Merry Xmas

Dear Readers,

Thank you for your continual patronage of my humble blog.

I have not posted much in recent months because of several reasons:

1. I do not talk about or discuss stocks currently held in the investment company;
2. A lot of attention has been devoted on stocks currently held, with some of them undergoing merger and acquisition activities. Stock specific activities took away a lot of time from general and philosophical thought activities;
3. There simply has not been much material in my head worthy of taking up your reading time.

So apologies for the dearth of articles. I am taking a short rest over Xmas, and taking the time to mull over broader ideas relating to investing. If this generates some interesting ideas or angles for discussion, then I will be posting them.

Regards
Yours One Legged

Interesting Articles

Slow advance of battery technology and implications in an article published by Business Spectator.

More academia navel gazing on the NBN here. Some food for thought on ultimate landscape of our telecommunications industry, except that the focus is way too narrow given the inexorable convergence of IT and telecommunications. Man with a hammer syndrome I reckon.

John Hempton's usual considerable intellectual heft being targeted at the future of telecommunications spectrum, relatively heavy reading here. Relevance once again to possible future landscape for telecommunications industry.

A not-too-recent article on Walter Schloss here. Investing wisdom is timeless, and I strive to learn from the preeminent, both dead or alive.

Warren Buffett's recent interview here. Most memorable quotes:

1. "You know you have a bad business when you have a good manager and still get bad results."
2. "You are nothing to the stock. The stock does not care about your buy price. The stock has no feelings for you. It just doesn't care."
3."Over one lifetime, USA GDP has increased by nearly 6-fold. This has never happened before."


Enjoy and Prosper,
Yours One-Legged

Recent Musings 9 October 2014

On risks versus returns, and how some psychology of misjudgment impact on the investment process.

Investing involves estimating risks and returns. Success or failure in investing over long periods of time (5 years and above) is a byproduct of average returns per unit of risk taken. The process involves an estimation of both the probability and consequences of each possible outcome, both good and bad. Once that is done, the overall result is compared with an alternative choice of investment.

That sounds like a lot of work. It is. Unfortunately, our human brain is not wired to automatically work this way. We prefer stories which progress in a linear fashion, rather than grasping with multiple timelines with different outcomes. In areas of complexity, we are wired to make simplifying assumptions.

There is also an asymmetry of incentive involved. Dreaming about returns is much easier. Assessing risks is unpleasant. Therefore the human brain, being risk/pain adverse, does not automatically engage in risk assessment.

The brain also suffers from a recency bias. This leads to the brain over-emphasising recent events, which can lead to extreme pessimism in bear markets and extreme optimism in bull markets. Both result in mispricings which can be systematically exploited, provided one is patient and not succumb to the Action Man bias. The difficulty in staying calm and patient must also be understood in light of our natural human tendency towards collective madness, especially in moments of stress and uncertainty.

Altogether, it is much easier to dream than work. Being aware of this will give one an automatic edge over the general market.

How do we apply the above learnings to our opportunity set in the current market?

Some great fundamental guidelines from Munger

Forbes has a very good article on the recent Daily Journal Annual Meeting with Charlie Munger.

You can read the article here.  To get the most out of it, I would suggest multiple rereading.

I have distilled the following fundamental guidelines insofar as relevant to investing, with the caveat that this is not exhaustive:

1.       Pick your spots;

2.       Know your limits;

3.    Easy does it;

4.       Be patient;

5.       Act decisively when the time comes.

Reporting Season EOFY 2014- Part 3

This is the business end of the reporting season, as far as I am concerned. Interesting season so far.

25 August 2014

MTU results out. $85m OCF, $100m OCF before interest. MC $1.2b, EV $1.5b.

SDI results out. $2.6m in FCF.  $7.6m OCF. $80m MC. Continued capex required for growth.

26 August 2014

SRV results out. FCF $40m. Cash in bank $108m. 120 mature floors, 16 immature floors, total floors 136. Like for like floors revenue increased 34%.  Occupancy of like for like floors at 79%, falling short of target set last year. However, number of offices has increased and margins have improved. 17% increase in revenue half on half translated into 22% increase in NPAT and OCF. Opening 9 new floors and expanding 5 floors in 2015 to add another 10% capacity.  Australia is under pressure, and USA not yet profitable. Guidance on 15% NPBT improvement in 2015. Balance sheet remains solid. Expenses ratio remained consistent. Revenue per floor is still very low at $1.7m, yet to even reach levels achieved prior to 2010. Net cashflow per floor is still low at $290k, half the levels prior to GFC. Possibility that OCF will reach near all time highs in 2015.

