Readings: Week 9 - 15 Oct 2017

15 Oct 2017

 

 

 

Charlie Munger’s Guaranteed Misery 

 

So to give this an investing twist, I borrowed the idea and pulled a few things off the top of my head for anyone who wants to guarantee investing misery:

  • Always try to get rich quick, chase the latest fad, and do it in the shortest time possible.

  • Let debt be your friend.

  • Mortgage everything you own, including future income, and bet it all in the market.

  • Cherry pick historical returns so your expected future returns are always high.

  • Expect a really high return so you can spend more money now (save less) and still reach your goals on paper.

  • Believe that no matter how much you trade, you’re investing prowess will easily exceed your return needs while covering costs and taxes.

  • Or just equate higher costs with better performance.Invest like the worst is so unlikely you never have to worry about it.

  • Or just assume the best and prepare for even better.Rely on stock volatility to assess the risks of the business.

  • Seek out the facts that fit your strategy, positions, and predictions and ignore everything else.

  • Know you’re always right. And when it doesn’t work out, it’s someone else’s fault.

  • Stay emotional. Stay irrational.

 

And whatever you do, repeat all of the above to guarantee the most miserable investing experience ever.

 

 

VALUE IN RETAILERS HARD TO FIND

 

One uses the retail sector most days and can factor those experiences into investment decisions. And because investing in emerging retailers relies on spotting management that excels at anticipating consumer needs. Also, the “herd” tends to oversell or overbuy retail stocks, based on top-down trends. Fearful of declining retail sales growth, the market thumps retailers en masse, even though there are always winners (think Aldi) and losers (think Myer Holdings) when consumers struggle and change spending habits. Some retail stocks have delivered soaring returns this year despite never-ending gloom about consumer weakness and rising competition. Electronics retailer Kogan.com has a 163 % total return over one year. Fashion jewellery retailer Lovisa Holdings is up 61%. They and other retailers are reminders that the sector has plenty of life and that strong management and an excellent retail concept can create rapid shareholder wealth. 

 

Retailers face 3 big headwinds.

  • The first is the consumer, who is under pressure from rising energy, health and education costs, as well as record-low wages growth. Consumer sentiment is in the doldrums, even though business sentiment is improving. That bodes poorly for the all-important Christmas trading season, which looks like being a shocker this year. 

  • The second headwind is price deflation. One retailer after another is having to lower prices or discount to win business, amid rising competition from local and international players and sluggish consumer demand. It’s hard to see an end to price deflation in retail, particularly in fashion, anytime soon. Retail profit margins in Australia, high by standards in larger developed markets, have further to fall. Lower margins and lower sales volumes can be a fatal combination in retail. 

  • Disruption is the third headwind. Amazon paranoia has gripped the market with fears that the online retail giant will smash local retailers as it ramps up operations this year. The fears are overdone in some cases: I can’t see pet owners deserting Greencross’ PetBarn for Amazon or Bunnings’ enthusiasts giving up their Saturday sausage sizzle to buy hardware online.

My preference has been for retailers with strong overseas growth prospects and less leverage to the Australian consumer. Lovisa is an example: I identified it in this report in September 2015 at $3.20 and it now trades at $5.24. 

 

 

Retail sales post biggest fall since March 2013, plunging 0.6pc in August

Retail sales slump dashes hopes for quick Australian economic rebound

 

  • Last week's retail sales report renewed concerns about the economic drag resulting from rising household debt. Retail sales have posted their biggest fall in about four-and-a-half years, plunging 0.6 per cent in August. The 0.6 per cent slump in retail turnover during August was the worst in almost four-and-a-half years.

  • Adding to the negative surprise was a downward revision to July's number, now a 0.2 per cent fall. Worse still, the weakness was spread across the country, with sales in every state falling. Even worse, sales fell in almost every type of retailing — among the biggest declines were a 1.8 per cent slump in the previously booming restaurants and cafes sector and a 1 per cent drop in household goods sales, including a dive in electronics. 

  • That's not surprising: Australia's household debt-to-income ratio just hit another fresh record at 194 per cent, with more than two-thirds of it tied-up in home loans. 

