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91
General Discussion / Re: Decision Journal
« Last post by galumay on June 24, 2018, 01:15:54 PM »
I was considering selling AAPL, they have hit $190 and we have made nearly 100% return on them. I considered some articles suggesting AAPL had an IV of around $150 and that got me thinking that they were starting to run a fair way ahead of fair value. On reflection I realised I havent actually run a valuation on APPL so it seems a bit rash just to use someone elses valuation.
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Shares / Re: RISK
« Last post by galumay on June 20, 2018, 07:16:11 AM »
"Risk is the likelihood of permanent capital loss. Opportunity risk is the likelihood of missing out on potential gains. Put together you'll see that risk is the possibility of things not going the way you want. " Howard Marks
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General Discussion / Re: Things People Say...
« Last post by galumay on June 20, 2018, 07:15:16 AM »
"Risk is the likelihood of permanent capital loss. Opportunity risk is the likelihood of missing out on potential gains. Put together you'll see that risk is the possibility of things not going the way you want. " Howard Marks
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General Discussion / Re: Things People Say...
« Last post by galumay on June 13, 2018, 07:33:11 PM »
“Nothing in life is as important as you think it is while you are thinking about it.” Daniel Kahneman
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General Discussion / Re: Decision Journal
« Last post by galumay on June 11, 2018, 04:42:15 PM »
Its time again to reinvest some dividends, we have about $5k in cash and first of all, it will go into adding to an existing position - in the past I was always keen to find a new position to put money into, I am now trying to consolidate and concentrate the portfolios so I try very hard to resist any temeptation to add new positions!

I think ADA is the most obvious home for some extra capital, it continues to be an undervalued compared to my range of IV, and I have high conviction that the business will grow. They have recently confirmed guidance for EBT to increase about 35% for the FY.

The competing homes for the capital were other businesses we hold that are apparently undervalued, such as SDI and SRV, but I have less conviction about their recovery and they are already larger postitions. The other idea would be to add to profitable postions where we saw potential for further growth despite solid gains, so KME, GCS, and SXE. It will be interesting to revist in the future and see which strategy would have been better, as smaller positions SXE and KME would have made the most sense, I probably would have opted for KME given it has had less SP growth to date.

Bought $5k ADA at $1.85
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Thoughts and Ideas / Moats in investing and businesses
« Last post by galumay on June 10, 2018, 04:42:34 PM »
Brian Bares on creating a moat in investing style and strategy.



also Pat Dorsey on identifying moats in businesses.



The basic points I gleaned from both videos,

BUILDING AN INVESTMENT STRATEGY WITH A MOAT (Bill Bares)

Moat doesnt equal edge

A moat is how hard it is to replicate what you do

Differentiation may not lead to outperformance.

What is an investment edge?

Repeatable sourcing of variant perception that leads to sustained outperformance

Sources of variant perception,

Informational
Analytical
Behavioural

Not much edge in informational, this is where market is pretty efficient

Analytical is the big edge, we all have similar info, its what we do with it, especially on a qualitative basis. Repeatable.

Behavioural, based on market psychology, makes sense, but no one seems to do it successfully, very difficult to implement consistently. (probably because of the very biases you are looking for.)
Turn arounds, market mispricings due for fear or greed.

Two pillars of investment process

Building a differentiated investment process that is hard to replicate - Moat


Creating Repeatable sources of variant perception that should lead to outperformance. -Edge

COMPETITIVE ADVANTAGE / MOAT AT A BUSINESS LEVEL  - (PAT DORSEY)

Capitalism seeks the highest returns possible, high profits attract competition.


Most businesses with high returns on capital will see returns decrease over time

But a small minority will enjoy many years of high returns on capital - because moat & edge.

They do this by having some form of structural advatage that makes competing on price difficult.

Great tech or great products are not moats/edge - think crocs!

Economic moats are structural and sustainable qualities that are inherent to the business.

Not hot products - popular toys, Krispy cremes

Not cool tech, if it can be easily replicated it will be.

