So Why Not Buy Apple..?!

Tags

$AAPL, AAPL:US, Apple, circle of competence, deferred taxes, disruption, economic moat, growth investing, growth vs. value, innovation, Margin of Safety, Philip Fisher, Steve Jobs, technology, value investing, Warren Buffett

We all know the type: Born-again value investors who still have that new car smell. No longer clueless, but the market hasn’t beaten adequate sense (or humility) into them just yet, so they’re still insanely over-confident. Which we tolerate – after all, we were like them once – then they start expounding their new & improved value investing philosophy, and it all goes downhill. I recall one encounter, some years back, where I struggled to get a word in, let alone offer some kind of reality check. Finally, my new guru was forced to pause & finally breathe, so I did the only sensible thing. I lobbed this hand grenade:

So why not buy Apple..?!

All I got was a puzzled look. Repeating the question, I then pummeled him with a veritable laundry list of Apple (AAPL:US) fundamentals & ratios. If he was such a value expert, surely Apple was a screaming value buy?! Needless to say, I never got much of a reply, but it stopped him in his tracks & scared him off…job well done! But the more I thought about it, the more it seemed like a valid question for other investors (& even me…). And a question to be asked in a spirit of honest inquiry. I mean, let’s look at Apple’s numbers today:

• Net sales have reached $216 billion (as of FY-2016).
• Net sales increased 99% & over 1,000% in last 5 & 10 years, respectively.
• Gross margin increased to 39% ($84 billion) in last 10 yrs.
• Op profit margin more than doubled to 28% ($60 billion) in last 10 yrs.
• Net income increased 76% & almost 2,200% in last 5 & 10 yrs.
• EPS compounded by 16% pa & 38% pa in last 5 & 10 yrs.
• Net cash/investments inc’d almost 1,400% to $151 billion in last 10 yrs.

• Current share price (as of cob Feb-7th):  $131.53
• Current market cap:  $690 billion
• Current P/S ratio:  3.2 times
• Ex-net cash/investments P/S ratio:  2.4 times
• Current P/E ratio:  15.7 times
• Ex-net cash/investments P/E ratio:  12.1 times
• Current FCF ratio:  13.2 times
• Ex-net cash/investments FCF ratio:  10.1 times

OK, just take a moment & marvel…even with the share price now approaching all-time highs again, surely Apple’s still a screaming value buy?

So why not buy Apple..?!

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Stock Picking…Art, or Science (Part IV)?!

Tags

art vs. science, asset allocation, diversification, Event Driven, GARP investing, growth vs. value, IRR, Margin of Safety, Return on Market Equity, stock picking, stock selection, stock valuation

Continued from here.

Value vs. Growth:

In my last Stock Picking post, I highlighted a common value investor failing – namely, a preference for over-leveraged & illiquid small/micro-cap stocks. All too often, it seems like this kind of preference (& others like it) are simply hard-wired in…maybe you’re born to be a value or growth investor! Now, we could get all touchy-feely here & try to personality-map this out – cautious vs. aggressive, quantitative vs. qualitative, thinker vs. dreamer, and so on – but does it really matter? Far better to recognise & accept what you are – if you haven’t already, just stop reading right now & come out to your wife:

‘Um, darling, it’s time you know…I’m a value investor!’

You may even find out she knew already…

Acceptance is the first & most important step in recognising inherent investing biases, and maybe trying to curb some of the worst excesses of hard-core value investing. [Of course, the same is equally true of growth investing]. This might take years…it definitely took me years! And pride often gets in the way – sometimes it’s nice to feel different, one of a select breed of smart investors who can boast of finding hidden gems in the rubble. But this is just an illusion – true growth investors are equally select. [Yes, most people seem biased towards growth stocks (if they ever mention stocks at all!?) – but in reality, they’re fairly clueless about money & investing. At best, they’re TALT* investors…] For them, genuine growth stocks are equally difficult & just as precious to find. And let’s face it – on average, in the real world, nobody can reliably claim value investing is superior to growth investing, or vice versa.

But accepting your value investing biases, curbing your excesses, and exploiting your natural advantages, is surely the best way to maximise your comfort & your returns as an investor. Except this can ultimately prove a double-edged sword…the world you end up living in may just be a value ghetto. Sure, it may feel large enough, it may even feel comfortable enough, but if that’s as far as your horizons stretch, you’re missing out on a whole other world of opportunity out there. Forget about investment ideology – again, this is about diversification, and it’s about becoming a better investor.

If you choose to ignore growth stocks & investing, you’re voluntarily cutting yourself off from vast swathes of the available investment universe – that’s countless companies, entire sectors, new/disruptive business models & secular trends, even geographies, etc. you’re missing out on, maybe forever…how does that make any sense? And even if you heed everything else I’ve written about diversification, how meaningful will the impact be if your portfolio remains blighted by the absence of growth stocks?

