Fusion Fund December Performance

With another year down it’s now only 4 billion years until the sun swallows the earth. Better hurry up and do all the things you’ve been wanting to!

I hope 2015 is a fantastic year for you and yours.

By now I’m sure you’ve seen all the Back to the Future II comparisons.  In case you missed it that 1989 movie was set in 2015 and featured flying cars, hover boards and self lacing Nike runners, along with some far out clothes. While people are working on flying cars and hoover boards, commercial availability is still decades away. The good news is Nike is planning on releasing self lacing shoes this year!

Fusion Fund Performance

Fusion Fund finished the year with a 7.9 percent gain, slightly ahead of the total return index’s 5.6 percent gain.

fusion-fund-performance-vs-all-ords-accum-2014-12 fusion-fund-performance-2014-12

Fusion Fund October Performance

With November almost finished and Christmas around the corner here’s Fusion Funds belated October performance charts.

The peak is in

The 1 to 5 year performance chart has peaked.

Fund management marketing wizards would give a right arm for these 25 percent returns across multiple time-frames.

fusion-fund-performance-vs-all-ords-accum-2014-10 fusion-fund-performanc-2014-10

October was a poor month for Fusion Fund, not that you can easily see that from either of those charts. With Acrux (ASX:ACR) and TFS Corporation (ASX:TFC) leading the way down.

Disclosure: Long ACR and TFC

Whale hunting in small ponds – multibagger stocks

SomnoMed Limited (ASX:SOM) is making ripples in a big pond. Here’s an excellent presentation on SomnoMed’s exciting growth potential, or just the slides.

100% unsubstantiated rumours suggest that James Spenceley at Vocus Communications Limited (ASX:VOC) has go big or go home tattooed on his inner thigh.
James’ audacious and intelligent stretch for West Australian telco Amcom Telecommunications Limited (ASX:AMM) shows he wants to be a whale.

I highlighted those 3 growth companies both here and as Motley Fool Australia recommendations. Another Motley Fool pick of mine Sirtex Medical Limited (ASX:SRX) is now 4 times higher.

Do you want to know how to pick multibagger stocks?

Here’s my path

How to pick multibagger stocks

  1. Identify growth sectors.
  2. Determine rewards and risks for companies in those sectors.
  3. Compare multiples and ratios to similar stories.
  4. Look for mispricing.
  5. Spread your investments, but stay concentrated. 5 to 15 companies is the sweet spot for most investors.
  6. Add to your winners. Especially if you didn’t start with a large position.

OK maybe it’s not super easy and yes that list merely skims the surface.

But here’s the secret to how you can trounce the market.

Just do the odd numbers. Growth sector, multiple/ratio comparison, buy a small basket.

If you’re lucky you’ll beat the market. If not then maybe give value investing a try. It’s a more reliable path to investing success.

A final tip to help reel in multibagger stocks.

We’re after the twin turbo of under-priced growth. We want price multiple expansion to magnify underlying growth.

We don’t need to stretch for low probability ideas. Such as story stocks with revolutionary inventions or ideas.

Sirtex, Vocus, Amcom and SomnoMed were small but proven companies when I picked them. They were high probability swings.

Swing less.

Disclosure: Long SomnoMed and Vocus.

Do stock price targets make sense?

When investing it’s easy to get bogged down in numbers. Whether it’s a simple price multiple like P/E or the input and output of a discounted cash flow analysis, numbers are the primary focus of most investors.

Judging by analysts reports the one number that rules above all others is the one year price target. That one number is supposed to accurately summarise hours/days or even weeks of research.

Of all the bullshit numbers, the 52 week price target, often predicted down to the cent, is the crappiest of them all. Yet it’s the one number highlighted in bold on the front of research reports.

Stock price targets make no sense

Price targets are a double dip of delusion. To think you can accurately predict the forward price of any stock to the cent or even within 20 percent is crazy, you can’t. Worse yet, fundamental analysts focusing on a short time frame such as a year exacerbates the delusion.

