Saturday, October 30, 2004
Brandes' familiar philosophy
One of my email subscriptions is to The Motley Fool's lunchtime newsletter. The Motley Fool publishes personal finance articles online, with a particular line in promoting low-cost index tracker investment amongst private investors.
That's not to say The Motley Fool refuses to recognise some fund managers have a record of significant outperformance. In this recent article TMF staff writer Maynard Paton doffs his cap to Brandes Investment Partners, who he goes on to describe as one of the fastest-growing fund managers in the world. After its formation in 1974, total assets had reached $11m by 1984. However, by 1994, those assets had swelled to $3.9b and by 2004, they topped $85b..
It's important to note this stellar increase from $11m to $85b in 2004 won't have been achieved through investment returns alone but will incorporate additional money from new investors or institutions.
Paton's introduces this fantastic article on Brandes' website. Reading this gave me so many strong and vivid flashbacks I now understand how it must feel to be Ozzy Osbourne or Sly Stone. Read on for extracts of Brandes' philosophy, in many areas frighteningly similar to my own:
We carefully evaluate the price we pay for the business. We analyze long-term rates of return, cash flows, balance sheet strength, management, asset values, and liquidation values. We also often look at private market transactions to determine intrinsic, or fair, value. We look for a business with a potential margin of safety – one selling at a price below our estimate of its intrinsic value. A margin of safety provides some protection from error and uncertainties. This is a conservative approach that aids in preserving capital and gives us the opportunity for profit...Most of our stocks carry low price-to-earnings ratios (P/Es). This is fundamental to our approach. But, as in the case of asset values, earnings may need adjustment – and we focus on “normalized” earnings, not the most recently reported results. In general, we tend to pay as little as possible for the earnings stream of a business. Stocks that are capitalized at very high rates (high P/Es) generally have high expectations attached to them. If these expectations aren’t met, the stocks may be vulnerable to steep declines. Stocks with low P/Es generally have lower risk and a greater margin of safety....
IS IT REALLY POSSIBLE TO ACQUIRE COMPANIES AT BARGAIN PRICES?
Yes. Many companies are overlooked, misunderstood victims of investors’ overreactions, misplaced fear, and exaggerated focus on short-term performance. We are often able to acquire companies inexpensively when they experience temporary difficulties or when market conditions are generally weak. We think independently and make investment decisions based on quantifiable evidence. We seek to shield ourselves from the influence of short-term public sentiment, and our actions tend to counter current opinion. We are patient, conservative investors who are willing to wait for values to surface...
WHAT IS THE ROLE OF ECONOMIC AND INDUSTRY ANALYSIS IN YOUR INVESTMENT PROCESS?
Analyzing or attempting to predict future macroeconomic trends plays virtually no part in our investment process...
HOW DOES A STOCK GET ON YOUR BUY LIST?
.. Securities approved for purchase are placed on a buy list with a specific price range for purchase and a target price for eventual sale...
HOW LONG DO YOU HOLD POSITIONS AND WHAT IS YOUR SELL DISCIPLINE?
We have no fixed holding period. We may hold an investment as long as the intrinsic value exceeds the stock’s market price. When a company’s stock price reaches our estimation of its intrinsic value, or if we are able to identify a superior alternative, it is sold.
Sound familiar? Several tenets of my approach are covered in this piece: margin of safety, low price-to-earnings ratio, investment based on quantifiable evidence, confidence to see beyond short-term sentiment, patience, clear exit points exercised with discipline and the conviction that economic analysis has no real part to play in equity investment.
Though I like to think I can remain aloof to popular investment mania and plough my own furrow away from the large investment houses, this Brandes article does provide some encouragement that my modus operandi is a mature and logical approach to investing. I'll be managing $85b myself in no time.
The Artful Dodger
(0) comments
That's not to say The Motley Fool refuses to recognise some fund managers have a record of significant outperformance. In this recent article TMF staff writer Maynard Paton doffs his cap to Brandes Investment Partners, who he goes on to describe as one of the fastest-growing fund managers in the world. After its formation in 1974, total assets had reached $11m by 1984. However, by 1994, those assets had swelled to $3.9b and by 2004, they topped $85b..
It's important to note this stellar increase from $11m to $85b in 2004 won't have been achieved through investment returns alone but will incorporate additional money from new investors or institutions.
Paton's introduces this fantastic article on Brandes' website. Reading this gave me so many strong and vivid flashbacks I now understand how it must feel to be Ozzy Osbourne or Sly Stone. Read on for extracts of Brandes' philosophy, in many areas frighteningly similar to my own:
We carefully evaluate the price we pay for the business. We analyze long-term rates of return, cash flows, balance sheet strength, management, asset values, and liquidation values. We also often look at private market transactions to determine intrinsic, or fair, value. We look for a business with a potential margin of safety – one selling at a price below our estimate of its intrinsic value. A margin of safety provides some protection from error and uncertainties. This is a conservative approach that aids in preserving capital and gives us the opportunity for profit...Most of our stocks carry low price-to-earnings ratios (P/Es). This is fundamental to our approach. But, as in the case of asset values, earnings may need adjustment – and we focus on “normalized” earnings, not the most recently reported results. In general, we tend to pay as little as possible for the earnings stream of a business. Stocks that are capitalized at very high rates (high P/Es) generally have high expectations attached to them. If these expectations aren’t met, the stocks may be vulnerable to steep declines. Stocks with low P/Es generally have lower risk and a greater margin of safety....
IS IT REALLY POSSIBLE TO ACQUIRE COMPANIES AT BARGAIN PRICES?
Yes. Many companies are overlooked, misunderstood victims of investors’ overreactions, misplaced fear, and exaggerated focus on short-term performance. We are often able to acquire companies inexpensively when they experience temporary difficulties or when market conditions are generally weak. We think independently and make investment decisions based on quantifiable evidence. We seek to shield ourselves from the influence of short-term public sentiment, and our actions tend to counter current opinion. We are patient, conservative investors who are willing to wait for values to surface...
WHAT IS THE ROLE OF ECONOMIC AND INDUSTRY ANALYSIS IN YOUR INVESTMENT PROCESS?
