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Intelligent InvestorPO Box 1158 Bondi Junction NSW 2022T 02 8305 6000 F 02 9387 [email protected] www.intelligentinvestor.com.au

report publIshed July 2011

the Intelligent Investor

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Dear Member,

When considering investment advice, you probably want to know a thing or two about those providing

it. This report will introduce you to Intelligent Investor’s analysts.

In it you’ll discover our greatest investment mistakes, our pet hates, favourite books and top tips for new

investors. I’m sure you’ll enjoy it.When I joined this publication in 2006, our former research director and current part owner Greg

Hoffman, took a chance on me. I boasted nearly every finance qualification but Greg focused on my passion

for investing and the fact that I had bought my first share at a very young age.

Now I find myself searching out ‘unconventional’, original-thinking analysts much like he did; Intelligent,

passionate people with practical experience. And I use the same practical tests he used on me to weed out

the many ‘pretenders’ this industry attracts.

The results, I think, speak for themselves. We read voraciously, welcome mistakes as opportunities to learn

and approach every corporate press release and annual general meeting with a healthy dose of scepticism.

These are inherently risk-averse individuals who understand that to make money, one must first preserve

what one already has.Their study of the world’s most successful investors, their investing experience and their inherent

conservatism will serve you well.Read of their experiences over the following pages and consider some of their book recommendations,

I think you’ll find them most beneficial.

Yours sincerely,

Nathan Bell Research Director

CoNteNts

Page Page

Nathan Bell 3 gareth Brown 4James greenhalgh 7 gaurav Sodhi 9Tony Scenna 10

The Intelligent Investor | Analyst profiles

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bIoGrAphy

Nathan grew up in Mt Gambier, South Australia, home of the famous Blue Lake which changes colour with the seasons (not unlike Nathan’s hair). After accumulating some savings by working in the local Kmart, he made his first investment in Tab. A columnist in the local rag had suggested subscribers could earn a 70% return from Tab’s float. Unfortunately he cashed in his holding for a $1 profit after just four months. It was an inauspicious start, but he’d been bitten by the investing bug.

Figuring there must be ways of making more than a dollar, Nathan experimented with all manner of investing techniques. Charting, hedge funds and punting on resources and technology stocks were each tested—unscientifically and unsuccessfully. His broker was grateful, his girlfriend less so (she stuck around, though, and they married in 2009). After high school, he moved to Adelaide to pursue a career in AFL, but managed to squeeze in an economics degree between training sessions just in case the footy didn’t work out.

It didn’t. So he spent a couple of years back in Mt Gambier, working as an accountant for Carter Holt Harvey, before heading off for a two-year stint in London, where he worked as a management accountant for the Evening Standard and as a financial analyst for the Electricity Pool of England & Wales.

On returning to Australia, Nathan moved to Sydney and worked in various roles for Deutsche Bank. It was here that the notion of value investing finally twigged and, in the course of reading as much on the subject as possible, he came across Intelligent Investor.

Q&As

Was your time as an operating accountant at Carter holt harvey useful in terms of your investing?

Absolutely vital. This is where I learned the nuts and bolts of accounting and, most importantly, its limitations. It’s important to understand the links between all three financial statements—what the accountants giveth with one hand, they taketh away with the other.

Academically, you’re one of our most highly decorated analysts. Which part of your formal studies have you found most useful?

Formal education is best for learning basic quantitative analysis skills. But it’s the ‘art’ of investment—understanding the qualitative factors—that’s most important, and it’s hard to teach.

The best learning also involves practical experience—you don’t really feel the pain of a mistake until it affects your hip pocket.

has working at Intelligent Investor changed your investment approach at all?

The amount of time I spend thinking about qualitative factors (for example the quality of management) has increased enormously. I’ve seen several companies that have had great investment potential based on the numbers, but after considering all the qualitative aspects, I’ve completely changed my opinion. Never be afraid to change your mind.

Where do you tend to find your best investment opportunities?

By avoiding ‘popular’ stocks where the market clearly recognises a company’s earning potential and has factored it into the share price. Small stocks off the radar of large investors hold plenty of appeal, but the mid-cap range where you find high quality franchises like Corporate Express and Flight Centre have been a happy hunting ground, as they tend to get tossed out fairly quickly when they run into temporary and solvable problems. Looking back over the past decade, I’m still amazed at how regularly high quality businesses trade at bargain prices. Yet most people opt for the latest hot investment where there’s a high chance of doing your dough rather than waiting patiently for a high quality

proFIle

FormAl eduCAtIoN

A degree in Economics and a Graduate Diploma in Applied Finance & Investment. I’m also a Chartered Financial Analyst.

