Falling knives cut deep

Don’t try to catch a  falling knife.

Do you know the game mumblety peg? As kids we called it knives and loved playing it.

Alas the mollycoddled generations will never know the thrill and the fear of throwing knives at their own and each other’s feet.

Most versions of knives involved two players and a pocket knife. Our favourite version of the game was stretch.

The object of the game is to make the other player fall over from having to spread their legs too far apart. The players begin facing each other some distance apart with their own heels and toes touching, and take turns attempting to stick their knives in the ground outboard of the other player’s feet.

If the knife sticks, the other player must move their foot out to where the knife stuck while keeping the other foot in place, provided the distance between foot and knife is about twelve inches or less. Play continues until one player falls or is unable to make the required stretch.

The ‘traditional version was also fun.

Two opponents stand opposite one another with their feet shoulder-width apart. The first player then takes the knife and throws it to “stick” in the ground as near his own foot as possible. The second player then repeats the process. Whichever player “sticks” the knife closest to his own foot wins the game.

If a player “sticks” the knife in his own foot, he wins the game by default, although few players find this option appealing because of the possibility of bodily harm. The game combines not only precision in the knife-throwing, but also a good deal of bravado and proper assessment of one’s own skills.

There is nothing quite like the fear of a knife in your foot to sharpen one’s skill assessment.

Anyway that’s  enough of a stroll down memory lane.

Falling knives

The major appeal of trying to catch a falling knives is rooted in anchoring. Coca Cola Amatil was $15 last year, it must be a bargain at $9!

Coca-Cola Amatil falling knife

Last week I confessed to anchoring when selling. Unfortunately I still occasionally fall in to the trap of anchoring with falling knives. I have been closely watching Coca-Cola Amatil (ASX:CCL) since it’s precipitous fall in April. It appeared relatively cheap. Relatively that is compared to its past multiples.

Fortunately Peter Phan of Castlereagh Equity pointed out to me there are other large Australian companies priced similarly that have better growth profiles and less execution risk than Coca-Cola Amatil.

Falling knives present numerous dangers, most of which are as painful as a knife in the foot.

  1. They can and often do keep falling. Cutting deep as they fall.
  2. Even when they eventually land they often turn in to value traps, that is the stock doesn’t rebound to capture past glory.
  3. Those stocks that do eventually bounce often don’t provide a good compound annual growth return. CAGR is the key return long term investors should focus on. If it takes too long for the investment to “work out” then a good absolute return can become a poor CAGR.

Coca-Cola Amatil is a good, but not great example of a falling knife. It has decent underlying businesses and negligible chance of falling to zero.

Speaking of zero, a much better example of a falling knife is Xero (ASX:XRO). Xero is a classic falling knife. Since XRO began falling in March, every single person who has tried to catch this falling knife has been badly cut. And those cuts could get a lot worse.

With no earnings and well heeled incumbents successfully fighting back there is no sign of the floor for Xero’s falling knife.

Xero closed today at $18. And just in case you think I’m jumping on the beat it while it’s down bandwagon, I’ve been screaming watch out below since Xero was $42.

xero falling knife xro asx

Falling knives are worthy of a place on your watch list. If they fall hard enough for long enough then they can provide sensational opportunities, with limited downside and massive upside.

Hopefully my recent purchase of Maverick Drilling at $0.16 will be a case in point.

The trick is patience. Wait, wait, wait and then wait some more. Stocks can keep falling by yet another 20 percent over and over again. Take Xero for example, it’s closing in on its fourth 20 percent fall from its March high. From here it could easily fall 20 percent twice more in normal market conditions or even 5 more times if a bear market bites.

Here’s an old post on the footwear company Crocs that illustrates just how far falling knives can drop, $75 to $0.79.

Disclosure: Please seek expert advice before playing mumblety peg. I am not authorised to provide advice on knife throwing.
Long MAD. CCL is still on my watch list.

Show me the Momo – momentum investing

Show me the money

MomentumMomentum investing or momo for short is one of a handful of reliable money making setups that persist despite the market’s awareness of them. Value and small cap stocks also continue to outperform despite market participants being aware of this for decades.

