22 Oct 2008
Economic crisis
A few posts ago I said:
"Unless there is a economic crisis or extreme interest rate rise I don't see how this is going to happen in just a few years (not even the 7 years of the last downturn). It seems more likely to me that we'll have a property downturn for a decade or more finally resulting in fair value, before we start the march up again. "
I think we've just been through a bit of a banking crisis so perhaps lending criteria will dry/stiffen up sufficiently to sustain about 15% a year nominal drops, which gives us a 50% drop in only 3 years. I still think that's unlikely but with inflation near 5% the drops in real terms could be of that order.
"Unless there is a economic crisis or extreme interest rate rise I don't see how this is going to happen in just a few years (not even the 7 years of the last downturn). It seems more likely to me that we'll have a property downturn for a decade or more finally resulting in fair value, before we start the march up again. "
I think we've just been through a bit of a banking crisis so perhaps lending criteria will dry/stiffen up sufficiently to sustain about 15% a year nominal drops, which gives us a 50% drop in only 3 years. I still think that's unlikely but with inflation near 5% the drops in real terms could be of that order.
10 Oct 2008
Bought Northamber at 39.40p on Sept 25
Northamber Plc is a United Kingdom-based company principally engaged in the supply of computer hardware, computer printers and peripheral products, computer telephony products and other electronic transmission equipment.
Price/book = 0.34
price/tangible book = 0.34
price/(current assets - all liabilities) = 0.39
In the last few years it's been making a small profit and paying a dividend. Price has ranged between 117p and the current lows around 30p.
Lets see what the next few years bring.
Price/book = 0.34
price/tangible book = 0.34
price/(current assets - all liabilities) = 0.39
In the last few years it's been making a small profit and paying a dividend. Price has ranged between 117p and the current lows around 30p.
Lets see what the next few years bring.
22 Sept 2008
Bought Mallett at 78.90p
Price/Book =0.43
Price/(current assets - all liabilities) = 0.53
Since 1865 Mallett have grown to be the largest and most exclusive antiques business in the world with galleries in both London and New York.
Their share price had been around 250p in the last few years but since the start of 2007 (credit crunch) it has collapsed to below 80p and well below book value.
Of course the credit crunch will impact them but in the long run I expect them to return to a fair price of at least 150p.
29 Aug 2008
Bought Titon Holdings at 33p
I bought Titon Holdings (TON) today. They are a leading UK supplier of Ventilation Systems and Window Hardware.
Notable features were low debt, with current assets (9M) enough to pay of all liabilities (2.7M), leaving 6.3M and a current market cap of 3.1M. So you could buy the whole company, close it down and take the cash in the bank (almost 2M), sell all the stock and collect receivables and make a profit.
The share price has floated around 100p for the last decade, but since the credit crunch and related housing slowdown their share price has collapsed to around 30p. The only reason I can see for this looking at the company reports is that profits halved in the last year and general market sentiment against the housing related sectors.
The plan is to sit back and wait for the cycle to turn and/or management to make the required changes and sell out above 60p. If that hasn't happened in 5 years I'll sell up and move on.
The details were:
Titon Holdings bought at 33p, market cap 3.1M, PB 0.3
Notable features were low debt, with current assets (9M) enough to pay of all liabilities (2.7M), leaving 6.3M and a current market cap of 3.1M. So you could buy the whole company, close it down and take the cash in the bank (almost 2M), sell all the stock and collect receivables and make a profit.
The share price has floated around 100p for the last decade, but since the credit crunch and related housing slowdown their share price has collapsed to around 30p. The only reason I can see for this looking at the company reports is that profits halved in the last year and general market sentiment against the housing related sectors.
The plan is to sit back and wait for the cycle to turn and/or management to make the required changes and sell out above 60p. If that hasn't happened in 5 years I'll sell up and move on.
The details were:
Titon Holdings bought at 33p, market cap 3.1M, PB 0.3
13 Aug 2008
Value Share Selection
My share buying criteria are slowly taking shape, based on extensive back testing as reported in "What has worked in investing" by Tweedy, Browne Company LLC, plus some testing of my own using DigitalLook's Market Stars system and my reading of Ben Graham.
I'm a simple chap so I like simple rules. I start by sorting the FTSE all share plus the FTSE Fledgling indices by price/book. I select those in the bottom 10%. Then I sort those by market cap and select the smallest 10%. Then I exclude those with a dividend yield less than 1%. Finally I sort by price/book again. Basically this gives me small cheap shares that are still paying a dividend. Generally I don't like to buy shares with price/book over 0.5.
I'm a simple chap so I like simple rules. I start by sorting the FTSE all share plus the FTSE Fledgling indices by price/book. I select those in the bottom 10%. Then I sort those by market cap and select the smallest 10%. Then I exclude those with a dividend yield less than 1%. Finally I sort by price/book again. Basically this gives me small cheap shares that are still paying a dividend. Generally I don't like to buy shares with price/book over 0.5.
