Author Topic: Decision Journal  (Read 5505 times)

galumay

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Re: Decision Journal
« Reply #60 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
« Last Edit: June 24, 2018, 01:13:14 PM by galumay »

galumay

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Re: Decision Journal
« Reply #61 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.

galumay

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Re: Decision Journal
« Reply #62 on: July 28, 2018, 03:37:03 PM »
once again considering any future investments, thoughts about buying another property again, if we bought a house in Wuyal and used all our offset plus a bit say $450k, then we rent to gov for $1000pw, pays off in under 10 years. If we had to move out of here, we cant move into IP because we wold lose tax benefit of offseting interest costs, if we lease to gov for 10 years we cant move into wuyal rd.

galumay

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Re: Decision Journal
« Reply #63 on: August 11, 2018, 12:03:00 PM »
Considering opening a position in LBL - Laser Bond Limited.

LBL is a very small business based in SA who specialise in hardened surfaces for high wear applications. They service agriculture, oil & gas, mining, drilling, boring, - basically any 'tool' or machinery part subject to high wear from errosion, corrosion or impact. They have a strong R&D program tied in with a university as well as larger clients. Its a profitable little business, very tightly held registry with about 70% held by founder family & director interests so its quite illiquid.

The growth potential with the business is their growing international sales and more especially a new technology services division. In this sector of the business they sell a Laser Bond facility to a foreign customer, they build, install & train then there is a 5 year service agreement for revnue based recurring income. This has potential to be a significant source of income for the business if they can successfully build on the first few clients in the division.

Management seem very focussed and 'no nonsense", typical of founder/owners IMO, the reports and announcements are refreshingly frank and with few of the bullshit bingo words and motherhood statements common in ARs.

Based on my calculation of range of IV i have them at around 30c fair value, based on the 2017 Annual report, they currently trade at 17c - after a run up from 13-14c caused by the announcement of another Technology licencing contract and a positive update on revenue for the full FY.

It should be noted that profit was significantly impacted by the first Tech services contract - it added about $1.4m to revenue and this will not appear in the 17/18 FY, but as the update of revenue for the FY noted, growth in revenue in the other divisions have more than offset this. Also the announcement of the new contract means that revenue will again be increased by this division in 2018/19 FY

The business has little debt, 25 year history of profitable operation other than a blip in 2013 when they made a loss as a result of closing their unsuccessful Qld operation, and a niche market with strong IP.

The downside is that its a very small business, with illiquid registry and the value I see may remain locked up and not apparent in the price for a long time. The risk appears assymetric to me, its quite possible that continued expansion into the international business and growth of the licensing model would see increased profits, dividends and eventually share price. On the other hand if they dont get any real traction with the international push, and the licensing model flops, then the business should be valued on its 2017 numbers anyway - which still makes the current price look cheap.

In terms of catostrophic risk, the consevative nature of the business, low debt and strength of underlying business even without growth, makes it hard to foresee an event that would cause the business to fail.

Its an easy to understand business, it has some competitive advantage with IP and niche marketing. Margins should be fairly easy to maintain as incremental price changes in the product will be easily absorbed by customers and outweighed by the overall cost benefit of the proprietry process of protection for wear surfaces.

Competitors in the industry are Hardchrome Engineering, Laser Cladding Services Australia, and Dura Metal,part of Axalta group a large USA based international coatings specialist. The first couple are small private businesses, I suspect they would only service within their own state. Dura Metal is part of a much bigger international business, but I dont really see them as a direct competitor, they are more selling complete laser cladding machines for manufacturers who want to clad in house. (although that is a potential market for LBL as well>0

Now is the time to take a position, because LBL will release results for this year in August and I expect there will be a further positive reaction.

6/9/18 I have taken a small initial position at 16.5c. I will accumulate any softness.

5/12/18 Well, a lesson in anchoring, I hesitated and didnt buy more because the price kept going up, they were quickly over 20c and having bought at less than 20c I couldnt bring myself to buy more over 20c, today they announced new sales to USA and price jumped 39% in one day - my position is up 93% in 3 months!

I have been fighting my anchoring and trying to find a way to build my position in LBL, finally they fell nearly 15% today and I was able to get an order filled, at 30c, so down from 35c last week. This parcel took our average price to 20c so still up 50% overall.
« Last Edit: December 18, 2018, 05:48:28 PM by galumay »

galumay

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Re: Decision Journal
« Reply #64 on: September 07, 2018, 02:58:24 PM »
Looking closely at another business, Joyce Corporation Ltd. A business that has been around for 132 years and readers my age will remember they sold foam mattresses etc in the past. It is now basically an investment company with a majority holding in Lloyds Auctions, owning Bedshed and Kitchen Connection as well. The business is tightly held with the top 20 shareholders owning 70% of issued shares and the CEO holding 40% on his own.

