Vita Life Sciences

Vita Life Sciences (ASX:VSC) today released their annual report. The report in my eyes is very pleasing and their expansion across Asia seems to be driving a larger portion of their revenue yoy. Their ROE is increasing at a healthy pace and free cash flows have risen over 250% compared to their previous year. The EPS has roughly doubled and their fundamentals are looking strong. I've visited local chemists to find out more about their Australian products and I've discovered they don't compete with Blackmores in general as they offer different products. I wonder how the market will take this over the next few months.

ASX Sharemarket game

 The basic premise of the game is that you're given $50,000 and your challenge is to make it grow and are given a choice of 150 stocks to choose from.

It's been one month into ASX's share market game and my portfolio has been doing pretty well with a 6% gain in the one month (after transaction costs). My 2 worst performers have been Slater & Gordon and Crown (which i've sold). Contrastingly, my two top performers have been G8 Education  and TPG Telecom (which together formulate about 1/3 of my total funds invested). 

The game has reinforced my notions to stay focused on buying part ownership in quality businesses that can continue to drive earnings and are run for the shareholders. Because, this is what i believe drives share prices.

My portfolio currently ranks in at 55 out of 10,180 portfolios. I will update this post again in one month to track my progression.

While i don't advocate short-term movements in stock prices to judge one's performance, i'm quite pleased with my result so far (TPG is exempt as they released their half year results after i bought the stock). But who knows what may happen tomorrow.

Value investing

 Just a short post about investing.

I personally like Walter Scholls summation on value investing. He says " I don't think i would like to buy good companies at bad prices, i want good companies at a discount. I'm looking to make a profit and i don't want to lose money. At times, people get nervous and you can buy a good comapny at a fair price. I can't generalize because each company is different but if you want to make a profit with a stock that may go up, say, 50% which may take several years, you'll just have to be patient. But i don't want to lose money. To do that, you usually want to buy stocks that are having problems. Quite often, the stock market acts emotionally, people act emotionally. Bad news, causes trouble. What you try to do is not get  involved with the emotions of buying and selling. "

I watched an interview with Sir John Templeton, where the interviewer asked "What is your advice to people in terms of the stock market today". Unfortunately, i can't seem to find a date of this interview (im guessing between 1960-80), but the message is still valid.

Sir John Templeton replied "Patience. Be a long term investor. Be prepared financially and psychologically to live through a series of bull markets and bear markets, because in the long run common stocks will  pay off enormously. The next bull market will carry prices far higher than this one."

The interviewer sharply contested "Why?"

Sir John Templeton: "Because the whole nation is growing more rapidly. Gross National Product (GNP) of the nation will double in at least the next ten years. we think that the GNP of the nation in 40 years will be 64 times what it is now and that will be reflected in sales volume and profits and share prices. So, from a long term investment standpoint, It's a question of when you should put your money into stocks. We can't give you the exact day, but some time the bull market will start again and you want to be in on it."

It just came to my attention whilst writing that last line that the interview was probably during the 1960-80s as the US market had a severe bear market during those times.



Personally, i agree with Templeton. Picking the highs and lows of the market isn't done with consistency. Having said this, i like companies that have stood the test of time and continue to produce more and more earnings. By earning more and more, the company has the ability (if necessary) to continue increasing dividends. By being a long term investor, and hanging on and adding to your long position's when stock prices fluctuate for reasons unrelated to business fundamentals, you can seriously increase your returns. It wouldnt surprise me if Buffetts dividend yield from his Coca-Cola stock holdings was in the range of 15-25% p.a. This goes to say without capital appreciation on top. However, this doesn't apply to Buffett, as he doesn't seek capital appreciation. Rather, he likes to own fractional ownership (if he's not buying the entire company) in businesses that can continue to grow its earnings. Bruce Greenwald, I think said it best "You are looking for things that are ugly, cheap, boring, out of fashion, small and obscure, or otherwise, if it's on the other side of the existing financing mania".

Excuse the poor formatting, my stylistic English isn't the best.

Here's a relevant article

http://www.cnbc.com/id/101511374

My short take on REA

Recently I've been considering buying into REA but I've changed my mind. While this is one of Australia's most successful business with huge opportunity it is a market darling. Despite analysts forecasting a price target of $100 in 2 years, my main concern is that the stock is priced for perfection. If it disappoints at some time in the near future, the share price might get obliterated. And, this, is what i am now waiting for. It may never happen and it could and is likely to keep going up, but I'm not willing to partake in such a game.

A stock for the long term?

