Know what you own

Another day another crazy irrational stampede for a lottery ticket.

Winning ticket du jour is Panorama Synergy (ASX: PSY). Suckers stampeding for a slice of the “laser” action have sent PSY skyrocketing 50 percent.

Stocks are not lottery tickets. There’s a company behind every stock. If the company does well the stock does well. It’s not that complicated. Peter Lynch.

Will Panorama Synergy do well?

how many deals you think flow from this,
not many, if any,
not many, if any,

Thanks to cuzzie bro Scribe

scribe-not-many-if-anyTwo reasons why PSY is a poor investment

  1. A month doesn’t go by without some company coming up with a better “laser”. Buying in to these stories is pure speculation. It has low probability of success and hence is high risk. In short a suckers bet, a lottery ticket.
  2. Know what you own. There is no way you can explain to a 10 years in 2 minutes or less what Panorma Synergy does or why you own it.

If you’re long, I wish you luck. But please  please please do watch this Peter Lynch speech and consider if he is describing Panorma Synergy.

$PSY is up 56 erpcent at $0.43

Fusion Fund has a spring in its step

Fusion Fund outperformed the ASX200 Accumulation Index by 1.2 percent in August,  1.8% to 0.6%. Year to date the fund is up 11.6 percent versus a not to shabby 8.2 percent for the accumulation index.

fusion fund performance 2014-08

Last week I read someone deriding funds for reporting 5 year returns instead of 6 year returns. The insinuation, or maybe it was explicitly stated, was that the funds were portraying returns in the best light possible.

I disagree, there was nothing manipulative or misleading in the funds’ reporting. Five year returns are a standard measuring stick. But as I now have just over six year’s of returns  and as those returns are even better than my five year returns I thought I’d share them.

Over the last six years I’ve averaged 18.1 percent per year compared to the 6.2 percent for the ASX200 Total return index.

fusion fund performance vs all ords accumulation index 2014-08

Is past performance indicative of future performance

The short answer is yes. Past performance is indicative of future performance. However, the tricky thing is that good historical performance can point to either a likely continuation of that outperformance or an imminent fall from grace.

Tony Hansen at Eternal Growth Partners wrote a thought provoking article this week about outperformance and skill versus luck.

Hold the press. I just downloaded the fund performance data Tony provided. The spreadsheet lists 278 Australian managed funds. The number one performing fund over 1 year returned 38.2 percent.

Is that the best you guys can do! Little old me returned 44.8 percent and I know people who did even better. Unfortunately 1 year performance data is close to meaningless, but hey it still puts a smile on my dial.

Over 3 years the Australian fund manager industry did slightly better. Seven of the 278 funds did better than me. Well done, you seven deserve your outrageously high salaries. To be fair, 79 funds (28 percent) outperformed the ASX200 accumulation index.

Looking at 5 year performance tables only six fund managers outperformed me. Of those six I see only one that I believe has a chance of outperforming me over the next 5 years. Past performance is meaningful contrary to what the industry is forced to say. Smallco Investments is more likely than the other managers to be near the top of the pack in five years time.

A good example of when past performance is not indicative of future performance is the other five funds. All five are either property, international or geared funds, or even more dangerously a combination of those attributes. Those funds are highly likely to get hammered in the near future. Their past performance is a strong indicator to future poor performance. The cyclical nature of investment returns ensures their imminent stumble.

Sorry I got distracted. What was I going to say? Oh yeah, luck versus skill.

I’m not going to claim my outperformance as skill. I’m a lucky guy. Always have been and I plan to work hard to ensure my luck continues.

Famous Five Fundamentally cheap ASX stocks

You know the deal, before I can reveal the five fundamentally cheap and exciting ASX stocks I’m obliged to make you wade through an introductory anecdote.

But keep reading because it might make you think.

Is discrimination bad?

I’m sure most people would instantly answer yes, discrimination is bad. But could it be good? Could discrimination have a valid purpose? Have we simply been programmed to believe discrimination is bad?

