position reduces, my investment thesis also breaks-down (and as the cash represents a large portion of my thesis, the validity could diminish rapidly.) Some economists are arguing the price of iron ore has been oversold and that the prices may go higher. This is not my game and iron ore forecasting is out of my reach. If the investment decision trickles down to this sort of thing, then I'll leave it alone. I had an order in for this company for $0.43 but cancelled it as I'm unsure of the potential problems.
Although the lower dollar should help, and the mid-tier miners are rushing to cut costs, it may only be a matter of time. Another scenario may be that the company defaults without drawing on too much cash, then it would be fine (as they redistribute the money in the business back to the owners), but that's too much guesswork for me. Even though it surpasses my idea of what would be considered logical or "rational", i simply cannot rely on something like this. For now, I'm on the sideline until i can gather more information.
As a side note, if you do follow my writings, you may have noticed that when i talk about the "circle of competence" I've said that mining/resources and the like are out if it. However, on the basis of sub-liquidation valuation, i would buy into them. Never would i be forecasting miners EPS growth or anything like that. Because if you are forecasting miners growth rates, in essence, you're also indirectly forecasting commodity prices which is not something i partake in. This is an exceptional case of a traditional deep value investment where I'm paying for the business. In other words, I'm buying the balance sheet and that's all. Fund managers always tell you that you need an edge to outperform the market. What I've noticed is that many of them analyse industry's that are likely to experience structural tailwinds in the future and trickle the argument down to individual companies (top-down) that are likely to benefit. While it's not the only method, and investors should investigate a range of methods, it's one to consider. If you can find a situation where you have a range of benefits, you have a higher probability of excelling. This is extremely difficult and requires an inordinate amount of time, playing out scenarios, conducting "what if" analysis and thinking independently (this is, that from what I've read and realised, is something that many value investors spend a lot of time thinking about.)
This is extremely important, and many investor's don't pay enough attention to this part of the investing spectrum, which plays a key role in how fund managers do outperform. This is what i spend most of my own time on analysing, trying to get as much probability of success on my side, which isn't easy and there's not only one way of going about this. One piece of advice I'd like to share is that when conducting these types of activities, you should always have at the forefront of your mind the notion of capital preservation. By this i mean that if you were to invest in company A, how much can you lose (or gain) if it defaults? Naturally, you gravitate towards the balance sheet first. However, some businesses aren't very tangible and have wide economic moats in the likes of large network economics, for example Ebay, which are hard to crack. Drawing a line here is something that is tough and is something that i battle with consistently. I believe Warrem Buffett, is a somewhat cross-breed between the traditional value investor and the "growth" investor. He employs techniques from both schools of thought, but always has capital preservation at the forefront. He is willing to buy a terrible business, if the price is right. But, as good business are hard to find at good prices, he pays so-so prices for them. Ideally, you would want to buy these businesses during bear markets, which would most likely help maximise the probability success factor which i talk about.
Research shows that value companies (by value i mean companies that are trading at low price to book ratios) tend outperform the market over the long-term, and sometimes by a large margin. However, this doesn't mean you shouldn't be buying into businesses that have high price/book ratios because, as i mentioned before, they tend to be businesses that sell products which are highly desired, hard to replicate and have wide moats and at times, various moats working in their favour at one time which may be why you pay a premium for their earnings (subjective.) The best example i can give is Coca-Cola, which in my opinion is the best business the human race has ever seen.
This example also demonstrates a weakness in my investing acumen, namely, that I'm not pre-empting enough thought into my investment decisions prior to making them. This will need to be worked on. Luckily though, i haven't had to lose real capital before realizing this as my prior investments (which i still hold) have performed well. Although, the depth of my research on the other companies (ones that i have bought into) is much greater than my effort to date on Mount Gibson.
What does this have to with anything you may be thinking. Well, to weather the potential storm if the prices of iron ore trade below Mount Gibson's break-even point, then they might have to draw on their surplus cash position to maintain business. As the cash position reduces, my investment thesis also breaks-down (and as the cash represents a large portion of my thesis, the validity could diminish rapidly.) Some economists are arguing the price of iron ore has been oversold and that the prices may go higher. This is not my game and iron ore forecasting is out of my reach. If the investment decision trickles down to this sort of thing, then I'll leave it alone. I had an order in for this company for $0.43 but cancelled it as I'm unsure of the potential problems.
Although the lower dollar should help, and the mid-tier miners are rushing to cut costs, it may only be a matter of time. Another scenario may be that the company defaults without drawing on too much cash, then it would be fine (as they redistribute the money in the business back to the owners), but that's too much guesswork for me. Even though it surpasses my idea of what would be considered logical or "rational", i simply cannot rely on something like this. For now, I'm on the sideline until i can gather more information.
As a side note, if you do follow my writings, you may have noticed that when i talk about the "circle of competence" I've said that mining/resources and the like are out if it. However, on the basis of sub-liquidation valuation, i would buy into them. Never would i be forecasting miners EPS growth or anything like that. Because if you are forecasting miners growth rates, in essence, you're also indirectly forecasting commodity prices which is not something i partake in. This is an exceptional case of a traditional deep value investment where I'm paying for the business. In other words, I'm buying the balance sheet and that's all. Fund managers always tell you that you need an edge to outperform the market. What I've noticed is that many of them analyse industry's that are likely to experience structural tailwinds in the future and trickle the argument down to individual companies (top-down) that are likely to benefit. While it's not the only method, and investors should investigate a range of methods, it's one to consider. If you can find a situation where you have a range of benefits, you have a higher probability of excelling. This is extremely difficult and requires an inordinate amount of time, playing out scenarios, conducting "what if" analysis and thinking independently (this is, that from what I've read and realised, is something that many value investors spend a lot of time thinking about.)
This is extremely important, and many investor's don't pay enough attention to this part of the investing spectrum, which plays a key role in how fund managers do outperform. This is what i spend most of my own time on analysing, trying to get as much probability of success on my side, which isn't easy and there's not only one way of going about this. One piece of advice I'd like to share is that when conducting these types of activities, you should always have at the forefront of your mind the notion of capital preservation. By this i mean that if you were to invest in company A, how much can you lose (or gain) if it defaults? Naturally, you gravitate towards the balance sheet first. However, some businesses aren't very tangible and have wide economic moats in the likes of large network economics, for example Ebay, which are hard to crack. Drawing a line here is something that is tough and is something that i battle with consistently. I believe Warrem Buffett, is a somewhat cross-breed between the traditional value investor and the "growth" investor. He employs techniques from both schools of thought, but always has capital preservation at the forefront. He is willing to buy a terrible business, if the price is right. But, as good business are hard to find at good prices, he pays so-so prices for them. Ideally, you would want to buy these businesses during bear markets, which would most likely help maximise the probability success factor which i talk about.
