I’ve been investing in a haphazard manner for around 15 years and in a concentrated value style for around three. My evolution was basically a series of overconfident mistakes and some lucky outcomes, with some stubbornness in the mix. My father mowed lawns for a living, but jagged the investing bug somewhere along the way. He was a value guy at heart and both my parents taught me the value of a dollar. Their price conscious investing expressed itself mostly through index funds (this was a couple of decades ago) and more recently through ETFs, a style I continued as a teenager.
I trained as an electrical apprentice after leaving school in 2003 and having ok wages for the first time only encouraged my love and passion for investing. I never wanted material things, but the thought of being financially independent seemed like a worthy goal. I bought a house in Brisbane’s Western suburbs in early 2006 at a fortuitous time, as property prices swiftly moved upwards over the next decade and would have made things a lot harder if I’d waited a few years, for which I can sympathise with many young people today.
ETFs weren’t sexy enough for my 20 year old self and through 2005-7, convinced of my own genius, I started buying individual stocks. The timing couldn’t have been worse. Sleep-walking towards a cliff in hindsight, but I had no knowledge of financial history or valuation. I bought mostly Australian blue chips through a dodgy combination of tips and hunches. The first stock I ever bought was a miner called Zinifex. I bought a block for $6000 which I finally sold down the track for for around $800. Terrible stuff and far from the only disaster. I got lucky with a couple like CSL, which turned out to be an incredible business and tripled over the next six years or so (sold it WAY to early). I also did a round trip through the GFC on some stocks like Macquarie Group and Fox Corp, which I ended up with a small profit on, but a lot of heartache along the way.
The best bit of all was that I had levered up through a margin loan in 2006 and went into the GFC with a $100 000 portfolio geared at 50%. By 2009 I “owned” a portfolio worth $50 000, but of course still owed the bank as much. I suffered margin calls all the way down, which I was able to meet, as I was earning good money and had low living costs. It was a humbling time, to say the least, but my enthusiasm wasn’t dampened.
By 2010 I had built up some equity in my home and decided it was time to plow more money into the market. I had read all the Warren Buffett quotes about being greedy when others were fearful and had a dogged faith that stocks were the way to get wealthy over the long term. I invested heavily between a Global 100 ETF, an ASX 200 ETF and an Emerging Markets ETF. Emerging markets were quite expensive at the time, knowing what I know now, but you have to learn these lessons the hard way.
Over the next five years, those investments appreciated nicely, although I was still highly leveraged and started to become aware of my financial fragility. I had earned enough pay my house off, and now that I had, I had no intention of losing it. I started to sell down my ETFs and remaining stocks to get debt out of my life. I got my portfolio down to an unlevered position. Through the lens of 2020 hindsight, I left a lot of returns on the table by panicking as early as I did, but I don’t regret it.
Around 2015 I became interested in individual stock names again and began reading all the usual value stuff- Buffett letters, Klarman, Graham, Fisher, Lynch et al. I loved the intellectual rigour of it all and started to transition my portfolio from a largely ETF based one, towards one that is wholly individual stock names. My early forays were mostly unsuccessful, many value traps and failed turnarounds looked like cheap compounders to my untrained eye and I suffered for it. Eventually I started to realise that the Grahamite school of deep value was much more philosophically aligned with me and began to concentrate my efforts there.
To make a monumental understatement, I am no Warren Buffett as a business analyst and simply don’t have the ability to distinguish between sustainable moats in temporary distress and melting ice cubes. It sounds easy and often seems so in hindsight, but is remarkably difficult to do well. On top of this you often have to pay top dollar for the privilege of joining the compounder club and high prices leave little room for error if a business disappoints the market.
I would much rather hunt in the bargain basement and buy value that is clear to see today. Often this is a low price to free cash flow multiple or discount to a conservative NAV. You can see strong appreciation from these types of businesses by them going from toxic to merely hated. My ultimate investment is one with lower debt, a sustainable revenue stream and selling at a low enterprise multiple combined with a low Price/ Free Cash Flow (this combination can help screen out structurally unprofitable businesses and punishes companies with more debt). Good managers are also desirable, but this can be very hard to know from an outsiders perspective. The cherry on top would be for it to be located in a loathed country with cheap currency.
The last few years have been somewhat painful, as I have embarked upon a deep value journey during a time of extreme underperformance for value investing. Also during this time I have watched the ETFS I sold too early march on upwards, while I have held my crummy companies and cash pile waiting for opportunities to present themselves. Luckily I am stubborn and won’t be abandoning the style anytime soon. In fact I believe that the severe underperformance of a global deep value strategy is precisely what has set it up for extraordinary returns to come (at some point).
I plan to keep this blog as a way of keeping myself honest and laying out my thoughts from time to time. More to come.
Guy
Superfluous Value Blog 