Author Topic: Decision Journal  (Read 5923 times)

galumay

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Re: Decision Journal
« Reply #45 on: January 27, 2018, 10:21:54 AM »
I have been starting to think about expanding my company to prepare for the inevitable drop in business activity as the NBN project in Nhulunbuy nears completion. Have been doing some kite flying about business ideas with Putty and some of the ideas are,

* Expand coffee business.
pros - existing business unit
known model
scaleable
high margin
low hours
cons - really requires a dedicated business place in industrial area to scale up.

* Depot for trucking transport
pros - partnership with Putty
existing business
low hours

Cons - requires a suitable site in Industrial with room for semis and big sheds

* Equipment hire (JLG/skid steer/scissor lift/dingo etc)
pros - low hours
high returns

Cons - requires a commercial site to operate.
licencing, insurance, capital

* Flat bed tilt tray truck
pros - work available
cons - long hours, 'buying a job'

* Buy commercial property for rental income
Pros - good income, low hours, could use a small part of it myself for coffee etc.
Con - high capital


« Last Edit: January 27, 2018, 02:28:38 PM by galumay »

galumay

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Re: Decision Journal
« Reply #46 on: February 16, 2018, 08:43:01 AM »
I am considering selling some or all of my Apple shares and taking a position in another US company called Support.com (SPRT).

We put $15kAUD into Apple and it is now worth nearly $32K, so we have done very well.

The thesis behind SPRT is not my own at all, the analysis is here, https://hiddenvalue.blog/2018/02/15/heads-i-win-tails-i-dont-lose-much and in brief the implied opportunity is a doubling in share price with little risk of a significant drawdown.

So the question to work through is in the first instance is SPRT a better home for our capital than Apple? My primary concern is the downside risk, and the consequences therof. So while the liklihood of SPRT going lower is low given the situation, there is a risk that the share price will drift lower over years as the cash is slowly eaten up and the business detiorates over time. AAPL is not free of downside risk either, given the very strong run up of tech stocks in the US its not hard to see a future where AAPL has a significant and sustained drop in share price. The difference is that its very hard to imagine a future where AAPL is not a profitable business, even if its in SP decline for an extended period so there is not much catostrophic risk IMO.

On the upside its not easy to see a scenario where APPL is worth twice its current price, but on the other hand it has doubled since I bought in, so it can happen!

The upside for SPRT is high in potential, but it will require a change in market sentiment, its not enough just for the business to justify a higher share price - that just makes the stock undervalued and it can take longer than I have for the market to rerate and currectly value the business. So the potential for an increase in share price, although likely, is by no means certain.

Of course on an emotional level the attraction is simply the lure of quick profits, the chance to buy something and double my money in short time, "get rich quick" syndrome.

Also the decision to sell AAPL should also be considered in isolation of the possibility of purchasing something else, and needs to be considered in the light of tax implications too.

Ok, a bit more time to think this through and do some more analysis, looked into AAPL valuation again and decided its still comfortably at or below intrinsic value. I still see SPRT as a great opportunity so will probably move some funds sitting in cash into it.

Ended up buying $10K USD of SPRT at $2.83 ps. Continuing to hold AAPL
« Last Edit: February 23, 2018, 10:44:19 AM by galumay »

galumay

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Re: Decision Journal
« Reply #47 on: February 21, 2018, 04:34:11 PM »
I am considering buying some more ITD at current prices, either adding to the personal portfolio or putting some in the SMSF, my detailed thoughts about the business are here, click here to view

I think this is one to wait and see, I cant see the SP rallying in any hurry. That was a pretty dismal HY report and essentially the business has sold off the only currently profitable part of its business - which strengthened the balance sheet but no profit is no profit!
« Last Edit: February 21, 2018, 08:53:49 PM by galumay »

galumay

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Re: Decision Journal
« Reply #48 on: March 03, 2018, 09:06:58 PM »
So RFG released a horrendous half yearly report, the only positive being an increased revenue on PRP, but given the issues around their franchisees in the last few months I suspect that is only temporary. Massive writedowns and hundreds of store closures along with incredibly restrictive covenants on their debt leaves RFG in a very precarious position with a dubious future.