Research shows that value companies (by value i mean companies that are trading at low price to book ratios) tend outperform the market over the long-term, and sometimes by a large margin. However, this doesn't mean you shouldn't be buying into businesses that have high price/book ratios because, as i mentioned before, they tend to be businesses that sell products which are highly desired, hard to replicate and have wide moats and at times, various moats working in their favour at one time which may be why you pay a premium for their earnings (subjective.) The best example i can give is Coca-Cola, which in my opinion is the best business the human race has ever seen.
This example also demonstrates a weakness in my investing acumen, namely, that I'm not pre-empting enough thought into my investment decisions prior to making them. This will need to be worked on. Luckily though, i haven't had to lose real capital before realizing this as my prior investments (which i still hold) have performed well. Although, the depth of my research on the other companies (ones that i have bought into) is much greater than my effort to date on Mount Gibson.
Friday 3 October 2014
Going long, a tradtional Ben Graham type of investment
In Benjamin Grahams book: The Intelligent Investor (more specifically, in chapter 7) he supposes some strategies for the defensive and enterprising investor. One of them comes under the title of "bargain issues" which are defined as companies selling below net current assets after accounting for long-term debt as well. The argument for this is to protect your principal (the initial money invested.) If you can find companies trading at below or near liquidation value, downside risk is reduced significantly. Even better, finding companies trading at less than net current assets means you get the fixed assets (PPE and the like) plus any goodwill for free. You get the going concern, free. Even better, because you're not including fixed assets, the subject of whether the assets on the balance sheet reflect their true "replacement value" is mitigated so there's no need to do adjustments ;). Cash of $100 is cash of $100, simple (if you want to learn more about accounting adjustments in practice have a look at Bruce Greenwalds book - Value Investing: From Graham to Buffett and Beyond.) Warren Buffett began doing this in the 50s and made a killing from it. Markets since then have become more efficient but not always. He recently bought South Korean companies that were trading at less than working capital (a typical "net-net" investment as it's called within the value investing literature.)
Well, what if the company defaults you may ask. Because you're subtracting all the liabilities and you also have non-current assets and intangibles on top, you can liquidate and get your principal back (in America you'd also have to subtract preferred stock from the equation, however, this isn't a big issue in Australia as it essentially doesn't exist here.) Sounds like a safe bet to me. I try explaining this type of investing as buying a farm for $5,000 but the farm has $10,000 sitting in the middle of it.
You see, Benjamin Graham was a very interesting man, at a time of financial mayhem and everyone asking the question "how much can i make" he turned the question on it's head and asked "how much can i lose?" (this is my interpretation of his work, but if you look at his 1934 preface of Security Analysis i believe it's not unreasonable to suggest what i am suggesting.) He then went out and formally detailed how you do that. He not only created a style of investing, he created a profession: the financial analyst.
The company that I've put an order in for (yet to reach my price) is Mount Gibson Iron (ASX: MGX). The problem with deep value investing (companies selling at least a 30% discount to firm value) is that you need a well diversified portfolio of them to do it successfully. Sometimes, the companies shares go to $0 and you lose everything. However, it's not all doom and gloom. This style of investing is one of the best if not the best in terms of shareholder returns. Another thing to note is that this type of investing is definitely not for everyone. The kinds of companies you focus on tend to have major problems at the moment, so iron ore companies may be a good place to start your search. Moreover, not only are they having problems but by nature, it's contrarian investing which means you tend to also be buying against the crowd.
Yes, i jumped around a lot, but i had a lot of things running through my head and i wanted to get them all out.
Well, what if the company defaults you may ask. Because you're subtracting all the liabilities and you also have non-current assets and intangibles on top, you can liquidate and get your principal back (in America you'd also have to subtract preferred stock from the equation, however, this isn't a big issue in Australia as it essentially doesn't exist here.) Sounds like a safe bet to me. I try explaining this type of investing as buying a farm for $5,000 but the farm has $10,000 sitting in the middle of it.
You see, Benjamin Graham was a very interesting man, at a time of financial mayhem and everyone asking the question "how much can i make" he turned the question on it's head and asked "how much can i lose?" (this is my interpretation of his work, but if you look at his 1934 preface of Security Analysis i believe it's not unreasonable to suggest what i am suggesting.) He then went out and formally detailed how you do that. He not only created a style of investing, he created a profession: the financial analyst.
The company that I've put an order in for (yet to reach my price) is Mount Gibson Iron (ASX: MGX). The problem with deep value investing (companies selling at least a 30% discount to firm value) is that you need a well diversified portfolio of them to do it successfully. Sometimes, the companies shares go to $0 and you lose everything. However, it's not all doom and gloom. This style of investing is one of the best if not the best in terms of shareholder returns. Another thing to note is that this type of investing is definitely not for everyone. The kinds of companies you focus on tend to have major problems at the moment, so iron ore companies may be a good place to start your search. Moreover, not only are they having problems but by nature, it's contrarian investing which means you tend to also be buying against the crowd.
Yes, i jumped around a lot, but i had a lot of things running through my head and i wanted to get them all out.
Wednesday 1 October 2014
A very interesting article on supply and demand, and their effects on asset prices
I've stumbled across a very interesting read. The article, essentially tells us to buy low and sell high, but due to various reasons (outlined neatly in the article) doesn't happen. I thought I'd share it because it ties in quite nicely to my previous post whereby i offered a different perspective on investing (namely, exactly what the whole article attempts to make you realise you should be doing, which is buying low and selling low.) However, it does so in a much more rigorous manner than i did. The author although he/she remains anonymous for "employment reasons" seems like a very interesting character with a wealth of knowledge.
The link for the article is:
http://www.philosophicaleconomics.com/2014/09/supply/
enjoy :)
The link for the article is:
http://www.philosophicaleconomics.com/2014/09/supply/
enjoy :)
Tuesday 30 September 2014
The counterintuitive approach to investing
One thing I've noticed in the stock market is that people tend to buy in rising markets and sell during depressing markets. To an extent, it makes sense. I mean, buy when it's rising so you don't miss out and sell when it's falling so you don't lose more. Repeat this process twice and essentially, what you're doing is buying high and selling low. People always talk about having an edge in the market to outperform it, how about doing the opposite. Selling during rising markets and buying during falling markets?