I know this girl, she’s a clever free thinker. I often seek her advice and usually listen to what she has to say. When she says something particularly interesting I write it down, like the following quote which has sat in the prized position on my monitor stand for the last six months.

I think discrimination is good as it lets people know who is at the top of the pack.

When I started to write that down she hurriedly added,

I know that is insensitive to the retards.

I’m still not sure which line made me laugh more. While I disagree with the sentiments I applaud her ability to question current social standards.

Accept nothing, question everything.

5 Fundamentally cheap ASX stocks

The famous five are SDI (ASX: SDI), Brierty (ASX: BYL), United Overseas Australia (ASX: UOS), Somnomed (ASX:SOM) and Acrux (ASX: ACR).

There were a few more put forward by the group, but they are the ones I recall. Somnomed and Acrux were my selections.

It’s a reasonably decent selection of companies put forward by a talented group of stock pickers.

On Somnomed I said I liked its long term story, but strongly believed a better entry point would present itself. Little did I know that would be so soon! I also had no idea that Acrux would deliver so quickly, closing 31.6% higher two days later.

Update: Where has the last month gone? I started writing this is July! I’m unlikely to finish this article, so will simply post it now. The five companies are all worthy of deeper investigation, though Acrux is no longer an easy slam dunk.

Since I started writing this I have gone long the contentious United Overseas Australia.

Disclosure: Long SOM, ACR and UOS. This is for entertainment purposes only. I am not authorised to provide financial advice. Unfortunately those who are authorised are generally not suitably qualified or experienced to do so. 

Morphic Asset Management

Last year I wrote about fund managers I’d be happy to invest our money with. If you’re seeking global exposure here’s a manager worth taking a look at.

Morphic Asset Management

I’ve respected Jack Lowenstein for many years. He did a terrific job at Hunter Hall and now heads up Morphic Asset Management.
I like Morphic’s investment philosophy.

  • Only funds with flexible hedging strategies will be able to deliver acceptable, steady, real, absolute returns for investors over the next decade.

  • Slavish adherence to any single investment style, such as ‘value’, ‘growth’ or ‘momentum’ is unlikely to be in the interests of investors through all investment and economic cycles.

  • Buying lower-priced stocks with reasonable growth prospects is more often a good strategy than simply buying pure ‘value’ stocks or pure ‘growth’ stocks, it is also important to consider price momentum to increase confidence that returns from these investments will not be too far into the future.

Morphic believes that in today’s economic environment the best way to manage money is to adopt the approach of high-performance fund management pioneers, such as George Soros. This involves intense economic and market research to identify thematic drivers that are wrongly priced by the market combined with detailed analysis of individual securities that allow these opportunities to be exploited with the highest return and lowest risk.

That philosophy has a hint of fusion about it. More importantly it displays an open mindedness that is refreshing in the investment world.

It’s early days for the fund and thus far it’s neck and neck with its global index. But it is their through cycle returns that I expect will outperform.

Fees are typical, they’ll work out around 2 percent if the fund outperforms by 3 percent annually. (1.35% management fee plus up to 0.27% expenses and 15.375% performance fee.)

Disclosure: This is not advice. I am not authorised to provide advice.

Free SMSF Accounting Software Approaching Maturity

Back in late 2012 I wrote about Mclowd, the free SMSF accounting tool.

At the time Mclowd was a relatively new entrant, and the software was in public Beta.

I recently went back to check on their progress, and was amazed at how much the guys had achieved in just 18 months, and how quickly their online Community is growing.

Having spoken to Product Manager Graeme McGuire it is clear Mclowd has the potential to displace BGL and Class with a platform that is free to both individual trustees and practitioners.  (Mclowd makes it money out of a services Marketplace that is run alongside the software, as well as product distribution such as actuarial certificates).

With the release of version 3.0 at the end of September (2014) Mclowd expects to provide support for the full SMSF life cycle, including Statement of Taxable Income and Member Benefit Statements.

From that foundation Mclowd intends to address usability issues and help content, as well as targeting some of the bells and whistles (such as data feeds, peer-to-peer analytics and improved integration with the Marketplace).

