John Murray's four-point strategy for selecting a winner James Chessell From: The Australian September 11, 2010 12:00AM
EXPERIENCED stock selector John Murray provides an explanation of his philosophy for investing. Do you read investment books?
The first investment book I read after I joined Perpetual (in 1990) was One Up on Wall Street by Peter Lynch. To this day it remains one of the most formative investment book I've ever read. I've still got it, dog-eared all over the place. And if I'm ever looking for some inspiration I'll got back to it.
How do you evaluate stocks?
We look at four factors. There's no magic in this, as they are all well known. Price to earnings is the first. Price to free cashflow is second. Third is price to net tangible assets, which is akin to the traditional price to book measure but, interestingly, over the past couple of years when stocks have been really out of favour, it has thrown up some opportunities. And finally, gross yield. I've always loved my yield.
Do you read broking analyst research?
Yes I do. I know a lot of fund managers say they don't rely on broker research but I guess it depends on what you mean by rely. To be able to tap into the top three or four analysts in a given sector can be really insightful. In a sense, as fund managers we are a jack of all trades, master of none. A broking analyst that covers the mining sector for 20 years should, in theory, know a bit about the companies he faces.
What was your best buy?
The stock that stands out to me was probably the first stock that I bought when I first joined Maple Brown Abbott (in 1995). I did a paper on (retail group) Foodland (taken over by Woolworths and Metcash Trading in 2005). I don't think I'd ever analysed a company like that before. I thought it was a good opportunity, but I had to prove it to people like (founder) Robert Maple-Brown and (managing director) John Knightley. The night before we had the paper I was so nervous. They don't come along that often. It was completely out of favour. We bought that in quite a significant fashion and made a lot of money for our investors. It was classic value stock.
What bad call comes to mind?
Primary Healthcare we got wrong. We bought it at an average price of $5.08 per share in 2008 and progressively sold out of it over the last year at an average price of $4.72. We had viewed Primary as the value play in the healthcare sector and bought into the stock after it merged with Symbion Health . . . The mistake we made was underestimating the impact on the company of a reduction in government funding for pathology tests. (The) important issue is to ask what we can learn from our mistakes. The key lesson with Primary was that you can't underestimate the potential for regulatory risks to impact businesses.
How hard is it to sell when you are down?
The hardest scenario to sell in is where you've bought a stock and the current share price is lower. The way you overcome that is by what I call sheet of paper test. It says forget about your history in the stock, but at the current share price based on what you know about the company now, is it a good business and is it good value. If you didn't have it in your portfolio would you buy it? If the answer is I would buy it, you should either hold or indeed buy more. If the answer is no, you have to ask yourself some serious questions. The test takes away the emotion of buying the stock.
Could you invest successfully only looking at ASX statements?
You could, but not as well. These days, with disclosure, there are so many numbers you could input into your model. And you could build up a picture about profitability and cashflow and balance sheet and so forth. But every time I have a one-on-one meeting with a chief executive or chairman I am reminded how important it is to see the whites of people's eyes. You become a reader of body language. I like to go along to meetings with one of my analysts and perhaps not ask as many questions, just sit and observe how (executives) react.