  • Momentum studies like this, Momentum Strategies by Louis Chan, Narasimhan Jegadeesh and Josef Lakonishok, reveal how past earnings surprises predict large drifts in future returns as analysts and the market are slow to respond.
  • Momentum Profits, Non-Normality Risks and the Business Cycle by Ana-Maria Fuertes, Joelle Miffre and Wooi Hou Tan. This paper shows that momentum profits are not normally distributed and that the momentum profitability is partly a compensation for systematic negative skewness risk in line with market efficiency. (You understood that, right?)
  • In this post Patrick O’Shaughnessy highlights two ways to improve the momentum strategy, that is by overlaying value or quality.
    You may think that value and momentum are polar opposites, but they work remarkably well together. Think of the combination as cheap stocks that the market is just beginning to notice. … A second way to improve the momentum strategy is to focus on companies with higher quality earnings. The simplest way to define quality earnings is by looking at non-cash earnings. The fewer non-cash earnings (which come from accruals like accounts receivable), the better.
  • For more information on momentum.

A classic momentum investing example

Australian investors need look no further than Nearmap (ASX: NEA) for a recent classic example of momentum outperformance.

nearmap-earning-momentum

Nearmap announced excellent results on the morning of August 22nd. It closed at $0.465 that day up 19 percent from $0.39.

In the close to 3 weeks since then Nearmap has put on another 22 percent, compared to the markets 1 percent decline.

Look forward not back

I believe one of the main reasons momentum is profitable is the psychological bias of anchoring. People focus on the $0.39 they could have bought Nearmap at “yesterday”. They choke on coughing up 20 percent more to buy today. This and other biases prevent them from rationally assessing the situation and buying.

I bought Nearmap on the day of it’s earnings announcement, despite already being long at around half the price. What has gone is gone, it’s useful for reference, but it’s the future that counts. Always look forward not back.

Confession time

I’ve overcome anchoring on the buy side, but where I still struggle is in selling. Here’s an example.

While enjoying a few beers — perhaps a few too many — with other analysts and fund managers I was asked about Acrux (ASX: ACR). I said I’d tried to sell at $2.10 two days prior and was foolish not to lower my price to sell that day. It was especially greedy of me as a short time prior I’d tried to sell the shares at $1.90, but missed selling on that day too. If I’d been happy with $1.90 then it was greed and anchoring keeping me from accepting $2.08.

Acrux is now 23 percent lower at $1.60. I’m not selling as that’s a fair price with the looming FDA decision. One day I hope to overcome my anchoring on the sell side.

Disclosure: I am better educated, more experienced, smarter, taller, hold more passports, have a bigger penis and am less likely to screw you over for a commissionthan almost all people accredited to provide financial advice. But this not advice, it’s for amusement only. I am not licensed to provide advice. I will talk my own book, but I won’t act contrary to what I say. While many financial professionals talk their books to enable them to sell at higher prices, I mainly talk my book so I can say “I told you so!” Annoying I know. Being right is my guilty pleasure and a personal fault, but for me it simply never gets boring or old. Yes you should feel sorry for my wife and kids, living with someone who is usually right is probably pretty annoying. But as I say to them, I wish I could find out for sure! I actually prefer being wrong, as failure is an excellent teacher. And if you believe any of this then you’re crazier than I thought.

Is Anteo Diagnostics the hottest ASX company?

Long ago, Keynes argued that the “central principle of investment is to go contrary to general opinion, on the grounds that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.” This powerful statement of the need for contrarianism is frequently ignored, with disturbing alacrity, by many investors. James Montier June 2011 GMO White Paper

There is little doubt that ‘everyone’ is agreed about the merits of Anteo Diagnostics (ASX: ADO) and its wondrous universal glue Mix&Go. Feckless ADO ramping posts on investment forum — and I use that term very loosely — Hot Copper garner so many positive recommendations that for now it seems investors can’t even think about any other ASX listed company. The image below is not from the ADO board on HC, rather it’s the top posts across the entire forum.

anteo diagnostics ado speculative bubble

I highlighted Anteo’s potential back in early 2011 and from a high level perspective very little has changed since then, that is except the intensity of vociferous longs, oh and the price of course, which is now 4 times higher. In fact very little has changed since way back in 2010 when Stuart Roberts at Southern Cross Equities said “Two licensees – Bangs and Merck – have been secured and prospective licensees in multi-billion dollar markets are showing interest.

anteo diagnostics ado speculative bubble chart

Yes deals do seem closer now than they have ever before. Perhaps Anteo will close two substantial deals this year and earn royalties of $20 million or more in 2015. Based on Anteo’s current market cap it’s trading at the fingers crossed possibility of 11 times 2015 sales. As Mix&Go is little more than a very clever glue that can be mixed up in someones backyard it will have high margins, let’s say 50 percent net margins. That gives Anteo a forward hopeful price to earnings multiple of 23.