INFormAl eduCAtIoN

No time, too busy studying.

JoINed the INtellIGeNt INvestor

April 2006.

prevIous employers

Carter Holt Harvey, Deutsche Bank.

hobbIes/INterests

AFL, fitness, music.

FAvourIte INvestING book

Poor Charlie’s Almanack by Charles T Munger; and anything written by Jim Grant.

INvestING hero(es)

Warren Buffett, Charlie Munger, Seth Klarman & Bruce Berkowitz.

FAvourIte INvestING Quote

“Without fear in a stock, there’s probably not much chance of big capital gains.”—Robert Wilson


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business to go on sale, where the returns are still high but the chance of losing money is close to zero.

What has been the most expensive investment lesson you’ve learned?

It’s a toss up. From my experiences with SkyNet Global I learned that it’s never worth paying up for ‘blue sky’ prospects. And from selling out way too early following investments made in Aristocrat Leisure and QBE earlier this decade, I learned that you should come up with your best estimate of intrinsic worth and buy with courage. If you’ve no estimate of intrinsic worth, how do you know what price to pay and when to sell?

What are the best and worst things about contributing to Intelligent Investor?

Doing what I enjoy doing—analysing companies. It’s a constant challenge: discussing ideas and opinions with the other analysts; mixing with the personalities in and outside of the office; helping members invest their money. The worst thing is when a recommendation turns sour and members lose money; it’s an inevitable part of the business, but that doesn’t make it feel any better when it happens.

What’s been your best investment decision?

QBE. Even after losses sustained from the 9/11 terrorist attacks were quantified, the stock retained its ‘fear factor’ for a while afterward. Unfortunately, I sold out at $12.

bIoGrAphy

Born and raised in the western suburbs of Sydney, Gareth developed an interest in business early in life. His first attempted deal was with the tooth fairy (he lost) and years later he took on various paper routes and part-time jobs before joining Commonwealth Bank in 1995.

Then, in 1997, a colleague lent him a copy of The Warren Buffett Way by Robert Hagstrom. It was a turning point. Despite having completed a Bachelor of Business (majoring in Finance) at the University of Technology, Sydney, he still landed a job at Intelligent Investor in 2002.

Gareth prefers studying industrial stocks and enjoys uncovering companies with attractive economics, especially those misunderstood by the market.

Q&As

you’re a voracious reader and traveller. how important do you think these factors have been to your investing success?

Reading is tremendously important to investing success, and I don’t just mean investing books but getting across a wide range of disciplines. You don’t need to make all the mistakes yourself when you have a curious personality and work hard at learning from others. Reading, observing, thinking and questioning are incredibly important. Trying to get a little smarter each year when nature is doing its best to send you in the opposite direction is a compelling challenge, too.

Travel is part of that, I guess, observing things from a different perspective. Australia has many beautiful places. But Ireland has better pubs, Belize has fantastic diving, and Austria has wonderful mountains and schnitzel. I’ve never found anywhere that offers nothing to love. I’ve forever been obsessed with geography, and enjoy experiencing what was once just a well-studied page in the atlas. A first-hand experience of other countries probably becomes more important as the world, and therefore investing, becomes more globalised. But while I’m always thinking about business, it’s not my main reason for travelling.

proFIle

FormAl eduCAtIoN

Bachelor of Business at UTS. I majored in Finance and learned a great deal about how not to think.

INFormAl eduCAtIoN

I had a paper route from about age 10. It was the free local Advertiser, which is a very different business from delivering the major papers. It’s all about efficiency rather than salesmanship, trying to deliver to 500 houses before dinner goes cold. Dad often helped out but, quite unfairly, I got to keep all $6.50 for the task. Almost all that money went into term deposits and, eventually, shares.


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before joining Intelligent Investor, you spent a few years at Commonwealth bank. Any lessons or stories you’d care to share from that time?

I’ve learned that big organisations are immensely more complicated than small ones. That’s important to understand if your career is analysing businesses, and probably explains why big companies are the exception rather than the rule when it comes to my own portfolio.