Analyzing or attempting to predict future macroeconomic trends plays virtually no part in our investment process...
HOW DOES A STOCK GET ON YOUR BUY LIST?
.. Securities approved for purchase are placed on a buy list with a specific price range for purchase and a target price for eventual sale...
HOW LONG DO YOU HOLD POSITIONS AND WHAT IS YOUR SELL DISCIPLINE?
We have no fixed holding period. We may hold an investment as long as the intrinsic value exceeds the stock’s market price. When a company’s stock price reaches our estimation of its intrinsic value, or if we are able to identify a superior alternative, it is sold.
Sound familiar? Several tenets of my approach are covered in this piece: margin of safety, low price-to-earnings ratio, investment based on quantifiable evidence, confidence to see beyond short-term sentiment, patience, clear exit points exercised with discipline and the conviction that economic analysis has no real part to play in equity investment.
Though I like to think I can remain aloof to popular investment mania and plough my own furrow away from the large investment houses, this Brandes article does provide some encouragement that my modus operandi is a mature and logical approach to investing. I'll be managing $85b myself in no time.
The Artful Dodger
Friday, October 29, 2004
Ben Bailey: not sure I'm lichen developments
Housebuilders have delivered staggering returns to shareholders for the last four years. Falling interest rates, a national shortage of quality housing and strong employment combined to make the perfect climate for these businesses. Their market boomed and much hay was made.
Construction companies represent a sector where share price performance amongst each member is highly correlated. They labour or prosper under the premise each will suffer or savour market conditions simultaneously. Whatismore, they a price-takers, their goods sell at the price agreed when the customer walks into their Portakabin - there's no notion of output prices being fixed for months in advance as many manufacturers enjoy. Housebuilders have little pricing powere. Also, there is little scope for cost-cutting innovation, no real value in research - they are stuck with whatever the market serves.
Contrast to manufacturers, pharmaceuticals or retailers. These companies can enhance earnings via improved productivity, design or invention. In comparison, housebuilders are left to look like lichen, stuck where they happen to land - unable to fix anything about their surroundings and left to the mercy of the elements. A company such as Ford, however, is like the migrating songbird. In tough times they can escape to a warmer, more profitable environment and take their chances their, for example, producing more smaller, cheaper cars or even buck the market by introducing a new model which recaptures customers' excitement and credit agreements.
My lichen of particular interest is Ben Bailey. The share price has toiled following warnings on the climate being suffered by other builders such as Countryside and Countrywide. Following recent interest rate rises, media doomongering on the future of the UK housing market has depressed sentiment further. These revelations leave me wondering if Ben Bailey provides a good home for my money. Outlook is uncertain but valuations are undemanding. Recent results from housebuilder Westbury confirmed the sticky patch but reassured the market on the industry's prospects:
some uplift in the autumn market, although customers are generally taking longer to commit. It is clear that interest rate increases and comments from the Bank of England have moderated both demand and sales prices, resulting in a more stable and sustainable market...Overall the fundamentals for our industry remain sound with household formation continuing to outstrip supply. In the short term consumer confidence, which is influenced by wider economic and social factors, could inhibit demand. However we remain convinced of the sustainability of the UK housing market in the longer term.
No two lichen are the same. Some may weather adverse conditions better than others or be living on a different patio entirely. I'm still confident of the market Ben Bailey operates in. I trust the management to inform me if trading had turned significantly worse and finally, I hope the stock market will recognise how undervalued Ben Bailey is and the shares rise accordingly.
But it is the last of these three convictions I hold with the least confidence.
The Artful Dodger
(0) comments
Construction companies represent a sector where share price performance amongst each member is highly correlated. They labour or prosper under the premise each will suffer or savour market conditions simultaneously. Whatismore, they a price-takers, their goods sell at the price agreed when the customer walks into their Portakabin - there's no notion of output prices being fixed for months in advance as many manufacturers enjoy. Housebuilders have little pricing powere. Also, there is little scope for cost-cutting innovation, no real value in research - they are stuck with whatever the market serves.
Contrast to manufacturers, pharmaceuticals or retailers. These companies can enhance earnings via improved productivity, design or invention. In comparison, housebuilders are left to look like lichen, stuck where they happen to land - unable to fix anything about their surroundings and left to the mercy of the elements. A company such as Ford, however, is like the migrating songbird. In tough times they can escape to a warmer, more profitable environment and take their chances their, for example, producing more smaller, cheaper cars or even buck the market by introducing a new model which recaptures customers' excitement and credit agreements.
My lichen of particular interest is Ben Bailey. The share price has toiled following warnings on the climate being suffered by other builders such as Countryside and Countrywide. Following recent interest rate rises, media doomongering on the future of the UK housing market has depressed sentiment further. These revelations leave me wondering if Ben Bailey provides a good home for my money. Outlook is uncertain but valuations are undemanding. Recent results from housebuilder Westbury confirmed the sticky patch but reassured the market on the industry's prospects:
some uplift in the autumn market, although customers are generally taking longer to commit. It is clear that interest rate increases and comments from the Bank of England have moderated both demand and sales prices, resulting in a more stable and sustainable market...Overall the fundamentals for our industry remain sound with household formation continuing to outstrip supply. In the short term consumer confidence, which is influenced by wider economic and social factors, could inhibit demand. However we remain convinced of the sustainability of the UK housing market in the longer term.
No two lichen are the same. Some may weather adverse conditions better than others or be living on a different patio entirely. I'm still confident of the market Ben Bailey operates in. I trust the management to inform me if trading had turned significantly worse and finally, I hope the stock market will recognise how undervalued Ben Bailey is and the shares rise accordingly.
But it is the last of these three convictions I hold with the least confidence.
The Artful Dodger
Saturday, October 23, 2004
Dana pushes gains for 2004 beyond 10%
Friday bought scenes of stifled celebration at Dodger central as Dana Petroleum inspired my portfolio to a value ten percent higher than at the start of the year. Chaucer and Ben Bailey have also both recovered from their nadir of only a fortnight ago but worryingly Dana is the only share in my portfolio showing any advance since January.