  • It's impossible to know if, and how much, this might have contributed to the fall in retail sales, but it's basic economic logic that if you cut people's take home pay they will reduce their spending on luxuries, which were some of the categories hardest hit in August. 

  • On top of all that, households have just been whacked with a 15-20 per cent rise in utility prices from July 1 on. If this weak trend continues it could lead Australia's economy into a downward spiral. Household consumption is 60 per cent of the economy — if spending growth dries up, generally economic growth does too.

  • "Lack of wage growth and high household debt have created a difficult retail environment and that will continue to contain retail sector growth over the next few years."

 

 

8 strategies for selecting small caps - DEAN FERGIE - Cyan Investment Management

 

When I select stocks in the small cap space (ex ASX200) I do not focus on Value as I find 'value’ to be one of the most confused, overused, misleading and irrelevant factors with respect to share-market opportunities. I don't think readers specifically want to find ‘value’, they simply want to invest in stocks that will deliver a significant positive overall return over time (capital growth and income, but mostly capital growth) with minimal to moderate risk. 

 

Coming briefly back to traditional 'value'. It is easy to find; any investor with a financial data source and rudimentary excel skills has the capacity to sort the universe looking for 'value criteria': a low PE (ignoring the negatives); a high dividend yield and perhaps, if they're feeling a little creative; an attractive EV/EBITDA ratio or a discounted Price/NTA ratio. Unfortunately, this type of analysis, albeit fundamentally correct in many cases, is fraught with danger. 

 

Looking for value invariably focuses the spotlight on the discounted stocks in the share-market; the oversold; the ignored; the disliked, distrusted and disappointed sectors of the market. Think of it as the discount or ‘sin bin’ end of the market.  

 

"Good stocks aren't cheap and cheap stocks aren't good". 

 

Distilling our investment process into a simplified form, we aim to find (and invest) in companies that are likely to perform better than market expectations. If this occurs, regardless of 'value', these share prices almost invariably rise over time.

 

8 tips outside the basic financial investment fundamentals that I believe will help guide you to creating a well-positioned, defensive and profitable portfolio at the smaller end of the market:

 

1: Follow the Momentum

 

We rarely buy stocks that are falling in price. Don't be afraid of buying a stock if it's cresting a record high. As a rule at Cyan we do not buy stocks if they've fallen to a record low and rarely buy into shares that are in a downward trend.

 

2: Investigate (and invest) in what you understand

 

3: Utilise anecdotal evidence

 

One of the advantages of investing in the Australian stock market is that you can be close to the action and have the ability to experience first-hand the performance of certain businesses. Whether it’s in the retail space, financial services, infrastructure, food, healthcare or real estate, don't discount the value of your own experiences with listed companies. 

 

4: Relentlessly follow cash flow

 

"Revenue is Vanity. Profit is Sanity. Cash is Reality." Without doubt, the most valuable financial report released by companies to investors is the cash flow statement. The cash flow statement gives complete transparency as to revenue run rate, company expenses and cash backing. They can be a clear indication as the true cash profitability of a business, or for those in earlier stages of their lifecycle, if or when a company might be required to raise capital.

 

5: Beware the Executive Chairman

 

If an individual owns a high percentage of the company then that influence should be mitigated by an independent and non-executive chairman. 

 

6: Be dynamic

 

We aim, over time, to buy parcels of shares as we become increasingly confident in a business and sell them either as the price increases or be we lose confidence in a company. Think of an investment like sailing a yacht, even if you set off in the correct direction, you always need to be vigilantly watching for changed conditions and always need to trimming the sails and altering your course. 

 

7: Understand the conflicts of interest in broker research 

 

So the moral of the story is, although sometimes the content is an excellent source of information, pretty much ignore analyst recommendations (and sometimes even the valuations). 

 

8: Have humility and never cross your fingers

 

Certainly one of the aspects of stock-market investing that we believe private investors do most poorly is selling. Whenever a business or company disappoints us we immediately take action to sell our position in that company, REGARDLESS OF PRICE. The philosophy of “I'll cross my fingers and hope this gets better over time” is one reason why part-time investors' portfolios do not perform as well as they should. Don’t be scared about booking an immediate loss when something goes wrong. Believe me, things usually get worse.

 

 

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