A Value Investing Blog

Posted on 18 Feb 2017 by Gareth Brown

Demographics for Dummies (and the RBA)

Demographics for Dummies (and the RBA)


There’s a prevalent assumption that Australia is far more urbanised (or should I say suburbanised) than the rest of the world. It’s is being spread by, among others, high-ranking staff of the Reserve Bank of Australia. Those staff have suggested urbanisation is a partial explanation for the gaping difference in dwelling price-to-income ratios between Australia and the US.

According to the RBA’s numbers, the average Australian dwelling sells for almost 5-times average household disposable income versus less than 2-times in the US.

But there’s a slight problem with the assumption about Australian urbanisation being far greater than in the US. While it’s both plausible and widely-believed, it’s also wrong. Last year, I attempted to prove as much—see Statistical Buggery: RBA Urbanisation. Continue reading “Demographics for Dummies (and the RBA)”

Posted on 18 Jan 2017 by Daniel Mueller

Value Traps, the Media Sector and the Fund’s Newest Investment, NZME

Value Traps, the Media Sector and the Fund's Newest Investment, NZME


The Australian media sector has wrecked the careers of many fund managers over the past decade. First were the growth investors — those prepared to pay high multiples for a business they think can grow. A decade ago high earnings multiples (around 20 times profit) were supposedly justified as deregulation was meant to lead to a wave of consolidation. Media moguls like the Packers, Stokeses and Murdochs were supposed to mop up the sector at premium prices. Fairfax (FXJ) was the most prized target, and APN News and Media (APN) wasn’t far behind.

Continue reading “Value Traps, the Media Sector and the Fund’s Newest Investment, NZME”

Posted on 12 Dec 2016 by Steve Johnson

Bellamy’s Lesson on Loyalty in China

Bellamy's Lesson on Loyalty in China


Just six months ago, organic baby-food company Bellamy’s was flying the flag for a new Australian economy. Australia’s reputation for healthy, clean food was going to pick up the resources slack as China’s growth transitioned from infrastructure to consumption, 

No stock encompassed the opportunity better than Bellamy’s, where sales grew from less than $30m in 2013 to $245m in the most recent financial year.

The stock is in a trading halt this morning. Another downgrade is likely, just a few weeks after the company’s first profit downgrade caused the share price to halve.

Knives will be out. The company’s lack of infrastructure will be scrutinised. Its lack of marketing expenditure will be blamed. But the cause of its woes is much simpler. Continue reading “Bellamy’s Lesson on Loyalty in China”

Posted on 08 Dec 2016 by Kevin Rose

Harley Rides on Without Us

Harley Rides on Without Us


Deciding to sell a stock is often harder than deciding to buy it. Selling our shares in Harley-Davidson (NYSE:HOG) provides a good example.

Since the US election, investors have rewarded companies with a nationalist bent. It doesn’t get more flag waving than Harley. Indeed, the company’s share price has risen almost twice as much as the overall market since Donald Trump’s election.

Sentiment that Harley’s core customer base will fare better under the new administration, combined with optimism around its new engine redesign, has pushed Harley’s share price to a level that reflects fair value. Continue reading “Harley Rides on Without Us”

Posted on 28 Oct 2016 by Kevin Rose

Is Google Finding Religion?

Is Google Finding Religion?


Something is going on at Alphabet (Nasdaq:GOOG), parent company of Google. This past Tuesday, the company announced that it was essentially abandoning Google Fiber, its high-speed broadband internet business. The business will “pause” expansion efforts into new cities and will reduce its employee base. The head of the unit is also stepping down. If that is anything other than a big corporate pink slip, then call me a lumberjack.

I’ve never been much of a fan of Google’s fiber effort. The company was always pushing a monolithic boulder up a Mt. Everest sized slope. It was taking on deeply entrenched incumbent service providers in the cable and telco companies. If you have read our thoughts on FISF holding Cable One, Inc. (NYSE:CABO), then you probably know that we have a great appreciation for those very boring cable businesses. Google was attempting to differentiate itself with a superior service (gigabit speed connection), but the latest announcement implies that its selling proposition failed to find traction. Or at least enough traction to earn an attractive return on Google’s investment.

But the changes at Google Fiber do not stand in isolation. On the same day, YouTube CEO Susan Wojcicki shot down speculation that YouTube might begin to invest more aggressively in scripted original programming. She essentially stated that YouTube’s ad-based business model didn’t generate enough profit to successfully compete with behemoths like Netflix and Amazon. Note the eye on financial discipline.

There have been other signs as well. Back in August, a number of key employees of Google’s self-driving car program left the company, including its Chief Technology Officer. While it remains a mystery as to the reason, rumors abound that he was frustrated with a change in strategy. Google was gearing up to separate the unit from its home within the Google X division and prepare it for life on its own. In other words, management had had enough theory (aka spending money), and now wanted a business (the payoff).

Keeping the Google soul

Taken together, it strikes me that CFO Ruth Porat is having a massive impact. We have noted in the past that her joining the company spurred us back in to the stock. But not even we could have hoped for this level of financial rigor. My guess is that if you worked at Google three years ago and wanted a billion dollars for a ping-pong table, a wet bar and an engineering team to develop a humanoid yogi, you probably got it. Those days are long gone.