But for the vast majority of trustees it is already a viable alternative to paid versions of the similar SMSF accounting software.

Graeme told me that trustees have responded to the consistent delivery of new functionality, with nearly $1m in SMSF assets being transferred each day.

But perhaps the most interesting aspect of Mclowd is the way an online Community is evolving.

Founder Ashley Porter started Mclowd because of the fees his mother was being charged for SMSF accounting, and he vowed to create an environment where trustees could manage their retirement assets in a much more empowered fashion, including their relationship with professional services providers.

Looking at the various conversations taking place in the Mclowd Forum, it is clear that a growing number of trustees are making the Mclowd Community their own, and in doing so potentially changing the balance of power in the SMSF space.

Integrated Research Profit Warning

Investors have taken Integrated Research (ASX:IRI) to the woodshed for a savage beating after it issued a profit warning this morning.

I continue to be stunned by the market’s surprise.

Here’s another look at Integrated Research’s growth. It’s long term profit growth has now slumped to a pitiful 4 percent, using the mid point of this year’s $8.3 to $8.7 million profit guidance.

integrated research ASX IRI profit warning

I wonder if The Motley Fool still have Integrated Research as a buy. I certainly hope not.

I also hope investors took my advice to sell out around $1.40 a year or two back.

Is all lost now? Well Integrated Research does have lumpy earning so there is always a positive next half to keep your fingers crossed for. Good luck with that!

But you should ask yourself this. Do you want to be in bed with management who blame external factors for their failure?

“The reported Gross Domestic Product for the United States fell 2.1% in Q1 CY2014; the United States is Integrated Research’s major market. “

OMG Steve and Darc, man up and at least be honest with your investors as to why you failed this half. Is your sales force letting you down? Or is it your product? Lumpy sales doesn’t cut it.

“… revenue increase of 9% to $53.2 million when compared to the prior year. Profit after tax is anticipated to be in the range of $8.3 million to $8.7 million compared to the prior year of $9.1 million. ”

Management couldn’t bring themselves to add that it’s a profit decrease of between 4 and 8 percent. Decreasing margins is never a pretty sight or a wise place to invest. This may be yet another one-off miss for Integrated Research, but it sure does stumble a lot.


  • This is the second year of declining profit. While I don’t like to extrapolate, a company without growth with a price earnings ratio of over 20 could fall a long way before finding fundamental support.
  • This half’s profit fall is between 33 and 39 percent.
  • The release of Prognosis 10 was meant to provide Integrated Research “with an exciting platform to enable future growth across all product lines, including the ability to develop cloud based applications.” What happened?

M2 Group soars on no news

A long term favourite company of mine M2 Group (ASX:MTU) has been swimming against the retreating market tide. M2 leapt over 5 percent this week on no news.

That is on no real news.

M2 did get a mention in Pie Funds’ newsletter on Tuesday morning. Mike Taylor’s  widely following Slice of Pie outlined a very bullish case for M2.

The Fund has also made a direct investment into M2 Group. Pie has previously been an investor in M2 and sold out, however, due to a recent correction in price we felt that it was compelling value and have taken a direct position as part of the funds allocation to Australasia. With strong management, over 20% earnings growth, a P/E of 12x and dividend of 5% it’s a good fit for the Global Fund.

I wonder if copy cat investors fell for that bullish argument without checking the facts. I’d certainly be extremely interested in any companies selling for 12 times earnings, with 20 percent growth and a 5 percent dividend.

Unfortunately M2 is not such a company. The price earnings multiple is right, but sadly the growth and dividend are both meaningfully lower. To be fair the forward dividend yield is likely to be around 5 percent, but the current yield is closer to 4 percent.

As for the growth, well M2 regularly buys whatever growth it wants, so never say never. But it is unlikely it will achieve anywhere near 20 percent real growth. Analysts are estimating 13 percent growth this year followed by an anemic 3 percent in 2016.

I hope Mike is right, as like him I sold my original M2 shares and have bought back in.

M2’s debt is still worryingly high and you probably shouldn’t look at M2’s half year cash flow statement if you’re determined to buy, but management certainly are top notch integrators.

