Ann: December 2012 Appendix 4D , page-9

wookie:
very good summary, I thought. Thanks for making it.

petepan:
yes, you're absolutely right, and the variant you describe is probably the more commonly "understood" way of value investing.

And I can cite many examples of buying companies than are unable to grow their intrinsic value, but that are trading at attractive enough discounts to their STATIC level of intrinsic value. Indeed, some of these I currently have in train at the moment (stocks like COF, PMP, TPI, FXJ, PRT, SFH).

These Discount-to-NTA stories are probably recognisable to most as "turnaround stories” (with all that descriptor entails..both good and bad).

I was going to include this topic in initial post on the subject, but thought that it would increase the complexity of what to the vast majority of investors is already a counterintuitive way of "creating wealth".

I will make a few observations based on my experience that I think might be useful to some.

Firstly, at any given point in time, at a guess I will probably have:

- 70% to 80% of my capital invested in the “Intrinsic-Value-Grower” category (companies such as ARP, AUB, BRG, CCL, DLX, DTL, MMS, NHF, ONT, RHC, SDI, SGN, SKE, WES, WOW), and

- the balance in the “Deep-Discount-to-Non-Grower-of-Intrinsic Value Category (COF, FXJ, GWT, IAG, IFL, KOV, ORI, PRT, PMP, SAI, SFH, SLM, TPI and WHG). [Note: Many of these cases used to be at steep discounts to NTA but the “discount” has largely disappeared over the past 6 or 9 months because the share price has risen (and in one or two case the gap closed because the NTA disappeared!)]

Secondly, as part of an ongoing desire I have to invest better, smarter and more prudently, I always back-test the investments I have made (and indeed didn’t make). I do this to try and learn from my mistakes, obviously so that I avoid repeating them, but also so that I can share these mistakes with others in the hope that they, too might invest more judiciously.

When I do reflect on these two sub-categories of Intrinsic Value Investing, it occurs to me that the more difficult to do, by far, is the latter (i.e., the Deep-Discount-to-Intrinsic-but-Non-Growing-Intrinsic-Value...which is quite ironic, because this one is what I sense most “value investors” try to do.)

Investing in a “Grower-of-Intrinsic-Value” is a lot easier, in several respects.

It admittedly requires some “up-front capex” in the form of researching the fundamentals and building a model in order to establish the veracity of “growing intrinsic value”, but thereafter, it requires very little ongoing mental exertion thereafter, other than to twice hear listen to how loud the clinging is of the dividend shekels are that drop into the dividend jar. And even if I pay a tad too much at the time of purchase, well the growing intrinsic value means that the passage of time will ultimately render my investment wealth-creating (assuming, of course, that I get the Intrinsic Value Growth assessment right, which happens overwhelmingly mostly, but not always)

Investing in the “Discount-to-Static-Intrinsic-Value” situations is a lot harder, yet the rewards are not commensurately higher, in my experience. They require not only the same – and invariably MORE – upfront research capex as the other case, but they then need ongoing monitoring and “maintenance mental capex” to ensure that the various milestones required. And there is invariably a lot more execution risk involved: invariably either some transactional acumen is required or some particular operational skillset needs to be brought to bear, or it is contingent on some third party action, or certain timelines present some sort of limiting constraint, or, or, or....

I guess the message I am trying to convey is that even before making the necessary quality-of-life adjustments, I find I have done far better in pure nominal terms alone out of my investing in Intrinsic Value Growers, than I have in getting Discount-to-Intrinsic Value (aka Turnaround Stories) perfectly right.

Once the stresses and the anxieties that go hand-in-hand with the latter, it becomes an unambiguous Non-Contest.

I only came to this view relatively late in my investing career, and I wish I had noticed it earlier on.

So I thought as an observation it might be of interest to others, to the extent that investing – by its very imprecise and emotive nature - is an ongoing process of evolving, learning and recalibrating.


Cam