Value at close of trade, Friday 22nd October:
Ben Bailey, 20/02/03 at 178p (400p)
Ben Bailey, 21/06/04 at 390p (400p)
Chaucer Holdings, 06/10/03 at 42.88p (44p)
Chaucer Holdings, 06/04/2004 at 54.75p (44p)
Dana Petroleum, 20/11/03 at 223.75p (442p)
Mayborn Group, 15/03/04 at 282p (263p)
+ cash holdings
Return to October 22nd: +10%
Each share has advanced since my last report and Dana is again approaching a level twice what I paid. Ben Bailey continues to suffer under negative sentiment on the sector, with fellow housebuilder Taylor Woodrow adding to the gloom, warning that sales were slowing in this trading update
continuing negative media speculation means that buyers are taking longer to commit. In the light of this, we now believe it prudent to forecast 2004 home sales around 6% lower than previously targeted, against which we are 94% sold
the market responded by marking Ben Bailey down 3%, the implication being these conditions will soon be felt in Bailey's area of operations. I remain confident in my 520p evaluation for the company but a slowdown looks to be on its way, the question for the market however is how soon this will arrive and what this means for the value of the shares today.
Action in the last two weeks reveals just how volatile a small portfolio of shares can be. Previous evaluation:
Ben Bailey, 20/02/03 at 178p (383p)
Ben Bailey, 21/06/04 at 390p (383p)
Chaucer Holdings, 06/10/03 at 42.88p (40p)
Chaucer Holdings, 06/04/2004 at 54.75p (40p)
Dana Petroleum, 20/11/03 at 223.75p (413p)
Mayborn Group, 15/03/04 at 282p (253p)
+ cash holdings
Return to October 5th: +4%
Without Dana's huge advance in 2004 my portfolio would have recorded a miserable 3% loss. Chaucer, Ben Bailey and Mayborn are all languishing underwater. Despite my 10% gain thus far I wonder if I am indeed a particularly good investor after all?
Keep watching this space.
The Artful Dodger
(0) comments
Value at close of trade, Friday 22nd October:
Ben Bailey, 20/02/03 at 178p (400p)
Ben Bailey, 21/06/04 at 390p (400p)
Chaucer Holdings, 06/10/03 at 42.88p (44p)
Chaucer Holdings, 06/04/2004 at 54.75p (44p)
Dana Petroleum, 20/11/03 at 223.75p (442p)
Mayborn Group, 15/03/04 at 282p (263p)
+ cash holdings
Return to October 22nd: +10%
Each share has advanced since my last report and Dana is again approaching a level twice what I paid. Ben Bailey continues to suffer under negative sentiment on the sector, with fellow housebuilder Taylor Woodrow adding to the gloom, warning that sales were slowing in this trading update
continuing negative media speculation means that buyers are taking longer to commit. In the light of this, we now believe it prudent to forecast 2004 home sales around 6% lower than previously targeted, against which we are 94% sold
the market responded by marking Ben Bailey down 3%, the implication being these conditions will soon be felt in Bailey's area of operations. I remain confident in my 520p evaluation for the company but a slowdown looks to be on its way, the question for the market however is how soon this will arrive and what this means for the value of the shares today.
Action in the last two weeks reveals just how volatile a small portfolio of shares can be. Previous evaluation:
Ben Bailey, 20/02/03 at 178p (383p)
Ben Bailey, 21/06/04 at 390p (383p)
Chaucer Holdings, 06/10/03 at 42.88p (40p)
Chaucer Holdings, 06/04/2004 at 54.75p (40p)
Dana Petroleum, 20/11/03 at 223.75p (413p)
Mayborn Group, 15/03/04 at 282p (253p)
+ cash holdings
Return to October 5th: +4%
Without Dana's huge advance in 2004 my portfolio would have recorded a miserable 3% loss. Chaucer, Ben Bailey and Mayborn are all languishing underwater. Despite my 10% gain thus far I wonder if I am indeed a particularly good investor after all?
Keep watching this space.
The Artful Dodger
Wednesday, October 20, 2004
ISIS: a logical investment strategy?
Of the astronomical number of trades executed on the stock exchanges each day, small potatoes chancers like myself initiate only a tiny proportion. The rump of the volume comes from institutional investors: professionals managing millions and billions of the public's money, usually through investment vehicles such as unit trusts, pension funds or investment trusts.
Fund managers are richly remunerated, typically receiving a six-figure basic salary. Each fund manager will have access to an in-house research team and a panoply of research and opinion from investment bankers. This safety harness doesn't come cheap, significant (and often opaque) administrative expenses are incurred by the investor and the effect on returns pulls and constrains performance like Jupiter influences a passing projectile.
The size of funds in place limits the opportunities managers can capitalise on - often there is simply insufficient supply of stock either in the market or in existence for capital to be ideally allocated. Options for investment are thus limited and an industry-wide aversion to stock specific risk results in a high correlation with the market portfolio itself. The managed funds can thus only significantly outperform by taking high risks or via prescient stock-picking approaching the theanthropic.
Further, an increasing amount of evidence and opinion tells us fund managers do not produce the returns to justify their salaries.
This article from Scotland on Sunday compounded my scepticism of the fund management industry and confounded my confidence in the knowledge and professionalism of the managers. I sat, as bewildered as a pygmy at a bar mitzvah, reading this twaddle involving ISIS fund management's Derek Mitchell:
ISIS Asset Management has been selling its stake in Cairn Energy due to fears that the market has become over-excited by the Edinburgh firm’s huge finds in Rajasthan. Where the firm once owned around 4.5% of Cairn’s issued capital, this has been reduced to 2.75% - raking huge profits for the firm.
But Derek Mitchell, manager of the Isis UK Select trust, warned: "We place the core asset value at about £10.50 to £11. The shares are currently at about £15.40. You’ve got £4 to make up there.
There's a yawning chasm of a logic gap in Mitchell's modus operandi - what is the strategy with his fund's huge Cairn stake and who did he think he would impress with this laissez-faire approach to investment?