While both those multiples are high, they are not outrageously so. Unfortunately there is a reasonable chance revenue and earnings will fall well short of those targets. And therein lies my concern. Everyone on the overcrowded Anteo boat are focusing on the upside potential without considering that the vast majority of speculative companies fail.

As Peter Lynch advised in One Up On Wall Street, hot stocks are best avoided.

If I could avoid a single stock it would be the one in the hottest industry, the one that gets the most publicity, the one that every investor hears about it in the car pool or on the commuter train, and — succumbing to the social pressure — often buys,” writes Lynch. “Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there’s nothing but hope and thin air to support them, they fall just as quickly,” he continues.

Second, avoid the stocks of companies that have been singled out as the next big thing: the next Google, the next Apple, the next Disney. “In my experience the next of something never is – on Broadway, the best-seller list, the National Basketball Association, or Wall Street,” writes Lynch. “In fact, when people tout a stock as the next something, it often marks the end of prosperity not only for the imitator but also for the original to which it is being compared.”  via Forbes

Flavor Flav of Public Enemy said it all in four simple words “Don’t believe the hype“.

Make no mistake Anteo is speculative. While I like and respect Anteo’s chief cheerleader Matt Sanderson I was gobsmacked by this exchange we had on twitter.

anteo speculative vs knowledge

I do appreciate the tremendous effort Matt has put in to analysing Anteo, but he seems to have imbibed to much kool-aid. No amount of research improves the odds of a speculative investment turning out favourably. Research does improve your odds of picking a winner, but from there it’s predominately luck. And certainly no amount of knowledge moves a stock from speculative to safe.

The other dangerous point about Matt’s comment is that most investors perform the majority of their research once they’re already long. Worse yet, that research is predominately to confirm their hypothesis. A speculative investor’s time would be be better spent trying to disprove their analysis. Either way no amount of post-investing research will improve the odds.

Another issue I have with Matt’s comments is that if Anteo delivers on all its promise, the retail longs will put it down to their skill, when as with all speculative investments luck plays the largest role.

I’m long Anteo but believe many investors would be best served by taking a bath on this speculative play rather than walking away victorious. It’s better to learn a good lesson early in your investment career than make a few lucky dollars and learn nothing. As Bill Gates said “success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

I do believe there is room in a well balanced portfolio for speculative companies. But like all investments be they speculative or not, they must be bought when the expected value is considerably higher than the current price. That boat has sailed for Anteo.

Expected Value: “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.” Buffett from the 1989 Berkshire Hathaway Annual Meeting via the brilliant PM Jar.

[Update 27 March: Perhaps the following song is more appropriate for Anteo. What do you think? At any rate, fabulous song and video.

Ha ha ha
Pump it
Ha ha ha
And pump it (louder)
And pump it (louder)
And pump it (louder)
And pump it (louder)
Turn up the Anteo

Disclosure: Long ADO

Investing: 10 percent science 90 percent art

This excellent Barry Ritholtz advice marries nicely with this Whitney Tilson video about his new book, The Art of Value Investing.

Ritholtz takeaway, learn the basics. Get the advanced concepts down. Even learn the myths and superstitions. Apply what you learned, is the same concept as Tilson expresses in the video, learn it then experience it.

Anyone who toils in the markets professionally or manages money for other people (or even their own investments) does not get to enjoy such a lavish, self-indulgent luxury. Their job is not to opine on such matters, but rather, to manage cash in the environment that is — the world that exists presently, and is likely to exist in the near future. It is not their role to manage money based on the way things ought to be — rather than the way things are.

I think of myself as a Sailor, and my job is to navigate the seas on behalf of my clients/passengers.

Any good sailor knows the Seas, the prevailing tides and the lunar cycle, He understands the trade winds. He must know how to read charts, the weather, the sky & clouds. He anticipates the changing seasons. He can navigate by the stars. @ritholtz

Education plus experience

Here’s a summary of Tilson’s video, mostly in his own words.

There is no sure fire way to get rich quickly.

To get rich slowly, invest prudently, apply the basic principles of value investing, that is look for a big discount — 50 cent dollars.