GNG results out. Revenue $114m, NPAT $14m, cashflow $18.8m. Locked in revenue is $110m for 2015. 14 studies as at June 2014. Total cash on hand $37.4m, AR $34.6m AP $21.6m. 4c dividend ff. MC $120m= 6.5x cashflow, 4.5x casflow after backing out cash, PE 8.5, PE 6.5 after backing out cash. Everyone is scared witless with mining services. Now, what did that old geezer said again about fearful and greedy?

VEI results out. Revenue up, but EBIT down, showing continual erosion of margins. FCF $17m, debt at $38m. EBITDA=$26m. MC=$120m, EV=$160m. EV/EBITDA=6, but EV/FCF=$9.4m.

VRT results out. FCF $44m, debt $140m, MC $620m, EV $760m. Required CAGR 7 to 8%.

HSN results out. FCF $18m. MC $250m.

REF results out. Revenue $9.7m, NPAT $1.5m with Contacts and TriTel making losses of over $500k. Cash on hand is $5.1m. OCF is $2.2m, FCF is $2.2m. No dividend, management wants to make acquisitions. MC $16m. EV $11m. EV/FCF=5.

TGA MD address. Focus on Return on Equity. Logical coherent plan executed consistently and communicated clearly. Looking to enter into telco market (note competition in this sector). Continued good performance at Rentals with opportunities being actively investigated. TEF continues to grow loan book to $73m, aiming for target of $100m. Rent-Drive-Buy concluded and closed.  Reaffirmed NPAT above $30m. Emphasis on culture. Ticks all boxes.

27 August 2014

LYL results out. Outlook okay, pressure in MS continuing.

AMA- $5.6m NPAT, $6m FCF. EBIT $8.8m, revenue $64m. Balance sheet is debt free with excess working capital. Very positive outlook. 1.6c ff dividend. Still a bet on Malone to deliver on the smash repairs industry consolidation.

FPS results out. Revenue $22m, PBT $6m, NPAT $4m, dividend 5c ff.  Cash in hand $11.1m. Receipts $24.5m, OCF $7m (Q4 took in $3m), OCF after tax $5.8m. Expenses down 6.7%, revenue up 3.6%. Positive outlook, using cashflow to pay dividends and surplus for acquisitions. The cashflow run rate is now over $10m pa before tax payment.

ICS- $2m in cash, but note working capital. $1.1m in OCF. Slightly disappointing but understood in light of money spent on premise relocation and fitout. MBC continues growth. MC $10m, trading at less than PE 10 and less than 10x cashflow. 0.1c dividend nf.

TTI- outlook positive, especially in LED street lighting, but balance sheet is too precarious, with heavy debt load and low free cashflow. Prefer to avoid solvency risk.

CGO- Revenue up, NPAT up. OCF at $2.7m. Undemanding price ATM.

UOS HY out. Book value essentially stayed flat. Still trading at substantial discount to book.

TWD results out. Revenue down, NPAT flat. FCF $6m. Leveraged to housing market, on the improve for 2015, plus franchising becoming capex light. Solid balance sheet, high dividends maintained.

28 August 2014

VOC results out. Revenue is $92.3m, up 37%, beating expectations. Underlying EBITDA $33m. Cashflow this half is $17.5m versus $13m last half, given total cashflow of $30m, which matches up with EBITDA. Core Capex at $18m. Capex efficiency reduced to 0.58. Internet division result is staggering, and appears that growth with continue and largely offset $4m of EBITDA loss on the Vodafone contract renewal. Buildings connected over 1000, fibre kms is 585, utilisation up at 13% despite expanded base. Prior to FX Networks acquisition, looking at $40m to $50m of cashflow for 2015, placing it on 10x to 12.5x multiple at current MC. Market wants reducing capex and increasing dividends. I want increasing growth capex and no dividends.

TCN results out. FCF $2.3m. Solid balance sheet, no debt. $3.6m in cash plus $1m receivables from associate. MC $21m is not expensive.

CTE results out. Revenue increased to $9.1m from $8.7m.  NPAT is $500k. Cash on hand is $6.2m, unearned income is also up. Operating cashflow is $1.5m, FCF is over $1m. Watch the cash next year once the capex is removed. MC justified even at current run rates.

RHT results out. HepaFat sales have started. Revenue $2.28m, cash in hand $2m. Ferriscan revenue is $2,284,565 with 5596 scans, clinical use volumes up 32%.

RHC results out. Need to find time for deep dive.

29 August 2014

SCD results out. Slight negative cashflow. Before tax payment of $1.6m, actually OCF positive. No balance sheet deterioration, cash in hand is $6.2m. Orders on hand smaller than during GFC days. Service continues to buffer. Cash plus net property is $7.5m, plus franking credits of at least $1.6m. MC is slight over $8m at last traded price.  The benefits of downside protection is apparent with plays like SCD. Heads I win, tails I dont lose much.

