a lame attempt at words of encouragement

I have been following PRR silently for about two years now, and want to preface my post by saying I am not trying to be a “Told-You-So”.

Instead, I am trying bring a message of sympathy and encouragement borne out of myself having in the past a experienced similar painful feeling that PRR shareholders will have right now.

About 20 years ago, I – at the “nudge-nudge, wink-wink” recommendation of a senior broking analyst I knew – bought shares in a company called Polartechnics (PLT was the code).

Long story cut short: I lost my shirt (luckily I had only a few thousand dollars invested in the stock, and luckily I sold it a few years before it went belly-up).

This all occurred at a stage of my investing career that I knew very little (even though, ironically, I was employed at the time as an analyst myself, at one of Australia's pre-eminent independent broking firms).

What made me sell the stock was getting a job in 1997 working with a fund manager who was then an already successful investor, but who over the next two decade went on to generate spectacular returns, especially on a risk-adjusted basis (meaning he generated excellent returns while actually taking on very little risk).

He gave me a lot of material to read on Value Investing, most notably Peter Lynch’s “One Up on Wall Street” and various Warren Buffet books and essays.

At the same time, he taught me that the only way to invest was to buy shares in companies that had a demonstrated track record of increasing their Intrinsic Value.
And the only tactile, meaningful, sustainable measure of Intrinsic Value is GROWTH IN THE GENERATION OF SURPLUS CAPITAL.

In other words, if companies cannot generate surplus capital – through all business and economic conditions – then they are not investment grade businesses.
Not just that, but they need to demonstrate that they can GROW their surplus capital generation.

With this definition, it becomes clear that the overwhelming majority of companies listed on the ASX, fall outside the definition of “Investment Grade”.

In fact, I estimate that a mere 100 or so, of the 2300-odd companies listed on the ASX, fit the bill of Investment Grade.

The rest are incapable of creating wealth for their shareholders, and no matter how well-intentioned like PRR, become little more than crapshoots which inevitably permanently destroy the value of shareholder capital.

So, thankfully, my encounter some twenty years ago with someone who knew what he was doing, helped my invest in the time-honoured way that creates shareholder wealth, and was the sole reason that I reached financial independence well before the age of 50.

It might sound like I am boasting; I’m not.

What I’m saying is that I became financially free not BECAUSE of me, but DEPSITE me.
It was the handful of surplus-capital-growing, investment-grade companies that caused it.

And I’m not trying to lecture either, especially not at this inopportune time.

While it might appear to be presumptuous and sanctimonious sermonising, all I’m trying to do is to help others who might be at a similar stage of their investing careers as I was 20 years ago, as that wise old fund manager did for me.

So the advice that I am passing on is that the road to durable, sustainable wealth is through investing, not in share price charts or in stocks that “sound” good, but only in the very few companies that can create value for their owners, through all sorts of business environments and economic conditions.

I have seen far too many of these wealth destroying outcomes, and it saddens me, because it is so easily avoidable.

I hope I have not offended by rubbing salt in the wounds; instead I hope I have provided some food for thought so that some good might come of this.

Please don’t shoot the messenger.

Cam


PS.
Interestingly, after selling my PLT shares in the early 1990s, I put the proceeds into what was then a little company called Reece (REH).
Back then REH cost me $1.35/share and was generating Net Profit of $8m on Revenue of $180m
Today the stock is valued at over $26/share and this year will generate Net Profit close to $130m on Revenues of around $1.6bn, having grown profitability in 18 out of the last 20 years.

And, of critical importance, REH has NEVER come to shareholders to ask for money to fund its growth...it has funded it’s growth purely organically: The company was started with less than $10m and right up to this day, Issued Share Capital is still $9.96m, like it has been for over 20 years!
(Oh, and it warrants mentioning that REH today has net cash of around $150m)

As I said, it is DESPITE their shareholders – not BECAUSE of them – that this company (and others like it) create wealth for their owners.

Had I not been taught that very valuable SURPLUS CAPITAL GENERATION lesson back then, I might still have been muddling along today doing what most people do, namely what I call “Investing-by-Hope”, and naively giving my hard-earned money to companies in entitlement offers and share purchase plans, without really understanding their businesses in the context of shareholder wealth creation.

PPS.
Compared to REH’s $9.96m of shareholder capital that has remained constant, PLT after 1992 went on to raise new equity capital in 12 out of the next 14 years, for an amount totalling a whopping $85m, before the market’s hope ran out and the company went belly-up in 2006.

PPPS.
I am not inferring that PRR is facing solvency risk, like PLT. Far from it. Patently, the company has a degree of cash backing.