I am an NFL fan. This is fairly uncommon in Australia, but it is a sport I thoroughly enjoy watching. I suspect the combination of interesting strategic elements with brutal physical contact is the main reason. I played Rugby League until my 30’s and enjoyed the physicality of it and strategy is innately appealing to me. An NFL story came to light a couple of weeks ago that got me thinking about investing.
In the linked story above, the quarterback of the Washington Redskins is alleged to have asked his coaches not to review in film sessions his bad plays. I’m not sure if the story is true, but it was interesting to me. I commented to another investor through the week that the truly great quarterbacks probably spend/spent the vast majority of their time looking at the plays where they made mistakes, with a view to not making the same mistakes again in future.
The link to investing should by now be obvious. I would hazard the best investors in the world would spend more time thinking about mistakes they’ve made and how they can ensure they don’t ever make the same mistake again. More average investors probably put mistakes behind them and move on without thinking much at all about it. The very worst investors probably also move on, but not before first blaming an incompetent board/CEO/management in combination with a corrupt market/system/government, without ever giving consideration to the elements of the mistake that were controllable by their own actions.
Looking back over the mistakes you have made is a painful, but necessary part of virtually any activity you wish to improve at.
As part of my process, I review every holding on a regular basis, but after a sale, I always ensure I do a complete and thorough review. Whether the position was a big winner or a big loser, I must know what I could have done better. In the case of winners, I want to review whether I was too timid in the buying. In truth with winners this is the usually the biggest mistake, although value is often more obvious in hindsight. If faced with an opportunity with similar characteristics to a similar previously successful investment, you want to be sure you are suitably bold.
With a trade that makes either a loss, or a meaningfully below market performance after the decision to sell has been made, a fine-toothed comb must be used to ensure that any element of the decision that can be removed (by not repeating) in a future investment is ferreted out. Unknowable risks will occasionally ‘torpedo’ a decision made on proper grounds, but more often than not, risks could have been avoided. A great deal of the time and effort of a successful investor will be spent in this area.
You can be sure I will spend more time reviewing ‘tape’ of my ‘interceptions’ than I will of my ‘touchdowns’ when I’m quarterbacking your capital! – Tony Hansen 15/12/13
P.S The market bested EGP for the first time in 8 weeks this week by ¼%. Unusually it got us in a week where it declined. Wins over the market in declining weeks are usually our ‘bread & butter’. As I said last week, declines leading into subscription dates aren’t the worst things that can happen. Like many of you, Sue & I look forward to adding a healthy chunk to our existing EGP holdings come 31 December.
|
|
Apr 1st 2011 |
Jul 1st 2013 |
Current Price |
Current Period |
Since Inception |
|
EGP Fund No. 1 |
1.00000 |
1.33220 |
1.55342*1 |
16.61% |
59.30%*2 |
|
35632.05 |
39163.27 |
42441.60 |
8.37% |
19.11% |
EGP Fund No. 1 Pty Ltd. Up by 16.61%, leading the benchmark by 8.24% since July 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 59.30%, leading the benchmark by 19.11% all-time (April 1st 2011).
*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit
*2 calculated based on dividends reinvested
sale reviews
Hi Tony…just a suggestion i for one who trys to understand valuing i would like to periodically read reviews of a stock after a sale, either loser or winner…it would be an opportunty to learn for anyone who is interested (myself :), ) and would also give insight into your processes and analysis…. with regard to buying in … the market still seems high to me even with the gloom this last week or so… how do you see the unit price evolving over the next few quarters….i'd be surprised if it didn't revert to more normal growth levels or maybe even retreat a little….i still have a few more questions we need to ask but we feel we are likely to invest,(if we are allowed too of course) but given our late dicovery of the fund we think in the absence of another gfc type or major correction event, timing and progessively build a holding over a few entry points may be the best way to go….
Sale Reviews
Thanks for your comment Jane,
I have only made a few sales since inception and I have always done something of a 'debrief' in the blog when I have done so. Transpacific industries was the most recent, and the sale was not entirely for valuation reasons, I thought it was still very cheap (I have been proven correct as it is up nearly 20% since selling), but the reason was more to do with a very small position dominating too much of my 'thinking time'. I want to be very relaxed about our holdings where possible. Debt usually makes me nervous and I didn’t have the stomach to wait out the deleveraging of TPI.
I can also promise you some discussion of a recent sale in the upcoming Shareholder letter, which will come out around early January. I think holders will be surprised what it is.
As to the general level of the market, well I can't claim any special insight in respect of that. Based on P/E, forward P/E, likely prevailing economic conditions over the next 5 or 10 years, and with relatively modest (corporate) borrowing levels, I certainly don't think the Australian market 'over' valued (it isn't particularly cheap either, but waiting for pricing perfection is more likely to lead to disappointment over time due to missed gains). The Aussie market is fairly unique in respect of the distortion Telstra, the Big 4 banks & the 2 big Miners can cause in respect of apparent market levels however. I suspect the 'forward' estimates in respect of the miners especially are understated. Thomson consensus EPS estimates for BHP for example forecast 3.67% compound EPS growth for BHP through the next 3 financial years to FY2016. We don't own BHP, but I think this extraordinarily pessimistic.
The advantage of this distortion is that there are myriad small companies whose valuation can be lost by the market when these bigger companies seem overpriced. There are always cheap stocks. Even on November 1 2007 I could have named stocks that were cheap relative to their prospects and the market was so clearly overpriced it was not funny. This does not mean those businesses didn't lose quotational value through the collapse, but usually, the losses were usually far smaller than the market as a whole.
The same realistically goes for our unit price, in that I can't realistically forecast where it will be in any given quarter. I have consistently said the 12% we have beaten the market by annually since inception will likely moderate to closer to the 3 – 5% I target over time/future periods.
If the market were to fall sharply, I suspect we could meaningfully beat it. Whilst I can't promise any particular level of performance if the general level of the market were to fall by 25% over the next 12 months, I would be disappointed if I couldn't limit the fall in EGP to something like 15% or less. The corollary of that is that should the market for some reason rally by 25% over the next 12 months, it is entirely possible EGP might underperform such a result.
Over the next 10 to 20 years, I would be surprised if the Australian market including dividends didn’t return something in the 6 – 10% range annually. If that is the case, given I intend to keep our fund very small, if EGP didn’t earn something in the 10 – 15% range, I would be disappointed – Tony