I also learned that taking phone calls from the New York office at 3am wasn’t what I wanted to do in life. The buzz of working in a hectic dealing room was great for a while but, for me, that wore off after a few years and grey hairs. Some people are perfectly hardwired for such a frantic, reactionary environment, but with my temperament I had to settle for long-term investing.

Leaving the bank, travelling and studying for a while before taking a big pay cut to work at Intelligent Investor was undoubtedly the best career decision I’ve ever made.

you’ve developed quite a concentrated, or focused, approach to investing. What was behind that? Was it a sudden realisation or a gradual refinement?

I took to focus investing pretty much as soon as I discovered value investing, after perhaps three or four years of fumbling around trying to figure it all out. It starts when you first come across a situation where your confidence is very high, because you understand the business, like the management and love the price. You just know you’re onto something. And then you start to wonder: ‘Why have only 2% of the portfolio in this stock when I could have 10% or 15%?’

After a few successes with bigger bets, you just can’t go back. Nowadays, I feel that if an idea isn’t good enough for a big swing, then it’s probably not good enough—although there will be exceptions when a portfolio approach is the best and safest way to take advantage of a situation or specific industry downturn. If I have any faith in my own analysis, I’ll always prefer 10% in each of my best 10 ideas than 2% in the best 50 ideas. Truly great ideas are rare. But investors also need to understand that when you’re concentrated and wrong, it hurts. It’s not an approach for everyone.

Can you share a couple of insights or lessons that have helped you along?

It’s important to realise that the stockmarket is a competitive, unforgiving environment. It owes you nothing and you have no right to demand easy riches. Just because you want a risk-free return of 10% a year doesn’t mean it’s possible. Most newer investors go through a tough time learning this reality.

A cold, rational approach is your best defence against permanent and painful investing misjudgment.


For sure. Investing was very much a solo act for me before 2002. My workmates or friends rarely talked about stockmarket investing and, when they did, it was best to switch off. Now I work with a bunch of like-minded but quite different individuals. They bring suggestions that would never have made it onto my radar, and a different way of viewing problems and opportunities. Hopefully I can return the favour.

I was already an experienced investor when I started working here, but the chance to work with like-minded investors and the opportunity to do it full-time have meant that the past eight years have been the steepest on my learning curve. Also, the process of constructing clear and concise reports for members is cathartic. Having to put thoughts into print really discourages the sort of fuzzy thinking one can get away with in private.


Generally, my best investments have come from one of two areas: undue pessimism regarding a particular company or industry, or unrecognised (free) growth. In general, I’d suggest that the market overpays for what it views as certainty, and underpays for optionality.

Investors are rarely silly enough to sell you wonderful companies like Woolworths for 12 times earnings; why should they? But, as a group, they occasionally underprice a situation

proFIle CoNtINued...


October 2002.

prevIous employers

Commonwealth Bank, Big W, Parramatta Advertiser logistics (delivery boy).

hobbIes/INterests

Reading, travelling, anything in or around water, snowboarding, eating.


Tough one. Probably Common Stocks and Uncommon Profits by Phil Fisher. But I definitely wouldn’t recommend limiting yourself to one book.

INvestING hero(es)

Everyone’s probably going to avoid Warren Buffett here, in order to be different. But I doubt I could overstate the impact he’s indirectly had on my life. And obviously Charlie Munger belongs here too, as does Phil Fisher. Those three are born thinkers and contrarians and, importantly, they’ve also been very generous teachers.


There are so many. But get your head around these and I think you’ll be well placed in investing:

“If a man knows where to get good advice, it is as though he could supply it himself.”—Goethe

“The shoemaker makes a good shoe because he makes nothing else.”—Ralph Waldo Emerson

“Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.”—Don Brinkworth

“When it doesn’t rain I have no need to fix the hole in my roof and when it rains I can’t go outside to fix it.”—Unknown

“Models should be used, not believed.”—Henri Theil

“The language of truth is unadorned and always simple.”—Latin saying


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with a low downside, a good chance of a reasonable outcome and a small chance of a spectacular one, probably by not ascribing any value to the free lotto ticket. That’s where I’ve found the most interesting opportunities over the years.


I made a large number of unforced errors in the early days, a result of not knowing what I was doing. I bought into businesses with bad economics, like Amcor and dodgy gold explorers. But I think of those errors as tuition fees.