ONT results out. OTC revenue dropped. OCF $8m, FCF $5.5m. Results actually an improvement, and weird accounting treatment stripped out $800k from NPAT. Normalised FCF is over $6m due to stamp duty issue on acquisition. CEO communication is excellent.

SBB HY out. COGS skewed. Interest rates checked out at savings rate of 0.35%. If the accounts are to be believed, this is trading at 1x OCF after backing out cash, and 2.5x OCF before backing out cash. Why is there no dividend? They obviously do not need the cash hoard, given that they are OCF positive to the tune of $10m per half, and capex is less than $2m. Something NQR.


That's it folks. Enjoy and Prosper, and drop some comments.

Yours One Legged

Reporting Season EOFY 2014- Part 2

The pace is definitely picking up this week. 

18 August 2014

GBT- $14m in FCF. Results already well guided, but Mr Market appears surprised.

AZJ- underlying EBIT $851m. Still very little FCF flowing through. Debt increasing. Pass.

ABS figures show new car sales fell in July 2014.

DWS- revenue down, NPAT down, but very good cashflow at nearly $20m. Clean balance sheet with excess cash and working capital.

TCN- interesting....

19 August 2014

BYL results out. $9.9m NPAT even though revenue down. Balance sheet in net cash. Dividend declared. Cashflow is a whopping $28m. Revenue next year at least 20% higher at $300m. ROE just under 20%. Book value 54 cents, increased 13%. Civil margins lower than mining margins- unexpected. 15% gross margins.

TPI results out- made a profit, announced dividend. But whole fleet grounded a day later due to safety concerns. Difficult to find any excess free cashflow.

SHL- revenue and NPAT up in low teens. Very low ROE despite high level of debt. Pass.

EAX results out. Flat with no growth but priced for growth. FCF slight improvement to $4.5m due to changes in working capital. Not looking good on other fronts.

TOL- flat revenues, increased NPAT due to cost cutting.

MND results out. Holding firm with huge load of work in hand. SP bobbing up and down in a range as Mr Market keeps his eye on the IO price and news on China.

MVF- now trading at $1.75, below IPO price of $1.85. IPO Mark II candidate.

20 August 2014

NWH- $1.1b revenue, NPAT $45m. 9c dividend. Work in hand $1b, forecast $1b revenue 2015, with $2.4b of tenders in progress. Cashflow over $120m, FCF $80m, spewing out cash as capex is reduced. ROE 12.5%. Book value is $1.22. Red Flag= PBT line decreased by half. Margins crunched. Share register of NWH resembles a playground for traders.

CCL HY results- FCF annualised to $200m. Owner’s earnings= $200m. EV $9b. Small volume growth in soft drinks, the same with USA, but margins being crunched. Watkins not articulating any clear strategy, in fact, I am not sure Watkins really knows what the core problem is.

ARP results flat. No growth but priced for growth. Pass.

MYT- FCF $257m. I need to learn more about the NZ electricity market.

TOX- sales and NPAT both up, $370m and $22m. FCF $23m. MC=$425m. Pass.

SEK results- FCF $230m. Pretty demanding implied growth CAGR embedded in SP. Pass.

SRX- NPAT $24m, FCF $24m before R & D- MC= $1.1b. CAGR required is now over 20% for 10 years. Pass.

UOS- terminated Myanmar venture. I breathed a sigh of relief.

21 August 2014

MGX results out. Cash kitty up to $520m. Dividend 4c. $60m of capex for Koolan Island coming up. Shine project delayed. With Chinese control, not sure whether shareholders' interest will be served.  Pass for the moment.

IMF results out. Investments just under $100m, cash and receivables $180m, debts $50m, net=$130m. Optimistic valuation is $400m vis a vis MC of $350m. Not enough margin of safety. Character of IMF is changing, not the same IMF of old. Pass.

AZV results out. NPAT just under $4m, but everything is stuck in receivables. Cashflow anaemic at $577k and barely covered capex. Let's see what the next results look like. Pass.

NAN results out. Strong sales growth, turned profitable, annualised to $2m to $3m NPAT, but MC is $238m. Pass.

GLH- $1.4m of inflows but $1.1m of R & D capitalised. Revenue is up, but I am still not convinced this is worth $20m. Cash is up slightly to $1.1m. but cash boosted by annual license fees collected upfront, with close to $1m of this being unearned. Outlook growth is slowing to 10% for 2015. Quite a crowded space. Pass.

ARA- good cashflow $5m, strong balance sheet with no debt. $80m MC. Nothing on sell side. Just announced buyback. NTA 39 cents. $16m in excess cash. Very little HC noise. Worth a further look.