The business is profitable and pays a healthy dividend yielding about 8% and growing, its a cash cow generating relatively large free cash flow. There is some debt but its quite manageable. The business owns property that is valued conservatively on the books for about $9m. The business has about $6m cash on hand. All on a capitalisation of only $43m.

By my calculations the range of IV is somewhere around $4 and it currently trades for around $1.60.

Basically I think its just an unloved business, not understood and slipping under the radar.

Thinking about what could go wrong, the car auction business is susceptible to competition, barriers to entry are low as are switching costs. Revenues would presumably fall in a recession, but its unlikely such a conservatively geared company would suffer too much from economic head winds. A housing crash might see the Kitchen renovation business become less profitable, although its entirely possible the effect would be positive as people chose to renovate instead of selling. The bed business is not threatened by online growth, people want to 'road test' a bed before buying, but again in a severe recession it could suffer. Basically all the business units are vulnerable to negative consumer sentiment given the products they sell, so share price and dividends could suffer in a protracted downturn, but the business should be resilient enough to come out the other side of the cycle.

I cant see any catostrophic risk with such a conservative business, people are going to still buy cars at auction, sleep in beds ad cook breakfast in a kitchen!

Buying now makes sense only because the discount to value is so great, and given the trajectory of revenue, earnings, profit, cashflow and dividends, its unlikely it will continue to trade at such a discount indefinitely.

Considering selling a small parcel of NWH to fund an entry position in JYC, it is now my 2nd biggest position and selling this parcel would represent returning the original invested capital and leave the rest as pure profit.

A mixture of quick & slow thinking! I have put in an order to sell down NWH, buy some JCY but also add to my holding in KME after it fell 8% yesterday when the founder owner notified he was selling down his holding by 15% over the next 4 years. IMO that is an over reaction because its actually positive that it increases liquidity a little in a very tightly held business - he is selling 500k shares over 4 years and that only reduces his holding by 15%! bought more at 65c which is more than 5% below recent prices.
UPDATE - more fast decisions, bought more today at 62c nearly 10% below recent prices!! I won't throw any more at it, although I think it may drop some more in the short term.
« Last Edit: September 14, 2018, 11:35:35 AM by galumay »

galumay

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Re: Decision Journal
« Reply #65 on: September 13, 2018, 09:18:19 AM »
We have 3 months of power cuts coming up while the power network is being upgraded, decided to get a proper switch and outlet added so we can run a genset to keep the house powered up. Can buy a cheap genset for $1100 but will probably get the more expensive yamaha at $1700 because of better resale value.

galumay

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Re: Decision Journal
« Reply #66 on: October 05, 2018, 06:53:59 PM »
Guys of Gove.

Cons- cant find someone to manage business, then 1 of us have to run. (at any time)

       - Opportunity cost, if we do this we cant do much else.

       - Create debt

       - catostrophic risk - one of us dies, town closes, cyclone.

       - more work/involvement/stress

       - Negative impact on family
   
       - Working with staff

       -

Pros -   Potential passive income stream

       -   High return on invested capital

      -   Possibility of active engagement in both the business & community.
 
      -  Providing employment opportunity

      -   Leverages the line of credit in our IO loan while its still IO.


Alternatives - Do nothing
     
      -  Buy more property
 
       - buy commercial property

      - potential investment with Putty

      - do nothing now, something later

      - Buy Phil's business

     -  Start a similar business from scratch after they leave.

     - Invest similar amount in share market.


OTHER THINGS,

   - Follow up lease

   - Talk to Jess

   - Decide on a structure

« Last Edit: October 13, 2018, 06:59:16 PM by galumay »

galumay

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Re: Decision Journal
« Reply #67 on: October 28, 2018, 09:40:02 AM »
I am starting to come to the view that one of the biggest errors in my investing history has been failing to sell my positions in businesses that have failed to execute in the way I had hoped. My strength has probably been not selling the positions in businesses that have executed as well or better than I hoped.

As part of this thought process I am looking at my personal portfolio and considering how to adjust for this error. In alphabetical order,

AHZ - Should have sold when I realised management interests were not aligned with the business or shareholders. I actually specifically identified this point in time and failed to act. I cant sell now as they are suspended.

CDA - best performer in the portfolio, a multibagger. Should have put more into the position as management executed the turnaround, I did average down a little, but should also have averaged up.