I try to keep to it simple.

  1. Is this company meaningfully undervalued?
  2. How sure am I right?
  3. How large is the downside if I’m wrong?
  4. Are there good catalysts to send this company towards over-valued within a few years?

As I’ve said many times, I utilise both the market weighing and voting machines. I seek the twin turbo charge of increasing value and multiples. I want the weight and popularity of a company to increase. That’s my path to market outperformance.

Price ranges make more sense

I mentioned Nearmap (ASX:NEA) is my last post. I like it’s growth prospects, sticky recurring revenue and leverage. So here’s an example of how I think about price targets ranges and returns from my investment in Nearmap.


Each of the five rows in blue display possible prices for 1 to 6 years hence — my sweet spot in investing is circa 1-3 years. The two green rows at the bottom show the total and annual compounded returns for the middle/bold row above (average range).

The price ranges are based on multiple valuation methods such as dividend discount, discounted cash flow, return on equity or price multiples. Each method is a different tool and works better or worse depending on the company. I choose a combination I consider most appropriate for the company in question. For Nearmap that’s DCF and price earnings multiple derived from projected profit and loss statement.

Wow, it’s starting to sound like I get bogged in numbers! But that’s far from the truth. If you run into me on the street or in a cafe, I would not be able to tell you my price range for Nearmap. Heck most days I couldn’t even tell you its current price (it’s fifty something…right?) as those sort of details are almost meaningless to me. But I could say it’s probable Nearmap will thump the market over the next few years and has the potential for excellent long term returns.

As I’m long Nearmap I probably wouldn’t tell you about the downside — the execution risks and the competition. However I will tell you this, next year’s earning may well disappoint a few investors and that could provide an attractive entry point. But I’m not prepared to speculate on that, so am both long and living in hope that next years earnings do disappoint so I can opportunistically buy more.

Garbage in garbage out

The main reason I do valuations is not for the price output, but to examine the inputs. Can the company grow sales that fast? Will the industry support those sales? What will margins look like? Can the company self fund?

I view valuation as a tool to help me think more deeply about a company and its prospects, rather than a tool to output a single target price or even a price range.

Circling the wagons

Circling back to the fours questions I posed earlier. The two times I bought Nearmap it was meaningfully undervalued and I had a high conviction. The valuation gap is now smaller, but Nearmap does have excellent long-term potential.

When I bought there was limited downside due to the strong, sticky and growing Australian revenue stream. With Nearmap’s US expansion and price increase there is now both more upside and downside potential.

Nearmap is a catalyst rich company that could easily provide the twin turbo charge I seek.

Disclosure: Obviously long NEA. 

Can retail investors outperform the market?

Lies, damn lies, and statistics” was popularised by Mark Twain to describe the persuasive power of numbers.

For many years I’ve replaced damn lies with facts. Lies, facts and statistics.

Facts, like statistics, can tell you whatever you want to believe. Many people believe the are looking at the truth through the lens of either statistics or facts, but they are often simply seeing what they wish to. They then use the “lies” to entrench their position.

Facts and statistics are often the trees stopping us from seeing forest.

I’m not implying it’s always best to focus on the forest, sometimes it’s the trees we need to look at. The important part part is to have the right focus for the circumstances, an open mind, and not to swallow statistics or facts without chewing.

Statistics tell us that retail investors woefully under-perform the market. Stats also highlight around 75% of fund managers lag the market. Many people concentrate on those dire figures and in the case of ETF and index funds heavily publicise them.

So why would a retail investor bother trying to outperform the market? Statistics say it is highly unlikely and individual investors are seriously out-gunned by institutions.

The answer is, invert those statistics.

Can retail investors outperform the market?

Market returns are the average of all participants. So if the vast majority of participants under-perform the market then a minority must be trouncing the market.

I occasionally communicate with one  of these market thrashing investors. Here are his returns to October 2014


Those are some awesome numbers. For some perspective on how good his performance is consider this. Over the last 5 years he would have turned $100,000 into almost $410,000 and over the last 3 years $100,000 would have grown to almost $290,000. Simply phenomenal.

