brave souls rewarded today, page-198

Charts tell you when sentiment has turned, but they don’t tell you when it has reached undervalued status. If you are impatient (guess what.. most are more impatient than they admit or realise… try checking how long you hold a position on average and what your range is, it should be median 3-5 years and rarely less than 12mo otherwise you are vulnerable to fear/ greed/ sentiment and are thus market fodder) then you will be worried about being stuck waiting for 6-12mo for the charts to turn definitively bullish, and which point the chartists, sentiment traders and fundamental traders will pile in and you will likely miss most of the sp recovery. For example, I bought and held orecobre for ages after it dropped from $7 and held for 2 years while it was 2-3 bucks and sentiment was full of hopelessness, then it ripped up to $10 in the blink of an eye. If I had tried to wait for the chart to tell me when to buy back in, rather than when I knew it was undervalued and sentiment poor, I’m certain I would have missed most of the upside.

same with covid. The market recovered most of its losses while the sentiment and the media were still in the depths of covid u certainty. i didn’t start buying until July/ august and missed most of the bounce. How many of you bought a large % of your current holdings in March/ April?

so for me, rather than wait for sentiment to turn and the charts to confirm the buy signal on the 5 year monthly candlestick etc, I just bought at 8.50 because it is cheap on a 3 year view based on reading all their reports, listening to their tech day and results webcasts, crunching the backward and forward fy21-23 numbers like ev/ ebitda, forward p/e, peg, price / sales, price / NAV, etc etc. those numbers all look like a value stock (eg ev/ebitda 10, p/s 1.5, p/e 17, peg <1, p/nav 2.5, etc etc and these numbers are for fy21 and look even better for fy22 and fy23.

contrast those to the sector, the market in general and they are favourable.

then overlay the fact that it is (1) literally the global market leader in its industry, that (2) this industry is in its infancy and rapidly growing at >25% for the next decade and beyond, and that (3) they are expanding into new use cases (self driving, video), (4) into new verticals (product from service, govt) and into (5)new geographies (eg landing and expanding their projects with the massive China tech giants and the autonomous self driving companies).

finally they are demonstrating smart capital allocation by reinvesting into new products to move up the value chain/ stack of AI/ ML eg developing models as well as providing training data, whilst simultaneously undertaking disciplined cost cutting programs and reducing core expenses at the same time that revenue grows, thus driving operating margin expansion.

they are also automating some of the data annotation processes and improving data labelling accuracy to drive higher quality datasets (improves customer satisfaction and thus loyalty plus pricing power) as well as reducing the cost through reducing the hours worked by the crowd to achieve the same volume of annotation.

when I put all those layers of analysis and valuation together, I dont really understand why an investor with a 3 year+ time horizon would want to wait for the charts to turn (and if you are shorter term then good luck because you will likely do poorly long term according to all the research).

investing is about doing the work to establish conviction, then having the bravery to execute that conviction against the crowd, and then finally having the patience to wait for the thesis to unfold.

one can be wrong, and I’ve been wrong before, but as long as you are right 6 times out of 10 your gains will far outweigh your losses in terms of relative profit vs loss over 3-5 years.

hence I’ve been taking advantage of current weakness to accumulate appen at 8.50, alibaba at sub 140, northern star at 8.60 and Worley at 9.60.

I may be wrong on one or even two of those over the next 3 years, but the prices are so cheap that my downside is limited to probably 20-30% max, and I’ll bet at least 2 of those will be up over 100% in 3 years.

importantly, I am still holding 5-10% cash by lightening my holdings to rebalance from a few winners that look expensive having run up 150-200% in 2 years (bbn, fcx:us, etc).

so if Apx, or alibaba or nst or other stocks drop another 20-30% in a market selloff due to inflation/ taper tantrums, I’ve still got a little cash ready to take advantage.

that’s my thoughts, take it onboard, corrrect me on my misjudgements or dismiss me as you wish.

I like to put my thesis in writing both to gather my thoughts and to be transparent for future reference, but so I can go back and review my own thinking in 1-3 years but also so others can call me out as a fool in future for my foibles or can trust my judgement as a worthwhile contributor as I establish a track record, as I believe I have over the past 5 years on hot copper.