CMI results. Woeful tale continues, electrical down but still profitable at $11m PBT, but TJM losses increased, despite increase in aftermarket sales volume (decrease in OEM orders). Management and board revamp. Forecasting positive medium term outlook for Electricals and return to profitability for TJM in 2015. Declared 3 cents dividend. Pass.

CTE- partnership agreement with RGS. I wonder how much is CTE planning to spend on its stem cells development. Is this announcement a furphy designed to buoy the SP ahead of a disappointing FY report? Still cant find a new CEO?

MVP results out. Negative FCF. Remains a “potential” stock unless numbers start flowing.

IRE- $70m FCF- $1.4b MC. Pass.

BRG review- PBT $70m- MC $910m. Cashflow before tax also $70m. Clean easy accounts. 130m shares x $7= $910m MC. With NPAT and FCF at $50m, Current price implies 8% CAGR for 10 years.  Chart target is $6= $780m MC?

PTM FUM increased from $16b to $22b. Keenly waiting for FPS.

AIO FY results out. OCF is $600m, but capex is $700m! EV value including debt is over $9.3b.  NPAT is $257m. 

22 August 2014

NEA results out. Clean balance sheet in net cash. Cashflow strong at $11m. Good tailwinds. Last half OCF is $7m versus $4m for previous half. Annualised without growth and stripping out R & D, OCF is now $11m, easily underpinning current SP of $150m. There is also cash of $23m on the balance sheet. Refining my understanding of NEA's business model. Hopefully I will put my thoughts in order for a meaningful post.

PME results out. Building up nicely. R & D of $5m exceeds OCF of $4m. CEO said pipeline is building up in the USA.

CAF NPAT turnaround. Cashflow going backwards, and negative after paying litigation claims. Pre claims OCF also decreased to $7m. $40m in working capital to be freed up due to mismatch of receivables and payables. Declared dividend. Balance sheet strong with $16m of cash plus franking and tax losses, balanced by provision for claims at $13m.  Too hard basket.

JIN- results out. Australian profits are up slightly despite lower revenue, but some of the cash earned here is spent on overseas expansion with very little to show. Mexico=0, USA= 0, Germany=$8k revenue. Pass.

IFM results out. Improvement- price shot up another 10% to 97 cents. This is a 5.7 bagger forgone from days of 17 cents. Painful.

Riddle for the day: Who is going to win the growth race PME, NEA or RHT?

Hint: there is no correct answer, but bonus points will be given for correct questions. 

Enjoy and Prosper,

Yours One Legged

Reporting Season EOFY 2014- Part 1

Okay folks, back to serious business.

The run-up to this year's reporting season was much more boring than usual due to the dearth of any news. In fact, 2 weeks into the reporting season, things are still pretty dull in terms of any exciting business developments or news that matter in the long term. The reality is that things just do not move that quickly in the business world.

5 August 2014

COH- NPAT $93m. FCF $80m. Market Cap is $3.8b. FY15 NPAT will be around $150m to $170m assuming half on half performance continues together with growth in the high teens. At current prices, implied growth is over 10% CAGR for 10 years with 10x terminal value. N6 surprised on the upside with good sales. I do not understand COH adequately on a qualitative basis to make an informed guess as to its possible long term growth rates. It also appears that this industry is akin to an arms race, not unlike the smartphone battles, where new products are constantly required to keep ahead of competitors. This is not a healthcare play unlike say Ramsay Health Care, it is a technology play.

TCL- $20b EV. $500m in FCF.

Question of the day: Which businesses are able to provide an analogue experience in a digital world?

6 August 2014

I have an ABC policy- Anything But China. So it was with some reluctance and disgust that I reviewed SBB. I even managed to persuade my darling missus to do some research for me. If you want to know more, I am afraid you will be disappointed, as I am not going to make myself an unwitting target of a potential defamation suit.

OFX 1^st quarter numbers up over 30%. 1st quarter EBTDA is $7.8m.

7 August 2014

IPP results out. Still cashflow negative despite revenues up 40%, positive EBITDA before writedowns. Losing ground in Singapore, but making money in Malaysia, and turning profitable in HK as expected. Share price is still strong due to REA taking a big stake. Current market cap is $650m. Maybe REA can make it work, but REA can afford the risk of losses more than me.

IRI- growth in H1 did not follow through to H2 due to lack of once-off license sales. Lack of recurring revenue is spooking market. Not much growth but somehow priced for growth.

TTN results out. Still not much FCF despite being in a good sector.

8 August 2014

REA- Revenue up 30%, NPAT up 37% to $150m. FCF about $150m. Results driven by Australia. Market cap pre-results is $6b- implies 20% CAGR for 10 years. Market marked down REA by 8% because results did not reach expectations. 