The decision I need to make is whether to sell them at any price, and take whatever loss is offered, or do I wait and see if they can turn the business around?

The risk in holding is that the business cant recover and all capital is lost, assuming it could be sold out for $1 that means the choice is between retaining $5k capital and losing the last $5k. How llkely is it that the business will fold? I think its probably something less than 40%.

If it doesnt fold what price might it recover to? I would assume survival would include a CR which will dilute shareholders, profit will drop hugely, assuming EPS dropped from around 37c to 15c (allowing for dilution included), then I can see an IV range around the $2 mark. That would indicate a 60% chance of an upside the same as the downside - $5k.

So to expected value, lets say a 20% chance the business will fail, so (20%*0)=0c + 20% chance it will survive with a value of around $1 (20%*$1)=5c and a 60% chance it will end up around $2 after a CR & recovery, so (60%*$2)=$1.20 giving me an expected value of $1.25 The implication here is that I should probably sell if the SP is over $1.25 or buy more if I have a high conviction of the business surviving, at below $1.25. It would probably make sense to add a high margin of safety to either of those decisions!

I know those figures are completely rubbery, but I am trying to get a rough feel to help with the decison.

Another thought is to invert the question and ask "under what conditions would I buy shares in RFG?". The answer would be, only when the debt was reduced to a controllable level. So the conclusion is that there is no way I would buy them at any price, therefore conventional wisdom is if one is not prepared to buy, then one should sell. Trouble is I have never been convinced the decision is as binary as that, given that the additional factor is that one already owns a position in the business.

Still thinking...!

I am still trying to form a final decision about RFG, I think it really comes down to what the value of the business might be going forward,is it more or less than the current SP? I really have to do some more number crunching. ...
Ok so given the current shares on issue, FCF would have to drop to 30% of current amount and EPS to 14% of current amount to give it an IV range around where its trading. So thats a pretty dire outlook to see the long term value as $1. The big question is the debt, its about $250m which is 2.5 times current EBITDA, and $50m more than capitalisation with an interest cover ratio of 10 on current earnings, but probably less than 5 going forward. Its the debt that makes it a hospital case, without that its just a smaller business that can recover, with it I am not sure its not terminal.

Just looking at the financials further, intangible assets are valued at nearly $700m - i suspect there are massive writedowns coming, this will hugely negatively impact on equity and make all the metrics so much worse. Time to sell, this may never recover. I think that the odds ar so heavily against recovery here, much worse than i first thought. I would put the liklihood of failure at 50% now, so (30%*0)=0c + 50% chance it will survive with a value of around $2 (50%*$1)=50c  and a 20% chance it can rebulid and grow to a $2 business (20%*$2)=0.40c giving me an expected value of $0.90


Sold for $1.065, a loss of nearly $20k. Sobering. Next to reflect where I went wrong!
Bought for $24755 sold for $5341 for a loss of $19414 or 78%, dividends of $5788 so overall a loss of 55% on invested capital or a return of -16% per year

« Last Edit: March 26, 2018, 02:59:40 PM by galumay »

galumay

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Re: Decision Journal
« Reply #49 on: March 21, 2018, 07:39:09 PM »
AX1 shares have had a strong run since the positive year results, the price has run well ahead of my range of calculated intrinsic value which is 70c-$1 based on the last full year results. Even allowing for a strong full FY2018, I think the price is 'frothy' and I am considering selling out.

I have some lingering concerns about the retail sector as a whole and the current price of $1.25 implies some pretty heady growth in earnings over the next few years. I calculate that cash flow would need to increase by around 30% from last year to support that sort of share price and that seems a tall ask. I think its very prone to a rerating if the figures are not really good for the full year. Some of the 'froth' is probably generated because the PRP was pretty poor so it made the current numbers look bettter, (case in point, online sales up 170%).

If i am wrong it may well make new highs over the $1.60 mark, but if I am right it could fall pretty hard - its been as 76c this year.

I have let this sit for a couple of days, I come back with the desire to hold in case they run back up to the $1.90 range (anchoring of previous high and FOMO, 2 classic biases!), but my head says stick to the strategy, SP price significantly exceeds IV range with no compelling reason - SELL!