Last time I updated this profile I said that it’s quite possible that my greatest ever stuff-up lies ahead, not behind. In terms of absolute dollars lost, that proved correct. But I think you can do a lot to reduce your errors of commission (capital loss) by not beating yourself up too much over errors of omission(opportunity cost). Judging from my own experience and from what I’ve heard from members over the years, the biggest mistakes seem to be driven by a fear of missing out, at least during the market’s frothier periods. You’ll never understand all the risks in any situation, but a rational approach is your best defence against unforced errors. Intelligent diversification provides some protection against being wrong.


As I’ve mentioned already, putting ideas into clear, concise reports is very helpful. And I love the fact that so many members appreciate the help we offer them. That appreciation, along with the great friends I’ve made working here, has made my job satisfaction immense. As for the worst things, there’s not much to complain about, really. The hours are long but the work is satisfying.


Two in particular stand out, more for the lessons than the actual returns. Buying Great Southern Plantations in 2002 and 2003 was a textbook example of an industry suffering undue pessimism, providing an opportunity with very low downside and some chance of a spectacular outcome. I put about 40% of my portfolio into that opportunity, and it grew to more than 60% of my portfolio before I started selling out. On average, I probably made four or five times my money on that investment in a few short years. The fact the company went bankrupt in 2009 shows that things change, and using the so called ‘bottom drawer’ is no excuse for not keeping up with developments.

And buying Flight Centre the first time around, in 1998, was the other. It was a case of unrecognized growth. It was selling on an average PER at the time, but was making spectacular strides by growing per store profit consistently and growing total store numbers some 25% per annum. I had a high degree of confidence in this one, and put roughly 25% of my portfolio into it. It had risen by about five times when I sold down and then out three to five years later. And it was a pleasure to get another crack in 2005 and 2006, and again in 2009.

II Value investing boot camp, Sydney 2008


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bIoGrAphy

James grew up in the inner Sydney suburb of Balmain, moving out about the time the first four-wheel drives began to choke its narrow streets. His high school years were spent near the beach although the ability to surf eluded him.

James’s earliest interest in the sharemarket came during the 1987 crash. After remarking on the event to his school mates, he quickly realised the sharemarket was not cool, to most 16-year-olds anyway. Never one for following the crowd, this left him undeterred. So off he went to university to study accounting and finance. As a student, James bought his first stocks and learned his most important lesson: don’t sell Commonwealth Bank shares the day after the privatisation.

He found his way into stockbroking for a few years—although we try not to hold that against him—with a backwater division of the firm that is now Morgan Stanley Smith Barney. A break overseas took him to London for a year, where the wee hours of the morning would find him researching the stockmarket. It was during one of these night-owl periods that he identified and bought shares in ASX Ltd the day after the stock exchange operator listed on its own exchange, tripling his money in a year.

James’s interest in small, underpriced companies was awakened. He joined Intelligent Investor as a contributor in 2000, before becoming research director of the now defunct small companies publication Growth Stocks (nee The GTS Report) in 2002. He’s been a senior analyst with Intelligent Investor since 2004 and he’s also the company’s compliance manager.

Q&As

What useful lessons or insights did you gain from your time in the stockbroking business?

Four things come to mind. First, a lot of very smart people saying something doesn’t necessarily make it right. I learned to use other people’s ideas, but make my own decisions.

Second, I soon discovered that most published analyst ‘valuations’ of companies are works of fiction. Spreadsheets can be made to spit out any figure you want, so it’s best to completely ignore the discounted cash flow valuations produced by stockbroking analysts.

Third, despite there being a lot of intelligent people in the stockbroking business, with access to better information than most, 99% of brokers, analysts and clients only care about what the share price does over a year or so. If you instead focus on how the business might perform over the long-term, you have a huge competitive advantage over everyone else.

Fourth, the whole industry structure is flawed because stockbrokers depend on you trading for their livelihood—and this isn’t in the best interests of most clients.

you’re well known among the team for an encyclopaedic knowledge of small companies across many industries. how have you gone about building up your knowledge in these many and varied areas?

I originally learned a lot from devouring The Australian Financial Review daily. If I found an interesting company in its pages, I’d then go and wade through that company’s announcements for a few years. Knowing a little about a lot helps broaden your knowledge of how businesses work, I think.

While I don’t read ‘the Fin’ as much as I used to, it’s still probably a good place for beginners to start (although make sure you read it with a critical eye). Funnily enough, I think my ‘circle of knowledge’ is contracting now—rather than knowing a little about a lot, I’m trying to concentrate on knowing more about a smaller number of companies.

you’ve historically held a lot of cash in your portfolio. Why?

