Update No. 103 – 08/03/13

Psychology (primarily MY psychology) is what I thought I’d briefly discuss this week.  I self-identify as a value investor, and a value mind-set pervades all aspects of my life.  But it is important not to mistake what value is, it can exist in many forms.

As the value-investing mentality pertains to stock investments, perhaps the first 10 years of my investment career were spent with a sharp focus on businesses that had declined meaningfully and recently in price, with a view to deciding whether the decline in price exceeded the decline in value. One of my great past-times was scouring stocks that were hitting 1 and 3-year lows, and then doing a bottom-up fundamental analysis to decide whether the new lows were justified.  I have done very well out of this over the years and I still look for major price dislocations, but now I tend to go about things the other way around – I familiarise myself with the business, decide what a fair/cheap price level is and then wait for businesses I like to enter it.

Because the Australian stock market is relatively small, it is not difficult to have a pretty good understanding of most of the areas of the market that interest you.  I instinctively avoid most miners, all explorers and focus on companies with (usually) a long listed history – mostly industrials.  I would hazard there are about 200 companies whose operations I could describe with reasonable detail, perhaps a quarter of those I would say I am even more familiar with than that.  Fifteen of these companies we own and those I feel I know ‘intimately’, reading everything that is published and I try to be as familiar as possible with the industry dynamics they face.  When you have a suite of listed businesses you know very well, a falling price is not always necessary to create a ‘value’ situation, improving business metrics could be doing the ‘heavy-lifting’ when it comes to value.

I have done something in the last 12 months I’ve never done before, purchased shares at all-time highs.  I’ve not gone nuts with it; just two of our fifteen stocks have been added at these ‘high’ levels.

One of these businesses, which I added to EGP in the last month I’ve followed closely for about 5 or 6 years.  Over the last 11 calendar years, it has closed higher on every December 31st each year than the last, excepting one year where a 1.1% decline was registered (however a 1.3% dividend meant you still ended up ahead – just) detective types shouldn’t have too much trouble guessing which stock it is as not too many closed 2007, 2008 & 2009 at higher levels each year (remember the GFC…).  In this case the value came from the continued growth in the business and a fairly stable price for a couple of years which has seen the intrinsic valuation climbing at a rate quite a bit faster than the share price.  The recent half-year report put it deep into my desired value range and saw me adding more to a position I’d started building gradually in the previous few weeks – at a price equalling the all-time high.  This week, it hit new all-time highs, so someone else has obviously come to the same conclusion.

The other case is in a stock for which our purchasing program ran between July and late November 2012.  Interspersed in the middle of that buying was the AGM, which I attended where I had the opportunity to speak at some length with the management of the company.  The frankness and forthrightness of the management reassured me and I continued my purchasing up to an all-time high.  The stock has since hit another all-time high more than twice as high and subsequently fallen back.  I believe a ‘tip-sheet’ mentioned the stock (which is why I don’t usually mention our stocks here, the market, particularly in the more thinly traded end where I specialise can be easily dislocated) and it briefly went a bit silly in price (exceeding my calculation of Intrinsic Value briefly – though I did not sell any) before falling back (about 30%) to where it trades presently about 50% above our average purchase price.

Obviously if the bull-market continues, we could find ourselves with less of our ‘bargain’ opportunities.  You can rest assured that if I do buy at or near all-time highs, it will be for one reason only – Intrinsic Valuations are hitting all-time highs to the extent that the price still represent ‘value’- Tony Hansen 08/03/13

P.S. Our holdings took a substantial dip this week, in a week where the market advanced meaningfully.  We still lead the market handsomely in the period and since inception, but a couple of our larger holdings took decent declines over the last 7 days.  I will talk more about it next week, but our holding will be generally quite uncorrelated with the broader market.


Apr 1st 2011

Jan 1st 2013

Current Price

Current Period

Since Inception

EGP Fund No. 1












EGP Fund No. 1 Pty Ltd. Up by 14.40%, leading the benchmark by 2.95% since January 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 39.26%, leading the benchmark by 23.12% all-time (April 1st 2011).

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