Price Vs Value

All true investing is founded on an assessment of the difference between price and value; we’re intent on paying a price lower than the value we receive. There’s about 2000 companies listed on the Australian Stock Market (ASX). If you imagine those 2000 companies like a restaurant menu, on most days it offers a menu full of bland, unhealthy, fully priced choices. We’re devoted to an endless search for a highly compelling investment situation. The single most likely reason for a share price to rise is because it was unvalued in the first place. We spend a terrific amount of time reading. We see our job as essentially just corralling more and more facts and information and occasionally this may lead to some action. Every day, media, a share register, a share price or a company announcement will point you in the right direction. That’s when we start to think, watch and wait. We’re incredibly selective about what we’re buying. Sometimes we watch companies for years waiting for the share price to represent outstanding value. Typically, we’ll only come up with two or three really good ideas a year. If we can’t find a good idea, we don’t invest anything. You simply cannot buy something cheaply unless there is some bad news. We believe that buying unloved, cheap companies where share prices are at all-time lows is a far more successful strategy than buying them when there’s lots of popularity built into the share price. We don’t pay for popularity.

“We’re incredibly selective about what we’re buying”

What attracts our attention is share price graphs that go down, not graphs that go up. We hunt for opportunity amongst shares that the broader market dislikes, shares that are beaten down and out of favour, shares that for one reason or other have dropped far below the value of the underlying business. If the broader market hates it, we’ll be taking a very close look. We’re not reactive or emotional about a company’s share price. We’re only concerned with calmly finding and assessing true value. We tend towards a two-year horizon. We think that if a company’s share price has every chance of doubling in this time frame, then that’s a share we might buy. We like to own situations where we’re not reliant on everything going right for the share price to rise.

“What attracts our attention is share price graphs that go down, not graphs that go up.”

Situations where the share price has become very “oversold”. Situations where even quite a small change in sentiment about a company can see the share price double. We’re not very interested in small companies that plan to be tomorrow’s big companies, usually there’s lots of complicated plans involved where a lot has to go right to justify the optimistic share price. Occasionally we’ll see a situation we like but we’re not inclined to overpay to capitalise the ambitions of small companies. We’re simply looking for situations where a share price is so heavily oversold that it won’t take much to double its value. Many assets available for purchase today are “priced for perfection”, where if anything was to go wrong, or not go according to plan, the assets value could quickly be less than the purchase price. (Think of the value of houses, farms and popular shares.) We don’t believe in this style of investing.

“Looking for situations where a share price is so heavily oversold that it won’t take much to double its value.”

What we find is that sharemarkets repeatedly offer wonderful situations for cheap assets. We want that “margin of safety” where we’ve bought the assets cheap – where we can stand a few things not going according to plan and still do well because we’d started out so far ahead by getting the purchase price right. Here’s a few examples of the types of businesses that attract our interest. Notice how they’re not the big popular names in the market; yet they’re substantial companies – companies that tend to fly under the radar. The profits to be had by buying them at their low point can be immense and the downside risk, minimal.

“Repeatedly sharemarkets offer wonderful situations for cheap assets.”

Whitehaven Coal Limited (ASX stock code WHC): Whitehaven is a major operator of open-cast coal mines in Australia. In early 2016, Whitehaven was bogged down in the difficulties and cost of developing a major new open-cast coal mine. It wasn’t helped that international coal prices were at historical lows. The market decided that in February 2016 a reasonable price for Whitehaven shares was 35 cents a share. Just under two and half years later, the Whitehaven share price hit an all-time high of $5.60. This was a gain of 1500% from its lows of 35 cents. Whitehaven didn’t do anything in particular to bring about this transformation, it just got on with its business of owning and operating coal mines and sending the coal to China.

“Whitehaven Coal up an incredible 1500% in just under two and a half years; Persus Mining up 354% in seventeen months; Myer Holdings up 106% in two months.”

Persus Mining Limited (ASX stock code PRU): Persus owned a collection of African gold mines. Annual gold production was forecast to almost double as its third mine was developed. In September 2018 the market thought all this potential should sell for 33 cents a share. Seventeen months later, in March 2020, Persus hit an all-time high of just over $1.50 a share, that’s a gain of about 354% in 17 months. Myer Holdings Limited (ASX stock code MYR): This is the well-known Australian department store chain that’s fallen on hard times in recent years with high overheads and declining ‘in store’ turnover. It’s in something of a battle to reduce its fixed costs and expand its online business. The market got particularly pessimistic about this and in February 2019, was happy to buy and sell the shares for 36 cents a share, subsequently a new management team installed a few months earlier managed to halt the decline; two months later some of that pessimism had abated and the market thought that all of a sudden Myer shares should change hands at 74 cents a share; that’s a gain of 106% in two months. These companies didn’t require complicated plans to succeed, they didn’t have to reinvent the wheel for their share price to increase, pretty much they just got on with the business that they were familiar with, putting one foot in front of the other until the market saw them in a different light. Until sentiment changed. The value was always there – for those investors prepared to look and think differently from the crowd.