Anyone who has been paying attention will recall my philosophy on stock investment: buy it cheap, sell it fair. Mitchell's strategy appears confused, lackadaisical and ill-disciplined. Admittedly, Mitchell is operating at a disadvantage to private investors, his 4% stake in Cairn would be impossible to offload in a single trade. This would be dribbled out in such a way that the price was carefully preserved for later trades - news that a large seller existed in the market would raise the spectre of an overhang, deterring buyers and reducing the chances of the stake being unwound at a favourable price. But this is exactly what Mr Mitchell has done by publicly stating he believes the prevailing share price is exaggerated by over-excitement with Cairn's recent oil finds. Mr Mitchell is undermining the performance of policy holders' investment, talking down the prospects for one of the funds largest holdings!
But Mitchell's capacity to befuddle does not end there. He quantifies the level of over-excitement and price dislocation as £4 per share, 40% above his company's appraisal of core asset value at about £10.50 to £11. This begs the question, why was only a fraction of ISIS' Cairn stake sold in the market when the fund manager reckons the company 40% overhyped? Does Mitchell draw no conviction from ISIS' research, if a such a huge advance beyond fair value would not push him into selling, what would?
I'm guessing Mitchell is hedging his bets. His investment in Cairn is already showing a huge profit, he is locking in a portion of this and letting the rest 'run free'. This is an easy decision to make, even if Cairn's shareprice were to take a dramatic turn south from here, the combined position would show a positive return on the initial investment. There's a certain appeal in this logic but to my mind it's a manifestation of a psychological flaw common amongst investors. Whitney Tilson refers to this as "mental accounting" and remarks how there is no such thing as house money.
By taking profits and leaving the rest of his position open Mr Mitchell is labouring under the delusion his Cairn shares represent 'free' or 'house' money i.e. he cannot lose from here. House money is a fallacy, there is only policy holders' money and any good fund manager should know this should be put to use where it will generate best returns. At 40% over fair value, how could this be with Cairn?
Derek Mitchell of ISIS Asset Management - you're having a laugh.
The Artful Dodger
(0) comments
Fund managers are richly remunerated, typically receiving a six-figure basic salary. Each fund manager will have access to an in-house research team and a panoply of research and opinion from investment bankers. This safety harness doesn't come cheap, significant (and often opaque) administrative expenses are incurred by the investor and the effect on returns pulls and constrains performance like Jupiter influences a passing projectile.
The size of funds in place limits the opportunities managers can capitalise on - often there is simply insufficient supply of stock either in the market or in existence for capital to be ideally allocated. Options for investment are thus limited and an industry-wide aversion to stock specific risk results in a high correlation with the market portfolio itself. The managed funds can thus only significantly outperform by taking high risks or via prescient stock-picking approaching the theanthropic.
Further, an increasing amount of evidence and opinion tells us fund managers do not produce the returns to justify their salaries.
This article from Scotland on Sunday compounded my scepticism of the fund management industry and confounded my confidence in the knowledge and professionalism of the managers. I sat, as bewildered as a pygmy at a bar mitzvah, reading this twaddle involving ISIS fund management's Derek Mitchell:
ISIS Asset Management has been selling its stake in Cairn Energy due to fears that the market has become over-excited by the Edinburgh firm’s huge finds in Rajasthan. Where the firm once owned around 4.5% of Cairn’s issued capital, this has been reduced to 2.75% - raking huge profits for the firm.
But Derek Mitchell, manager of the Isis UK Select trust, warned: "We place the core asset value at about £10.50 to £11. The shares are currently at about £15.40. You’ve got £4 to make up there.
There's a yawning chasm of a logic gap in Mitchell's modus operandi - what is the strategy with his fund's huge Cairn stake and who did he think he would impress with this laissez-faire approach to investment?
Anyone who has been paying attention will recall my philosophy on stock investment: buy it cheap, sell it fair. Mitchell's strategy appears confused, lackadaisical and ill-disciplined. Admittedly, Mitchell is operating at a disadvantage to private investors, his 4% stake in Cairn would be impossible to offload in a single trade. This would be dribbled out in such a way that the price was carefully preserved for later trades - news that a large seller existed in the market would raise the spectre of an overhang, deterring buyers and reducing the chances of the stake being unwound at a favourable price. But this is exactly what Mr Mitchell has done by publicly stating he believes the prevailing share price is exaggerated by over-excitement with Cairn's recent oil finds. Mr Mitchell is undermining the performance of policy holders' investment, talking down the prospects for one of the funds largest holdings!
But Mitchell's capacity to befuddle does not end there. He quantifies the level of over-excitement and price dislocation as £4 per share, 40% above his company's appraisal of core asset value at about £10.50 to £11. This begs the question, why was only a fraction of ISIS' Cairn stake sold in the market when the fund manager reckons the company 40% overhyped? Does Mitchell draw no conviction from ISIS' research, if a such a huge advance beyond fair value would not push him into selling, what would?
I'm guessing Mitchell is hedging his bets. His investment in Cairn is already showing a huge profit, he is locking in a portion of this and letting the rest 'run free'. This is an easy decision to make, even if Cairn's shareprice were to take a dramatic turn south from here, the combined position would show a positive return on the initial investment. There's a certain appeal in this logic but to my mind it's a manifestation of a psychological flaw common amongst investors. Whitney Tilson refers to this as "mental accounting" and remarks how there is no such thing as house money.
By taking profits and leaving the rest of his position open Mr Mitchell is labouring under the delusion his Cairn shares represent 'free' or 'house' money i.e. he cannot lose from here. House money is a fallacy, there is only policy holders' money and any good fund manager should know this should be put to use where it will generate best returns. At 40% over fair value, how could this be with Cairn?
Derek Mitchell of ISIS Asset Management - you're having a laugh.
The Artful Dodger
Monday, October 11, 2004
Beating the bank account
In August my portfolio was scraping an embarrasing and painful low, recording a pitiful 1.7% rise on the year to date. In this post I renewed my promise to readers that I'd achieve a 10%+ return in 2004.