ICU - a stupid exercise in trying to short term trade, something I since came to accept was outside my circle of competence. SELL

KPT - although price has dropped, management executing as planned and remains a long term high conviction postition. HOLD

LPE - ditto, next 4C very important for conviction on postion HOLD

MOC - I have held because of the yield and more recently because of the belief that the financial services sector may be a growth area for the business. SELL

NWH - My big mistake was not averaging down when NWH went to 20c, as I did in the SMSF. Still a strong HOLD

SND - Should have sold when the business failed to execute, still possible its able to turn around and need to look at H1 report when it comes out.

VRS - bought too early, position size is so small its probably not even worth exiting.

galumay

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Re: Decision Journal
« Reply #68 on: November 08, 2018, 06:46:18 PM »
Thinking I should sell ADA, they released a profit guidance for the FY with a projected drop in profit of around 25%, management are abjectly failing to execute and in the past I have held businesses like this waiting for them to turn around. This time I think its time to sell, can always buy back in later if they do manage to start running the business profitably. The adjusted IV based on drop in EPS would be at or below current price.

Well missed out on the sell, tryed to get out at $1.45 this morning but the bottom dropped out of the market, they are now under $1. Now my inclination has flipped to thinking they may be worth averaging down at below $1. $1 would be around the IV if EPS drops by 30% this year. The choice is between selling and losing $15k now, or averaging down with another $5k which would leave me with a $32k investment worth $15k, or holding at an average of $2.25

Averaging down doesnt make sense, doesnt reduce the average price much and just commits more capital. So its sell or hold!

Well the price keeps dropping and the averaging down is starting to become a consideration, on a value point of view, if I assume a drop in EPS of 35% this year, i get an EPS based IV of around 90c, given that its trading at under 80c now, that is a further 10% margin of safety.

In terms of averaging down, it brings the average price down to $1.78

Can now average down at 68c and bring the price to $1.65. That means they would still have to more than double for it to be profitable.
« Last Edit: December 06, 2018, 09:37:52 AM by galumay »

galumay

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Re: Decision Journal
« Reply #69 on: April 06, 2019, 02:13:20 PM »
Looking at starting to build a position in a new business, Global International (GLB). It is an Australian company, that is a global producer and distributor specializing in purpose-built apparel, footwear and skateboard hardgoods (decks, wheels, trucks, etc.) for the boardsports, street fashion and workwear markets with products sold in more than 100 countries worldwide. Founded in 1985 by three Australian brothers, Globe International’s core business is divided between proprietary brands, licensed brands and distributed brands.

It meets many of my investing criteria, it has a superior ROE, strong free cash flow, no debt, owner run and managed with the 3 brothers holding about 70% and the top 20 holding 90%, growing revenue and earnings, stable share count with no issues since float, an executive management scheme based on cash payments which i prefer to issuing shares, or even worse options. (the brothers took no salary at all for many years after floating in 2001) Its also cheap by any metric, trading around $1.75 i have a range of intrinsic value between $2.70 and $2.90. Its on a p/e of 8.5 and E/EV of 12.75. NTA is over $1 ROE is around 20%.

Its an easy business to understand, and while fashion is not a popular industry these days, good businesses with good management can prosper in this space.

So why is it so cheap? The long standing chairman passed away suddenly, he had been with the company for 14 years and as a older and very experienced businessman, was a contrast to the young entrepreneurial founders of the business, but that event didnt seem to impact the price much. Also his replacement would appear to be equally qualified, experienced and competent. The main drop in the last 12 months was after the ½ yearly report which showed growth in earnings and revenue, but extrapolating those results would see less top line growth for the full year after a stellar 2017-18. So maybe its cheap because the market doubts its ability to continue to grow at the historical rate of the last 5 years. The illiquid nature of the company also means its more volatile and this would explain the sharp fall on the HY1 results.

No doubt operating in the retail clothing sector also makes it out of favour in the current climate, add youth fashion as a sector and there is probably even more (deserved) nervousness about the business.

So what can go wrong? The biggest risk seems to me to be simply the capricious nature of youth fashion, they could quickly find themselves just as uncool as they have been cool historically. Also a severe economic downturn probably effects this end of the clothing market more as its more discretionary than basic clothing. Poor capital allocation or management missteps is another risk, but both look unlikely based on the track record and amount of skin in the game. There is also some FX risks and exposure to economic circumstances in their global markets - but equally there are not insignificant opportunities from the same.

One thing to look at was what has gone wrong in the past, 2013-14 were tough years with losses recorded, looking back it was a less diversified business and there were substantial costs with growing the business and some heavy impairment charges that made marginal earnings report as significant losses. Its worth noting that even though profit was marginal and revenue base was 33% less than today, the share price was still over $1.35.