Want another advantage? How about focusing some attention on $100m market companies. Some may say that if you do that you're taking on excessive risk (and most of the time you probably are) but not always. While others may say you're wasting your time because others would have invested in it already. That too may be the case but not always. This is slightly more complicated in that many funds cannot target such companies due to legal and other constraints.
A big advantage a value investor has over most others is attitude, for example the ability to exercise patience. Remember, your stock broker makes money on activity, while you make money on inactivity. Rather than constantly buying new issues or stocks you hear on the TV, why not hold fewer stocks and concentrate more attention to each one. A famous boxer once said, it's often the punches you miss that wear you out the most. When investing, you don't need to swing at every pitch. You may swing often and get lucky on some and hit them out the park, but most of the time this doesn't happen. Most of the time, the swings miss, and only end up hurting your wallet. My point is to focus on the ones that are to be hit out of the park. To do so, you'll need to be prepared to do your homework on companies. No one said it was easy, because if it were easy, everyone would be doing it. So what are you waiting for?
Want another advantage? How about focusing some attention on $100m market companies. Some may say that if you do that you're taking on excessive risk (and most of the time you probably are) but not always. While others may say you're wasting your time because others would have invested in it already. That too may be the case but not always. This is slightly more complicated in that many funds cannot target such companies due to legal and other constraints.
A big advantage a value investor has over most others is attitude, for example the ability to exercise patience. Remember, your stock broker makes money on activity, while you make money on inactivity. Rather than constantly buying new issues or stocks you hear on the TV, why not hold fewer stocks and concentrate more attention to each one. A famous boxer once said, it's often the punches you miss that wear you out the most. When investing, you don't need to swing at every pitch. You may swing often and get lucky on some and hit them out the park, but most of the time this doesn't happen. Most of the time, the swings miss, and only end up hurting your wallet. My point is to focus on the ones that are to be hit out of the park. To do so, you'll need to be prepared to do your homework on companies. No one said it was easy, because if it were easy, everyone would be doing it. So what are you waiting for?
Sunday 28 September 2014
International exposure!
As i mentioned in my previous post, (G8 Educaiton/Sirtex update) i believe the US economy is on a good road to recovery and that 10 years from now i believe the economy will be in a much better state now. For example, i believe the GDP per capita to be relatively higher than it is now. Contrastingly, i also said that i believe Australia's future is bright but I'm somewhat cautious in making this statement (it comes down to how you define "bright".) I'll give you one of my reasons: if you look at the most recent reporting season, earnings grew at around 6-7%. This is fine, but the growth has come from cost-cutting and the firms have distributed the funds back to shareholders in the form of dividends. So, i question how such companies will grow with strength in the future.
I believe the search for yield is somewhat misinterpreted by market participants, especially retirees who tend to rely on such income. I don't think they have considered that a 6% dividend yield now is great, but its the growth in the dividend that matters. If the company is growing it's dividends at a low level, inflation will destroy you. Especially if inflation is growing faster than the dividend yield itself! Telstra is a good example of this. If you bought into Telstra in 2007 because of the dividends you would have received 28 cents per share. Fast forward to 2013 and whats the dividend per share? 28 cents. Factor in inflation at, say 2.5% per year (middle of the RBA target band) over the same time, your real loss is about 16% (due to the erosion of purchasing power brought about by inflation.) I could go on for a while but we'll leave it there for now. I hope it's sparked some different things to look at if you're using the traditional "dividend yield story" which as you can see, if you dig a bit deeper, is flawed. I've held capital appreciation constant here which of course isn't realistic but it makes the point clear. Of course this doesn't apply to every company.
Another probelem faced by the Australian economy is the depressing terms of trade (mainly due to the multifaceted problems faced by our miners) this will subtract from our national income. Tie this in with where our companies are going to grow, it becomes more apparent we may have some issues. All of these problems among others are the sorts of things running through my head when i made my initial statement.
So what can we do about it? I don't think I'm in a position to give my two cents for these sorts of issues as they extend slightly beyond my level. But what i will say is what I'm doing. I'm buying part-ownership in good businesses. Some of which (especially Sirtex) deriving most of their income from overseas. If you believe the $A is overvalued this might benefit you over your investment horizon. That's one way, another might be to avoid companies that are dependent on interest rates being low. Seth Klarman has been reported to give back ( or will be giving back) about $4 billion to shareholders. One of the reasons is because he believes the fairy tale of free money (this is more prominent in America than Australia as the Fed Funds rate is basically zero and has been for a while now) will have to come to and end soon and some companies aren't positioned well to deal with inclinations in interest rates. As you can probably see, these reasons among others all come back to finding good businesses. But how you define "good" is subjective and is difference for everyone.
Going back to Australia's future, i believe it maybe wise to allocate a certain portion (maybe around 20%) of my invest-able funds to the American stock market. The appropriate method for me will be a low cost ETF (Vanguard or Blackrock probably.) I will continue my focus on Australia, but some money in an international market whether it be certain Emerging Market economies such as China or India or even buying a tiny piece of corporate America will be ideal for investors. Due to my lack of experience i won't be engaging with Emerging Markets just yet (if at all.) As a note, i won't be doing bottom-up stock picking in global equity markets (hence the ETFs.)
I believe the search for yield is somewhat misinterpreted by market participants, especially retirees who tend to rely on such income. I don't think they have considered that a 6% dividend yield now is great, but its the growth in the dividend that matters. If the company is growing it's dividends at a low level, inflation will destroy you. Especially if inflation is growing faster than the dividend yield itself! Telstra is a good example of this. If you bought into Telstra in 2007 because of the dividends you would have received 28 cents per share. Fast forward to 2013 and whats the dividend per share? 28 cents. Factor in inflation at, say 2.5% per year (middle of the RBA target band) over the same time, your real loss is about 16% (due to the erosion of purchasing power brought about by inflation.) I could go on for a while but we'll leave it there for now. I hope it's sparked some different things to look at if you're using the traditional "dividend yield story" which as you can see, if you dig a bit deeper, is flawed. I've held capital appreciation constant here which of course isn't realistic but it makes the point clear. Of course this doesn't apply to every company.
Another probelem faced by the Australian economy is the depressing terms of trade (mainly due to the multifaceted problems faced by our miners) this will subtract from our national income. Tie this in with where our companies are going to grow, it becomes more apparent we may have some issues. All of these problems among others are the sorts of things running through my head when i made my initial statement.