The last month been a push-me-pull-you period for my portfolio, Dana's surge has been tempered by contagious malingering and deterioration in the values of Ben Bailey and Chaucer, both were depressed to excruciating lows, with Ben Bailey at 365p to sell and Chaucer 40p. At times like this it is imperative to tune in to management announcements from your company and it's peers. Ben Bailey was walloped by profit warnings from Countryside and Countrywide. Chaucer, the Lloyd's insurer, had its shares decimated following the Atlantic hurricane season and a raft of storm-damaged profit warnings amongst the sector.
Judgement and careful analysis is vital at times like this. The investor has to re-examine the original case for buying, the earnings outlook and most crucially, the price in the market. Unless the earnings outlook has suddenly changed, the negative share-price shift is the result of market sentiment. Uniform negative sentiment on any share is normally temporary and will pass.
In Chaucer's case, the market was spooked by the hurricanes but the announcement was clear, though a large portion of pre-tax profits were wiped out, these events were of exceptional severity - performance would normally be much better. Chaucer remained a profitable business trading at around the value of its tangible assets - the future stream of profits was being offered in the market for free. That's a cheap share and one to hang on to.
Ben Bailey was buffetted by the conviction in the market that earnings were approaching an inevitable slump. Investors often fall into the trap of deluding themselves they posess some prescient powers. The trickle of profit warnings dried up and today saw the shares give their first positive return in a long while.
I've a huge amount invested in Ben Bailey, it's effect on my portfolio reminds me of walking a young child - if they are in a good mood you are pulled along faster, faster than the natural rate for either of you. When the mood swings however, despite your best efforts (Dana's huge rise) the catankerous little toerags will stop any advance.
Large positions can throw an investor into child-like changes of temperament. When rising and taking your whole portfolio with them, delusions of mantic genius can take hold as the investor pats himself on the back for being bold enough to pile into cheap shares. Reverses differ - despite good performances from other holdings, a large stake shrinking is infuriating, disheartening and leaves one wondering if it was all worth it.
I'll end the blog on a positive note. Today's 6% advance from Ben Bailey pushed my portfolio to a 7% return for the year so far, well in advance of anything on offer in the building society. Maybe this has been worth all the effort after all?
The Artful Dodger
(0) comments
The last month been a push-me-pull-you period for my portfolio, Dana's surge has been tempered by contagious malingering and deterioration in the values of Ben Bailey and Chaucer, both were depressed to excruciating lows, with Ben Bailey at 365p to sell and Chaucer 40p. At times like this it is imperative to tune in to management announcements from your company and it's peers. Ben Bailey was walloped by profit warnings from Countryside and Countrywide. Chaucer, the Lloyd's insurer, had its shares decimated following the Atlantic hurricane season and a raft of storm-damaged profit warnings amongst the sector.
Judgement and careful analysis is vital at times like this. The investor has to re-examine the original case for buying, the earnings outlook and most crucially, the price in the market. Unless the earnings outlook has suddenly changed, the negative share-price shift is the result of market sentiment. Uniform negative sentiment on any share is normally temporary and will pass.
In Chaucer's case, the market was spooked by the hurricanes but the announcement was clear, though a large portion of pre-tax profits were wiped out, these events were of exceptional severity - performance would normally be much better. Chaucer remained a profitable business trading at around the value of its tangible assets - the future stream of profits was being offered in the market for free. That's a cheap share and one to hang on to.
Ben Bailey was buffetted by the conviction in the market that earnings were approaching an inevitable slump. Investors often fall into the trap of deluding themselves they posess some prescient powers. The trickle of profit warnings dried up and today saw the shares give their first positive return in a long while.
I've a huge amount invested in Ben Bailey, it's effect on my portfolio reminds me of walking a young child - if they are in a good mood you are pulled along faster, faster than the natural rate for either of you. When the mood swings however, despite your best efforts (Dana's huge rise) the catankerous little toerags will stop any advance.
Large positions can throw an investor into child-like changes of temperament. When rising and taking your whole portfolio with them, delusions of mantic genius can take hold as the investor pats himself on the back for being bold enough to pile into cheap shares. Reverses differ - despite good performances from other holdings, a large stake shrinking is infuriating, disheartening and leaves one wondering if it was all worth it.
I'll end the blog on a positive note. Today's 6% advance from Ben Bailey pushed my portfolio to a 7% return for the year so far, well in advance of anything on offer in the building society. Maybe this has been worth all the effort after all?
The Artful Dodger
Friday, October 08, 2004
Keeping faith with Chaucer
Chaucer Holdings, the Lloyd's insurer and previously my second-largest portfolio holding has been a big disappointment in 2004. The company's share price has meandered and malingered, from 47p in January up to 53p in April and this week was as low as 40p. 2004 has been as infuriating as a long journey stuck behind a caravan watching other possible investments speed by and rise out of reach.
My lacklustre portfolio performance has been exacerbated by the impulsive and ultimately rash decision to buy more shares at 54.75p in April: the very high for year. At each portfolio review the record of 4075 additional Chaucer shares sneers at me for my lack of self-discipline, like the empty bottle by the bed that was last night's 'one too many'.
The frustration has been made more acute still by the positive newsflow up until the hurricane season. August's syndicate forecasts revealed good trading conditions and the expectation of another strong underwriting result for Chaucer in 2004. Though these expectations have since been dashed by the extreme hurricane frequency in the Atlantic, with 41.9p of tangible assets and still operating profitably it would have been illogical to have sold at this week's lows.
Though Chaucer's failure to reap any profits smarts I am convinced the shares remain undervalued and I refuse to sell an undervalued share - this is one of the central tenets of my investment strategy.
Do not sell cheap shares.
In One Up on Wall Street Peter Lynch denounces 'pulling up flowers', the common pitfall of pruning good investments from a portfolio:
A price drop in a good stock is only a tragedy if you sell at that price and never buy more. To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise
I calculate Chaucer, measured alongside it's Lloyd's peers, is worth 64p. A sale at 40p would stop the losses from this investment but would be as rash and ill-conceived as my April purchase at 54.75p. Selling would be a desperate lunge to plug a leak in the portfolio - it may bring psychological and financial closure but it would be an immature and petulant response to price weakness.