Tilson views money managers similar to brain surgeons or fighter pilots — his ego aside, his point was the same as Ritholtz’s sailor. Stop talking and start sailing, you need experience.
Go to school, learn the science, but after that investing becomes an experience based process.

Art is 90 percent of the investing equation and it’s gained through experience. Gain as much experience as you can by suckling at the teat of others pain.

Single biggest mistake is projecting the immediate past into the future. Rare view mirror investing — recency bias.

Three most dangerous words in investing are I missed it. Forget where the stock price has been, all that matters is whether the stock price today is at a big discount to intrinsic value.

Step beyond margin of safety

Margin of safety is the much vaunted investment tool of value investors, and by value investors I mean all sensible long-term investors. Margin of safety is a great concept, but is it the best tool for investment selection, risk management and portfolio optimisation?

Michael Mauboussin argues it is in this excellent 2001 paper.

Investors should base the magnitude of their investments on the size of the margin of safety.

Mauboussin’s Ruminations on Risk is a brilliant paper. I mostly agree with him, but want to share an even better investment tool we can easily use.  But before we get to that, let’s play a game.

Game on

Imagine you have two investment options. Investment A has a margin of safety of 12 percent, while Investment B has a MoS of 8 percent. Which would you invest in?

Probably neither, right? So for the sake of the game imagine you must invest in either A or B.

I’m going to hazard a guess you opted for A. Its MoS is 50 percent greater than B and for some of you that return may even be above your hurdle rate.  Investment A is the logical choice if you use MoS as you primary investment selection tool.

Let’s keep exactly the same investments, but throw my preferred investment selection, risk management and portfolio optimisation tool into the mix. Let’s look at the return/risk profile of these investments.

risk/return ratio

The current price of both A and B is $5. Investment A has an 80 percent chance of being profitable, that is a 60 percent chance of 20 percent upside and a 20 percent probability of a juicy 60 percent profit. Conversely Investment B has a mere 20 percent of being 20% profitable.

Remember, I haven’t changed the game, the respective margins of safety for A & B are still 12 percent and 8 percent.

Are you still happy with your investment decision? As a reminder, A has a 12 percent MoS and an 80 percent chance of being profitable, whereas B has an 8 percent MoS and a mere 20 percent chance of profitability.

Think risk

If you’re still opting for A, then perhaps the following sentence which encapsulates my investment philosophy will help change your focus slightly. Focus on the downside, and the upside will take care of itself. (Hat tip to Mark Sellers.)

The downside for A is 60 percent, whereas B has a comparatively modest 20 percent potential loss. Hopefully, that changes your investment decision. For me, focusing on the risk rather than the return has led to better investment decisions, and I’m confident it will for you too.

Investment B is the better investment choice, despite having both a lower margin of safety and lower probability of profit. I know some of you won’t be convinced and may even believe the higher probability weighted MoS for A means that over time successive investments in A will result in higher overall returns.

The pain of asymmetry

We’ll you’d be right, except for the asymmetry of returns. For those not familiar with the asymmetry of returns, all it means is that identical percent gains and losses are not the same, e.g. it takes a 100 percent gain to make up for a 50 percent loss. Losses hurt more and not just psychologically.

This asymmetry results in B having the higher probable return after a number of iterations. For example if we start with $5 then after ten iterations B will have grown to $8.20 while A will only have grown to $6.10.

If you’re using a probability weighted margin of safety you’re already way ahead of most dart throwing investors, but it may be time to take another step on your investing journey. Adding the return/risk ratio to your tool kit helps you focus on the downside and will improve your risk management.

My hurdle rate is not a percent return, it’s a return/risk ratio of three. For every dollar risked I want a potential payoff of three dollars. Investment B meets that criterion, whereas A has return/risk ratio of 1:1. See what a huge difference the return/risk ratio makes? It’s like pulling back a veil to see the real picture.

As I said in this post, using a risk return framework forces me to consider multiple outcomes and to look forward. It provides a rationale mechanism to overcome the noise of fear and greed. Most importantly, it forces me to consider what could go wrong.