I traditionally imposed a high hurdle for my own sharemarket investments. If I didn’t think a stock had the potential for between 50–100% growth over 2–3 years, then I wouldn’t buy it.

Senior analyst, James Greenhalgh

proFIle

FormAl eduCAtIoN

Bachelor of Commerce (Hons) (UNSW), Graduate Diploma of Applied Finance and Investment (FINSIA).


April 2000.

prevIous employers

County NatWest Securities (now Morgan Stanley Smith Barney).

hobbIes/INterests

The sharemarket. Followed by, in no particular order, film, fiction, family, friends, food (oh, and wine and travel).


One Up on Wall Street by Peter Lynch.

Continued page 8...


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As those opportunities are relatively rare, my default position was cash. And I’d usually ‘recycle’ the capital within a year or two, selling out of stocks that were approaching my valuation and putting the proceeds into cash until I found another opportunity.

I’ve always liked having sufficient cash available to take advantage of opportunities. I’m relaxing this rule a little now, consistent with Peter Lynch’s comment that ‘it’s better to be caught with your pants up’.


I’ve generally considered myself a value investor for a while, but more in the mould of John Templeton and Peter Lynch, who were widely diversified and would buy any type of business as long as it was cheap. But Intelligent Investor ‘house style’ is probably closer to the Buffett approach of buying high-quality businesses, paying up for them if necessary.

Having been slowly worn down, I’m now more willing to pay higher prices for great businesses than I once was (one of John Templeton’s investments rules is to ‘Remain flexible and open-minded’, after all). Intelligent Investor also encourages patience, so I hold my stocks for much longer than I used to.


I’m much more interested in high-quality, large companies than before, partly because I manage my family’s portfolio as well as my own. But my ‘signature investment’ hasn’t changed. I love beaten down, out of favour companies and industries, as I’ve found these produce the best returns for me. Most of the stocks in which I’ve doubled or tripled my money have been small cyclicals down 60–70% from their highs. Wait a couple of years and, hey presto, the cycle turns and the stock recovers.


When I first thought about this question, I assumed it meant ‘What was my biggest loss? ’. Croesus wins that gong for me, although it doesn’t worry me—I knew the risks and allocated my capital accordingly. But I’ll frame my answer in terms of opportunity cost instead—I bought Computershare in its 1994 float and sold the day it listed, thereby missing out on a hundred-bagger over the next 13 years. While I don’t worry much about it, especially as it was early in my investing career, I think it demonstrates the importance of patience.


Few people get to spend their day doing what they love. In my case, I love studying companies and thinking about how they work. It’s also great to work with other knowledgeable investors who sit outside the investment mainstream, which keeps me challenging my thinking. I also get enormous satisfaction from providing independent sharemarket research—and helping people become better investors. The worst thing? Staring at a blank computer screen with no ideas for a story and a deadline looming large.


Investing isn’t about just one decision. It’s about making a number of good ones, and avoiding too many mistakes. So a portfolio’s growth is an accumulation of many decisions rather than just one. But, if I focus on my ‘signature investments’, then Integrated Research stands out for me.

In June 2003, the small software company reported a profit warning after the tech bust had already been grinding on for a few years. I did some numbers and concluded that it was trading at less than four times average earnings. It subsequently became a four-bagger for me. It was one of a number of profitable but unloved technology companies that turned out to be very profitable opportunities at the time. I’m still working on my first ten-bagger, but I find it hard to keep holding stocks that no longer seem undervalued.

proFIle CoNtINIued...

INvestING hero(es)

John Templeton (although I’ve not yet bought an international stock!) and Peter Lynch.


“If you buy the same securities everyone else is buying, you’ll have the same results as everyone else.”—John Templeton

Sir John Templeton


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bIoGrAphy

A fan of comic books (or as Gaurav calls them, graphic novels), a keen boxer and a trained economist, Gaurav wasn’t exactly who we expected to hire when we first sent out the call for a resources analyst. But with a successful track record as a private investor and a lifelong fascination with rocks and minerals, it wasn’t long before we realised we had our man.

Gaurav’s fascination with the stockmarket started early and led him to study economics, first at school (he insists we mention that he graduated from James Ruse Agricultural High) and then at UNSW. Appalled at the prospect of working in a bank and wearing a tie to work (he has never mastered the art of tying a necktie) Gaurav took an offer to work at libertarian think tank The Centre for Independent Studies, where he worked on development economics, trade issues and foreign affairs.