Of course, the classic value objection to growth stocks is that they’re invariably over-valued. But this, my friends, amounts to nothing more than a red herring… A true growth stock always seems to be over-valued, yet its share price can subsequently look astonishingly & ridiculously cheap after the business/stock somehow manages to scale up by hundreds or even thousands of percent. The real complaint here, I suspect, is that growth investing is just too hard!?! And if you’re a value investor, there should be no shame in admitting this – because that’s exactly how it feels: You naturally take a primarily quantitative approach to investing & you always require an adequate margin of safety, but identifying true growth stocks demands a far more qualitative approach & appears to offer little in the way of safety…

Stock Picking…Art, or Science (Part II)?!

Tags

art vs. science, asset allocation, bottom-up stock picking, concentration risk, diversification, growth vs. value, home bias, Margin of Safety, stock picking, stock selection, stock valuation

Continued from here.

OK, time for a more in-depth look at stock selection. [NB: We’re presuming you’re already comfortable with the rigour & consistency of your stock valuation process]. While I’m happy to acknowledge stock selection may (ultimately) be art, here I’m going to illustrate & argue why it should be mostly grounded in science. So yes, I’m sorry – I don’t have any magic tricks up my sleeve to avoid, for example, a situation we all abhor…you know the one I mean:

You dutifully winnow a list of stocks down to two finalists, do a fine job of valuing them side-by-side, and make your final/fateful selection…only to see one stock double in three months, while you ponder the 35% loss on the stock you actually bought!?

But this can & does happen to the best of us! Unfortunately, it comes with the territory… You have to remember buyer’s regret & remorse are really just symptoms of Fear & Greed. Which can be tackled in two ways:

– Ignore the Problem:  As tempting as self-flagellation is, why indulge in such a pointless exercise? Don’t forget, we’ve already assumed you’re doing a bang-up job with your stock valuation process – so you obviously shouldn’t be buying dud stocks, or forsaking a decent margin of safety! What you’re dealing with here is really just Lady Luck…and her rough edges tend to get smoothed out over time.

– Systemise Your Process:  Stock selection is an independent, but equally important, part of your investment process – and as I’ve argued before, formalising & systemising every single component of that process is the best way to subdue and kill your fear & greed. Like I said, stock selection is mostly a science..!

And as I wrote in my last post:

‘Stock valuation must be absolute, but stock selection is usually relative.’

Mea Culpa (II)…

Tags

blogging, diversification, fear and greed, Margin of Safety, portfolio allocation, size effect, value investing, Warren Buffett

Continued from here.

vii) ‘Sorry, I don’t have any sure-fire winners’

Do I feel confident about my portfolio? Yes, I do…

But with an important caveat:  I feel long-term confident. I’d even dare to say I expect to out-perform my benchmark indices. [Well, another caveat: That’s really not my objective – I’m more focused on absolute returns & generally improving my risk-reward ratio].

But do I feel confident about my individual stock picks? No, not necessarily…

Unfortunately, this is a reality we all face as investors. No matter how diligent your research, no matter how rigorous your quantitative & qualitative analysis – all too often, individual stocks feel just like a roll of the dice. Most obviously, the insidious effects of fear & greed are to blame – but no matter how hard you stamp these out, you’re still subject to the tender mercies of Lady Luck. And there’s no escaping her. [Though it helps if she looks like this…] As any good boxer will tell you:  If you box, you will get hit… The sooner you resign  yourself to rolling with the punches, the better – but don’t forget, the best boxer (usually) wins in the end.

And over time, investing skill & experience will inevitably beat luck, while diversification is also your ultimate secret weapon. Sure, I confirm my portfolio allocation for each stock I write-up – and that’s a great indicator of my confidence level – but the real lesson I preach is diversification, not concentration. Imposing relatively mechanical limits within your portfolio (see Well, Are You The Right Size?) is a great way to remove emotion from the equation. [Over the years, I’ve homed in on 3-7.5% as an optimal allocation for a single stock, in a portfolio of 15-20 (core) holdings]. As any smart investor will tell you, they’re usually confounded by their portfolio winners & losers in any one performance period. And trying to predict (or buy) just a few top picks is a fool’s game. So, no matter how confident you are, you still need to spread your bets…

viii) ‘I’m sorry it’s a micro-cap, and you hate the price & spread’

Well, really, I’m not…

Sirius Real Estate – I’m Out

Tags

commercial property, German property, Karoo Investment Funds, KWG Kommunale Wohnen, Laxey, Margin of Safety, NAV discount, Net LTV, Principle Capital, residential property, Sirius Real Estate, special situations, SRE, Weiss

I’ve completely disposed of my remaining Sirius Real Estate (SRE:LN) holding. [I previously noted a small sale in August, reducing my portfolio stake to 2.8%]. This is a rare event – in the past year, my selling’s been mostly limited to top-slicing as certain stocks neared/exceeded my price target(s). Crikey, I must sound like a bloody buy & hold investor!? Rarer still, I think it’s only my second disposal of an investment that clearly hasn’t been working out. [Cresud (CRESY:US) was the first – a v different macro decision. Fortunately, the right decision…the stock’s down nearly 25% since!]