Today's recovery to 42p to sell was most welcome and naturally I hope Chaucer can return to it's pre-hurricane high. Recovery could indeed continue right up to fair value, investments sometimes need a external shock for the market to reevaluate the trades being offered.
The Artful Dodger
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My lacklustre portfolio performance has been exacerbated by the impulsive and ultimately rash decision to buy more shares at 54.75p in April: the very high for year. At each portfolio review the record of 4075 additional Chaucer shares sneers at me for my lack of self-discipline, like the empty bottle by the bed that was last night's 'one too many'.
The frustration has been made more acute still by the positive newsflow up until the hurricane season. August's syndicate forecasts revealed good trading conditions and the expectation of another strong underwriting result for Chaucer in 2004. Though these expectations have since been dashed by the extreme hurricane frequency in the Atlantic, with 41.9p of tangible assets and still operating profitably it would have been illogical to have sold at this week's lows.
Though Chaucer's failure to reap any profits smarts I am convinced the shares remain undervalued and I refuse to sell an undervalued share - this is one of the central tenets of my investment strategy.
Do not sell cheap shares.
In One Up on Wall Street Peter Lynch denounces 'pulling up flowers', the common pitfall of pruning good investments from a portfolio:
A price drop in a good stock is only a tragedy if you sell at that price and never buy more. To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise
I calculate Chaucer, measured alongside it's Lloyd's peers, is worth 64p. A sale at 40p would stop the losses from this investment but would be as rash and ill-conceived as my April purchase at 54.75p. Selling would be a desperate lunge to plug a leak in the portfolio - it may bring psychological and financial closure but it would be an immature and petulant response to price weakness.
Today's recovery to 42p to sell was most welcome and naturally I hope Chaucer can return to it's pre-hurricane high. Recovery could indeed continue right up to fair value, investments sometimes need a external shock for the market to reevaluate the trades being offered.
The Artful Dodger
Thursday, October 07, 2004
Dana the double-bagger
This is a celebration blog. Today saw my second-largest holding, Dana Petroleum smash an investment milestone/portfolio millstone and reached a price double the one I paid for my shares. Dana Petroleum shares closed the day at 453p to sell. In just under a year Dana has earnt me over £3500 and this whopping gain has transformed my portfolio gloriously.
Dana now represents 29% of my total portfolio and with the price of oil on the exchanges breaking records faster than a falsetto of transexual East German athletes, the company's future continues to inspire shareholders.
The Dana story is one investors dream of, a company with growing earnings and a growing reputation. This inspires a double-whammy rerating of the stock. The price rises in reaction to higher earnings per share and the rise continues apace as market participants rush to buy, convinced the company has greater prospects for earnings growth than previously reckoned.
Peter Lynch, former fund manager at the gargantuan mutual fund Fidelity Magellan, earned legend in the investment community via his book One Up on Wall Street. Lynch's magnum opus was dedicated to empowering the private investor to sniffing out stocks that could earn return 100, 500 or as much as 1000% of the original stake. What would Lynch advise I do with my Dana shareholding? Page 286 of my edition (first Fireside, 2000) declares:
The moment I feel Dana is more likely over-priced than under-priced I'll sell.
The Artful Dodger
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Dana now represents 29% of my total portfolio and with the price of oil on the exchanges breaking records faster than a falsetto of transexual East German athletes, the company's future continues to inspire shareholders.
The Dana story is one investors dream of, a company with growing earnings and a growing reputation. This inspires a double-whammy rerating of the stock. The price rises in reaction to higher earnings per share and the rise continues apace as market participants rush to buy, convinced the company has greater prospects for earnings growth than previously reckoned.
Peter Lynch, former fund manager at the gargantuan mutual fund Fidelity Magellan, earned legend in the investment community via his book One Up on Wall Street. Lynch's magnum opus was dedicated to empowering the private investor to sniffing out stocks that could earn return 100, 500 or as much as 1000% of the original stake. What would Lynch advise I do with my Dana shareholding? Page 286 of my edition (first Fireside, 2000) declares:
- Just because the price goes up doesn't mean you're right
- Selling an outstanding fast grower because its share price seems slightly overrated is a losing strategy
- Companies don't grow for no reason, nor does fast growth continue forever
The moment I feel Dana is more likely over-priced than under-priced I'll sell.
The Artful Dodger
Tuesday, October 05, 2004
Portfolio review: cruel September
In August, I said September was going to be a crucial month for my portfolio performance. All but one of my holdings reported interim results last month and the market's reaction would play Caesar to my three brave gladiators Dana, Mayborn and Chaucer, gesturing thumbs up or down and sealing the fate of my cash.
Market reaction was muted in the end but negative sentiment on the UK housing market and an unusually severe hurricane season saw my two largest holdings wounded in combat. On Monday Chaucer confirmed the market's expectation that profits would suffer this year in the wake of hurricanes Charley, Frances, Ivan and Jeanne:
on the basis of a normal level of catastrophe activity over the remainder of the year, estimates that they will reduce budgeted profits before tax for the year ending 31 December 2004 by between £10m and £15m. These estimates do not alter Chaucer's intentions with regard to the dividend for the year.
I expect this to knock a third off Chaucer's full-year profits. Hits like this go with the territory when you decide to invest in a Lloyd's insurer and explains why the sector traditionally trades at a discount to the market. Chaucer's sector peers have all been making similar announcements this week, it's reassuring to know this affliction is shared. The company was keen to reassure shareholders the inclement Atlantic autumn could provide some uplift to future profitability, via increased premium rates:
These events are likely to have a beneficial effect on rates in the property and energy sectors. Chaucer had previously indicated that the capacity of Syndicate 1084 would reduce from £400m to £375m for the 2005 year. Chaucer will now work on revised plans to maintain capacity at £400m.
Meaning the company sees more profitable underwriting opportunities than previously anticipated.
The disappointment from Ben Bailey and Chaucer has again been ameliorated by a storming show from Dana Petroleum. At 413p to sell the shares have advanced 84% since purchase.