From there it took a quick stint at management consultants Accenture to help cement the notion that independent thinking is rarely found in multinational corporations. After exiting the rat race, Gaurav finally found work in the natural resources industry when he was hired to construct pricing models for water markets. With a job at Intelligent Investor, Gaurav is thrilled to be doing what he has always wanted to do; go to work without wearing a tie and think independent thoughts.

Nothing makes him happier than eating a homemade sandwich.

Q&As

What was your worst investment decision and why?

I sold Cochlear in a panic when it fell to about $25 a few years ago. I didn’t really understand the hearing implant market and got spooked by all the analysts talking about a new competitor and superseded technology. I learnt two things from that experience; to do more homework before you buy and to hold your nerve before you sell.

your best investment decision to date?

My best investment so far has been in Oil Search which I bought for less than 90c and sold for over $6. I was lucky in that I happened to buy when oil prices were taking off and I hadn’t expected that. But I also bought the stock with a lot of conviction, thinking that the market was paying no attention to its huge stranded resource. I was a bit lucky with the timing of my sale though—I sold my holding because I needed the money, not because I thought it had reached full value.

If there was one thing you could say to someone completely new to the stockmarket, what would it be?

Be patient. Some of the worst investments I’ve ever made have come from rushing into a company with great potential, knowing the price was too high. It’s okay to hold cash when you don’t see opportunities; it’s really not going to burn a hole in your pocket!

What has been the most important thing in your years of investing?

Recognising all the psychological subtleties that accompany investment is a huge advantage. Successful investing takes a lot of self-knowledge. The best investors are good researchers and good analysts of course, but they also have a lot of personal characteristics that contribute to their success; they are independent thinkers, curious and not easily influenced by others.

What is your favourite investment book and why?

Peter Lynch’s books taught me a lot about investing, but I think there is great value in reading broadly. The best investors tend to be those who can draw on knowledge from a

proFIle

FormAl eduCAtIoN

Undergraduate degrees in Economics and Political Science and halfway through a Masters in Econometrics.

INFormAl eduCAtIoN

Every time I lose money! I’ve learnt quite a lot.


October 2009.

prevIous employers

State Water, Accenture, The Centre for Independent Studies, Angus & Robertson.

hobbIes/INterests

Boxing, graphic novels, anime, tennis and reading.


When I joined TII, Greg bestowed Buffett: The Making of an American Capitalist on me and it’s every bit as good as he (constantly) says it is. One Up on Wall Street by Peter Lynch is also fantastic.

INvestING heroes

Peter Lynch, Kerr Nelson, Jim Rogers. And I can’t leave out Warren Buffett.


“Be fearful when others are greedy, and be greedy when others are fearful.”—Warren Buffett It really does sum up what it means to be a contrarian.


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wide range of sources. I’m convinced that feeding your curiosity will, over time, improve your investing skills.

Which investors do you most admire and why?

Peter Lynch is one of my favourite investors. I love the simplicity of his approach and I’m a big believer that everyone knows a lot about something, and that’s where they should focus their investing attention. I also think Kerr Nelson is amazing and I’m enjoying learning about a chap called Seth Klarman.

What is your investment pet hate?

I can’t stand CEOs who take credit for good results in a benign environment, but then blame ‘adverse market conditions’ for losses. I see it all the time in the mining industry. Any fool can run a mining business when commodity prices are high; the real skill only comes into play when prices are low. That’s when management is supposed to earn its salary, not blame others for bad results.

What was the first stock you ever bought and why?

The first stock I ever bough was out of desperation. I really, really wanted to be part of the stockmarket so, without knowing anything about the company, I bought shares in News Corp. I didn’t do any research; didn’t even look at the annual report or even know what they did, except that it had something to do with news and I loved watching the news. Unfortunately, the investment worked out reasonably well so it took me a while longer to learn the lessons new investors need to learn. If I had lost money then it would have saved me a lot more down the track.

bIoGrAphy

Tony was born and raised in the then working class suburb of Balmain, Sydney. At the tender age of 14 he landed a job at the local hardware shop during school holidays. The salary was duly banked, but the experience itself proved far more valuable. In contrast to the inner-city cafés where, it seems, the staff are always right, Tony learned that to be successful a business owner must accept that customers are always right, even when they’re wrong.