Its not big market share, the only time market share can be a moat is when its anti-competitive, eg monopoly or duopoly protected by externalities. (geographic, legislative)

Moats generally manifest themselves in pricing power, a company that cant raise prices is unlikely to have a strong moat

Exception is if you have a moat based on scale (rare) then driving price down to force competitors out of the market can be a successful strategy of businesses with a moat.

TYPES OF MOATS

Intangible assets

BRAND

Increasing willingness to pay more or lowered search costs.
This must exist in one form or the other - would you pay $1500 more for a Sony TV over Panasonic?

Brand must change consumer behaviour to be a moat.

Brands are valuable if they deliver a consistent and or aspirational experience.

Dont change product and give people a reason to change brand, new coke, new pizza shapes

Create scarcity and exclusisivity. Restrict availability of new products etc. iPhone releases

Online brands involve trust for obvious reasons so a trusted online brand has an advantage beyond price, eg Amazon customers typically dont look elsewhere even though it would be easy.

PATENTS
probably need lots of them to provide any sized moat

Licenses and approvals

casinos, landfills,

SWITCHING COSTS

Does the cost of switching to a competitors business outweigh the advantages? (or at least not be advantageous enough to bother,)

Integration with customer business, high upfront cost to switch, payback from renewals - MYOB, Office 365,

Service contracts for expensive infrastructure - eg lifts.

Input costs that are fractional, allows you to price set. eg an additive that greatly improves product, small unit cost, big value, you can increase costs easily. adhesives, fastners, lubricants, enzymes,

NETWORK EFFECT
Provide a service that increases in value as the number of users increases. Facebook because of advertising.

Aggregated demand b/t fragmented parties. MC & Visa, ticket clippers, barrier to entry very high

See it with distributers, connecting fragmented suppliers with fragmented retailers. DDR.

COST ADVANTAGES

Find a cheaper way to deliver a product that cant be replicated quickly/easily

Scale, spread fixed costs over a large base, obviously suits a business where fixed costs are a high % and variable costs are low. Relative size matters more than absolute size  = Australia Post

Niche, minimum efficient scale. Things like very specific and embedded software solutions, (maybe CDA?) - emergency services comms software, maybe ADA? Flight simulators.

MANAGEMENT

A good jockey will do well on a good horse but not on a broken down goat.

A poor jockey on a racehorse will beat a great jockey on a goat, if he can just stay on the horse!

Managers matter in the context of the moat.

The required level of managerial skill is inversely proportional to the quality of the business

Bad managers invest capital outside a company’s moat, lowering overall ROIC.This process is called deworsification or burning piles of cash.

An exception to every rule

A tiny minority of great managers can create enormous value via astute capital allocation even if they dont start with great horses. (buffet, textile mills)

Moats in a global context.

Local differences can create moats

Minimum efficient scale is more common, (woolies & coles) basically niche markets

WHY MOATS MATTER

They add intrinsic value

A firm that can compound cash flow for many years is worth more than a firm that cant

The value of a moat is largely dependent on reinvestment opportunities, the ability to reinvest loads of cash at a high incremental ROIC is a very valuable moat.

If a company has limited ability to reinvest, the moat adds little to IV. It does add certainty and confidence to the IV.

Moaty businesses that generate cash are good, ones that can reinvest cash are amazing!

Overestimating the moat means you may pay for value creation that never materialises.

Underestimating the moat means paying a large opportunity cost.

Isnt the moat already priced in?

Less often than you think.

Short termism.

Quantitive data is efficiently priced

Qualitative insight is less efficiently priced.

“All of the information is in the past, all of the value is in the future”
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General Discussion / Re: Decision Journal
« Last post by galumay on May 22, 2018, 10:54:12 AM »
TNE released their first half results and promptly dropped nearly 10%, I think that the business is priced to perfection so any concerns in announcements lead to a pretty harsh rerating, in saying that I couldnt see much at a first glance, UK a bit soft and high receivables are a bit of a concern. Thinking about averaging down with some cash.