Disclosure: Long M2 Group.

Performance, Pigs, and Investment Process

Pigs at the trough

What’s the difference between an independent director and a shopping trolley?

You can load a trolley with grog but can’t push it anywhere you want.

Hat tip to Michael West @MichaelWestBiz for that amusing summary of Peter Swan’s damning report on the performance of independent directors. As Swan’s report was published in October last year, I’m guessing that you need to present your findings at a junket for the media to take note.

Anyway, it’s great to see the pigs at the trough have finally been exposed. The bigger question is why does the ASX governance council require all listed companies to adopt a majority of independent board members? Do they have any empirical or even strong anecdotal evidence to suggest people without skin in the game who often lack industry knowledge are capable stewards of shareholder wealth? Of course they don’t.

It’s time to slaughter the pigs! Have skin in the game or fork off.

6 Signs of a Good Investment Process

I enjoyed this post on the investment process by Todd Wenning at Clear Eyed Investing. Todd’s 6 signs of a good investment process are:

  • Stoic: It can endure both good and bad short-term outcomes without getting emotionally swayed in either direction.
  • Consistent: It doesn’t adjust to current market sentiment and sticks to core competencies.
  • Self-critical: The process is periodically reviewed, includes both pre-mortem and post-mortem analysis on decisions, and is refined as needed.
  • Business-focused: Rather than rely on heuristics like “only buy stocks with P/Es below 15,” a good investment process focuses on understanding things like the underlying business’s competitive advantages (if any) and determining whether or not management has integrity and if they are good capital allocators.
  • Repeatable: A process gets more valuable with each application — insights are gained, deficiencies are noticed, etc.
  • Simple: The less complex, the better. If you can hand off your process to another investor without creating significant confusion, you’re on the right track.

It’s a great list, though I disagree with some of his finer points. Anyway, Todd is well worth following.


With no disrespect to Todd, I always wonder when reading articles like his if the writer is struggling with poor performance. I hope not, but when my performance lags I often find myself reaffirming that it’s process not outcomes that count. Here’s how Michael Mauboussin put it in ‘More Than You Know’, as quoted by Todd.

Results – the bottom line – are what what ultimately matter. And results are typically easier to assess and more objective than evaluating process.

But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field…all emphasize process over outcome

While I think my process is good, I know my outcomes are great. Give me another ten years and I might also know my process is great.

What a cracking month. The All Ords Total Return Index blasted ahead 4.4 percent. I did slightly better with a 7.2 percent return.

Daily, monthly and even yearly performancefusion fund short term performance vs all ords accum 2014-07 mean little to a long term focused process such as mine, but they are the repeatable steps that facilitate review. And hey, if we can’t celebrate our small victories we’ll get mighty thirsty!

As Mauboussin says results are what ultimately matter and naturally in the investment game it’s long term results that really matter.

As the next chart show I continue to do exceeding well over the long term.

fusion fund performance vs all ords accum 2014-07What I find even more stunning is my results over the last year include an average cash holding of 45 percent. That’s like beating Mike Tyson in a fight with one arm tied behind your back.

Or is it?

fusion-fund-asset-allocation-2014-07I think a better analogy may be beating Mike Tyson when he has both arms tied behind his back. As this asset allocation chart shows when the market is winding up for a punch my cash position increases. The high cash position stops the market from delivering a knockout blow and allows me to continue taking big swings.

I’m not trying to time the market. Our cash balance is more a reflection on both the lack of opportunities and elevated risks in the market. Just because others are prepared to take more risk for less reward doesn’t mean I will.

Here’s some pearls of wisdom on holding cash from Seth Klarman and Warren Buffett as used by Steve Johnson in his article ‘The real reason you should hold cash‘.

One doesn’t need the entire market to become inexpensive to put significant money to work, just a limited number of securities. Klarman

Holding cash gives us optionality. Alice Schroeder, author of the definitive Buffett biography, The Snowball, says this is one of the most important things she learned: “the optionality of cash”.