I actually managed to avoid a loss in both instances – not what you’d expect from stocks that haven’t worked out..! Obviously, there was plenty of luck involved – but I’d definitely credit a good entry price as a key saving grace. Having the discipline to demand an adequate margin of safety for each purchase isn’t just about increasing your potential upside – it can also save your bloody ass when things go wrong. Let’s take a closer look (using my original Sirius post for reference) & see if there’s anything to learn here:

Investment Opportunity & Crisis Hedge:   My investment thesis identified German property as a secular investment opportunity – it’s cheap in absolute terms, the German economy’s perhaps the most resilient in Europe, and Bund yields remain incredibly supportive. I continue to believe this thesis is correct, but actual property & share price gains to date have been mostly enjoyed by the residential sector. [Check out my German property series: Parts I to V]. I also suggested German property might be a good hedge against any further unraveling of the European sovereign debt crisis. Fortunately, sentiment’s improved dramatically this year – it’s interesting to see German residential share prices peak & then trade sideways/lower for much of the year, as investors migrated back into higher risk European exposure.

Catalysts – A Summary (Part I of II)

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Alternative Asset Opportunities, asset allocation, catalyst, correlation, dividend tax treatment, Event Driven, Expected Value, fighting the Fed, Investegate, IRR, Liquidations, Margin of Safety, offer premium, portfolio allocation, QE, Recommended Cash Offer, Risk Arbitrage, risk-on risk-off, takeover offers, Takeover Panel, VIX, volatility, wind-down

My 10-part series on catalysts last year (stretching from Jan to Dec!) was well received, judging by the readership & links. I vaguely promised a summary to wrap up the series – as we’re well into the new year (already?!), it now seems appropriate to deliver that post (& hopefully it proves useful).

By the end of last summer, I concluded there’s little point fighting the Fed… A fortunate decision, as the market’s been decidedly risk-on since then! Though I must say, the power of central bank liquidity still surprises me. If you recall, last summer, we appeared to face a pretty bleak outlook both sides of the Atlantic: The fiscal cliff in the US & the sovereign debt crisis in Europe. [Hmmph, different stories…same destination!] Personally, I considered the cliff to be just like those periodic kerfuffles over the US debt ceiling – no genuine threat, but divisive political rhetoric could certainly roil the markets (& perhaps prompt a rating-agency response). On the other hand, the European crisis…er, what happened, where the hell did that go..?!

This risk-on attitude’s left my portfolio light on investments with shorter-term/lower-risk catalysts (i.e. event-driven investments). However, I still strive to pick new investments which (ideally) possess at least one longer-term/higher-risk catalyst. That type of catalyst doesn’t necessarily mean you avoid downside risk, but hopefully it stacks the deck in your favour vs. what the average value investment (complete with margin of safety) might offer. It may also accelerate the time-line for a stock’s realization of its intrinsic value/upside potential. Anyway, much of my event-driven exposure was ultimately re-invested in Alternative Asset Opportunities (TLI:LN) – so I simply exchanged a low return/relatively uncorrelated risk for a cheap/high return/totally uncorrelated risk! Go on, you might want to give it a try..! 🙂

Heading Into 2013…

Tags

Alternative Asset Opportunities, Argo Group, Asta Funding, Avangardco, correlation, EIIB, FBD Holdings, Fortress Investment Group, JPMorgan Russian Securities, KWG Kommunale Wohnen, Livermore Investments, Margin of Safety, Petroneft Resources, portfolio allocation, portfolio performance, Richland Resources, shareholder activism, Sirius Real Estate, Total Produce, Trinity Biotech, Universe Group, Vietnam Opportunity Fund

There was a gratifyingly large surge of page views yesterday checking in on my 2012 Portfolio Performance! I’m suitably humbled by the attention – gulp, makes me wonder what challenges 2013 will throw up?! Hopefully the blog’s sparked a few decent ideas & stock picks for you in the last year or so, and you’re pleased with the progress of your own portfolio in 2012. It’s certainly been rewarding for me – most obviously in terms of improving my investment focus & analysis, but also in terms of the constant stream of questions, challenges, feedback, gossip, ideas, etc. from blog readers.