Values on 31st August:
Ben Bailey, 1281 shares on 20/02/03 at 178p (412p, £5277.72)
Ben Bailey, 890 shares on 21/06/04 at 390p (412p, £3666.80)
Chaucer Holdings, 8092 shares on 06/10/03 at 42.88p (46p, £3722.32)
Chaucer Holdings, 4075 shares on 06/04/2004 at 54.75p (46p, £1874.50)
Dana Petroleum, 1551 shares on 20/11/03 at 223.75p (338p, £5242.38)
Mayborn Group, 1406 shares on 15/03/04 at 282p (255p, £3585.30)
Cash holdings: £323.22
Total: £23,692.24
and today's closing prices:
Ben Bailey, 1281 shares on 20/02/03 at 178p (383p, £4906.23)
Ben Bailey, 890 shares on 21/06/04 at 390p (383p, £3408.70)
Chaucer Holdings, 8092 shares on 06/10/03 at 42.88p (40p, £3236.80)
Chaucer Holdings, 4075 shares on 06/04/2004 at 54.75p (40p, £1630.00)
Dana Petroleum, 1551 shares on 20/11/03 at 223.75p (413p, £6405.63)
Mayborn Group, 1406 shares on 15/03/04 at 282p (253p, £3557.18)
Cash holdings: £424.66
Total: £23,569.20
My returns achieved thus far in 2004 amount to a derisory 4%. Better than a loss, however.
The Artful Dodger
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Market reaction was muted in the end but negative sentiment on the UK housing market and an unusually severe hurricane season saw my two largest holdings wounded in combat. On Monday Chaucer confirmed the market's expectation that profits would suffer this year in the wake of hurricanes Charley, Frances, Ivan and Jeanne:
on the basis of a normal level of catastrophe activity over the remainder of the year, estimates that they will reduce budgeted profits before tax for the year ending 31 December 2004 by between £10m and £15m. These estimates do not alter Chaucer's intentions with regard to the dividend for the year.
I expect this to knock a third off Chaucer's full-year profits. Hits like this go with the territory when you decide to invest in a Lloyd's insurer and explains why the sector traditionally trades at a discount to the market. Chaucer's sector peers have all been making similar announcements this week, it's reassuring to know this affliction is shared. The company was keen to reassure shareholders the inclement Atlantic autumn could provide some uplift to future profitability, via increased premium rates:
These events are likely to have a beneficial effect on rates in the property and energy sectors. Chaucer had previously indicated that the capacity of Syndicate 1084 would reduce from £400m to £375m for the 2005 year. Chaucer will now work on revised plans to maintain capacity at £400m.
Meaning the company sees more profitable underwriting opportunities than previously anticipated.
The disappointment from Ben Bailey and Chaucer has again been ameliorated by a storming show from Dana Petroleum. At 413p to sell the shares have advanced 84% since purchase.
Values on 31st August:
Ben Bailey, 1281 shares on 20/02/03 at 178p (412p, £5277.72)
Ben Bailey, 890 shares on 21/06/04 at 390p (412p, £3666.80)
Chaucer Holdings, 8092 shares on 06/10/03 at 42.88p (46p, £3722.32)
Chaucer Holdings, 4075 shares on 06/04/2004 at 54.75p (46p, £1874.50)
Dana Petroleum, 1551 shares on 20/11/03 at 223.75p (338p, £5242.38)
Mayborn Group, 1406 shares on 15/03/04 at 282p (255p, £3585.30)
Cash holdings: £323.22
Total: £23,692.24
and today's closing prices:
Ben Bailey, 1281 shares on 20/02/03 at 178p (383p, £4906.23)
Ben Bailey, 890 shares on 21/06/04 at 390p (383p, £3408.70)
Chaucer Holdings, 8092 shares on 06/10/03 at 42.88p (40p, £3236.80)
Chaucer Holdings, 4075 shares on 06/04/2004 at 54.75p (40p, £1630.00)
Dana Petroleum, 1551 shares on 20/11/03 at 223.75p (413p, £6405.63)
Mayborn Group, 1406 shares on 15/03/04 at 282p (253p, £3557.18)
Cash holdings: £424.66
Total: £23,569.20
My returns achieved thus far in 2004 amount to a derisory 4%. Better than a loss, however.
The Artful Dodger
Sunday, October 03, 2004
Dana fair value: take II
My previous blog attempted to ascertain a fair value for Dana Petroleum, my second-largest holding. That initial approach suggested 677p, way north of the price the company trades at today.
Here's a second attempt, using similar heuristics. I shall continue to assume that for the 2005 year of account Dana achieves
The first half of 2004, saw production increase from 16,081 barrels per day to 17,895. The price achieved for a barrel of Brent crude rose from $23.14 to $31.33.
Multiplying crude price rises by production increases shows a 51% rise in crude oil revenue yielding a 32% rise in turnover. The increase in production resulted in a 30% increase in costs. At times of high oil prices, projects and prospects that were previously infeasible become economic. The upside potential of an exploration prospect is increased for the same sunk cost expense. Thus costs may be expected to rise with the price of crude, unlike my analysis in the previous blog, where I assumed costs would only rise with production.
If the relationship between crude revenue, turnover and costs holds, the proposed 71% hike in crude revenue enjoyed in 2005 would increase turnover 50% and costs 56%. With a tax rate of 51%, post-tax profit for the full year would be £28.5m.
This translates into a target price today of 436p, less than 10% off today's market value.
As ever in this sector, the price of crude oil is crucial. Oil at $45 would put a fair value on Dana of £5.73 and the price in the market today (Brent crude benchmark) of $46.19 gives a fair price of £6.16.
I shall continue to look out for broker forecasts (after all, they do have better access to management) on Dana, the current consensus of 21p is frankly risible.
Increasing my shareholding further should cash become available may prove prudent come 2005.
The Artful Dodger
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Here's a second attempt, using similar heuristics. I shall continue to assume that for the 2005 year of account Dana achieves
- Production averaging 24,000 barrels per day
- Average price per barrel of $40
The first half of 2004, saw production increase from 16,081 barrels per day to 17,895. The price achieved for a barrel of Brent crude rose from $23.14 to $31.33.