“[Buffett] thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

As the above asset allocation shows I found an inexpensive security this month, but more on that another day.

One final chart that tells me my process is on the right track and encourages me to keep perfecting it.



Does making financial predictions make you a dickhead?

The good news is making financial predictions won’t make you are dickhead, the bad news is you already are a dickhead!

Before I dive in to the very shallow pool of self congratulations that most financial pundits wallow in, allow me to recap part of my investment philosophy.

As a young lad my mother used to say, “According to you everyone is a dickhead except the Pascoes and Morels”. Bede Pascoe was my best friend and my mum was right. Bede and I thought most people were dickheads!

I was around 14 when I realised that I might also be a dickhead. I remember the incident well, which is unusual for me, and funnily enough Bede was the one who delivered my realisation.

My mantra changed slightly to “everyone’s a dickhead, including me”. The core tenant of my philosophy became that whatever theories or beliefs people held as truths were probably wrong. Yes 2 plus 2 equaled 4, at least most of the time, but I doubted most things, including lots I believed.

So when my interests turned to finance it was no surprise that I thought efficient markets theories were the spawn of complete smegheads.

Predicting the future

But what may surprise you is that I embraced predictions. Yes I have a crystal ball! It may be a tad cloudy, but all you need to make money in the markets is a slight edge. My crystal ball is one of the tools that delivers that edge.

When people believe in efficient markets or scoff at predictions they deliver me an edge.

My focus when investing is predicting the future. Predicting what a company is likely to achieve and how investors are likely to react. Predicting what is likely to happen over the next few years and how investors will respond. This crystal ball gazing works best when the market is mispricing a company, that is when the market focuses exclusively on either the good or bad news surrounding a company.

People are unable to entertain competing ideas let alone objectively price the outcome of those opposing ideas. The larger the herd the easier it becomes to predict the next move.  

Is making financial predictions unusual or bad?

Predictions have a bad wrap, but finance is all about making predictions.

Discounted cash flows are predictions. Not only that, they’re predictions of the worst kind. Predictions should be as vague as crystal balls are cloudy. But by wrapping a prediction in financial mathematics many fools suddenly believe they can predict to the cent what something is worth. They try to predict cash flows 10 or 20 years in to the future and worse yet try to accurately predict them.

Of course wise value investors realise that accurately assessing value in incredibly difficult to do, so they embrace the concept of margin of safety. Buying something for considerably less than you predict it’s worth gives you a margin of safety. A margin to compensate for your cloudy crystal ball.

Soon, I’m going to blow my own horn by showing you one of my predictions and how it played out. But before that here’s a few more predictions.

At around $41 when some analysts were belatedly jumping aboard the Xero (ASX: XRO) rocket and calling it a buy, I said it may be worth a nibble at under $30, but the load up time was around $19. Some people thought I was crazy and Xero would never again see such a low price. Well Xero has traded under $22 this week and you know what I now reckon that under $10 may be possible and under $5 not impossible.

I arrive at those figures by predicting the future based on the reliability of past events and investor reactions. In this case a major market correction or some other major event is likely to occur well before Xero is profitable. When that happens stocks without earnings will be taken the woodshed  and flogged to within an inch of their life. And that is the time to buy a company like Xero.

The wonderful thing is that it doesn’t mater if I’m wrong, it only maters if I’m right. I lose nothing if wrong, but am prepared to win if right. Compare that to those telling people to buy Xero at over $40. If they were wrong there was huge obvious downside, if everything went perfectly there was limited upside.

Here’s another prediction. The current yield chasing craze will end badly. Investors who are currently congratulating themselves on being masters of their own universe will be found to be naked as the yield tide goes out.

On to the main self congratulating event, here’s what I wrote in March 2013. Hopefully you can extract something useful for your future endeavours.

Finger Lickin’ Good

Collins Foods (ASX: CKF) owns, operates and franchises KFC and Sizzler restaurants…

A respected fund manager, Orbis Investment Management, continues to buy Collins Foods, and they now own 17.4 percent of outstanding shares. They’ve bought over 60 percent of shares traded in the last month.

