9 Dec 2010
Pre-Christmas sale, everything must go...
As has become clear, my portfolio has undergone a major change from a collection of low price/tangible book, low earning companies to a growing collection of low price/book companies with far better earnings histories.
Using my new approach to valuation (which as ever is mostly stolen from the giants whose shoulders I am trying to stand upon), I found that most of what I owned was already 'overvalued'.
The list of the departed and their annual gains is as follows, some of which I've mentioned before:
Company profit/loss Holding days
J Smart Contractors 5.2% 403
M J Gleeson 34.2% 541
French Connection 15.7% 639
600 Group 4.2% 682
Northamber 31.2% 757
Mallett -8.9% 785
Titon 47.7% 812
Averages 18.5% 660
Even though I've ended up selling these companies outside of my original system (which was to sell when the price/book ratio reached one, or after five years) I am happy, or perhaps lucky, with the average returns.
Currently my valuation method is in a bit of a flux, and there may be some movement beyond what I mentioned before. The basics remain the use of historic ROE and price/book, but the ROE factor it is likely to be some combination of ROE10, 5, 3 and 1, all handily provided by sharelockholmes.
The companies above were re-valued either with ROE10 alone or the averages of the above averages (making averages of averages seems to be a compulsion of mine). Taking the average of the averages gives around a 40% weighting to the current ROE, with gradually less for the prior years. It makes some sense to me and in combination with less strict price/book entry criteria (I will now buy companies above book value and with negative tangible book values (!)) it certainly throws up a different sort of company to those I've held before. I'll nail down the exact approach in the coming weeks or months.
I realise this move (from buying assets on the cheap with little or no thought for anything else, to paying much more attention to the earning power of the assets) represents a sizeable amount of style creep, which can be a very bad thing; but as long as you're creeping in the right direction I think it's justifiable. I can only point my finger in Buffett's direction and say that if he did it, so can I.
Using my new approach to valuation (which as ever is mostly stolen from the giants whose shoulders I am trying to stand upon), I found that most of what I owned was already 'overvalued'.
The list of the departed and their annual gains is as follows, some of which I've mentioned before:
Company profit/loss Holding days
J Smart Contractors 5.2% 403
M J Gleeson 34.2% 541
French Connection 15.7% 639
600 Group 4.2% 682
Northamber 31.2% 757
Mallett -8.9% 785
Titon 47.7% 812
Averages 18.5% 660
Even though I've ended up selling these companies outside of my original system (which was to sell when the price/book ratio reached one, or after five years) I am happy, or perhaps lucky, with the average returns.
Currently my valuation method is in a bit of a flux, and there may be some movement beyond what I mentioned before. The basics remain the use of historic ROE and price/book, but the ROE factor it is likely to be some combination of ROE10, 5, 3 and 1, all handily provided by sharelockholmes.
The companies above were re-valued either with ROE10 alone or the averages of the above averages (making averages of averages seems to be a compulsion of mine). Taking the average of the averages gives around a 40% weighting to the current ROE, with gradually less for the prior years. It makes some sense to me and in combination with less strict price/book entry criteria (I will now buy companies above book value and with negative tangible book values (!)) it certainly throws up a different sort of company to those I've held before. I'll nail down the exact approach in the coming weeks or months.
I realise this move (from buying assets on the cheap with little or no thought for anything else, to paying much more attention to the earning power of the assets) represents a sizeable amount of style creep, which can be a very bad thing; but as long as you're creeping in the right direction I think it's justifiable. I can only point my finger in Buffett's direction and say that if he did it, so can I.
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