As a result, I now feel somewhat honour-bound to cough up some kind of 2013 Portfolio. I should immediately flag that some of you may find this a bit of a cop-out… 😦 But, in my defence, let me say:

– The start of a new year really means little to me, I don’t suddenly discover I have whole new batches of stocks to buy & sell!

– I rarely write about stocks I don’t own. This is pretty deliberate – my intention was never to simply fill up blank space with an idea each day/each week. I think people can really only judge your level of analysis & conviction against whether you actually own a stock – and, of course, by how much stock you own!

– I also don’t write about stocks I track, or discard, very much. First, mostly because they’re far too numerous! Second, I’m not sure I’d always manage a proper (in-depth) write-up about such stock(s). And third, I’ve sometimes tracked stocks every single day for literally years on end before buying – how often do you want to hear about them?!

German Residential Property (Part III)

Tags

absolute return, Austria, dividend yield, financial crisis, financial derivatives, German bunds, German property, Germany, home ownership, income/dividend bubble, intrinsic value, land grab, Leverage, Margin of Safety, Mr. Market, NAV discount, Net LTV, Price/Book, REIT/MLP sector, relative value, rental yield, residential property, safe-havens, special situations

Continued from here.

OK, now we’ve looked at German residential property fundamentals. The current supply/demand & home ownership rate, rental yields, safe-haven status, and particularly the low valuations, certainly appear to offer a persuasive investment case. So, how do we exploit it?!

As I’ve said, I’m perplexed by the general investor obsession over direct property investment. What a hassle! And let’s correct a key misconception: People say they prefer direct investment as they can leverage it up – something you can’t, or shouldn’t, do with an equity investment! Yeah, sounds logical…but it’s complete rubbish! That coveted (?!) leverage is already embedded in listed companies (and far more efficiently/cheaply than you could obtain).

Let’s say you’ve a spare 300 K knockin’ around. You could buy a 1 mio property, with the help of a 70% mortgage (and years/decades of property/tenant headaches to come!). Or you could invest in the equity of a listed property company that owns 1 mio of property (with the same 70% leverage). All at the click of a button & an occasional read of their financial reports. What an easy choice… OK, but who knows where the hell the share price might trade?!

German Residential Property (Part II)

Tags

arbitrage, Berlin, commercial property, correlation, Debt/GDP Ratio, Deutsche Mark, Eurobonds, Europe, European sovereign debt crisis, Eurozone, GDP growth, German bunds, German property, Germany, Highway to Hell, Leverage, Manhattan, Margin of Safety, Net LTV, quantitative easing, rental yield, residential property, safe-havens, unemployment rate

Continued from here.

Economy:

Germany’s by far the largest & strongest (major) economy in Europe, with an average real GDP growth rate in excess of +3.3% in 2010 & 2011. Growth remains positive in 2012, while 2013 GDP growth’s forecast to be +1.7%. Far better than most EU growth rates in the same period…

It’s one of the few countries with a primary budget surplus. Actually bested by Italy, what a surprise! Germany’s Debt/GDP ratio at 81.6% isn’t much better (also surprising) than the EU average of 88.2%. But the majority of citizens (& investors) remain supremely confident in Germany’s ability to manage its own finances – and rightly so, I believe. [An important point to make: Now, really, an 88% Debt/GDP ratio? What crisis..!? I think not. I’d venture we can trace the current market hysteria squarely back to the bumbling & foot-dragging of Europe’s politicians. A clear message for US politicians as they merrily race down their own fiscal/debt Highway to Hell. An inability to learn from history’s unfortunate, but perhaps forgivable – an inability to learn from today’s headlines, however, just makes you a complete f**king idiot,sir!]

German Residential Property (Part I)

Tags

commercial property, developed markets, Europe, Eurozone, German bunds, German property, home ownership, Margin of Safety, real estate agents, residential property, safe-havens, stock tips

German residential property’s been described (particularly recently) as:

‘Perhaps one of the safest & most attractive asset classes in Europe, or even the world‘.

OK, seems like typical talking-head hyperbole! But in this instance, I’d really have to agree… In fact, I’ve agreed with that thesis for the last couple of years now, and v profitably too! Whenever somebody I meet tugs my sleeve for an investment tip, that’s exactly what I offer up (in all good conscience): German residential property is a safe & compelling long term investment. Hmm…it’s amusing, and extraordinary, how rapidly most people lose interest in such a dull recommendation! Which just goes to show:

i) I guess most people are truly just looking for a tip…in the v worst sense of the word. Perplexing..!? Do they have some bizarre faith I can conjure up, at will, a stock that’s sure to double for them within a week!? Is this really how some people think investing works? In the end, it illustrates how few people walk the talk – they just don’t apply themselves & follow through consistently with their investing. Often, when they actually decide to invest, it seems like their decision may just boil down to the persuasiveness of the ‘tipper’, rather than the merits of the actual stock thesis!