Update No. 82 – 19/10/12

Our holdings spiked up nearly 2.5% this week to a record high of $1.20803 per share.  This outpaced the not unimpressive weekly rise in our benchmark.  I don’t have too much more to say, except blame AGM season; a few of our holdings have presented well at AGM and consequently improved their recognised value at market, one that I’ve mentioned on these pages previously rose 20% today alone, which combined with already improved market sentiment has led to the steady climb in our portfolio.

The majority of the content below was intended this for last week’s post, but I got side-tracked on my soap-box last week about the financial waste of the professional classes.  What I had really intended to write about was Joseph Piotroski’s work to create a ‘score’ to determine what companies that would traditionally fall into the ‘Value’ category are actually worth investing in.  The academic paper is provided here (.pdf) and is an excellent tool for the up and coming value investor that is not as widely known as, for example, Benjamin Graham’s work. It is in fact an excellent extension of Graham’s concepts, and using the ideas (a scoring range to eliminate financially weak companies from investment consideration – or perhaps as ‘short’ targets) in combination with traditional fundamental analysis could prove helpful.

There are many websites touting ‘Piotroski Scores’, and as usual with all ‘screening’ tools, there are some wildly variant results, I found Fairfax Media scored at 9 on one site and 4 on another, as with any other method, rigour in (personally) checking data is imperative.  The academic paper linked above indicates a 7.5% per annum outperformance (over 20 years), which even in very weak market conditions would be an extremely satisfactory result, so for investors with personal holdings looking to reassure themselves, check your portfolios score based on the criteria in the paper and if you find a low scorer, dispassionately see why it scored lowly and if you cannot reconcile the low score with valid reasons, discard the holding and look for something better.  There are myriad sites that have tracked results of high-scoring businesses after the release of the paper which likewise seem to steadily outperform (without the ‘hindsight’ investment of the original paper) the overall experience of the general market.

It appears (depending on where you source your data) that the mean score for the Australian market is about 4.1 (possible scores range from 0 – 9 – higher being better), the EGP portfolio scores a ‘weighted’ average of nearly 6 (5.75) and will improve greatly in the next couple of weeks when a larger & lower scoring holding is removed through a buyout.  The metrics in the Piotroski Score are usually valid and looking at some screens in researching for this post, I can unscientifically say that in my view the companies appearing at the top of the scoring generally looked in my view to be of considerably higher quality than the low-scorers.

Finally I wanted to give my regular take on the US economy, prompted by Wednesday’s housing start figures.  At the start of the year, I said I expected starts to get to about 800,000 in 2012 and that unemployment would likely fall to 7% if that were the case. Last month’s drop from 8.1% to 7.8% gave credence to this prospect, Joe Weisenthal takes the view that the plunge will continue, I no longer think we’ll see 7% unemployment in 2012, but 7.2% – 7.4% is not unlikely by the time the December figures are reported.  The housing starts in September indicate unemployment is likely to continue its decline, with a 45% year on year jump to 894,000 starts.  People routinely underestimate two important things here, firstly, the extraordinary employment that accompanies housing and secondly, the United States ability to take global growth and drag it along with it when its economy is going well. As I have said previously, the most astounding thing about this is that the underlying natural demand for housing is roughly 45% higher still at between 1.2 & 1.3 million units, so there is still ample improvement left.  I usually strongly agree with Scott Sumner at themoneyillusion.com but I think he has overlooked the importance of trends in his short post on housing starts this week.  He (correctly) states that:

Unemployment was 5.8% in July 2008 and 6.1% in August 2008.  Housing starts were 923,000 in July 2008 and 844,000 in August 2008.  Housing starts are now at 872,000.  And unemployment is 7.8%

I do, however, think Scott fails to recognise (and for the first time ever I was prompted to comment on one of his posts) that 12 months prior to August 2008 Housing starts were 1,330,000, they declined 36.5% year on year to that point.  Basically construction companies (and building product companies & the whole housing supply chain) were finishing a large backlog of building & then laying employees off.  The reverse is true now (with the 45% YOY rise), there is a large an increasing backlog of new housing to be built and construction companies (and their supply chains) will need to add meaningful numbers of new personnel.  If housing starts plateaued for 6 months at current levels, unemployment would most likely continue falling meaningfully – Tony Hansen 19/10/12.

P.S. Happy Birthday Mum…


April 1st 2011

Jul 1st 2012

Current Price

Current Period

Since Inception

EGP Fund No. 1












*I believe this is the Thursday night result Fridays S&P prices not available at publication

EGP Fund No. 1 Pty Ltd. Up by 17.29%, leading the benchmark by 4.17% since July 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 20.8%, leading the benchmark by 19.51% all-time (April 1st 2011).