In trying to think of reasons not to sell, the only one that really sticks is that the next scheduled reporting will be the full year results, and that is several months for the SP to run further up. The risk with that thinking is an unexpected trading update with negative implications - the reaction would be likely fast and hard given the calculated over valuation. So I have talked myself out of that one too!

Thinking about expected value, maybe a 20% chance of dropping back to 80c, = 16c and a 60% chance of trading around $1.25 = 75c and a 20% chance of making new highs at $1.90 = 38c so a total expected value of $1.29, on that basis a sell looks pretty well the right decision at this time.

 Sold,26/3/18 at $1.265 invested capital, $25249, proceeds $46683 profit of $21434 or 85% plus dividends of $9806 so total return on capital invested not adjusted for holding periods and sale timing, $31240 or 124% over 3.5 years so 35% per year26/3/18

« Last Edit: March 26, 2018, 02:41:50 PM by galumay »

galumay

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Re: Decision Journal
« Reply #50 on: April 06, 2018, 12:47:15 PM »
Without documenting the process, I bought another parcel of ADA, the price is well below my range of IV, the business has no debt, a good flow of contracts and a comptetive advantage. I increased the position by $10k.I believe the price was depressed by the combination of a soft market and the news that ADA missed out on the NASA contract, once the next FY report is in I expect there will be a re rate of the business.

I am also considering putting another $50K into the EPGCVF fund, I would prefer to have the funds invested rather than sitting in cash, and unless I can find a compelling investment opportunity I am probably better paying a small fee for EGP's expertise and time in finding opportunity.

galumay

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Re: Decision Journal
« Reply #51 on: April 09, 2018, 05:10:58 PM »
Still equivicating about putting more money into EPG, in one way I feel like its an admission of failure to follow my strategy through, its accepting that even after fees EPG is likely to make a higher return than I can. Of course that may not be an admission of failure so much as a simple fact!

I did increase my holding in KME, i only bought a small parcel originally and the business has performed in line with my expectations and I think its looking like a good decision to invest in it so it makes sense to increase what was a very small opening position. I realise its not something I have done often enough, and it should be part of my strategy, averaging up as a business improves and consolidates and the market starts to recognise the unlocked value.

I also increased our stake in LPE, although its already quite sizable, EPG bought 3m shares off market this week from the 2 founders of the business, that is a large vote of confidence in a business that is just starting to show profitibility and I felt the opportunity to increase our position and average down a little was not to be missed.

My belief is that both KME and LPE will continue to show growth in the businesses and for different reasons both should see a reflection in share price with a market rerating as the long term earning potentials continue to be realised.

galumay

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Re: Decision Journal
« Reply #52 on: April 09, 2018, 09:13:47 PM »
Had another look at GCS, a construction business that EPG have a significant holding in, they got in at below 50c and when I looked at them last it was trading at around 85c which was towards the top of my calculated range of IV. Now they have slid back to 68c despite a very healthy HY report in Feb.
My IV range is around 70c-$1.00.

Bought in for 67c. 10/4/18
« Last Edit: April 11, 2018, 09:31:35 AM by galumay »

galumay

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Re: Decision Journal
« Reply #53 on: April 11, 2018, 09:33:59 AM »
Added to my position in LPE in our personal portfolio, I had built quite a large position in the SMSF and the more i look at it the stonger my conviction becomes. As mentioned previously EPG increasing their stake was a big confidence booster. For a fund to invest significantly in a business not yet paying a dividend seemed pretty compelling and strong endorsement. This will average down the cost in the personal portfolio and make the position a meaningful size.

galumay

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Re: Decision Journal
« Reply #54 on: April 12, 2018, 03:36:37 PM »
Owen Raszkiewicz from RaskFinance recently sent me an email with his "Better Half Checklist" - a series of questions his wife asks him prior to him taking a position in a company. I think its worth trying to add a version to my decision journal,

What does the company do?
-
How does it make money?
-
Why will it go wrong?
-
Who are the competitors?
-
Why is now the time to buy?
-

galumay

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Re: Decision Journal
« Reply #55 on: April 12, 2018, 03:43:56 PM »
In the spirit of the above, and in retrospect, I shall apply this to my decision to increase my holding in LPE yesterday,

What does the company do?
- installs a single electricity meter on the front of multi dwelling complexes and through its purchasing power is able to offer discount electricity to tenants and residents

How does it make money?