ASW- full year result flat yoy. Difficult to advance without ability to scale due to small size and already very efficient operations. The registry game is about scale.

UOS- profit guidance of about $64m PBT before minorities. Some headwinds coming due to sliding property market in Malaysia with the introduction of GST.

11 August 2014

COF FY results out. As expected, Geosciences still under pressure but International Developments division revenue improved. Operating Cashflow is over $20m (steady for last 3 years). No restructuring costs this half. Net debt reduced to below $50m. No dividends declared, as directors continue with debt reduction strategy. Contracted work in hand is $100m for ID and $90m for Geosciences. EV at $120m. Geosciences margins continue to be under pressure at 4%. As a leading indicator of conditions in the mining services sector, COF’s results indicate that things are not improving in a hurry. The initial investing thesis remains solidly intact. But it has been a roller-coaster ride with the share price dropping over 75% to 10 cents at one stage, and then staging a recovery. To make matters worse, I failed to top up during the entire ride. Not my finest moment.

FLN- revenue increased 40% but running a loss. CEO certainly likes the word "monotonic." Commented that FLN is like Ebay in 1997. Mate, we can talk again once you show a profit and positive cashflow.

TGA- Perennial ceased to be a substantial holder. TGA has a moat as competitors have little mindspace for this sort of unsexy business, and the banks are not interested in this sector due to small profits. TGA’s size and penetration of the communities it serves give rise to economies to scale. It went through the GFC with hardly a blip, testament to the resiliency of its business model. One of the more neglected quality businesses on the ASX.

OFX- director picked up nearly $60k worth of shares on market.

12 August 2014

SGH- WIP now exceeds total yearly revenue. Expenses/Revenue static at 79%. I have examined the figures for each year back until 2007. It was an exercise which was both intriguing and disgusting. It was also interesting that total revenue and total cash receipts from 2007 to present tally to an exact figure of $1.462b. An exact match...hmmmm. For your information, I am halfway through drafting a blog post which attempts to discuss concepts of accrued revenue, work in progress, prepaid revenue, unearned income and other such similar exciting items in balance sheets.  I know, I know, you can hardly wait to read more on accounting arcania.

RKN- results are pretty good, still growing in business market, strong cashflow. News reported hiccup with new software, with lots of complaints on social media.

BOL results out. Total assets is $389m (negligible intangibles). Total liabilities $155m. Equity is $234m vis a vis market cap of $84m. OCF= $23m before asset sales. Management expects further strong FCF in 2015 which will be used to reduce debt currently sitting at $89m net. Finance cost is $8m which will decrease by at least $2m in 2015. Expects infrastructure to kick in in late 2015, and picking up speed in 2016 and 2017. Flagged another $15m to $20m of capex in 2015, which is largely covered by expected asset sales. CEO confident that business is cashflow positive, and asset sales only supplement cash on top.

13 August 2014

CRZ- sales up 10% NPAT up 14%. FCF nearly $100m. Market cap $2.6b.

AMM- FCF $20m. Capex $27m. Maintenance capex=$10m. Since DA=$11.4m, Owner’s earnings= $24m. Forecasted NPAT growth of 20% for 2015. Trading at 20x owner’s earnings.

CPU- results out. NPAT up 60% with flat revenue.  Need to check interest margin revenue.

CSL- R & D is US$466m. OCF less capex is $1b- US$1.5b after adding back R & D. Share price has gone off again. The waiting game continues.

VOC splurged another $11.7m for WA data centre. Purchase price nearly 6x EBITDA. Pouring capital into a commodity business at the height of the boom. Wisdom of this acquisition will depend on cross-sales eg revenue synergies. Risky.

SSM FY out. Cashflow from operations is over $50m. Out of this they paid off the Syntheo liability and $5m interest, with a net cashflow of $25m. The money raised was capital raising they paid down debt. Gross debt is $17m, and net debt is $11m. EV is $88m. Next year’s cashflow will be in the range of $30m to $50m, putting SSM at cashflow multiples of 2 to 3x.  Cashflow boosted by lack of capex spending which was running at $10m per annum. Normalised cashflow should be about $20m to $40m. SP unmoved. New management remuneration based on EPS and TSR again (current fashionable metrics- way inferior to return on capital).

14 August 2014

TLS and FXJ results out. TLS increased dividend and announced buyback.

15 August 2014

IRI results out. Very little growth, good ROE. Recurring revenues on the increase to over 40% of revenues. Priced for growth at $160m compared to less than $10m FCF.

Lastly, dear readers, a small riddle:

"How would a one-legged man win in an ass-kicking contest?"