Orbis has been virtually the only buyer of Collins Foods. The stock, a recent IPO at $2.50 per share, is seemingly hated and/or ignored by virtually the rest of the investing population.

Imagine how low the price may have fallen if Orbis had not been buying! $1 or less? Now that would be a one-foot hurdle!

We may still get $1, but at around $1.10 Collins is a good two-foot hurdle.

Orbis can only buy 2.6% more of Collins Food stock, so patient investors may soon be rewarded with a great entry price. Naturally there are no guarantees that we’ll get a lower price, but the odds are in our favour.

Over the medium term a rebound in Queensland trading conditions should stabilise the business and earnings.

Here’s a couple more comments I penned on Collins.

March 2012
Collins Foods (ASX: CKF) was close to being our top pick last month and again this month. If it weren’t for low trading volumes, this purveyor of grease and starch may have made the starting lineup. Institutional investors remain shy, and most retail investors are yet to notice the opportunity.

Investment arms of NAB sold down their holdings in December and January; respected Orbis Investment Management was a buyer. With bad news baked into its share price, any positive news will send shares rocketing, while further bad news is unlikely to have much effect. In sum, Collins presents limited downside risk with the possibility of a double within two years.

February 2012
Collins Foods (ASX: CKF) has been trading in a tight range since its disappointing inaugural results as a listed company. Institutional investors remain shy of a company that has already burnt several of their brethren, and most retail investors are yet to notice the opportunity.

Collins has now doubled! And after hitting $1 as I said it might.

Collins Food Group ASX:CKF share chart

While it may appear I’m simply blowing my own trumpet, I’m really sharing this for the lessons that can be learnt. It’s basic stuff that most people simply don’t make part of their investing DNA.

  • If the bad news is priced then the upside potential is probably being ignored and mispriced.
  • Be prepared! Imagine what could happen based on the facts at hand and be ready to respond to what occurs. I predicted share price could hit a $1 when Orbis could no longer buy, it did.
  •  Think about companies from a future perspective rather than linearly extrapolating historical data.

It’s that simple logic that led me to Acrux (ASX:ACR). The downside was more than priced in. Today’s price jump is no surprise. It wasn’t rocket science or advanced financial maths — there’s an oxymoron — it was simply assessing whether the risks were being over-weighted. The downside was priced in! That puts you in the wonderful position of any good or even alright news will be an upside catalyst.

Acrux Axiron sales increase chart

Here’s another example from 2013 using pSividia.

pSivida is hoping third time’s the charm. Alimera has submitted  ILUVIEN for FDA approval for a third time. The outcome is expected in October. If rejected, watch out below, pSivida longs will be  crushed. Here’s the crucial point for those looking for better odds. A rejection would make pSivida worthy of attention as it will still have the growing European cash flow, a promising pipeline and the possibility of eventual FDA approval if Alimera coughs up and performs the additional trials the FDA have always wanted. It may also have a share price starting with 1 — ouch!

The approval was rejected and that proved to be a great time to go long. While pSividia didn’t drop below $2 it did get within the ballpark.

So the next time people laugh about crystal balls you might want to ask them what they’re basing their investment decisions on. DCF? That’s the worst type of prediction. Historical financials? While useful, it’s what is gong to happen that counts.

Whatever they’re basing their decision on its most likely a crystal ball going by another name. They’re simply dickheads without enough insight to know that.

My name is Dean Morel and I’m a dickhead! A lot of my predictions are wrong, but as they cost me nothing I can keep making them all day. Sometimes my guesses are right and I take a swing.

Disclosure: You’re a dickhead, but you’d be an even greater one to think this is anything more than the ramblings of an idiot.  I’m long several of above mentioned companies. Needless to say this ain’t advice. Here’s the advice, pull your head out of your arse, look at the future, figure out what is likely to happen and what is priced in. Or like me, if you discover your head is too far up your arse then keep forcing it further up until it finally pops back out your neck. I’m not sure mine has popped out yet, but it’s getting close ‘cos it no longer smells like shit in here.

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