So what can we do about it? I don't think I'm in a position to give my two cents for these sorts of issues as they extend slightly beyond my level. But what i will say is what I'm doing. I'm buying part-ownership in good businesses. Some of which (especially Sirtex) deriving most of their income from overseas. If you believe the $A is overvalued this might benefit you over your investment horizon. That's one way, another might be to avoid companies that are dependent on interest rates being low. Seth Klarman has been reported to give back ( or will be giving back) about $4 billion to shareholders. One of the reasons is because he believes the fairy tale of free money (this is more prominent in America than Australia as the Fed Funds rate is basically zero and has been for a while now) will have to come to and end soon and some companies aren't positioned well to deal with inclinations in interest rates. As you can probably see, these reasons among others all come back to finding good businesses. But how you define "good" is subjective and is difference for everyone.
Going back to Australia's future, i believe it maybe wise to allocate a certain portion (maybe around 20%) of my invest-able funds to the American stock market. The appropriate method for me will be a low cost ETF (Vanguard or Blackrock probably.) I will continue my focus on Australia, but some money in an international market whether it be certain Emerging Market economies such as China or India or even buying a tiny piece of corporate America will be ideal for investors. Due to my lack of experience i won't be engaging with Emerging Markets just yet (if at all.) As a note, i won't be doing bottom-up stock picking in global equity markets (hence the ETFs.)
Thursday 25 September 2014
G8 Education/Sirtex update
As I've been witnessing over the past few weeks G8 Educations share price has been getting slogged. It is now getting to a point where I'm getting interested in adding to my position. G8 education is the lowest weight in my portfolio and I've been keen to add to my position for a while. The method i think i will take if i decide to do it will be to put 1/3 of the amount i wish to add to my current holdings now and add the rest over time (a dollar cost averaging system, albeit, a limited one.) However, the only difference is that I'll only add to my holdings in the future (that is, after the initial 1/3) if it lowers my net average price. So in a sense, a dollar-cost average system where i only add to my holdings if it lowers my net average price, otherwise hold off. I have a few reasons why i would take this method.
On another note, Sirtex will be holding their Annual General Meeting on the 28/10/14 which I'll be going to. It'll be exciting (hopefully) to see what they will have to say about the future of the company. I hope some good questions get asked or i can ask some myself.
On another note, Sirtex will be holding their Annual General Meeting on the 28/10/14 which I'll be going to. It'll be exciting (hopefully) to see what they will have to say about the future of the company. I hope some good questions get asked or i can ask some myself.
Tuesday 23 September 2014
A brief history of my stock picks
I have now been involved with the stock market directly for about 9 months. On the other hand I've also been participating in the ASX Sharemarket game (of which i'm playing my second game as we speak) which has been good. Here's some of the worst picks I've made YTD:
1. Crown (ASX sharemarket game)
2. Aveo Group (held in my own portfolio but sold due to various reasons)
3. Next DC (only been holding for a few weeks and I'm breaking even on it in the ASX sharemarket game 2 however wouldn't own this in my personal portfolio.)
4. Vita Life Sciences (A stock I've only held personally)
On the other hand, I've made some great stock picks which have served very well. All of these have been mentioned in the past and permeate throughout my blog posts since i started doing them.
1.G8 Education (paid $4.13 in the ASX sharemarket game 1 and also hold it in the game the second time round. I also hold this stock in my own portfolio)
2. Sirtex (Paid $14.72 in the ASX sharemarket game 1 and currently hold it in the ASX game round 2. I also hold it in my personal portfolio)
3. Slater&Gordon (only held it in the ASX sharemarket game 1 and i believe i paid about $5.65 for it but had to sell because the game is very short term and the stock was under pressure.)
4. TPG Telecom (paid $5.31 and have held this stock in game number 1 and currently hold it in game number 2, but don't own it personally)
These stocks have been the key performers of mine both good and bad. A subtle but very important note is that I've used share price performance to judge my own performance here only because it's common practice and it will make sense to readers. However, when i analyse my own returns this is definitely not the route that i take. Rather, i judge my performance on how the business has performed i.e. change in book value. This is a key distinction between myself and the vast majority of market participants.
1. Crown (ASX sharemarket game)
2. Aveo Group (held in my own portfolio but sold due to various reasons)
3. Next DC (only been holding for a few weeks and I'm breaking even on it in the ASX sharemarket game 2 however wouldn't own this in my personal portfolio.)
4. Vita Life Sciences (A stock I've only held personally)
On the other hand, I've made some great stock picks which have served very well. All of these have been mentioned in the past and permeate throughout my blog posts since i started doing them.
1.G8 Education (paid $4.13 in the ASX sharemarket game 1 and also hold it in the game the second time round. I also hold this stock in my own portfolio)
2. Sirtex (Paid $14.72 in the ASX sharemarket game 1 and currently hold it in the ASX game round 2. I also hold it in my personal portfolio)
3. Slater&Gordon (only held it in the ASX sharemarket game 1 and i believe i paid about $5.65 for it but had to sell because the game is very short term and the stock was under pressure.)
4. TPG Telecom (paid $5.31 and have held this stock in game number 1 and currently hold it in game number 2, but don't own it personally)
These stocks have been the key performers of mine both good and bad. A subtle but very important note is that I've used share price performance to judge my own performance here only because it's common practice and it will make sense to readers. However, when i analyse my own returns this is definitely not the route that i take. Rather, i judge my performance on how the business has performed i.e. change in book value. This is a key distinction between myself and the vast majority of market participants.
Sunday 21 September 2014
Nothing but red
The ASX200 has recently been getting obliterated. Uncertainty among QE policy, depressed miners and the depreciating $A among many other issues may be causing problems here at Australia. As I've mentioned many times before and will continue to do so, red is good. Instead of speaking along the lines of "the trend is your friend" i think along the lines of "red is your friend." I believe volatility is good if you can take advantage of it.
To jump round slightly, i believe Australia's future is bright but i'm somewhat cautions in making this claim. I have little doubt that America will be far better off 10 years from now, but that's a different story. As the mining boom concludes and Australia scrambles to make-up for lost output ambiguity increases. However, i don't think it's all doom and gloom. People will still be spending money domestically on certain things, no matter what the circumstances are. Having a part-ownership in good businesses is my way to hedge against most risks.
To jump round slightly, i believe Australia's future is bright but i'm somewhat cautions in making this claim. I have little doubt that America will be far better off 10 years from now, but that's a different story. As the mining boom concludes and Australia scrambles to make-up for lost output ambiguity increases. However, i don't think it's all doom and gloom. People will still be spending money domestically on certain things, no matter what the circumstances are. Having a part-ownership in good businesses is my way to hedge against most risks.