Hint 1: Bobby Fischer

Hint 2: Sun Tzu

Enjoy and Prosper,

Yours One Legged

A No-Brainer "Investment"

This post drew its inspiration from a great blog post written by Tony Hansen, which I urge all readers to read here.

The Australian Superannuation Co-Contribution Scheme (CCS) was introduced in 2004. For each of the years from 2004 to 2011, a low income earner paying $1000 into his/her superannuation fund would have received into their super another $1500 tax free from the CCS. In 2012, the CCS would have paid $1000. In 2013 and 2014, and for future years (assuming no changes), the CCS payment is $500 for every $1000 of after tax contribution.

A low income earner who made use of this opportunity from its inception in 2004 right up until 2014 would have received a total of $12,500 superannuation co-contributions from the CCS for an outlay of $10,000 over this ten year period. Assuming a relatively modest 8% yearly returns, a sum in excess of $32,000 would have resulted from this exercise. The only investment "skill" required is the effort of saving the equivalent of $19.20 per week from after tax pay. Bearing in mind the low income tax rebate available to low income earners every year, the actual saving required drops to a mere $11.50 per week.

In advertisement lingo: "Receive $32,000 in 10 years by paying less than $20 per week."

There are very few investment opportunities, in fact none that I could find, available to the general public which provides such fabulous returns for virtually zero risk and miniscule effort over such an extended period of time. The mystery to me is why so very few take advantage of it. One logical inference is that for many people, saving $20 per week is just too difficult. Another logical inference is that our education system and financial system have not been doing a good job of lifting standards of financial literacy amongst Australians.

The good news is that it is not too late to act now (ala Demtel and TV infomercials). A low income earner saving $20 after tax per week into his/her superannuation for the next 10 years, assuming 8% per annum returns (quite achievable with a low cost index fund), would have accrued a total of nearly $22,000.00. Yes, the money is locked away for a long time, and yes, the laws governing superannuation is quite likely to change in the future. On the other hand, to carry the cheesy advertising angle a bit further, what have you got to "lose", other than one less $20 note in your wallet every week? If the CCS is removed 5 years from now, there is no loss to the saver, who can just redirect his/her savings elsewhere.

For young people just starting out working, perhaps in low paying apprentice jobs, it will be difficult to find a more rewarding alternative to the CCS. Consider the fact that a 18 year old out of high school, working as a low paying apprentice, by saving $20 per week, would have accumulated an extra $22,000 in their superannuation account before they turn 30, on top of any employer contributed superannuation.

Whether one is low-income, mid-income or high-income, I hope that this post delivers the message clearly: how you play the cards you have been dealt in life is equally important, if not more important, than the cards you have to start off with.

Disclaimer: Opinion of a General Nature Only, containing facts that may be wrong or outdated. Definitely not financial advice of any kind.

Dogs versus Darlings 4 months later

A follow up on this amusing exercise.

As at midday 11 July 2014, the Dogs are down on average 7.8%, and the Darlings are down on average 19%. The Dogs are still outperforming the Darlings by nearly 11%. This does not include the effect of dividends.

Diehard aficionados may also like to track FLN, probably one of the most expensive shares you can buy on the ASX at this time. Please do remember that shares are not Veblen goods.

Hummingbird Value's Investment Strategy

Another great read here.

The strategy outlined by Paul Sonkin is very similar to the strategy currently employed at Castlereagh Equity, from philosophy, stock selection, buying and selling, to portfolio management.

Arlington Value 2013 Letter

Inspiring read. 

Thoughts on Aggregators

The following is an excerpt of my diary notes in September 2013. It contains extracts from an email conversation I had with another investor whose opinions I admired. The central part of this excerpt concerns the issue of aggregators, namely companies that grow by acquiring others.  I call them the Pac-Mans. 

24 September 2013

Aggregators

Thought of the day: aggregators versus organic growers. Spending on acquisitions are capitalised whereas spending on organic growth is expensed.

Buffett has previously warned of the "sleight of hand" with the accounting treatment for acquisitions. He pointed out that post acquisition, the acquirer gets a free kick with margins and earnings as the target usually comes with accounts receivables and contracts in progress for which the costs of sales has already been expensed.  Since the acquirer capitalises all acquisition costs, the metrics such as cashflow, earnings and margins are boosted in the operating section.

Your point that organic growth spending is usually expensed is an excellent point. Although in cases of heavy R & D, this may need to be revised.  CSL provides an excellent support for your point, as they expensed all their R & D every year.  The value of their IP does not show up on the balance sheet.