Now let’s compare his returns to mine.


While we both handily thrashed the market, I trail by a considerable distance. Even though my performance over 5 years appears pretty close to his, it’s not. Instead of growing to $410,000 over 5 years, I would have “only” grown it to $309,000. A few percentage points makes a huge difference.

Investor X wonders why I hold such a high cash balance, around 50 percent at the moment.

One comment I would have, is the fact that you have moved to around 50% cash. I also watch Geoff Wilson’s performance with his LICs WAM, WAX and WAA, and he also likes to keep between 30-50% cash. I have always thought he could do a lot better if he was prepared to be more fully invested. Yes, you are both in an excellent position to take advantage of the down turn we are now in, but I wonder at the cost of lost opportunity. I rarely have more than 2-3% in cash. If I sell something, it is because I have found what I judge will a better investment to move onto.

Investor X is right. My returns would be much closer to his over the last 5 years if I was 100 percent invested. While close to meaningless, we’ve also compared monthly volatility and my portfolio is more volatile. So why do I hold so much cash?

The simply answer is personality. While investor X was able to live with a 60 percent fall during the GFC, I could not. Our portfolio dropped around 20 percent during the 2008 market crash. I prefer to sacrifice some upside to ensure I can sleep well at night.

The other answer is buy fear sell greed. While many market pundits present facts and statistics showing that the market is under or over value, or  just right, I focus on the trees, the individual companies. I raised cash in September as companies I held became overvalued. I’ll redeploy capital when it’s easy to do so, when companies I want to buy are being sold by fearful investors.

Investor X is older and probably wiser than me. He clearly has better performance over the last 5 years. But what happens if we layer on our respective 60 and 20 percent drops?

It turns out if we started with a $100,000 prior to the GFC and our returns included both the falls and gains from above then investor X’s portfolio would now be worth $164,000 while mine would be $247,000. Naturally if we exclude the GFC drop, but our portfolios fell by similar amounts now, the figures would be the same, i.e. $164k and $247k.

I’m not saying this is what happened or will occur, but I hope it illustrates why I focus on the downside. If not then perhaps this graph of gains required to make you whole again will.

See the difference. While it only take a 25 percent gain to make up for a 20 percent loss, it takes a massive 150 percent increase to recover from a 60 percent drop. (See this post on the lies behind this accepted fact and how it can take exactly the same percentage gain to make up for a loss.)

I am so far off topic I should change the title, but hopefully through the many diversions you can see two retail investors thrashing the market in two different ways. While there are many wrong paths, there is no one right path to market outperformance. Each investor must fine the path that is right for them.

Some paths are easier to follow as they are clearly marked. Value, momentum and small caps are 3 paths that have provided strong tailwinds for up to 9 decades now.

A little meat

During September I sold, Analytica Limited (ASX:ALT) and Global Health Limited (ASX:GLH), and reduced M2 Group (ASX:MTU) and My Net Fone Limited (ASX:MNF).

While I say it’s the companies I focus on, that is simply part of the story. Market corrections are not fair to all comers. Some stocks get whacked 90 percent, some might only drop 10 percent and there will even be a few gainers.

In general stocks that are any of overvalued, speculative, small caps, without earnings or popular are hardest hit.

I continue to hold some stocks that are likely to get clobbered in a correction. Two companies that jump to mind are Somnomed Limited (ASX:SOM) and Nearmap Limited (ASX:NEA). I hold these and would look to buy on a correction as it is simply too difficult to ‘time’ individual growth stocks.

Disclosure: Long MTU, MNF, SOM and NEA.

ABC 7.30 report takes knife to Regeneus

In what can best been described as a hatchet job, the 7.30 report has taken the knife to Sydney based stem cell company Regeneus (ASX:RGS).

My major realisation from watching the report, was just how low the credibility and integrity of the ABC has slipped. Is the 7.30 even one rung above Today Tonight?