What can go wrong? If they miss the profit guidance of +10-15%

I think I paid too much for them originally at $5.45, the question is are they cheap at $4.46?

Even averaging down it only drops the average price to $5.29 so i suspect there are better homes for the capital.

Waiting for the full year results is probably the best course of action
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Thoughts and Ideas / Interview with Kuntal Shah
« Last post by galumay on May 18, 2018, 08:34:27 PM »
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General Discussion / Re: Decision Journal
« Last post by galumay on May 16, 2018, 08:54:54 PM »
As much as I see the value in a deision journal, and I really think its helped me make better decisions, I realised today that there are times where its imperative to make quick decisions where time is of the essence and an opportunity may be lost if the process is too drawnout.

Obviously the hope is that some of the lessons learnt from writing a journal such as this will flow into quick decisions as well, inversion, baysian probability, expectancy etc.

Todays example was that I saw a hilux ute for sale at $3750, we have saved nearly $3000 towards a replacement car for Sal as her old hilux ute has a pretty serious death rattle in the engine and needs quite a bit of work done on it. The problem was that when I rang the guy selling the car, he already had someone who was coming to look at it and had received a lot of calls from interested people.

I went and took it for a test drive, and took it to our mechanic to have him look over it for anything that really jumped out. He said everything looked good with it and that it drove well. I knew I had got in for a test drive before the first person who had rung about it, but obviously he would get first refusal at the asking price. I decided on the spot that we should buy it, cars like this in this condition dont come up often and the price was more than fair. (on checking the cheapest similar car I could find in australia was $5000 and most were nearer $9-10K.) I figured we would likely sell Sals old ute for what we paid for it, $1500, so we would get into the new one for under $2500.

Having decided I wanted the car, I then made another decision, I knew that if the other party offered the asking price, they would get it on the basis of first in, best dressed. So I made the decision to offer $4000 or $250 over the asking price. I figured $250 was nothing really to secure the car if I really wanted it and I suspected that such a strong offer, with a '4' in front instead of a '3' would make it very likely the owner would sell to me despite me being 2nd in line and I thought it unlikely the other party would want to offer more.

It proved to be correct and we got the car. Had I taken time to deliberate, and write down a case for and against the decision we would certainly have missed out.

What I could have done better was apply some of the models that I have practicised in the decision journal into the 'on the run' decision.

So, invert, "What happens if we dont buy this car". Well, we have our budgeted cash still to buy something else. We might not need to bbuy anything else as the old car might have kept running for another how ever many years.

So, probability, The car has already lasted 3 years  without dying, probability is likely better than 50% it would go another 3 years. But it does need a new exhaust and the brakes are sounding like they need money spent on them too. The probability of the motor dying may only be less than 50%, but the consequence would be that there was no residual value, so say 50% * $1000 for a sale later = $500 plus 50%*$0 if it dies, =$500 + $0 = $500. That implies if we can sell it for anymore than $500 we are better to sell it now.

Also probability of finding another car for round our budget if the current one dies down the track is quite low. I reckon maybe 6 or so a year come up, so in any given month only a 50% chance. I think we could say a 50% chance of buying something at $4000 =$2000 plus the 50% chance we would have to pay more like $10K which is the next sort of price bracket for utes = $5000, so an expectancy of $7000. This implies buying at $4k now and still having a saleable car for $1K+ is the better option.

What could go wrong, we could sell the old car and then the new one could have some unexpected mechanical fault that turned out to be expensive. We could find we cant get any decent offers for the old one, something much better could come along for a similar price. None of these seem to be worse consequneces that the possibility of the old one dying, being worth nothing and no cheap replacements available.

Update - we sold the old ute for $1600, which is $100 more than we paid for it 3 years ago! Mind you if running costs were included it would be a different story, none the less its no mean feat to sell a car for more than you paid for it and now we have done that twice in a row. The result is that it only cost us $2400 to move into the new Hilux, which is a satisfactory outcome in my view.
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