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.
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