The Black Swan and OC Funds Manager
Since the success of The Black Swan: The Impact of the Highly Improbable
As these beautiful water fowl are relatively common in my neck of the woods I have always been bemused by the title of The Black Swan. I do know the underlying story of the phrase, unfortunately stupid arrogant white guys are quite as rare as these fowl. Perhaps a better title would be The Honest Banker.
I read a good article in the Australian today and thought I’d clip a few well worn, but still tasty chestnuts to share.
The following is from OC Funds Management portfolio manager James Casey.
DO your own homework and analysis. Don’t rely on others.
BE wary of companies with excessive debt.
REMAIN humble. If the facts change, change your mind.
MOST important, understand the price you are paying to invest. If you pay too much for a business, even a high-quality business, your returns will be compromised from the start.
Our [OC Funds Management's] overriding aim is to protect investors’ capital. We seek to protect capital by avoiding large losses and avoid making serious investment errors. [Interesting that they felt the need to state that. Are other funds managers seeking to makr serious mistakes and large losses?]
Due to our focus on risk avoidance and capital preservation, we apply what we call a two-dimensional valuation process. [2D? I'm not sure if that is 2008 or 2000 and late, go 3D guys, it's all the rave.] For this we calculate a standard base-case valuation, and in addition we construct a low-case valuation to provide a worst-case scenario for a stock’s possible price outcome. This provides a valuation range for a potential investment and gives us clear guidelines as to the opportunity and, more importantly, the risk of the investment. It also indicates the prices at which we should consider buying and selling the investment.
The techniques used to value companies will vary depending on the business-model dynamics and the nature of the earnings stream. The techniques we use to value companies may include capitalisation of earnings, discounted cashflows and comparable valuation analysis.
It’s school holidays here in Victoria and the end of financial year in Australia was yesterday, so I’m going to be busy for the next few weeks.
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