The return/risk ratio is also my portfolio optimisation tool of choice. The higher the ratio the larger my investment.   As I said 3:1 is my hurdle, I may invest a small portion of funds in companies meeting that hurdle, I start getting excited with ratios over five. I invest a lot when the ratio is over seven, as I did when I was pounding the table on Telstra in early 2011 – back when everyone else was calling Telstra a dog. Currently Telstra does not meet my hurdle rate, but as I’ve sold most of our holding and admit to being slightly addicted to its dividend, I continue to hold a small weighting.

Part Two – Putting the return/risk ratio into practice

Once you start regularly using the return/risk ratio it makes investment decisions easier.

What’s the probability and size of the downside? What’s the probability and size of the upside?

This same frame work should be used for both prospective and perhaps more importantly to current positions.  After all it’s only what you own that can hurt you. Saying that, I admit to not rigorously applying it existing holding, although I really should.

Imagine you’re a reasonably smart investor and followed my recommendations of investing in Integrated Research (ASX: IRI) at around $0.45. Hold on, I think I’ve written about this before. Yes here you go.

When I sold, Integrated Research was up 265 percent since my recommendation in the first edition of Motley Fool Share Advisor. IR was also up a market obliterating 300 percent since I’d recommended it as one of TMF Australia’s radar stocks.

Like me, you may have found IR was close to 3 times larger a position in your portfolio than originally intended. That’s a nice problem to have, but it is still an issue that requires thought. For example if you bought a 5 percent position, IR was now over 13 percent of your portfolio.

Above $1.30 IR was significantly overvalued. So why hold 3 times your normal position in an overvalued company? That would be stupid right? But hey if you see it differently please let me know in the comments below.

Here’s how someone summarised IR on Hot Copper:

However, it tells the story: 1st article when IRI had earnings of 4.5c, share price under 40 cents, dividend 4 cents, and cash. Relatively low risk.

Now, 2012 earning 5.4 cents, SP $1.20+, dividend 5 cents, still has cash.

Company obviously in a sound position, however value … ? One would have to say the “easy” money has been made.

I like that thinking. It’s simple, value focused and based on tangible information.

At the current price of $1.24 my analysis suggests a possible downside of $0.40. Yes, you should always work out the risk fist, remember focus on the risk and the return will take care of itself. So I only need to answer one question, is a $1.20 upside probable?

Can IR double in price from here? I see virtually no chance of that.

IR has grown revenues at 3.5 percent a year over the last five years, while earnings per share have grown at a miserly rate of 1 percent. The growth rate has been slightly higher over the shorter time-frames, but still nothing to get excited about.

While I respect the excellent management team and think Mark Brayan justly deserved the IT Executive of the year award for his excellent strategy and execution, there simply is no sound investment case that can be made for IR at the current price.

Mr Brayan sensibly diversified IR’s revenue stream due to the sword of Damocles hanging over the company – the huge risk in HP Non-stop infrastructure revenue collapsing. He has added a few more hairs to the sword, but make no mistake, software is a cyclical business and if, or more likely when, those infrastructure revenues go into terminal decline the slowing growth of unified communications and payments are unlikely to stop investors being cut.

Back to the point

Anyway, I’m getting away from the point of this article, which is that a return/risk framework is a superior investing tool than margin of safety. It conveys more information and focuses on both the risk and return, whereas margin of safety tends to focus the mind on returns. My returns have improved since adopting the return/risk ratio and my losses have shrunk. For me it is the ultimate risk management and portfolio optimisation tool.

Don’t be a dart throwing monkey

When you make an investment decision you must have an idea of the probable outcomes. If you have no idea then you may as well throw darts.

Have an idea

I laugh and cry when I read statements by analysts like the following.

When we moved the company to Hold, we had no idea if we’d ever make it a Buy again. Being patient doesn’t mean we were necessarily ‘waiting for a better price’ — we had no idea if a better price would ever come.

If they had no idea what the heck are they doing advising people what to do! Investing is all about having ideas and assessing the probable outcomes. If you can’t do that then get out of the game.

What’s just as bad is the focus on price, as in “if a better price would ever come”. At its core investing is about profiting from a perceived margin of safety. Margin of safety is the difference between price and value. The larger the margin the better.

Look for a better entry point — not a better price

Once you find a company you like, you should be looking for a wide margin of safety, not a better price. It is entirely possible to pay a higher price, and yet have a more attractive margin of safety — a better entry point. You may miss an opportunity or two, but remember opportunities are plentiful, capital is scarce.

Shares move in waves from under to overvalued and from under to overbought. Once you recognise those trends you’ll have an idea, and that will help you make better investment decisions.

