April 9, 2010
March Quarterly Report for Value Fund
March Quarterly Report for Value Fund
We've just put the finishing touches to the latest quarterly report. Download the PDF, listen to the podcast or both. As always, your comments and thoughts are welcome.Don't forget I'm also touring the country towards the end of April, presenting the fund and a few of my favourite stock ideas to potential investors. For dates and times, click here.
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Comments
it seems to me the more time spent at a computer looking at stock prices the more likely one is to trade and there is a bit of trading going on in your portfolio.I would suggest you have a couple of days each week with the computer off and just concentrate on reading and thinking.I suspect Buffet if asked would give you the same advice
Might I also recommend the following book to you, if you had not read it already? http://en.wikipedia.org/wiki/Good_to_Great
Reason I recommend it is because I hope you can better carry out qualitative assessments (through personal contact) of such good-to-great companies rather than just deal with companies that make it past the initial filter.
Bring out more of the Phil Fisher in you please.
A bit harsh Mat - you have to do a fair bit of trading to establish the fund. It would take 5 years to fully invest the capital if you only traded once every 2 months or whatever.
I agree the WDS trade is hardly what you would expect from a 'value' fund, it's more like a longe hedge fund trade.
That aside, I can't see a problem with a fair bit of trading in the first few months. If the fund is still trading like that in 12 months, well, then I would be worried.
A comment guys, why not put the benchmark returns (whatever they are - isn't it the cash rate for the performance fee?) in the same table as the fund's returns? Mentioning it in the text is a poor substitute.
Thanks John. I've read the book but, to be honest, wasn't particularly impressed with it. Picking companies that have performed well in the past is pretty straight forward - picking those that will perform in future is something Collins hasn't been particularly good at. The eleven companies he declared 'great' have performed poorly on average and one of them, Fannie Mae, is practically bust.
here are the eleven companies:
Abbott Laboratories
Circuit City
Fannie Mae
Gillette
Kimberly-Clark
Kroger
Nucor
Philip Morris
Pitney Bowes
Walgreens
Wells Fargo
Thanks Justin, good point. We'll definitely include it in future.
To be honest, I don't know what people want a value investor to do if a stock they purchased appreciates 40% in one day ... hang on to it simply because they have to hold everything for the long-term? If a stock goes up to my estimate of its value I'm going to sell it and move onto something else. If that means I lose the tag 'value investor' then I guess I'll have to live with it.
My aim is not to replicate anyone but to learn as much as I can and then stick to the method that works best for the fund. Importantly, that will change over time as the fund changes.
Buffett is not the same as Graham and there are plenty of successful investors out there who are different to Buffett ... Buffett today is much different from the Buffett of 50 years ago when he only had a few million dollars to worry about.
Just another word of support for Steve.
If I wanted a cash box I would leave it in an online account at 5.75% at call. I think investors need to let him buy some stocks. And as my wealthy Great Grandmother reminds me... "It is never a profit until it is in the bank".
Hi Steve, the Comsec website lists the SKI debt to equity ratio is more than you thought)at 304% whilst not dissimilar to other infrastructure companies. I'd like to understand why are we/the market are comfortable with this? For example, does the prescribed statutory 8% profit somehow factor in and compensate for the interest on the debt? Thanks.
Hi Mike, I'm not sure whether or not you're a member of The Intelligent Investor but, if so, you might find this review Steve published last year to be helpful on this issue; Spark's WACCed up returns.
Steve, I'm a Value Fund investor only, asking for your take on this.
Hi Steve
I personally see nothing wrong with the WDS trade (hey, if every trade turned out like that...!), I was more just making the point that that sort of trade (buy straight after a shocking results announcement, sell tomorrow after the bounce), is not really the sort of opportunity I imagine most people expect a 'value' fund to be pursuing.
I know, you must be thinking this is BS - getting criticised for making a 40% return in one day!
No doubt that there are plenty of opportunities out there like this, but if I saw a value fund PM making (many) trades like this I would think 'style-drift' and mentally place the fund in a different category (long-only hedge fund for example).
Circuit City also went bust last year - I remember thinking about this book at the time.
Hi Mike,
Apologies for the delayed response - I've been travelling. The reason the gearing looks so high on Commsec is because Spark is a stapled security. When you buy it you get a share stapled to a loan note. These loan notes are on Spark's balance sheet as a $1.2bn liability but they are more like equity than debt (they structure it like this so they can get the cash out without paying tax - offshore investors don't like franking credits - and the businesses often generate more cash than accounting profits, which is difficult to pay out under a traditional pure equity structure).
Check out this piece I wrote on Sydney Airport for a more detailed explanation of a similar structure.
http://iifm.grox.com.au/bristlemouth/is-maps-sydney-airport-insolvent/
The underlying net debt/equity for Spark is about 150%, and the reason people are comfortable with that is the predictable nature of the cashflows.
To be fair, I'd rather Steven declare these trades and make them rather than ignore such arbitrage "on principle". Ben Graham did devote a whole chapter on arbitrage opportunities, as I recall.
The issue seems mostly settled, but for the sake of giving my two cents...
the WDS trade is but one of many forms of value investing - opportunism at its best. Casually taking advantage of short term volatility and buying the much touted '$1 for 50c' and then selling it back at closer to $1 DEFINES VALUE INVESTING. Whether this happens over 3 days, 3 months or 3 years makes no difference, the cheaper the purchase price the lower the true risk and the larger the potential upside. The moment that the price returns to anywhere near the proverbial $1 mark, the risk of the market taking back the easy gains increases dramatically.
In my mind, this type of opportunity is one of the main reasons for holding a material cash balance in a portfolio.
I am not an investor in the fund as yet, but with a view to becoming one, this sort of trade in a volatile small cap stock, mixed with the more typical medium-longer term holdings is precisely what i would expect of the fund based on Steve's presentation at the information night.
The moment that arbitrary 'rules' are introduced that would lean against this style of trade, the smaller the window of opportunistic investing becomes.
Good work Steve.
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