Saturday 20 September 2014
What's new
I've been idle with my stock research recently due to other commitments. However, my positions haven't changed in terms of relative weights or new additions. Currently, I'm long G8 Education (ASX: GEM), Vita Life Sciences (ASX: VSC) and Sirtex (ASX: SRX).
However, Sirtex is more on the side of a speculative buy at these prices. Sirtex's near-term future may see a large inclination in both key fundamentals such as, both the top and bottom lines and a "step-change" demand in their products if the Sirflox study proves effective. However, if it doesn't come out positive or lack of take up by oncologists and all the rest of it will probably see the stock plummet which could be both a good and a bad thing, depending on what you do with it. I've bought into this stock myself and am completely aware of the risks involved (i.e. a decent chance that my quotational loss could amount to 70% of the price i paid for it). So the capital used to buy stock was money which isn't needed elsewhere per say.
I've been a big fan of G8 education and how their expansions are coming along. They are exercising due diligence, which can be seen through their organic growth, attractive multiples for the business they're buying and cost discipline (rising EBIT margins). There are of course some key risks such as a macro downturn may lead to a slump in demand. (As I'm also a big fan of the qualitative side of investing and Phil Phiser's methods, I've spoken to many mothers about their opinions on child care services and I'm very pleased with the results I'm hearing. I've talked with parents from both low economic advantage all the way to the other end and there is definitely some consistency throughout their reasoning from both sides when it comes to child care). The biggest risk for me is their solvency with rising debt. Debt is something i disapprove of with pleasure.
The only thing I'd like to add about my previous VSC coverage is that I'm hoping their advancement into Indonesia comes sooner rather than later. However, I'm willing to wait, as always because I've got nothing but time baby!
However, Sirtex is more on the side of a speculative buy at these prices. Sirtex's near-term future may see a large inclination in both key fundamentals such as, both the top and bottom lines and a "step-change" demand in their products if the Sirflox study proves effective. However, if it doesn't come out positive or lack of take up by oncologists and all the rest of it will probably see the stock plummet which could be both a good and a bad thing, depending on what you do with it. I've bought into this stock myself and am completely aware of the risks involved (i.e. a decent chance that my quotational loss could amount to 70% of the price i paid for it). So the capital used to buy stock was money which isn't needed elsewhere per say.
I've been a big fan of G8 education and how their expansions are coming along. They are exercising due diligence, which can be seen through their organic growth, attractive multiples for the business they're buying and cost discipline (rising EBIT margins). There are of course some key risks such as a macro downturn may lead to a slump in demand. (As I'm also a big fan of the qualitative side of investing and Phil Phiser's methods, I've spoken to many mothers about their opinions on child care services and I'm very pleased with the results I'm hearing. I've talked with parents from both low economic advantage all the way to the other end and there is definitely some consistency throughout their reasoning from both sides when it comes to child care). The biggest risk for me is their solvency with rising debt. Debt is something i disapprove of with pleasure.
The only thing I'd like to add about my previous VSC coverage is that I'm hoping their advancement into Indonesia comes sooner rather than later. However, I'm willing to wait, as always because I've got nothing but time baby!
Wednesday 3 September 2014
Portfolio update
So reporting season has concluded. It was an eventful period for me as it was the first time i went through a EOFY season. Like with most things, we saw the good, the bad and the ugly. Some companies produced astonishing returns while some others didn't. I'll leave market analysis to others.
I had to tweak my portfolio a bit. I downsized a position as i had too much of my money tied to the one stock which isn't the best idea. I also had the opportunity to purchase a new stock which I'm extremely excited about. When i first started i set out a target to try to achieve a 15% return on my investment in my first year. This is still my current target.
I had to tweak my portfolio a bit. I downsized a position as i had too much of my money tied to the one stock which isn't the best idea. I also had the opportunity to purchase a new stock which I'm extremely excited about. When i first started i set out a target to try to achieve a 15% return on my investment in my first year. This is still my current target.
Thursday 28 August 2014
One big advantage small individual investors have over bigger funds
It is clear that managed funds may have some advantages over us smaller guys, such as the ability to meet management. However, one huge disadvantage they face over us are liquidity/portfolio size constraints. Managed funds managing $1 billion will have big difficulties moving a substantial portion of their money into smaller companies. This provides us with a huge structural advantage. In a sense, buying into large cap stocks is throwing away this advantage we have. The reason why smaller caps may be beneficial is because they tend to be under-researched companies and not invested in by bigger funds. For these reasons, there is a greater chance of securities being mis-priced.
Yes, smaller companies tend to be riskier, but not all. A company that comes to mind is Nick Scali. I'm not saying to go out and buy it, but it's an example of a wonderful business that huge funds will have trouble getting their hands on. I hope this may make you think a little differently or broaden your scope in terms of the investment landscape of which you have at your disposal.
Yes, smaller companies tend to be riskier, but not all. A company that comes to mind is Nick Scali. I'm not saying to go out and buy it, but it's an example of a wonderful business that huge funds will have trouble getting their hands on. I hope this may make you think a little differently or broaden your scope in terms of the investment landscape of which you have at your disposal.
Wednesday 27 August 2014
Sirtex Medical (ASX: SRX)
Sirtex is a company that looks interesting. From my two days of reading, here's what i've gathered. Essentially, the company treats inoperable liver cancer. However, the treatment is only used as a last resort at the moment, For this reason, among others, the company only caters for roughly 1% of the addressable market. The interesting thing however, is that the company has engaged in a massive trial study to test it's efficacy and prove the treatment is indeed effective. The study, called SIRFLOX, is due to report its results in early-mid 2015. If the results are positive, the treatment will move form being a last resort to a first (along the lines of Chemo and radiology). This could mean big business for the company. The interesting thing is though, who out of everyone would know the likely results? The CEO for one. He has gone and tripled production facilities in many parts of the world to meet "expected demand" because he believes the results are positive. My question is, why the hell would he be building excess capacity at the moment, when the results are not out yet? (The head office is actually very close to where i live. I should just pay Mr Wong a visit. Ha, i wish!)
The stock is definitely not cheap whether you're looking at the in terms of the current P/E or even the forward P/E. If you buy in now, you better be aware that the stock could plummet if the results come out negative (which may become a potential opportunity again, but read on to find out why.) However, the CEO has stated that even if the results come out negative, current growth is sustainable. It could be a possible long-term play if some characteristics change. Some key fundamental metrics such as margins and ROE and extremely strong. It's also debt-free and has only raised a minimal amount of additional of capital in the past 10 years.On top of this it's generating quite a pleasing result on incremental capital. So it's definitely ticking some boxes. One thing to note is that the FCF's are not very good at all (but is somewhat justified given the growth prospects of the company.)
