Thank-you

Just a short note to say thank-you to the various people who have reached out to me over the year to discuss ideas and strategy and provide feedback. This has helped me immensely, and I can't thank enough both the many professional and private investors who give me their time and I hope in some way I have helped people too. 

Have a great festive season. 

Thanks a lot. 

Kristian 

Third Link Growth Fund

The team at Harness Asset Management is proud to announce that we have joined the stable of fund managers responsible for looking after capital in the Third Link Growth Fund founded by market veteran Chris Cuffe. 

Member fund managers surrender their fees which, are allocated to a selection of children's charities. 

More info at http://thirdlink.com.au

What's happened to takeover arbitrages?

Getting straight to the point, it just doesn't seem that trading takeover arbitrages makes money these days. If anything, the way to make money from takeovers is to short the takeover target, although I certainly do not advocate or practise that strategy. For me, the most profitable and stress avoiding thing to do is just walk away and look for easier ways to make money. 

Before I go on, if you are unfamiliar with the term 'takeover arbitrage', it means buying the takeover target after the takeover has been announced. The ideal takeover is a binding, all-cash offer as it theoretically reduces risk, and leaves upside exposure should a higher bid(s) come along. 

The problem however is that bids can and do fall over and the downside can be horrible, especially compared to the upside. To use the three most common words in finance, there is often no 'margin of safety'. 

There are two reasons why I find it hard to get excited about takeovers these days: 1. many are 'indicative, conditional and non-binding' and 2. plenty of takeovers are just dodgy. 

Treasury Wine Estates (TWE) had not one but two conditional offers and still a deal could not be finalised:

Graincorp still hasn't recovered after the government knocked back the takeover: 

The recent collapse of the Reef Casino (RCT) was just plain fishy and regardless of what the actual truth is, the takeover arbitrageurs got a spanking: 

The mining sector is littered with failed takeover attempts, despite often superficially valid takeover bids on the table. 

Warrnambool Cheese and Butter (WCB) has been the only (that I can think of) truly success takeover arbitrage story from the past few years: 

I haven't traded a takeover for well over two years now, and apart from the very occasional sitting duck that has lots of embedded value, I can't see me trading too many in the future either. Please contact me if you disagree! 

Kristian 

Disclosure: no position in any of the above names

AIMS Property Securities Fund (APW)

I last wrote about APW back in May. Back then, the unit price was 10c and the NTA 15c. Now, the unit price is 11.5c and the NTA 18.1c. Prima facie, the unit price performance has been a bit of a yawn, however a 15% appreciation in a market that has been increasingly on the nose (market was down over 2% today (1 December) is actually pretty good.

I think the price could appreciate more (and has been higher - please note I have previously sold some stock at higher levels). Certainly there have been sellers of the stock lately, however if management can keep etching out NTA growth the unit price will invariably start moving again. The stock is trading at a big discount to NTA and has lots of cash so the margin of safety is high in my opinion, so for me it's justified holding on looking for more gains. 

Kristian

Disclosure: own APW

Australasian Wealth Investments (AWI)

I noted today that Andrew Barnes resigned as a Director of AWI. Mr Barnes was Chairman of AWI when the company bought van Eyk Research, which subsequently went bust. It is very rare for management to admit to mistakes, so it is commendable that Mr. Barnes has chosen to do so publicly. 

Kristian 

Disclosure: no position in AWI

Hastings High Yield Fund (HHY)

As noted a few times, one of the mandates I gave myself in this blog was to examine previous trades, including trades not taken. As a stock market investor, I see my job simply as to produce low-risk alpa as cheaply as possible; just like a German car manufacturer aims to produce quality cars while always minimising cost. So to do that, part of my process is to analyse past decisions and see what could be done better.  

The purpose of this post is to conduct a postmortem of my decision on HHY. 

I bought and sold HHY last year and made zero profit. 

My last note on HHY was September 2013 and the price was then 37.5c, so let's use that as the base line for analysis. 

HHY is now 17.5c, however there have a been further capital repayment of 3.59c (ex 24 September 13) and 25.8c (29 July 2014). The Internal Rate of Return (IRR) of what I have left on the table is 27.4% p.a. That's huge!

HHY has performed has a lot better than expected: it has chunked out lots of capital return quickly, thanks to the repayment of the Maher Terminals investment which I may or may not have determined might occur if I did more homework. So while I knowingly left money on the table, I had no idea I was leaving 27.4% p.a. behind. 

Anyway, from a return perspective, I made a mistake. 

From a risk perspective, I feel a little better about my decision. Looking back at that last post, my decision to exit was based on not being comfortable I would not get the return I want if everything did not work out fine and not having a big enough position to warrant the time to get to know the underlying investments better. 

To minimise risk, one approach that has worked very for well me has been to pyramid into positions... I buy a bit if my initial research stacks up, a bit more as I get more comfortable and keep buying all the way up to my target allocation. This has the dual benefit of helping to overcome paralysis by analysis (I actually tend to get on with my decision a bit quicker now as I'm only starting with a smaller stake) and if I realise I am wrong after doing further research, the overall % damage to my portfolio is very small. The flexibility of fluidity in my decisions has been a fantastic addition to my investment process. 

So I was clearly wrong to dump HHY on the basis of having a small position. This ought to have been the trigger point to do more research and buy more stock if I believed the story was sound, and not just flippantly say I can spend my time better elsewhere. 

This is not the first time I have left a stock because I didn't think the upside was enough only to be surprised by how well the stock performs. AIX and GPG come to mind immediately. So perhaps, I need to get a little better at trust, which also means doing more homework. Often cigar-butts are not massively underpriced, but underpriced just enough to be of little interest to people yet actually provide solid returns. 

And to be honest, one of my personal problems is I get bored with situations. Often, the better thing to do is be patient and just walk away and let competent management do it's thing. 

Kristian 

Disclosure: no position in HHY

Harness Asset Management - HAM!!!

It is with pleasure I can announce the launch of Harness Asset Management today (Friday 7 November).

Harness is being founded by my friend and fellow value sleuth, Nigel Littlewood. The investment committee is made up of Nigel, me, Matthew Kidman and Paul Hinds. A bunch of pretty hard headed value guys with our own money in the game.

The business is founded on value investing principles and a culture of prioritising the interests of clients ahead of our own. 

The fee structure is focussed on being rewarded for performance. Harness is open to investors who qualify as wholesale investors only. Please see the website for more details www.harnessam.com.au

Have a great weekend... 

Kristian