Update No. 239 – 30/10/15

I may have spotted the future of EGP this week, an “Apprentice Value-Investor” if you will.

My daughter Rachael is in Year 10. A few months ago, she mentioned her commerce class would be participating in the “ASX Sharemarket game”, and asked if I could help her out in deciding some criteria to make some stock selections. I asked how this works and she said the game ran for 10 weeks. I was initially horrified at the idea. There is next to nothing that can be learned over such a short period. In fact, the whole exercise could potentially be harmful, with those who ‘win’ thinking they are somehow skilled when such a short period of measurement leaves far too much room for luck to be the key determinant.

The teacher explained that the highest marks would be awarded to the student who had the best combination of trading results and explained all of their trades clearly.

In turn, I explained to her that the greatest mistake investors make is to trade too frequently and that the costs of this behaviour come in 3 main forms. Firstly, transactional costs, which thankfully the game allows for with the student being allocated $50,000 in theoretical cash, and each trade costing $20 to execute. The second cost is taxation, the regular trader triggering capital gain (and loss) events regularly and missing out on the wonders of applying your capital to a good business with compelling economics and letting the magic happen. The final cost is psychological, constantly trying to time your zigs and zags to beat the market, whereas if you simply buy some businesses you like, at prices you think are reasonable, all you need do is update yourself with information pertinent to their performance and market and you’ll tend to do well over time.

As such, I advised her to use a handful of characteristics to assist with valuation, narrowing the field down to those with the most desirable combination and discard the excess via reading to establish those which are weaker on the ‘qualitative’ characteristics, and giving some consideration to forward earnings guidance and the like.

Well, her selections worked out pretty well. The market, including dividends, advanced by 0.25% over the period (swinging fairly wildly between decent gains and substantial losses). Her selection of stocks (which were entirely her own, I just guided on some desirable metrics to consider) delivered a 12.12% return for outperformance of 11.87% over the ten week period, with her theoretical $50,000 becoming a theoretical $56,061.22. Disappointingly, I generated only 9.06% over the same period, so I have been bested by a 15 year old…

The result was sufficient to place her first at her school, in the top 2.8% of NSW participants and in the top 2.5% of the Australia-wide participants. As I said to her, it’s better to be lucky than smart (my ‘Dad-joke’ game is strong, she presumably finds such statements hilarious).

Interestingly, the average syndicate value was $50,859.79, so the ‘average’ participant generated a 1.72% return, which was about 1.5% better than the market. Quite a lot for a 10-week period, so perhaps there is a bunch of future portfolio manager in Year 10. Or perhaps as I first surmised, such a short period causes luck to be a more important element than talent. Or perhaps the market fell quite sharply before most of the participants had time to deploy their funds, leading them to buy after a fall and do (relatively) well.

So we may have located a future that will help ensure the ‘Eternal’ in Eternal Growth Partners name actually unfolds. Unfortunately for her, much like Charlton Heston’s guns, she’ll probably need to pry EGP’s portfolio from my cold, dead hands… – Tony Hansen 30/10/2015

EGP Fund No. 1 Pty Ltd. Up by 4.32%, leading the benchmark by 5.29% since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 93.70%, leading the benchmark by 58.63% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}