7 Aug 2008
Bought Pendragon at 8p and Ennstone at 16.47p
I started my toe dipping exercise into value investing this month. The plan is to start out light and only buy once a month or when I sell something. I want to hold up to 20 stocks and also use the sliding cash system I thought about last time where the cash % is twice the average PE of the market.
The general idea is to buy stocks from the FTSE All Share index which fall in the lowest 20% market cap of the bottom 10% price/book. So if there are 500 companies in the index then I pick the 50 with the lowest PB and then the smallest 10 of those by market cap.
Many previous studies have shown that these stocks can outperform the market over the next few years after purchase. The gist is that markets are not 100% efficient and that they over do the gloom on certain stocks or just don't value them fairly.
My sell signal will either be when the company reaches a price/book ratio of 1, or when I've held the stock for 5 years, whichever comes first.
This month I bought:
Pendragon at 8p, market cap 62M, PB 0.15. This is a car dealership network and it's been pretty beat up in this recession.
Ennstone at 16.47p, market cap 81M, PB 0.4. This is a construction and materials company and has not surprisingly lost a lot of value recently.
The general idea is to buy stocks from the FTSE All Share index which fall in the lowest 20% market cap of the bottom 10% price/book. So if there are 500 companies in the index then I pick the 50 with the lowest PB and then the smallest 10 of those by market cap.
Many previous studies have shown that these stocks can outperform the market over the next few years after purchase. The gist is that markets are not 100% efficient and that they over do the gloom on certain stocks or just don't value them fairly.
My sell signal will either be when the company reaches a price/book ratio of 1, or when I've held the stock for 5 years, whichever comes first.
This month I bought:
Pendragon at 8p, market cap 62M, PB 0.15. This is a car dealership network and it's been pretty beat up in this recession.
Ennstone at 16.47p, market cap 81M, PB 0.4. This is a construction and materials company and has not surprisingly lost a lot of value recently.
31 Jul 2008
Two Value Portfolios
I want to run some back testing on a couple of value portfolios. They're both based on picking relatively small cap stocks with a low PB, preferably below 0.5.
The first portfolio holds the stock for a year and if the criteria are no longer met (cap too large or PB too high) I sell, otherwise I hold for another year.
The second method buys the same stocks but holds them until the PB reaches 1, regardless of cap. Will this outperform the first method or will I just end up holding a bunch of stocks that are going nowhere, i.e. never reach par? Only back testing and time will tell.
This could be mixed in with the sliding cash holding method of the last post, or I could just be strict with the criteria and if the market is overpriced then there won't be many if any stocks with a PB of 0.5... there certainly weren't many between 1999 and late 2001.
The first portfolio holds the stock for a year and if the criteria are no longer met (cap too large or PB too high) I sell, otherwise I hold for another year.
The second method buys the same stocks but holds them until the PB reaches 1, regardless of cap. Will this outperform the first method or will I just end up holding a bunch of stocks that are going nowhere, i.e. never reach par? Only back testing and time will tell.
This could be mixed in with the sliding cash holding method of the last post, or I could just be strict with the criteria and if the market is overpriced then there won't be many if any stocks with a PB of 0.5... there certainly weren't many between 1999 and late 2001.
24 Jul 2008
Sliding cash ratio based on index p/e
I had an idea today that I might do some back testing with. It's kind of a slant on MPT with a dynamic cash allocation. What if instead of having a fixed cash allocation of say 30% which you re-balance to each year, you instead use the p/e ratio of whatever indices you're invested in (S&P, FTSE100 etc) to determine that allocation?
Assuming a p/e of 14x is fair value, 7x is very cheap, 21x is very expensive and 28x is an insane bubble, what if you used double that number as the cash %? So each year, if say the FTSE100 had a p/e of 14x you'd set your cash allocation at 28%. If the p/e was 7x you'd have the cash allocation at 14% and if the p/e was 28x you'd have the cash allocation at 56%.
This seems reasonable at first glance since at 14x, 28% cash is a reasonable safe amount. At 7x the stock market is historically cheap (with a better than average probability of going up) and yields are high so you load up on it with only 14% cash. At 28x the stock market is historically very expensive (with a better than average probability of going down) with low yields so you don't want much exposure, i.e. 56% cash.
I think I'll do some back testing if possible and see what history says.
Assuming a p/e of 14x is fair value, 7x is very cheap, 21x is very expensive and 28x is an insane bubble, what if you used double that number as the cash %? So each year, if say the FTSE100 had a p/e of 14x you'd set your cash allocation at 28%. If the p/e was 7x you'd have the cash allocation at 14% and if the p/e was 28x you'd have the cash allocation at 56%.
This seems reasonable at first glance since at 14x, 28% cash is a reasonable safe amount. At 7x the stock market is historically cheap (with a better than average probability of going up) and yields are high so you load up on it with only 14% cash. At 28x the stock market is historically very expensive (with a better than average probability of going down) with low yields so you don't want much exposure, i.e. 56% cash.
I think I'll do some back testing if possible and see what history says.
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