Hunter Hall, an investment company, has stated the company has the potential to be a $100 stock however it would need to address 10% of the market. This may seem like a dream, but if the results are positive, it could become reality very soon. Roger Montgomery is also looking to get on board. I'd definitely keep a close eye on this one.
The stock is definitely not cheap whether you're looking at the in terms of the current P/E or even the forward P/E. If you buy in now, you better be aware that the stock could plummet if the results come out negative (which may become a potential opportunity again, but read on to find out why.) However, the CEO has stated that even if the results come out negative, current growth is sustainable. It could be a possible long-term play if some characteristics change. Some key fundamental metrics such as margins and ROE and extremely strong. It's also debt-free and has only raised a minimal amount of additional of capital in the past 10 years.On top of this it's generating quite a pleasing result on incremental capital. So it's definitely ticking some boxes. One thing to note is that the FCF's are not very good at all (but is somewhat justified given the growth prospects of the company.)
Hunter Hall, an investment company, has stated the company has the potential to be a $100 stock however it would need to address 10% of the market. This may seem like a dream, but if the results are positive, it could become reality very soon. Roger Montgomery is also looking to get on board. I'd definitely keep a close eye on this one.
Sunday 24 August 2014
VSC half yearly accounts
First things first. In the last post I talked about predominantly being a value investor but also a growth investor if necessary. I'd like to point out that i believe, at times, that it's not always clear-cut in distinguishing between a value stock and a growth stock. I haven't looked into this sort of literature in depth but drawing a line between the two isn't necessarily a fluid task. I mean, if a stock has a P/E of 13 it may be considered a value stock, but, if it's 14, is it now classified as a growth? I'm not sure where the distinction lies.
Taking a different view point, Buffett has argued (i think it was in his 1992 annual letter to shareholders but i may be wrong on the date) that growth and value investing aren't separate concepts. His basic premise is that when you forecast future inflows using whichever method you use, you articulate growth rates in those forecasts. Therefore, as Buffett puts it, value investing and growth investing are "joined at the hip". Buffett's business partner, Charlie Munger, has also made the statement that all investing is value investing, i.e. paying less for something than what you perceive it to be worth. The point of this was to suggest that i didn't want to necessarily label myself as one type of investing as it can be argued that they may be the more or less similar depending on the way you view the situation.
Now, onto the reason why i wanted to make a post. VSC came out with their half yearly reports and to be blunt, I'm not too happy. Revenue generation was weak, and the large inclinations in the bottom line came from cost cutting and one-off boosts such as tax offsets which aren't a core part of the business and isn't recurring. For these reasons, adjustments need to be made. Looking at it this way, the growth was quite poor. I still believe the future for the company is promising. The fundamentals are still quite strong, and, the company has had to deal with tougher problems than this in the past and have come out quite clean. For example, problems with fraudulent management to the Pan Pharmaceutical debacle were much greater problems. Some of these issues date back to 2000, but, it's still relevant in pointing out that the company have been through worse and have pulled through. So, i believe it's too early to start drawing conclusions just yet.
In other news, I'm making a purchase of a new stock this week but will still maintain a surplus of cash in order to capitalise on opportunities as they arise.
Taking a different view point, Buffett has argued (i think it was in his 1992 annual letter to shareholders but i may be wrong on the date) that growth and value investing aren't separate concepts. His basic premise is that when you forecast future inflows using whichever method you use, you articulate growth rates in those forecasts. Therefore, as Buffett puts it, value investing and growth investing are "joined at the hip". Buffett's business partner, Charlie Munger, has also made the statement that all investing is value investing, i.e. paying less for something than what you perceive it to be worth. The point of this was to suggest that i didn't want to necessarily label myself as one type of investing as it can be argued that they may be the more or less similar depending on the way you view the situation.
Now, onto the reason why i wanted to make a post. VSC came out with their half yearly reports and to be blunt, I'm not too happy. Revenue generation was weak, and the large inclinations in the bottom line came from cost cutting and one-off boosts such as tax offsets which aren't a core part of the business and isn't recurring. For these reasons, adjustments need to be made. Looking at it this way, the growth was quite poor. I still believe the future for the company is promising. The fundamentals are still quite strong, and, the company has had to deal with tougher problems than this in the past and have come out quite clean. For example, problems with fraudulent management to the Pan Pharmaceutical debacle were much greater problems. Some of these issues date back to 2000, but, it's still relevant in pointing out that the company have been through worse and have pulled through. So, i believe it's too early to start drawing conclusions just yet.
In other news, I'm making a purchase of a new stock this week but will still maintain a surplus of cash in order to capitalise on opportunities as they arise.
Friday 15 August 2014
My investing checklist (to be continued)
When I invest my own money there are some rules I tend to follow. While I am
flexible in some aspects, not all factors meet this flexibility criteria. My
current aim is not to only follow one type of investing. Rather, learn many and
be able to adapt to a given situation. For example, I'm predominantly a value
investor, and if a value stock presents itself and I do all the necessary
research and it turns out to be an attractive investment, then I'll go for it. However, if a growth stock presents itself with attractive characteristics
then I'll also go for it. I intend to keep the descriptions light.
1. Within the circle of competence
A circle of competence is essentially the business in which you can understand well. You should be able to understand what the company does that you’ve put your funds in. This goes much further than just describing what products or services it sells.
2. Businesses with strong competitive advantages
Businesses which can deter entry and retain the ability to earn abnormal profits are ideal. If you can raise prices and not lose customers, then you’ve got a very good business. Examples include, Coca Cola, Wrigley’s chewing gum, Gillette and WD-40 (yes, that thing!)
3. Solid business with strong fundamentals and a promising future
The past isn’t always the best predictor of the future. If a company has had magnificent fundamentals in the past, the future is what matters. So, focusing on that is what really matters. It could be the case where it continues and even improves like it has with REA, but it might not. So undertaking strong analysis is essential.
4. Low P/E coupled with high returns on equity
A low P/E may be a sign of a stock undervaluation. Barring the normal P/E discussions, a low P/E can act as a risk management tool if it’s the right company. This is because a low P/E signifies that the market isn't expecting much from the company, so if it does have a bad earnings report one season, the capital losses can be reduced. This may also work on the upside. If the low P/E company produces a strong report then the upside could be endless. Contrastingly, if the hottest high-flying growth stock produces a bad report then its price can be slogged. (But i try and be careful and not fall into value traps, especially in trying to identify if there's financial engineering present.)