An interesting insight out of researching the old reports, in 2014 management had 2 strikes in voting on renumeration, management as holders of over 70% of the votes couldnt vote in the second renumeration vote and subsequent spill motion! So a tiny minority of shareholders were able to force a spill of the board! Of course the subsequent vote where management were able to exercise their votes, they were basically unanimously re-elected. Only 6 shareholders voted against it. It seems that Solomon Lew might have been the activist fiddler! He held about 6% It does highlight an issue I had never considered with companies where the directors hold most of the shares - activist shareholders have the potential to cause significant annoyance!

That leads to a probalitic consideration, it seems not unreasonable to assume the downside for the share price would be at worst the previous lows when it was a smaller business making a loss - around $1-35, which represents a drop of around 25% from current price. On the other hand a move towards the range of IV i have for the business sees an upside of at least 50% - and thats without any meaninful growth in revenue, profits or cash flow. So whats the liklihood we might assign to things going tits up? In such a well run business with no debt and hands on, skin in the game management I would have thought maybe 30% chance, so 30% * $1.35 = 0.41c + the chance that the business will at least tick along as is and no bad news seeing a close on the IV, I would think that is a 60% chance, so 60% * $2.80 = $1.68 and maybe a 10% chance of a strong increase in metrics and the IV being exceeded, so 10% * $3.00 = 0.30c  for a price expectancy of $2.40 which makes $1.75 look reasonably cheap.

« Last Edit: April 06, 2019, 03:15:09 PM by galumay »

galumay

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Re: Decision Journal
« Reply #70 on: May 08, 2019, 07:28:26 PM »
My decision making slipped in standard today, back to old impatient habits! Saw that Pushpay had released their annual report early this morning, pre open. I had a very quick breeze thru the headlines and thought it was a very good result, saw there had been no move in the price on open so bought some more at $3.56, it ended up closing at $3.45 and the market assessed the report as being less than optimum. Had I spent more time considering the report and comparing it to ealier guidance I would have realised that revenue was at the lower end of guidance and cash flow conversion not as good as hoped. Also growth seems to have slowed a little. Must learn to be be less impulsive! I do generally have it under control but weakened today, no doubt!

galumay

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Re: Decision Journal
« Reply #71 on: May 24, 2019, 10:27:17 AM »
I keep mentally revisiting a thesis to sell the deeply underperforming capital and re-employ it elsewhere. Underlying this thought is the idea of recovering the lost ground in another position as psychologically it seems more likely. Of course this is nonsense and its entirely possible that whatever I swapped the capital into would fall also, and compound the loss of capital. So clearly this is the wrong way to think about it.

The consideration should be only whether the remaining capital allocated in a losing position, can with any certainty, be better employed elsewhere, or whether its just impatience at play and the thesis can still play out successfully.

So lets look at the individual businesses, ADA, trading at 64c. At the EOFY on my metrics it was well undervalued and were it not for the management issues I would see it as a good business to buy at this price, but there are some dangerous signs, cash is very low, the business is now cash flow negative and management have left the business recently. The risk of waiting until the end of this financial year is that further poor performance could see its share price collapse further.

MXI is another where it raises the question of when is the thesis broken as opposed to it just taking a lot longer to play out than expected, I think that underlies all of the poorly performing businessses and why I find them so hard to sell, being right can look like being wrong for a very long time! While there are signs of a turnaround in the business, the debt is now a huge red flag. It would not be a buy for me regardless, due to the amount of debt its carrying so for that reason alone I should sell.

MYX - A turnaround play, that turned around, and then turned back again! Had the chance to get out at a small profit, now down 50%+. Its had a big fund buying up recently and maybe the turnaround is in. I always think about what a strong conviction buy this was for an online friend ROE, he rarely got em wrong!

SRV has also fallen from grace, but they have cash and no debt, skin in the game management...

WPL is the last one on my list to consider selling, now only about 10% down on my entry some years ago, its the only 'blue chip' and the only resources business I hold, it seems silly to sell this just to buy something else, a rise in oil will see it re-rate, its steady growth and well executed core businesses make it a steady and safe investment.

So really when I go through the underperforming businesses I cant find much conviction to sell! Which is annoying because I would like to reduce the portfolio size and I would like to invest in other opportunities as well as building postions in  good businesses I already hold!

Revisting this 20/6 - I am revisiting because I have uncovered another business I wish to invest in and don't have funds on hand to do so.

Back to the dilemma - if I sell the poorly performing businesses to buy the new one, no gaurantee the new business will not fall in price compounding the losses.