Someone has a big issue with  Regeneus and Louise Milligan opened wide to be spoon fed a story.

Regeneus Stem Cell Therapy

Regeneus currently offer a stem cell therapy called HiQCell. Stem cells are harvested from your fat and injected into your joints. Regeneus are working on an allogeneic human cell therapy, that is from donated cells. Basically an off the shelf solution so no liposuction will be required.

The 7.30 hatchet job

The story got off to a positive start when NRL Canterbury Bulldogs player Trent Hodkinson said Regeneus saved his career.

Then the knife came out with ex-AFL player Clint Bartram stating he never played again after receiving stem cell therapy. While the inference was this was a Regeneus failure, it’s interesting to note that the 7.30 did not state that it was Regeneus.

There are other companies and individuals such as Melbourne Stem Cells, Pure Cell and Ralph Bright who use similar procedures. Was Clint one of their failures?

Next came Ben Herbert, Regeneus co-founder and director. Associate Professor Herbert didn’t inspire confidence, but he did at least state the one important fact in the story, “There’s many statements on the record from Regeneus to do with placebo and pain reduction, and like I say, pain reduction on its own is not really the only story here.”

That was important as it appears the genesis of this hatchet job was this poorly worded release by Regeneus. This sentence in particular may have been the tipping point, “The clinical trial demonstrated that HiQCell is safe and treatment reduces pain and halts cartilage degradation in arthritic joints“.

While Regeneus have stated on multiple occasions that the placebo group experienced similar pain reduction, leaving that information out of this questionable press release was probably one straw to many.

But was it enough to justify such a hatchet job by the 7.30 report? I don’t think so and wonder whether Regeneus may be considering legal action against the ABC.

Update: I found this good comment on Hot Copper.

Dr Justin Roe is an Orthopaedic Knee Surgeon. Regeneus could be considered a direct competitor to his business. He states

The fact is that this procedure didn’t work – it was never going to work – it’s not based on good clinical evidence unfortunately”

That is a false, misleading statement. Hilary Richards had a knee reconstruction 1 year after the HiQCell procedure. She had advanced osteoarthritis, suggesting she wasn’t suitable for the procedure. She wanted HighQCell to replace the need for a knee reconstruction. As Regeneus have stated, the treatment is not a replacement for reconstructive surgery. It is more suited for patients with early signs of osteoarthritis, delaying the need for a knee replacement and reducing pain and swelling in the mean time.

Perhaps Regeneus need to be more selective when offering the treatment. Either way, Dr Justin Roe’s negative and unwarranted comments merely support his business. When it comes to mainstream media, it’s important to realise that……it’s all bullshit with intertwined vested interests.

Regeneus is now in a trading halt. I look forward to its reply.

Disclosure: I have an interest in Regeneus.

Are you any good at investing?

I’m a modest guy. In general I don’t take compliments well, I either ignore them or make light of them. My partner is training me to simply say thank you, but after 26 together she hasn’t had much success.

She also says I should sell myself more, you know talk myself up.

I struggle with that, as I’ve always found that in general there are people who “can” and people who say they can. Those who can have little need to say it, while those who can’t often shout they can.

Are you following me?

Clearly I’m on a completely different page from the Commonwealth Bank marketing team!

The more I know, the more I realise I don’t know. Maybe I’m simply a slow learner.

The two questions I’m most often asked are, what do I do all day, and am I any good at investing.

A normal day sees me reading, thinking, gardening, clothes washing , kid wrangling and cooking dinner. As spring blossoms daily exercise will come back into that mix.

As to whether I’m any good at investing, that’s complicated. My returns and consistent outperformance of the market are excellent, but I’m probably just lucky.

Fusion Fund Performance to September 2014

I’ve been lucky for a long time.


And my luck continues to this day.


To ensure my luck continues, I sell companies I own when they become expensive and buy when I’m offered attractive opportunities.

Right now I’m close to 50 percent in cash. For the first time ever I’ve invested a portion of our cash in a couple term deposits, six month and three month.


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 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.

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