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 31^st 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.

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

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