A company that is trading at a low P/E that is also generating high returns on shareholder funds is no joke. This can be a powerful combination, and it is one of the reasons that hedge fund manager Joel Greenblatt was able to return 50% p.a. for 10 years (although he specialized in spin-offs and the like.)
5. Margin of safety
What is a value investing check-list without a margin of safety? Typically, the value investors most important risk mitigation tool.
This list is to be continued and i do understand that this list may seem a bit unrealistic and more suited during bear markets.
Some other philosophies that I tend to follow (but not limited to) in no particular order are:
1. Within the circle of competence
A circle of competence is essentially the business in which you can understand well. You should be able to understand what the company does that you’ve put your funds in. This goes much further than just describing what products or services it sells.
2. Businesses with strong competitive advantages
Businesses which can deter entry and retain the ability to earn abnormal profits are ideal. If you can raise prices and not lose customers, then you’ve got a very good business. Examples include, Coca Cola, Wrigley’s chewing gum, Gillette and WD-40 (yes, that thing!)
3. Solid business with strong fundamentals and a promising future
The past isn’t always the best predictor of the future. If a company has had magnificent fundamentals in the past, the future is what matters. So, focusing on that is what really matters. It could be the case where it continues and even improves like it has with REA, but it might not. So undertaking strong analysis is essential.
4. Low P/E coupled with high returns on equity
A low P/E may be a sign of a stock undervaluation. Barring the normal P/E discussions, a low P/E can act as a risk management tool if it’s the right company. This is because a low P/E signifies that the market isn't expecting much from the company, so if it does have a bad earnings report one season, the capital losses can be reduced. This may also work on the upside. If the low P/E company produces a strong report then the upside could be endless. Contrastingly, if the hottest high-flying growth stock produces a bad report then its price can be slogged. (But i try and be careful and not fall into value traps, especially in trying to identify if there's financial engineering present.)
A company that is trading at a low P/E that is also generating high returns on shareholder funds is no joke. This can be a powerful combination, and it is one of the reasons that hedge fund manager Joel Greenblatt was able to return 50% p.a. for 10 years (although he specialized in spin-offs and the like.)
5. Margin of safety
What is a value investing check-list without a margin of safety? Typically, the value investors most important risk mitigation tool.
This list is to be continued and i do understand that this list may seem a bit unrealistic and more suited during bear markets.
Some other philosophies that I tend to follow (but not limited to) in no particular order are:
- · Understanding that the market, at times, can be very wrong and market inefficiencies can arise leading to a stock trading at a discrepancy to firm value. Further, that the market will at some point will realise its mistake and re rate the stock.
- · Don’t try to predict market direction
- · A strong balance sheet
- · Don’t be afraid to hold cash
- · Don’t over diversify
- · Don’t try and trade frequently
- · Exercise patience and due diligence
- · Don’t follow the crowd mentality and understanding that the best investing ideas come from independent thinking
- · Invest with conviction
- · Try not to place too much emphasis on macroeconomic factors such as interest rates especially when it comes to predicting them.
- · Try and invest in stocks that have a lack of analyst coverage
- · Strong cash flow generation
- · Low P/CF, P/B, P/S (depending on the business)
- · There’s not always a risk-return trade-off
- · Try and invest in companies where you are able to have a holding period of forever or until certain circumstances change
- · Be flexible in approach as an opportunity may present itself anywhere and in any form
- · And finally, be fearful when others are greedy and be greedy when others are fearful
Wednesday 13 August 2014
My reviews so far
The reviews I were meant to be doing have been put on hold as I've been bed ridden with the flu. The only company i managed to have a look at was G8 Education (ASX:GEM) because i own stock in the company. Their acquisitive growth is strong, with attractive multiples (about 4x EBIT). They also are realising cost synergies, for example, they are keeping employee costs as a % of revenue relatively stable. The highly fragmented child-care services industry provides G8 with much more opportunity. On top of this, they only own about 5% of the market with Goodstart the leader at about 12%. Affinity, is negligible (at the moment accounting for about 1%). I think I'll purchase more of this stock but I'm going to wait for it to fall in price before i do that. Albeit, the debt/equity ratio is getting a bit too much for me to handle! If it rises much more i may exit.
I believe the market as a whole may have a pull-back sometime soon (no idea when). This is because i believe investors are chasing yields as they shift money from cash to securities. This is a dangerous act if there is no justification for doing so. If this continues in the wrong companies, mushrooming prices which aren't backed by strong profits can be detrimental to those who went in at the wrong time and with the wrong mind frame. I.e. short-term focus.
The market being fairly priced/overvalued may also be apparent when looking at Berkshire Hathaway's most recent annual report which shows that the Oracle of Omaha is holding more cash.
I believe the market as a whole may have a pull-back sometime soon (no idea when). This is because i believe investors are chasing yields as they shift money from cash to securities. This is a dangerous act if there is no justification for doing so. If this continues in the wrong companies, mushrooming prices which aren't backed by strong profits can be detrimental to those who went in at the wrong time and with the wrong mind frame. I.e. short-term focus.
The market being fairly priced/overvalued may also be apparent when looking at Berkshire Hathaway's most recent annual report which shows that the Oracle of Omaha is holding more cash.
Wednesday 6 August 2014
Reporting season is among us!
A small reminder that Vita's report comes out soon (i believe it's around the 18th of August). I'm looking for strong EPS growth among many other things. In particular, anything above 20% in EPS/CF growth would be nice and anything below 10%, well, let's just say I'm going to be a bit worried. However, there are other aspects I'm going to be looking at. The recent price hikes are nice, but I'd prefer that prices fell. Let's see what happens after the report comes out. I'm expecting stronger revenues from the Singapore division and weaker revenues from Thailand. I believe margins may improve depending on how the other divisions perform and the relative performance of Singapore (as Singapore is a high margin division).
Other companies I'll have a close look at are: Seek, Carsales, Nick Scali, Real Estate.com.au, Sirtex, G8 Education, The Reject Shop and Coca Cola Amatil.
Other companies I'll have a close look at are: Seek, Carsales, Nick Scali, Real Estate.com.au, Sirtex, G8 Education, The Reject Shop and Coca Cola Amatil.
Saturday 2 August 2014
A short check list composed by an investment analyst at a fundamentally driven hedge fund
Here's a check list i just found on the internet. It's quite comprehensive and i'd like to borrow the headings and summarise them myself. The check-list comes from Oliver Mihaljevic.