However you invest, make sure you have an idea! Practice estimating probabilities and making rational decisions based on those probabilities. Keep track of your estimates and continuously revisit them to judge your performance. Doing so will help you improve your decision making process and your investment returns.

Why having no idea kills performance

Do I really need to explain why having no idea is death knell to your investment success?

When investing, don't be a monkey throwing dartsIf you have no idea you, are patsy sitting at the card table. Having no idea leads to holding companies in a sector that’s in obvious decline — obvious that is to anyone who does have an idea. It will result in dismal investment returns that a dart throwing monkey throwing could better. Having no idea means you won’t recognise we’re in a secular bear market and the probability of getting a better entry point for an overbought company is considerable higher than during a secular bull market. I could go on and on… but hopefully you get the idea.

As I said tried to explain in selling is hard, so start practicing your investing results will improve with practice. So start practicing basing all your decisions on an idea. Base your ideas on probable outcomes and a margin of safety. Then track all your estimates in an investing journal.

You do have a journal, don’t you?

 

Image edited from the amusing monkey poop site.

Have you ever noticed

Have you noticed that posters on finance messages boards almost exclusively post bullish views? Worse yet they shout down anyone sensible enough to venture a fearful scenario.

I wish there were more bearish views.

Fear greed spectrum

For every company there are multiple possible outcomes. Multiple scenarios across the fear-greed spectrum.

When investing it’s good to know and weight at least 3 alternatives. You could go crazy and use a Monte Carlo simulator. But 3 weighted outcomes will do.

So tell me, how many do you consider before buying part ownership in a company? And more importantly what’s your risk return hurdle?

Mine’s 3 to 1. But that’s simply to pique my interest ;-).

For every dollar I consider at risk I look for at least $3 in return. And get excited when I see over $5.

For example, if my fearful scenario for a company is a 50% loss, then the conservatively optimistic scenario has to be a 150% gain. However, these days I prefer lower risk, around 20-30% downside.

I currently have one large position that doesn’t meet my 1 to 3 hurdle. That makes me uncomfortable. Very uncomfortable, so I watch the company closely.

Moving on.

Risk return investing example

I used the following graph to highlight the attractiveness of Telstra Corporation (ASX: TLS) in January 2011. That opportunity had a 1 to 8 risk return!

Telstra was especially attractive due to multiple payoff windows that made it both an excellent short and long time frame investment. Just the type of investment I love, and suggest you look for —  excellent risk return profile and multiple payoff time frames.

Telstra Opportunity in Jan 2011

Using a risk return framework forces me to consider multiple outcomes and to look forward. It provides a rationale mechanism to overcome the noise of fear and greed. It would butter my toast if I let it! Most importantly, it forces me to consider what could go wrong.

Long live the bear.

Fugetaboutit, it’s already gone

I caught up on my Damodaran reading last night. As always, fabulous explanations and thought inspiring.

Damodaran’s post on sunk costs is important for investors and non-investors alike. In short, you’ve  got to know when to pull the plug on an investment, no matter how much it’s cost you. Cost absolutely doesn’t matter, beyond tax considerations.

If Victorian politicians understood the importance of ignoring sunk costs, Melburnians would have an Oyster card — or some other already proven electronic card for mass transport. Instead $1.5B was wasted on Myki.

Shefrin and Statman looked at whether investors are reluctant to realise their losses. They concluded the investor’s return is 4.4% higher over the next year if he sells the loser rather than the winner. So IGNORE what a stock cost you, it’s already gone. As Lynch put it, water your flowers and pull your weeds.

Damodaran puts forward four possible solutions to over our irrationality.

  1. Regular value audits: Value your companies at least once a year. Sell on value versus price value. If you use a spreadsheet for tracking your investments then try this. Hide the column with you original cost or share price. Having the sunk cost on display will screw with your mind.
  2. A selling rationale: Damodaran sells a loser for every winner and then happily deludes himself that he made a tax savvy sale instead of a mistake. Similarly, I try to minimise my capital gains. Or maybe I just make a lot of mistakes and want to sweep them under the carpet each year ;-).
  3. Automated rules: If you are going to use stop loss rules or any automated rule, then make sure you have other rules to buy back in.
  4. Decision making separation: Separate the buying and selling decision. Get your partner or investment buddy to make the sell decisions.

