Yes, definite mixed feelings here, with one-third of me saying...

Yes, definite mixed feelings here, with one-third of me saying "Gee, some drunken sailors are offering me a price of 25x earnings for my shares", while two-thirds of me is thinking, "Well, now I'm facing a bit capital gain tax bill and, not just that, but what do I buy to replace this fine business?"

There are probably only 20 or 30 companies listed on the ASX about which I am able to put hand on heart and declare that I believe the business models of those companies are of such durability that they will still exist and continue to earn in excess of their cost of capital in 10 or 20 years' time, and DLX is one of those.

For that reason, for years I have had a strong inkling that DLX is a takeover target (in fact, my contention is that DLX's acquisition of Alesco was a takeover defence tactic... at the time I was unhappy with the move, but to the credit of DLX management, the various Alesco businesses have been turned around and are earning their cost of capital).

I'm just a bit surprised that it has happened now, after the company has already moved far up the value curve. I guess when, as a buyer your cost of funding is negligible, the perception is that it is hard to pay "too much" for something you acquire. (Not sure how Nippon is funding the acquisition but I'm sure that credit from Japanese banks will be very generous terms given Japanese banks are able to source funds domestically at rates close to 0%).

Which is a good segue into the dilemma of what to do with the proceeds of my DLX shares (which now account for 7% of my invest-able capital). Like others, notably value investors, there is a distinct paucity of compelling investment opportunities today (as has been the case for the past 12-18 months, I feel).

The current stock market circumstances and "tone" feel to me like a combination of the Dot Com boom days (where anything technology-related, however conceptual, gets chased indiscriminately) and the pre-GFC days (when any company that was of any half-decent quality was bid up to valuation multiples 30%, 40% or even 50% higher than would be the case in a "normalised" market environment, and when even highly conceptual IPO's were getting away, and were well-supported in the secondary market).

The complacency and the disregard for risk is palpable.

Problem is, history shows that this kind of irresponsible market behaviour can persist for long periods at a time, often lasting several years.

In the meantime, after the sale of DLX I will be sitting with more than 20% of my capital in the form of cash; after another high-quality business I owned was acquired last year, as well as me over the past 6 months reducing my holdings in a number of oversized portfolio positions which I feel are fully-, and over-, valued, as well as having exited a few holdings

That's a position in which I cannot recall being since I started investing seriously more than 20 years ago!

While I feel like I'm trying to time the market, I don't want to simply buy shares for the sake of being fully-invested. As it is, I've been sliding way down the quality curve over the past 6 months, taking small, low-conviction stakes in some inferior quality, "deep value" companies, none of which have served me very well - unsurprisingly, really, given how many of such situations end up being little more than value traps.

It certainly is a challenging market for risk-conscious value investors.

Trouble is, given that most of the elevated asset prices have their genesis in unprecedented, stubbornly low interest rates, it's difficult to know what is going to make the situation change given that interest rates don't look like starting a meaningful upward trend any time soon.

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