A Huge Sustainable Competitive Advantage—A Franchise
In theory, when a business operates profitability it attracts competition. This is in the nature of capitalism. When the competition enters, sales get spread over more shops and so profitability declines. Profitability may also decline because the increased competition has led to increased price competition, among other things. When this occurs, the industry profitability will decline to negative economic profits and then companies will begin shutting down. However, a business with a sustainable competitive advantage or economic moat will allow the business to keep competition away. This may also allow for a franchise type of business (also known as franchise value or economic value).
Within the value investing framework, franchise doesn't mean a shop like Subway, franchise is the name given to a business that can earn above normal profits for extended periods of time (i.e. may not be mean reverting if you believe in that). This can be done by charging a higher price and not losing business to other similar firms (Think Coke.) In my opinion a brand is one of the most powerful competitive advantages a business could have. This is because for one, a strong brand name is extremely hard to replicate. As a side note, i believe a brand is only beneficial for investors if it allows the company to charge a higher price and not lose customers or results in larger sales volumes. On top of this, the brand may not be bought. For example, if it's been internally developed, the brand may not be directly recognised by accountants in the balance sheet. According to Ben Graham in his classic text "The Interpretation of Financial Statements" he says that the value of an intangible may not truly reflect its potential. Rather, he suggests you look at the earnings power of it.
This is what Warren Buffett saw when he started buying large stakes in The Coca Cola Company in the 80s. Everyone was looking at the same financial statements but Warren saw that the company had a brand name that was worth billions, potentially trillions which wasn't directly nor fully reflected in the statements. The opposite of a franchise is a commodity type business (think Airlines). These businesses are characterised by excessive competition and no price coercion what so ever. Typically, you want to stay away from these businesses without economic moats (if you want to understand economic moats to a much greater extent i suggest you read Pat Dorsey's - The Little Book That Builds Wealth.)
A Growing Stream of Free Cash
Free cash flows are the flows that will eventually end up to owners of the business. In recent times, the DCFF/E model(s) has become popular because earnings are subject to management discretion. For example, a company can directly reduce expenses through changing the useful life of a depreciable asset such as PPE (by increasing the useful life from say 5 years to 10 years will reduce the depreciation expense.) As the value of the business is simply the amount of cash one can get out of it, growing free cash flows are ideal (not going into too much detail here).
Simple, Understandable
I like businesses which are simple. Like Warren, i too, can't understand complicated businesses. A simple business is much easier to understand allowing you to also obtain a stronger grip on its future prospects. Peter Lynch once said that he liked simple businesses that any idiot could run, because someday one will.
Stable—The Basic Business Changes Little Over Time/ predictable earnings
A stable business such as Coca Cola means that earnings are more easily predicted. A business which is susceptible to constant change isn't ideal because it means earnings are much harder to foresee with a similar degree of certainty.
Consistent, Repeated Purchases of Product or Service
A wonderful business is one that sells the same product over and over again. Think Wrigley's chewing gum. It is attractive because it allows the business to not need to outlay capital expenditures or research & development and all the rest of it. Essentially, it reduces the expenses of the business.
This is just a short summary of Mr Mihaljevic's more comprehensive list. I elaborated a little more on the first point because i believe it's a very important one which i spend most of my own time on analysing.
A Huge Sustainable Competitive Advantage—A Franchise
In theory, when a business operates profitability it attracts competition. This is in the nature of capitalism. When the competition enters, sales get spread over more shops and so profitability declines. Profitability may also decline because the increased competition has led to increased price competition, among other things. When this occurs, the industry profitability will decline to negative economic profits and then companies will begin shutting down. However, a business with a sustainable competitive advantage or economic moat will allow the business to keep competition away. This may also allow for a franchise type of business (also known as franchise value or economic value).
Within the value investing framework, franchise doesn't mean a shop like Subway, franchise is the name given to a business that can earn above normal profits for extended periods of time (i.e. may not be mean reverting if you believe in that). This can be done by charging a higher price and not losing business to other similar firms (Think Coke.) In my opinion a brand is one of the most powerful competitive advantages a business could have. This is because for one, a strong brand name is extremely hard to replicate. As a side note, i believe a brand is only beneficial for investors if it allows the company to charge a higher price and not lose customers or results in larger sales volumes. On top of this, the brand may not be bought. For example, if it's been internally developed, the brand may not be directly recognised by accountants in the balance sheet. According to Ben Graham in his classic text "The Interpretation of Financial Statements" he says that the value of an intangible may not truly reflect its potential. Rather, he suggests you look at the earnings power of it.
This is what Warren Buffett saw when he started buying large stakes in The Coca Cola Company in the 80s. Everyone was looking at the same financial statements but Warren saw that the company had a brand name that was worth billions, potentially trillions which wasn't directly nor fully reflected in the statements. The opposite of a franchise is a commodity type business (think Airlines). These businesses are characterised by excessive competition and no price coercion what so ever. Typically, you want to stay away from these businesses without economic moats (if you want to understand economic moats to a much greater extent i suggest you read Pat Dorsey's - The Little Book That Builds Wealth.)
A Growing Stream of Free Cash
Free cash flows are the flows that will eventually end up to owners of the business. In recent times, the DCFF/E model(s) has become popular because earnings are subject to management discretion. For example, a company can directly reduce expenses through changing the useful life of a depreciable asset such as PPE (by increasing the useful life from say 5 years to 10 years will reduce the depreciation expense.) As the value of the business is simply the amount of cash one can get out of it, growing free cash flows are ideal (not going into too much detail here).
Simple, Understandable
I like businesses which are simple. Like Warren, i too, can't understand complicated businesses. A simple business is much easier to understand allowing you to also obtain a stronger grip on its future prospects. Peter Lynch once said that he liked simple businesses that any idiot could run, because someday one will.
Stable—The Basic Business Changes Little Over Time/ predictable earnings
A stable business such as Coca Cola means that earnings are more easily predicted. A business which is susceptible to constant change isn't ideal because it means earnings are much harder to foresee with a similar degree of certainty.
Consistent, Repeated Purchases of Product or Service
A wonderful business is one that sells the same product over and over again. Think Wrigley's chewing gum. It is attractive because it allows the business to not need to outlay capital expenditures or research & development and all the rest of it. Essentially, it reduces the expenses of the business.
This is just a short summary of Mr Mihaljevic's more comprehensive list. I elaborated a little more on the first point because i believe it's a very important one which i spend most of my own time on analysing.
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