Multiplying crude price rises by production increases shows a 51% rise in crude oil revenue yielding a 32% rise in turnover. The increase in production resulted in a 30% increase in costs. At times of high oil prices, projects and prospects that were previously infeasible become economic. The upside potential of an exploration prospect is increased for the same sunk cost expense. Thus costs may be expected to rise with the price of crude, unlike my analysis in the previous blog, where I assumed costs would only rise with production.
If the relationship between crude revenue, turnover and costs holds, the proposed 71% hike in crude revenue enjoyed in 2005 would increase turnover 50% and costs 56%. With a tax rate of 51%, post-tax profit for the full year would be £28.5m.
This translates into a target price today of 436p, less than 10% off today's market value.
As ever in this sector, the price of crude oil is crucial. Oil at $45 would put a fair value on Dana of £5.73 and the price in the market today (Brent crude benchmark) of $46.19 gives a fair price of £6.16.
I shall continue to look out for broker forecasts (after all, they do have better access to management) on Dana, the current consensus of 21p is frankly risible.
Increasing my shareholding further should cash become available may prove prudent come 2005.
The Artful Dodger
Friday, October 01, 2004
Dana - a new fair value
An investor mustn't plan too far ahead. News and economic events can make an investment change from attractive to repulsive - Cinderella to Barbara Windsor. Following news or results we must update our fair value. I've finally got around to this today for Dana Petroleum.
Using Dana's interim results, recent management announcements, the price of crude oil and current interest rates I'm going to arrive at a figure I will use in deciding if Dana shares should be bought (again), sold or held.
Dana's product is crude oil. The more of this Dana can get to it's market and the higher the prevailing price the better for my investment.
Just prior to the results, Dana made another announcement, highlighting the prospect of higher production:
Dana is pleased to announce that the UK Department of Trade and Industry ('DTI') has given its approval for the development of the Gadwall oil field...Commenting on the news, Tom Cross, Dana's Chief Executive, said:
'DTI approval of the Gadwall development achieves an important milestone in driving forward the Greater Kittiwake Area. Gadwall will add significant production to Dana in 2005 and increase the Company's total number of producing fields to ten.'
On Tuesday's interim results day, Tom Cross mused further on the company's production prospects for 2005, in an interview he told Reuters:
We estimate that our production should rise from 18,000 barrels a day to 21,000 barrels at the start of 2005, and 27,000 barrels by the end of 2005..We're looking at rising earnings for the next couple of years..we're extremely busy organically. We would prefer to buy assets rather than companies.
Taking the average 21,000 and 27,000 barrels per day of production, I'm estimating average production for 2005 of 24,000 barrels per day. The interims reported average production for the first six months of 2004 at 17,895 barrels per day. 2004's production was sold at an average price of $31.33. This produced a turnover at the interim stage of £48.7m.
With higher production over a full year, this figure rises to £130.6m.
Adjust again the expected higher price of crude oil, I'll use $40, my estimate for 2005 turnover amounts to £166.8m.
From the interims, Dana's cost of sales was £27.4m. Scale this for a full year and assume costs rise in tandem with production, this suggests full-year costs to Dana of £73.5m.
Turnover - costs = £166.8m - £73.5m = £93.3m
Double interim administration expenses to £2.2m for the full year.
That gives profit before tax of £91.1m, projected for 2005.
Apply the same 51% tax rate, leaving us with profit after tax of £44.6m.
This implies diluted earnings per share for 2005 of 59p. Discounting this to it's present value and using my heuristic of twelve times earnings for a company operating in Dana's sector gives a target price of 677p, almost twice today's closing price on the stock exchange.
Was there something wrong with my analysis, or do I genuinely know something Mr Market and the masses have missed?
I continue to hold.
The Artful Dodger
(0) comments
Using Dana's interim results, recent management announcements, the price of crude oil and current interest rates I'm going to arrive at a figure I will use in deciding if Dana shares should be bought (again), sold or held.
Dana's product is crude oil. The more of this Dana can get to it's market and the higher the prevailing price the better for my investment.
Just prior to the results, Dana made another announcement, highlighting the prospect of higher production:
Dana is pleased to announce that the UK Department of Trade and Industry ('DTI') has given its approval for the development of the Gadwall oil field...Commenting on the news, Tom Cross, Dana's Chief Executive, said:
'DTI approval of the Gadwall development achieves an important milestone in driving forward the Greater Kittiwake Area. Gadwall will add significant production to Dana in 2005 and increase the Company's total number of producing fields to ten.'
On Tuesday's interim results day, Tom Cross mused further on the company's production prospects for 2005, in an interview he told Reuters:
We estimate that our production should rise from 18,000 barrels a day to 21,000 barrels at the start of 2005, and 27,000 barrels by the end of 2005..We're looking at rising earnings for the next couple of years..we're extremely busy organically. We would prefer to buy assets rather than companies.
Taking the average 21,000 and 27,000 barrels per day of production, I'm estimating average production for 2005 of 24,000 barrels per day. The interims reported average production for the first six months of 2004 at 17,895 barrels per day. 2004's production was sold at an average price of $31.33. This produced a turnover at the interim stage of £48.7m.
With higher production over a full year, this figure rises to £130.6m.
Adjust again the expected higher price of crude oil, I'll use $40, my estimate for 2005 turnover amounts to £166.8m.
From the interims, Dana's cost of sales was £27.4m. Scale this for a full year and assume costs rise in tandem with production, this suggests full-year costs to Dana of £73.5m.
Turnover - costs = £166.8m - £73.5m = £93.3m
Double interim administration expenses to £2.2m for the full year.
That gives profit before tax of £91.1m, projected for 2005.
Apply the same 51% tax rate, leaving us with profit after tax of £44.6m.
This implies diluted earnings per share for 2005 of 59p. Discounting this to it's present value and using my heuristic of twelve times earnings for a company operating in Dana's sector gives a target price of 677p, almost twice today's closing price on the stock exchange.
Was there something wrong with my analysis, or do I genuinely know something Mr Market and the masses have missed?
I continue to hold.
The Artful Dodger