On the subject of aggregators (or roll-ups as they call it in the US), various anecdotes and studies I have read appears to suggest these fail more often than not.  Neptune Marine Service (NMS) was an example.  AMA was another failed example which got turned around. ABC Learning, MFS and Allco are the well-known bad-boys in the aftermath of the GFC. Nevertheless, early investors can make a lot of money on those who execute correctly.  I am thinking ONT ran by the excellent ex-army Daryl Holmes, CPU in the days of Morris, QBE in the mad days of Frank, and Navitas.

Here is a quick list with my current thoughts:

SGH- I still believe this will implode, but may survive implosion. Dislike management intensely.

AMA- made good money on this when Malone turned it around.  Very close to implosion before Malone.

ONT- this is a keeper, but not at current prices.

GXL- the debt load is getting scary, not as compelling as ONT.  Not sure whether retailing business has any relevance to the core vet business.

VEI- another one which nearly imploded. I dont think it will do well, as the specialist doctors have too much bargaining power.  Very different to ONT.

TRG- interesting but have not had a close look.

IVC- very good run, but I have questions about how they manage their prepaid book.

One quite common theme is that many of these aggregators have a strong run-up before they implode. The ones that don’t implode are runaway successes.  The ones that do implode can do well if they are turned around. A good specialist in this field can make decent money.

Cross post on SRV

The serviced office business has no barriers to entry. It is also difficult to get any meaningful advantages by being the lowest cost player via economies of scale. As stated by others, these businesses have large operating leverage due to high level of fixed costs and low variable costs. 

The way I see it, SRV is a play on very good and shareholder friendly management. Just like the insurance industry, you want management which is disciplined and focused on the bottom line for the long term future, as the industry is prone to be buffeted by economic cycles.  Management of SRV is savvy in that they pick their spots carefully in the market instead of trying to be everywhere and everything for everybody, a strategy used by Regus. Focusing on great service, great locations and innovative business solutions allow them to attract and keep high margin customers. As a contra reference, just Google "Regus Complaints" and you will see the point of distinction with SRV.

Due to the inherent cyclical nature of the industry, one needs to fully understand the boom and bust economic cycle (something I really need help on), to watch carefully what management does in good times and in bad times, and as always, to pick a good price for entry.  A lack of understanding will result in ruin, because it is precisely when things are all hairy and ugly that one should start buying, and precisely when things are going gangbusters that one should be selling. For SRV, it is in the midst of both economic downturns post tech crash and post GFC crash, when things are looking bleak and financials are weak that presented great buying opportunities. 

Over the very long term of say 10 to 20 years, I would venture to suggest that SRV under current management will increase intrinsic value quite steadily plus a respectable dividend return, however the ride will be very bumpy like a rollercoaster.

On a side note, plays such as HUB and other hipster plays are probably in a different market segment. For example, if a corporation needs to send over a specific team to implement a project in a specific location, serviced offices provide the ideal short term solution. No such team would want to work in a HUB or a hipster work environment. As we move more towards an information based economy, the need for segregated and quiet space for concentrated uninterrupted work increases.  As such I see no systemic risk to the underlying demand for serviced offices.

Dogs versus Darlings Week 5

In a previous post about 5 weeks back, I mentioned that I have set up a tracker portfolio comprising of 4 market darlings and 4 market dogs.

Except for week 1, the dogs have outperformed in every subsequent week. The dogs are currently down average 0.6%, and the darlings are down average 17.5%. Relative performance 16.9% in favour of dogs.

There is a little bit of "unfairness" in this comparison as technology stocks have gotten a bit of jitters lately. Plus 5 weeks is such a short period.  So we will continue monitoring and keeping track of this little exercise periodically.

Just as an interesting aside, one of the market darlings is XRO. 5 weeks ago, a prominent and popular newsletter put out a recommendation for XRO.  Apparently it is the best thing since sliced bread.  The bread is now being offered by Mr Market at nearly 50% off. This would make it twice the bargain it once was. Why do I not hear more stringent buy calls now from the newsletter?

In this game, valuation matters a lot. 

Recent Musings

Distilled to its essence, stock investing is actually a bet. I believe this is true even if one treats investments in stocks as being a part owner of a business. The simple reason is that business itself is a wager.  This stems from a fundamental truth: uncertainty is embedded into our very existence, as I have briefly alluded to in this post.

If stock investing is a bet on outcomes determined by uncertainty, why then are some investors more successful than others? EMH proponents will then tell you a story about monkeys, typewriters and Shakespeare. You will probably miss the footnote setting out an assumption that the number of monkeys involved exceeds the number of atoms in our known universe.

I prefer Charlie's simple answer: "My guesses are better than yours."

But why are Charlie's guesses better than mine?

The answer is also deceptively simple: by being rationale and harnessing the knowledge of fundamental truths.

But rationality has its problems too if applied in a dogmatic fashion.