Aveo group (ASX:AOG) is a stock that i currently own. I bought it about 1 month ago (for $2.18) and since then the market value portion that i own has declined about 10%. This hasn't phased me one bit and I'm actually excited as i will be purchasing more soon. The company has recently turned to profit, with strong growth in its sales/cash flows. The major problem i have with his company is it's low ROE.
 Despite this, the company is going through a rationalisation of it's assets as it moves to a pure-play retirement. Due to the aging population (this may seem like a 'forecast' but i don't think it is, as the ABS has reports showing how fast the population in Australia is aging, so i'd say that it's fact as opposed to 'wishful thinking') and i think it's positioned very well  to cater for this and it should serve the group fantastically. However, this wasn't the main reason i bought this stock. The stock is actually trading at a significant discount to book value (with net tangible assets at $2.78 per share), and in this current climate where i think the market is getting overvalued whereby valuations are jumping ahead of earnings, it's getting tough to find bargains.

I have high hopes for the stock in the long-term and the price decline of 10% hasn't moved me, and in fact, i welcome more decline so i can purchase more of this business at even a greater discount.

The three most important words in investing

Margin of safety by Seth Klarman is a book I've just stumbled across. I've watched videos and have heard alot about what he has to say but i couldn't put a name to the face. Fortunately, i have now. I was skimming through the book and found his definition of how to distinguish between speculation and investing.

"Mark Twain said that there are two times in a man's life when he should not speculate: when he can't afford it and when he can. Because this is so, understanding the difference between investment and speculation is the first step in achieving investment success. To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don't know, don't care about, or prefer to ignore. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk. Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses"

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If you read some of my posts i would like to think we're that on the same page hahah.

Less risk more return

Is lower risk higher return possible? I would argue it's possible and i'll explain.

·         Let’s suppose a share is currently trading at $20. Now that share price after some time e.g. 3 months falls to $10. The next day, a Russian bank, who’s a substantial holder of the company in question goes bankrupt and has to sell all its shares, pushing the price down to $5. This means that you can only now lose half as much. Moreover, it means that if the stock bounces back to $20, you can also gain twice as much. Thus, if the stock price gyrates for reasons unrelated to a company’s fundamentals, I would argue that this is an example of less risk and high return.

Wise words from a wise man

GEICO's former CEO Lou Simpson has revealed some wise words. They go back to investing for the long term and to not engage in active trading. "Attempting to guess short-term swings in individual stocks, the stock market or the economy is not likely to produce consistently good results. Short-term developments are too unpredictable. On the other hand, owning shares of quality companies run for the shareholders stands an excellent chance of providing above-average returns to investors over the long term. Furthermore, moving in and out of stocks frequently has two major disadvantages that will substantially diminish the results, transaction costs and taxes. Capital will grow more rapidly if earnings compound with as few interruptions for commission and tax bites as possible"

Simpson returned 24.7%  on average annually for 17 years.

A security i'm getting interested in

Vita Life Sciences (ASX:VSC) has tickled my fancy. Having only read a few pages of the last full year annual report, I've decided to pursue more investigation for this company. A little closer look at the fundamentals sees revenues, earnings, cash flow and return on equity (ROE) all rising. Particular emphasis is placed on the ROE for this company. It is increasing shareholder's equity at a healthy pace whilst simultaneously increasing its earnings, and still, the ROE is heading north. The group has zero debt and an extremely healthy balance sheet (approx $9m in cash). The company actively engages in share buy-backs (not sure at this point in time if it's beneficial as i haven't worked out the value of the business but it looks positive). On top of this, the group hasn't needed to raise much equity capital in recent time.

However, some current areas for concern (for me) is the volatility in the ROE and in the groups free cash flows in the past 10 years. Further, the slow growth rate in sales is also adding to the picture. Despite this, i will still pursue my interests in this company. 

A recent AFR article

"Fundies move from buy-hold strategy", a recent article by the AFR has sent chills down my spine, good chills. "Australian fund managers are ditching the traditional buy-hold strategy and instead looking for trading opportunities". I do question how they are going to do this with success in the long-run. I guess time will tell.

Buying $1 of assets for $0.50.

 This post is to acknowledge where my own investing principles have stemmed from (and continues to be shaped by) for the very short time that I've been investing. I'm very fortunate to have found my passion at a relatively young age and a set of philosophies that resonate with me. The notions that i outline below are implemented by me with my own funds and is dedicated to my hero with whom i have immense respect for.

There's no question as to why the world's greatest investor is exactly that. If you invested $10,000 in 1956 with Warren Edward Buffett when he commenced his investment partnership (Buffett Partnership, Ltd) you'd be worth over $500 million today. Contrastingly, that same $10,000 invested in the S&P would be $140,000. Ponder on that for a second.

Buffetts investment principles can be summed up as follows. I expand on them as to how i think they mean.

Rule number one: Don't lose capital. 
Rule number two: Don't forget rule number one. 
 
Capital preservation is the name of the game. When buying shares in a company you have to have at the forefront of your mind that you wish to not lose your money first rather than thinking along the lines of "how much money can i make". I think this is very important and it will make you rethink twice (or in my case 30 times) about whether what you're buying is really what you claim it to be.