But at the risk of biting the hand that feeds, I hope Google is not losing its soul. The company has a unique essence that has enabled it to continue to grow at a rate unheard of for a mega-sized company (unless you’re Amazon). Pouring money into R&D, encouraging its employees to spend time on unsanctioned side projects, its apathy towards money-losing ventures, the moonshots. Collectively these qualities represent an attitude that has led to major businesses like YouTube, Gmail, Android and others. Google Cloud looks primed to be the next in that string. I hope that the company finds the right balance, an appetite to fuel innovation without starving itself, but within a more fiscally reasonable paradigm.

Posted on 27 Oct 2016 by Daniel Mueller

Found: A Central Bank that is a Second Order Thinker

Found: A Central Bank that is a Second Order Thinker


After reading Gareth’s blog post on Central Banks: First Order Thinkers?, I wondered whether any central banks are practicing second order thinking. So I combed the globe to find a central bank that looks deflation in the eye and raises interest rates, rather than lowering them. And I didn’t have to venture far from Gareth’s Scandinavian examples.

Located on the western side of the Norwegian Sea, we find the Nordic island nation of Iceland. Its central bank has maintained relatively high interest rates over the past five years.

Continue reading “Found: A Central Bank that is a Second Order Thinker”

Posted on 13 Oct 2016 by Steve Johnson

Gale Blowing for Index Unaware

Gale Blowing for Index Unaware


Setting Daniel’s closet index huggers to one side, the past few years have been exceptional for Australia’s genuinely active fund managers. Our Australian Shares Fund has returned 34% over the last 12 months. According to Morningstar, that ranked the Fund just 7th out of 24 in its category. There are plenty of fund managers that have returned better than 30% this last year. And that’s one in which the main index, the All Ordinaries Index, returned just 14% including dividends.

Gale Blowing for Index Unaware
Forager Australian Shares Fund returns from


When it comes to international shares, the opposite has been true. Our International Shares Fund has outperformed the index by just 4.8% over the past year, yet that ranks it 10th out of 204 global funds Morningstar deems to be similar. Over three years, we are less than 1% ahead, yet Morningstar ranks the three-year performance 11th out of 176 funds.

Continue reading “Gale Blowing for Index Unaware”

Posted on 07 Oct 2016 by Daniel Mueller

Active Fees for Passive Returns – How Did it Come to This?

Active Fees for Passive Returns – How Did it Come to This?


In the 1990s, Colonial First State fund manager Greg Perry established himself as an industry doyen. Between 1990 and 2002, the manager’s flagship Imputation fund outperformed the All Ordinaries Index by 11.8% per annum. Together with CEO Chris Cuffe, the duo oversaw a highly successful period, with funds under management growing from $150 million to $100 billion, including $25 billion in Australian equities.

That period heralded an era when a number of fund managers established outstanding track records investing at the blue chip end of the ASX. Fund managers such as Perry, Peter Morgan and the late Robert Maple-Brown all significantly outperformed the All Ords for well over a decade. Long enough to suggest that it wasn’t by chance.

But the industry changed soon after the turn of the century. The pool of talented Australian fund managers seemingly dried up. The game transformed. Being a fund manager became less about outperformance. The new incentive – don’t underperform and you keep your funds.

Continue reading “Active Fees for Passive Returns – How Did it Come to This?”

Posted on 04 Oct 2016 by Gareth Brown

Brexit: Better Than Expected…So Far

Brexit: Better Than Expected…So Far


There’s been a slew of barely-worth-reading media articles outlining how the UK economy has kept up surprisingly well in the face of Brexit.

The response in other parts of the media, and on social media, has been harsh and predictable. Paraphrasing, it goes:

D’uh. We’re still in the EU. Theresa May hasn’t invoked article 50. The shit is yet to hit the fan.

I think that point makes sense on some level. But it strikes me as firmly first order thinking. It unavoidably assumes that consumers and companies are not anticipatory. That it’s logical that they’ll go on with their merry former ways until such day as May drops the bomb or even until the UK actually departs the EU a few years later. It assumes that the smug tweeter knows something—that the excrement will soon meet the fan—that is lost on all those hapless consumers and companies. Continue reading “Brexit: Better Than Expected…So Far”

Posted on 29 Sep 2016 by Kevin Rose

The Craft Beer Party is Over

The Craft Beer Party is Over


When I moved to New York City some sixteen years ago, every bar offered roughly the same menu of beers: Bud Light, Corona, Amstel Light, Corona, Heineken and Corona. But, much as in Oz, the craft beer market in the US has exploded over the last ten years. Now it is possible to walk into a bar and not recognize a single tap.

I love it. I love how easy it is to find good beer these days. I love visiting new cities and trying the different local microbrews. But the sheer number is overwhelming. The microbrewery count has gone from  about 1,500 in 2008 to 4,200 in 2015. With relatively few barriers to entry, a new one opens every day. For a beer enthusiast like myself, the plethora of options is nirvana.

The analyst in me, though, debates whether they can all survive. Looking back, no matter how many new beers lined the shelves, there seemed to be room for everyone. With the global behemoths like Anheuser-Busch and Heineken slow to react, the small craft brewers reveled in an extended party free of big business concerns like competition, distribution and supply chain management. Everything came easy for them as they rode the wave of the cultural zeitgeist. Continue reading “The Craft Beer Party is Over”

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