Casino and Lotteries and Rationality

Consider a simple game of Sic-Bo. In this game, three six-faced dice are thrown and you bet on the outcome.  One of the offered bets is Triple Sixes. The probability of Triple Sixes is easy to calculate- 6 x 6 x 6= 216. The casino offers you 198.  Will you bet?

"Of course not!" you say, "You gotta be stupid.  I cannot understand why people bet on this.  They must be stupid too."

Let's consider a few scenarios:

1. John is a professor in mathematics specialising in statistics. He placed a bet because he figured that he will probably not make the bet more than a dozen times in his lifetime. So the mathematics is irrelevant. He is out having a good time, a rarity at his age.

2. Matthew is a quantitative analyst at a hedge fund. He knows the maths too. And he has just been paid a bonus and is out on a hot date with Jane. He figured that showing Jane a good time will increase his chances of a happy ending to the evening.  So he placed a bet, and told Jane that 666 is his lucky number, because he is such a bad boy.

3. Jane is recently divorced after a difficult marriage. She is out on a date with Matthew, and she desperately wants this relationship to start well, and hopefully blossom into long term union. Matthew has just given her a $50 chip to bet on anything she wants.  When she sees Matthew placing his bet, she placed the same bet, and held him tight whilst the dice are spun, sharing a nice moment of anticipation together.

4. Tim is a special guest of the casino. He is a whale, casino speak for a high roller. Tim has made a tidy living on gambling over the years, principally by obtaining favourable gambling terms with casinos desperate for his business.  On this trip, Tim gets a sliding scale rebate on his gambling turnover, with rebate reaching 15% for any dollar of turnover exceeding a certain amount. Tim has already exceeded that amount in turnover, and any game he plays entitles him to the highest rebate.

5. Antonio makes a lot of money "on the side". However, he is not acquainted with any of those fancy schmancy lawyers and bankers who could legitimise his ill-gotten fortune. So the casino is the only place he knows which could turn black into white.

Each of the above participants are making rationale decisions, based on their own framework of reasoning, by assessing different risks and benefits. The lesson that the above imparts is to never assume stupidity and irrationality in human actions.  

Share Market Rationality

The same lesson applies in the stock market.  For every buyer, there is a seller. Sellers are not stupid.  In fact, most sellers are quite rationale and smart.  If a buyer consistently assumes that sellers are stupid (this happens more often than you can imagine), the chances of long term success in investing is rather slim.

A quick example: REA at current pricing is incorporating very lofty growth assumptions for the long term. On my rough model, the market at current prices is expecting REA to grow in excess of 20% per annum for 10 years. To make reasonable money with this investment, REA needs to grow at rates approaching 30% per annum for 10 years, and continue to grow beyond that.  Putting it another way: sellers are locking in profits from growth of 20% per annum for the next 10 years, such growth being far from certain. Buyers are paying them to take on the uncertainty of this growth eventuating.

Who is getting the better deal here?

Buyers of REA at today's prices are assuming that the sellers are stupid.  Sellers of REA stock are quite likely to be sitting on some pretty fabulous gains. Selling means that they will likely incur taxes. If REA is going to grow at 30% per annum for 10 years and still continue growing beyond, selling REA means that a lot of upside will be given to buyers by sellers, and a big slice to the Taxman. I have never heard of charity beginning in the sharemarket, though most could call it "home" given the amount of time they spend staring at screens.

More importantly, which participant is likely to have a better and more intimate knowledge of REA? A new buyer, or a seller who has probably held for a much longer period?  Enough said.

Some investor says that they do not care why sellers are selling, because the sellers usually have a multitude of reasons, some of which may not relate to investment at all.  The Sic-Bo examples above probably reinforces this idea.  To me, this answer is always naggingly unsatisfying, not unlike an unfinished task constantly on reminder.

As they say, if you do not know who is the patsy at the poker table....

That's enough musing for the evening.  Thank you for reading, and as always, enjoy and prosper.

Yours One-Legged

Current Rereadings

Every time I suspect that I am about to do something stupid (and not necessarily limited to investments), I think of Charlie.  Needless to say, I think of Charlie a lot.




It is unfortunate that this book was written before the advent of the Apple iPhone and iPads which redefined the industry. Nevertheless, it contains lessons of ungodly importance if one is to succeed in investments.



Excellent content hides behind the cheesy title. Chapter One alone is worth 10x the price of this book. Unfortunately, some readers will learn the wrong lessons, judging by the popularity of spin-offs in recent years.

I believe these 3 books, together with the seminal Intelligent Investor, are likely to be all that is required for an average investor to get an edge in the markets, if the correct lessons are learned and applied diligently. It also helps immensely if one is reminded of Charlie constantly.