James, is understanding the fundamental worth of a business critical to an investment decision? Yes. The higher the price, the greater the market's growth expectations. As for the 'blue sky' component of the valuation, in my view, analysis always wins out. Price and momentum indicators are useful only in conjunction with an understanding of valuation. At Lumenary we apply an objective framework for analysing that component - but that's a topic for another article. Understanding the intrinsic value and the 'blue sky' component will help investors view prices as exactly that, prices. We have shared our framework at a few industry conferences - feel free to join us next time if you'd like to understand more. Russell, regarding intrinsic values, I disagree for the reasons I've outlined above. Stock prices and sentiments vary widely across the world. Reasonable prices are always available - one just needs to look globally for them. In addition, as a matter of overall approach, I would question whether one should re-calibrate their valuations to reflect stock price movements for one particular stock. Graeme, the first chart shows precisely the how stock price-to-intrinsic value relationship has changed over time. The growth of both variables has not been identical, even if you take the last 5 years as you've proposed.
The intrinsic values above are very conservative. Accounting anomalies have been reversed and the value of future growth has been kept separate. In contrast, stock prices include the blue sky assumption of future growth. How much is a reasonable multiple to pay for future growth? That depends on the factors discussed above, including any other alternative companies one could invest in. Relative measures are more useful than absolute when assessing the context of the opportunity; intrinsic values are still estimations. Extremely high prices (and stock price-to-intrinsic values) may still prove reasonable if the factors above are supportive. There are many parties one could join, so understanding the sobriety of the crowd and how much alcohol actually remains is key to deciding whether you should join this particular one. Note the article is not intended as a buy/sell recommendation for HEICO.
Thanks for engaging Grant. Yes, we absolutely live and breathe the founder-led ethos given Lumenary backs exactly these kinds of organisations and is also founder-led in itself by yours truly. We do believe that founder-led organisations tend to place a stronger focus on fundamental matters of good business such as an ethical and customer-focussed culture, which Hayne mentions in his interim and final reports as being at the heart of many issues, rather than a lack of regulation. We aren’t in any way suggesting anti-regulation, nor have we indicated that penalties shouldn’t be imposed for bad behaviour. Best practice governance frameworks such as the ASX’s Corporate Governance Principles and Recommendations for example, have done nothing to address these cultural issues.
Great event and insightful commentary. Thanks James
Thanks Rob. In my opinion opportunities are there for those that can see the bigger picture. As they say 'if you don't look, you won't find'. Curious to hear about other common misjudgements observed by others.
Agree. As Warren Buffett says, businesses run well when everyone eats their own cooking.
There's always the option of allocating some investments to proven quality and some to more blue sky-type investments. It sure doesn't have to be one or the other. I'd also add proven quality and promising aren't mutually exclusive. There are promising companies that also have proven quality. Think Nike, which continues to go from strength to strength and continues to evolve their business continually.
The ability to dedicate time and have the 'finger on the pulse' is the main advantage fundies have. At the same time there are also other structural constraints faced by fundies. Given the competitive landscape is constantly evolving, investment theses are never static, always dynamically evolving. @Shaun, I'll be writing a piece about emotional biases (including commitment bias) shortly. If you've chosen to drive with a manual car, then you'll have certain advantages - just make sure you dedicate the time to learning it properly, otherwise automatic is a safe choice.
Thanks Emanuel. I enjoyed contributing my first wire. Nice to connect with similar-minded investors.