As has become clear, my portfolio has undergone a major change from a collection of low price/tangible book, low earning companies to a growing collection of low price/book companies with far better earnings histories.
Using my new approach to valuation (which as ever is mostly stolen from the giants whose shoulders I am trying to stand upon), I found that most of what I owned was already ‘overvalued’.
The list of the departed and their annual gains is as follows, some of which I’ve mentioned before:
Company profit/loss Holding days
J Smart Contractors 5.2% 403
M J Gleeson 34.2% 541
French Connection 15.7% 639
600 Group 4.2% 682
Northamber 31.2% 757
Mallett -8.9% 785
Titon 47.7% 812
Averages 18.5% 660
Even though I’ve ended up selling these companies outside of my original system (which was to sell when the price/book ratio reached one, or after five years) I am happy, or perhaps lucky, with the average returns.
Currently my valuation method is in a bit of a flux, and there may be some movement beyond what I mentioned before. The basics remain the use of historic ROE and price/book, but the ROE factor it is likely to be some combination of ROE10, 5, 3 and 1, all handily provided by sharelockholmes.
The companies above were re-valued either with ROE10 alone or the averages of the above averages (making averages of averages seems to be a compulsion of mine). Taking the average of the averages gives around a 40% weighting to the current ROE, with gradually less for the prior years. It makes some sense to me and in combination with less strict price/book entry criteria (I will now buy companies above book value and with negative tangible book values (!)) it certainly throws up a different sort of company to those I’ve held before. I’ll nail down the exact approach in the coming weeks or months.
I realise this move (from buying assets on the cheap with little or no thought for anything else, to paying much more attention to the earning power of the assets) represents a sizeable amount of style creep, which can be a very bad thing; but as long as you’re creeping in the right direction I think it’s justifiable. I can only point my finger in Buffett’s direction and say that if he did it, so can I.