As Damodaran reminds us and Andrew commented the other day, holding a stock in your portfolio is equivalent to buying the stock.

My Foolish Returns

The Motley Fool was — and I’m sure still is — a wonderful organisation to work for.

For me, the greatest perk wasn’t the clever people, free food, fabulous Q&A sessions with great guests, or even spending a little time with David Gardner.

For me, the greatest perk was being forced to both clearly articulate and follow my investment philosophy.

I set out to show case the merits — and to skeptics, the plausibility — of a low risk, high return philosophy.

Is it too early to say, I rest my case?

Probably, but let’s look at the returns anyway.

First up, the returns for my recommendations on the Fool’s Australian flagship newsletter Share Advisor.

Before we go on, there is absolutely no point in rushing out to buy any of these companies now. The outlook, valuations and certainly the price is now different from when these recommendations were made. If I was in need of independent advice on any of these companies, I’d head to http://www.fool.com.au/.

  • 7 out of 7 are outperforming the market.
  • 100% positive absolute returns.
  • 2 huge winners, over 10x the market.
  • 4 more winners over 2x the market.
  • Average return over 6x the market. OMG, that blows my own mind!

Next up is my pre-Share Advisor returns. These radar stocks were my weekly-ish top recommendations. This set of data is only partially dividend adjusted and may not be 100% correct — come on Google finance, you can do better — but it’s close enough.

Of note the BHP pick was a DO NOT buy / WAIT recommendation. Telstra was my top pick for the S&P ASX/20. I think it went on to be the top performing stock on the ASX200 over the next year.

Again reasonably impressive results.

  • 7 out of 8 absolute positive returns.
  • 6 out of 8 beat the market.
  • 2 huge winners. Over 10x market return.
  • 2 more big winners, 4x the market return.
  • Average return almost 4x higher than the market.

Finally Shares 2012, which I approved the picks on, but full credit for the fantastic outperformance goes to the individuals who recommended them.

Again a decent set of numbers, with full credit to Peter Phan for bumping up averages with his AMA Group (ASX: AMA) pick. My vivacious replacement Scott Phillips and fellow Fool Analyst Mike King  picked 4 of the market beating Australian stocks. If we conveniently ignore the US picks.

  • 8 out of 8 Australian picks outperformed.
  • An average return 4x higher the market.

While less than a year is certainly too short a time frame to fairly judge stock picking prowess, I have to rest this case here, perhaps belatedly so.

I left The Motley Fool in June. Plus, I would have already sold QBE Insurance Group (ASX: QBE) — firstly because I fail to understand all the risks it faces from its US and other acquisitions, but also being up around 30% in short order is a great return from a stalwart stock. And to complete the circle, that fast price rise removed the margin of safety that made the investment attractive in the first place.  Scott Phillips, the Motley Fool analyst, knows QBE better than me. I also recently reduced my positions in Integrated Research (ASX: IRI) and M2 Telecommunications (ASX: MTU), but remain long both.

Disclosure: I have nothing to disclose except my genius stock picking skill and willingness to accept I may be wrong, oh yeah, and I’m long many of the above companies. I wish it was genius skill, then maybe I wouldn’t have all the battle scars the market has inflicted on me over the decades. I left The Motley Fool around June 2012 and have no regular contact with anyone at the company. This is a blog for entertainment purposes, it is most definitely not financial  advice. I’m not licensed to give financial advice and I will be wrong… a lot of the time. This is the last time I’ll post returns in this fashion from my Motley Fool days. 

Free S&P/ASX Total Return (Accumulation) Data

In the immortal words of Joey Tribbiani,  how you doin’?

Keeping track of your investing performance relative to an appropriate index provides a reality check on how you are actually doin’.

But where oh where can you get the data for free?

As usual, it best to go straight to the horses mouth. For index data, S&P neighs like a horse.

Free S&P/ASX Total Return (nee Accumulation) Data

  1. Goto https://www.sp-indexdata.com
  2. Register as a user, it’s free.
  3. Click on “Others” tab.
  4. Select your time period, up to one year.
  5. Select Australian Indices.
  6. Select your index, whether it is the S&P/ASX All Ordinaries, S&P/ASX 200 or another.
  7. If you want accumulation index then select Total Return.
  8. Then Export.

Hope that helps. The picture below may help even more.

You may also be interested in the discussion Justin and I had back in the comments on this post.

 

 

 

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