LPE makes about 20% margin on sales of electricity.

Why will it go wrong?

Biggest risk is probably new competitors or power companies trying to squeeze margins

Who are the competitors?

None I could find

Why is now the time to buy?

EPGCVF have just bought a significant extra position, off market from the founding directors, so increased institutional attention (albeit small end of town) recent market softness has pushed shares under 2c, has just become cash flow positive and secured finance (rather than picking shareholder's pockets, always a sign of a maturing business.)
-

galumay

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Re: Decision Journal
« Reply #56 on: May 07, 2018, 08:00:49 PM »
REH have made an offer to acquire MORSCO a similar business based in the US, so plumbing supplies, waterworks and HVAC (heating and cooling equip). The offer is nearly $2b and as a result REH are doing a capital raising to retail and institutional investors as well as raising debt of about $1b.

We will be able to buy 1 share for every 11 we already hold with a chance to increase that by about 40% to maintain holding size after dilution. The issue price will be $9.30 which is a discount of about 13% to last close.

For me there are 2 main questions, do we want to continue to hold REH post acquisition and do we want to take up the offer at $9.30.

Reasons not to continue to hold include the belief that not many ASX companies pull off large acquisitions in the US, the potential that the market will have reservations and the share price may drop and remain depressed for a significant period of time, and finally the acquisition may detract from REH existing business and damage the stellar results over the previous years - and given the high prices REH has commanded due to its record any sort of reduction in growth could cause a serious re-rate.

Reasons not to take up the issue even at the discount are that the market may present an opportunity to buy at less than $9.30 as concerns about the acquitsition may cause the SP to drop below $9.30 anyway, also if the decision is to sell our position then it makes no sense to buy more at a higher price than our original entry of $9.

Alternatively, if REH can make the acquisition work then it will likely drive further growth on a bgger scale and the share price could rise strongly over the next 2-5 years, in this case the ability to buy further shares at a discount of such size should not be missed.

It really comes down to a question of my confidence in REH being able to make the acquisition work as per their narrative.

Other concerns, MORSCO have been owned by private equity for about the last 5 years, PE wants its pound of flesh for their dirty work, thats a serious concern. Multiple of 15 X EBITDA is an expensive acquisiton by any terms, debt stretches the balance sheet in what has been a very carefully managed business.

Obviously the market and institutional investors dont share my concerns! Price has shot up to $12 and the instiutional placement was strongly supported, and in fact the size of the offering was increased. Aso the price ended up being $10.30 - a fair indication of how strong the support was. These factors seem to indicate participating in the SPP makes sense, even if we sell out post issue.
« Last Edit: May 13, 2018, 08:29:05 AM by galumay »

galumay

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Re: Decision Journal
« Reply #57 on: May 08, 2018, 07:08:27 PM »
...and today AHZ have announced another Capital Raising - after promising shareholders it wouldn't be necessary. It leaves me deeply conflicted, I have held such confidence in the long term prospects of this business, but this feels like the straw to break the camels back, further dilution, more lies from management, maybe its time to re-assess whether its not better to cut the losses and find a better home for the capital.

Having a quick scan, every time I have taken part in an AHZ issue, within 6 months I could have bought the shares cheaper on market. Something to keep in mind. They have had some form of CR EVERY single one of the 5 years I have held.


I will wait until the details emerge and give it proper consideration.

In no great surprise to me, the AHZ share price has fallen hard from around 38c back to just under 30c - meaning you could buy on market for less than the SPP (30c). I will be sitting this SPP out, I have lost my strength of conviction about this business, and particularly lost faith in management's ability. 
« Last Edit: May 13, 2018, 08:23:48 AM by galumay »

galumay

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Re: Decision Journal
« Reply #58 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.
« Last Edit: May 20, 2018, 10:07:54 AM by galumay »

galumay

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Re: Decision Journal
« Reply #59 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
« Last Edit: May 22, 2018, 11:03:11 AM by galumay »