But...if I dont sell the poorly performing businesses they may continue to drop - and the new business I didnt buy may go up! Opportunity cost!

Overall the portfolio is performing well, so ignoring the anchoring bias of considering the purchase price of the poorly perfoming businesses, is there a better home for the capital in another business? Without the aid of a crystal ball thats hard to say!

My inclination is that i want to sell WPL, but I am not sure the reason is simply that its much nearer its purchase price! Thats a dumb reason to sell, its definitely the best business of the ones I am considering selling.

I am also trying to think about the whole portfolio as a value point rather than looking at individual prices, so we are well up overall, made nearly 20% last FY on a TWIRR basis, up 50% TWIRR over 5 years, 90% in absolute terms including savings contributions, so anything I sell has no impact on the existing performance and if the resultant capital can be put to work somewhere better then I should sell - but that comes back to making sure I have high conviction of any postions I switch into.

Inverting that thought though, is the fact that I already hold these businesses and just because they have fallen so hard, probably means they will revert to mean at some point and again, I can consider the base price as not what I paid, but where the overall portfolio sits today. COmplicated.

I am trying to get the feel for how to look at this, one way is that given the positive overall performance of the SMSF, its reasonable to regard the underperforming businesses as costing whatever they are currently trading for today - so the decision is simply is company A the best home for that capital (regardless of price), or is there a higher conviction home elsewhere for it - either in increasing existing positions or taking new ones. This way of thinking helps remove the anchoring inherent in considering the price paid. So the question becomes is ADA a better position at 43c than say PAR at $1.50 or AER at 13c, or more @SFC at $13.80?

The best way to try to think about it is in fact remove the sell consideration for the moment, if ADA represents $5k, where is the best home for that $5k - ADA or one of the others?





« Last Edit: July 04, 2019, 12:38:23 PM by galumay »

galumay

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Re: Decision Journal
« Reply #72 on: July 04, 2019, 08:54:38 PM »
Paradigm (PAR.ASX) is the business I have been researching and considering freeing up some capital to take a position. Essentially PAR have adapted the use of an existing oral drug, that is used for urinary tract conditions, to an injectable drug that treats OA (osteoarthritis), it is made from the timber of the beech tree and the base drug is manufactured by just 1 private company in Germany. Its a gerneric drug, out of patent, but due to the difficulty of manufacture no one has successfully made the gerneric in the 10 years since the patent expired. PAR has a huge potential market with OA as well as a varitey of other related conditions like Ross River Virus that can be treated with the drug. It has plenty of working capital with about $78m in the market with cash burn of about $10m per year.

The real grunt work of research has been done by Fifty One Capital and can be read here,

http://www.fiftyonecapital.com/paradigm-201806/2018/7/16/paradigm-biopharmaceuticals-ltd-research

http://www.fiftyonecapital.com/par-201811/2018/11/24/paradigm-biopharmaceuticals-ltd

and

http://www.fiftyonecapital.com/paradigm-201903/2019/3/8/paradigm-biopharmaceuticals-ltd

I have been burnt by bio-techs previously (AHZ), but this seems to be a case where the hype and promise would seem justified and the realisation of tangible profits seems likely within 12 months.

The liklihood of a valuable partnership with a large pharma or even a total buyout is farily strong as well.

It does look to be a strongly asymmetric investment opportunity with enormous upside and small likelihood of downside. The main thing that tempers my enthusiasm is that while its asymmetric, the downside is total loss of capital - if this doesnt come off the company has nothing and will go broke in all liklihood. EDIT - funny I raised the concern about the impact of the downside and then the next morning read this article - http://tuvalu.santafe.edu/~ole/Peters2009.pdf

For this reason I think its sensible to limit the size of any initial postion to $5k and wait to see if they can actually get to market.
« Last Edit: July 05, 2019, 08:25:54 AM by galumay »

galumay

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Re: Decision Journal
« Reply #73 on: July 05, 2019, 09:25:04 AM »
So back to whether or not to sell out of some positions! Looking deeping into WPL, my back of the envelope modelling tells me it's fully valued and then some at current prices so unless there is an explosion in the price of oil or some other external factor, probably little growth to be had there. I think there are better opportunities to invest in other holdings that have more growth likely. So I am going to sell WPL and spread across some of the other positions.

Would I buy ADA & MXI at current prices, no, too many redflags even at current prices, so I will sell them also

MYX I will hold because I would be a buyer at current prices, as I would with SRV.

I am going to open a small position in PAR as discussed elsewhere and maybe also AER, also increase PPH & SFC holding