1) Know what you own

When you buy a share you must understand what it is exactly that you're buying into. You must be 110% certain that you've made the right choice before going ahead and pressing that buy button. You must know the ins and outs of the business, as if you were the owner of that business. Buffett always says "Investment is most intelligent when it is most businesslike". Focus on buying businesses and let the market take care of itself.

2) Research before you buy

This rule i think is linked to number one. It is imperative that you do your research before you buy into a business. Don't buy businesses and then do the research, in my opinion you're setting yourself up for failure if you do this. After serious research is done, and by serious i mean you could talk about that business like the CEO would, you must stay on top of what's going on with that business. 

3) Own a business, not a stock.

This is an extremely important foundation rule. When you buy a share, you're buying part ownership of that business. This is investing. On the other hand, buying stocks, i.e. pieces of paper that gyrate in prices by the second is speculating. This is akin to gambling. By following such a common tradition, you're punting on that the price will go up. With market updates "The Dow has hit an all time low today" or "It's red across the board" by the minute it's hard to sometimes step back and actually put that on the peripheral. Buffetts teacher, mentor and lifelong friend, Benjamin Graham introduces in chapter 8 of  The Intelligent investor the concept of Mr.Market. A crazy, manic depressant who is there to serve you and not instruct you. If you own shares in lets say Flight Centre, and you notice that its lost 3% in  market value today, do you sell because of this? Do you sell because the price has declined? Or do you research as to why it might have declined and to see if the underlying business value has changed? Stock prices change by the second, business value doesn't. Price and value are two completely different concepts. Buffett often reminds us that "Price is what you pay and value is what you get". If i was to ask you how much a typical ball point pen was worth, do you answer with something like "whatever it costs at Officeworks" or would you answer along the lines of "how much ink does it have". It's important to remember this distinction and don't buy into stocks because they are rising in price. This practice doesn't work in the long run. 

4) Make a total of only 20 lifetime investments

Imagine that you had a punch card (like a coffee card)  and every time you buy a stock you'd punch a hole. This is what this rule is referring to.

Now i must admit i probably won't completely adhere to this. But the underlying message here is important and that i do have this message factored into my final decision of whether or not to buy a business. At business school I've been taught that the market is efficient and that you can't 'beat it'. Essentially, there's no point is trying to find undervalued stocks because you're wasting your time. I believe that this is rubbish. Beating an index can be done because the index is filled with good companies but also bad companies which can drag its performance (as the stock price in the long-run reflects the value of the business. And I'm not talking about market value. I won't detail this here as this is another post in itself). Therefore, to beat the market i believe you need to be a better stock picker. Many people have done this including Warren Buffett.

This leads me to talk about diversification (or diworsificaiton as Mr Lynch coined). This is the process by which you spread your funds over a variety of different companies and/or asset classes to reduce risk (or so they say). Without getting too detailed here, i do believe a little of diversification is necessary. By a bit i mean 8-16 stocks (depending on your situation this may change, i.e. a mutual fund with enormous funds under management, may have to do things differently due to maybe legal obligations).  Is over diversification necessary? Warren Buffet doesn't seem to think so and neither do i. This is linked back to know what you own among another things. If you own 50 different companies in your portfolio you can't tell me that you can equally rank number 1 to 50. What i mean by this is that company number 1 and company number 50 is highly unlikely to be understood equally. Further, if you're truly buying superior businesses with good economics at a discount to business value its also unlikely that number 1 is just as good as 50.

When Warren buys, he buys in a few businesses (contrary to diversification) and he buys BIG. He also buys and holds indefinitely (or until certain circumstances change). This indefinitely aspect reflects that he's 110% certain that what he's bought is what he thinks it to be. Coca-Cola, GEICO Insurance, The Washington Post, Gillette, American Express and more recently IBM are some examples of investments made by Buffett. Notice how these businesses are quite well known. Not just by him but you too (with a few exceptions). Buffett likes to buy simple business in which he can understand completely. In the lead up to the dot-com crash, articles were posted about Warren saying that he has "lost his touch" as ten-baggers (a phrase coined by Peter lynch meaning that you've made 10 times your money. e.g. investing $1 turning into $10 would be an example of a ten-bagger) were popping up everywhere. These notions about Warren were rubbish, Warren didn't invest in such business because for one he didn't understand them, they had unstable earnings (the ones that made any!) etc..., Essentially, he stayed within his circle of competence. To become a successful investor i believe you must be extremely patient and disciplined. Such qualities  exude from Warren at levels that would make most people cringe. I'm a firm believer that in order to become the best you must learn from the best.

5) Margin of safety 

A concept developed by Buffetts mentor Benjamin Graham and introduced in chapter 20 of The Intelligent Investor. It's crucial that before you buy shares you must buy them at a discount to their intrinsic value (intrinsic value means what the business is worth today). You need to find a suitable discrepancy between the price of the share and what the business is actually worth on a per-share basis. Suitability will differ for everyone and this is why i see investment as both an art and a science.This discrepancy is refereed to as the margin of safety and relates back to rule number 1 and capital preservation.