After completing an economics and accounting degree at Sydney University, Tony took up a research analyst role at Perpetual Trustees in 1983, on the very day that Australia’s then oldest trustee company went into administration. In 1988, he left to help establish a new funds management business, before setting up his own, Selector Funds Management, in 2002.

speCIFIC QuestIoNs

you’ve worked in the funds management business for more than a couple of decades now. Are there any common traits you’ve noticed between successful (or unsuccessful) fund managers?

Safety in numbers is how I would characterise the approach of the majority of fund managers. The really good managers stick their neck out by backing their research with conviction. They invariably get rewarded with performance. Perpetual Trustees allowed

proFIle

FormAl eduCAtIoN

Bachelor of Economics, Sydney University.


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us to back ourselves with big positions when we saw opportunities rather than following accepted indices or consensus views. I have always admired that.

you’re exceptional at analysing a company’s strategy and quickly identifying the business’s critical success factors. do you think strategy is a simple science? how do you approach it?

Exceptional? I don’t see myself in that way at all. If anything I am very slow on the uptake, but my mind races around when I see or hear things and I ponder and ask lots of questions until it starts to make sense to me. As investors, we fret about so many things that are certainly important in the short-term but inconsequential in the long-term. I try to ascertain what is important in the long-term and, no doubt, if you stick at it long enough, the pieces of the investment jigsaw puzzle do come together.

Where do you typically find your best investment ideas?

I try to learn about a lot of businesses over a long period of time. Sometimes it leads to nothing because the businesses or the management teams don’t stack up. The valuation alone rarely gets me across the line. Over time however the ones that do appeal invariably loom larger on the horizon and if the circumstances and opportunities present themselves it certainly is acted upon.


Rather than recounting a speculative mining stock gone wrong my most expensive lesson revolved around the use of debt when buying shares and how it influenced my decision to sell when all the fundamentals told me I should have held. The stock in question was my participation in the Federal Government’s 1996 final sell down of Commonwealth Bank shares at the initial instalment price of $6.00, with a further $4.45 per share due in late 1997. Having acquired a seasonably large share allocation in the public offer, I borrowed the entire purchase cost expecting to benefit from the high fully franked dividend yield that would offset my borrowing costs. What I didn’t expect was the shares to fall below the initial instalment price on day one putting my capital position at risk. I exited with a small loss, but regretted the decision months later when the bank’s share price motored north. It was a lesson on how debt and leverage can undermine the most thought out investment case.


As an external contributor to Intelligent Investor, the best aspect of the business that I have observed and applaud is the manner in which the management team and staff have continually improved the level of its service and the quality of its research without undermining its independence or its integrity.

The most difficult aspect has been getting a coherent investment message across a wide ranging investor audience.


Initially I thought that one or two investment decisions would come to mind but in the end the best have been the ones that have flourished over the years without much input from me. Some favourites include Flight Centre picked up at the issue price of $0.95, Allgas Energy purchased in the mid eighties at $4.50 and eventually taken over in the mid twenty dollar range. And perhaps my top picks a string of building societies that privatised in the early 1990’s in which I was fortunate to have participated.

ImportANt INFormAtIoN

Intelligent InvestorPO Box 1158 | Bondi Junction NSW 1355T 1800 620 414 | F (02) 9387 [email protected] www.intelligentinvestor.com.auWarNINg This publication is general information only, which means it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether a particular recommendation is appropriate for your needs before acting on it, seeking advice from a financial adviser or stockbroker if necessary. The Intelligent Investor and associated websites are published by The Intelligent Investor Publishing Pty Ltd (Australian Financial Services Licence no. 282288).

dISclaImer This publication has been prepared from a wide variety

of sources, which The Intelligent Investor Publishing Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about the investments and we strongly suggest you seek advice before acting upon any recommendation.

cOPyrIghT The Intelligent Investor Publishing Pty Ltd 2011. No part

of this publication, or its content, may be reproduced in any form without our prior written consent. This publication is for subscribers only.

dISclOSure In-house staff currently hold the following securities

or managed investment schemes: ABP, ALL, ALZ, ARP, AVO, AWC,

AWE, BBG, BER, CAH, CBA, CIF, CMIPC, CND, COH, CRC, CSL, CUE, EBT, ELDPA, FGL, FLT, HVN, IAG, IDT, IFL, IFM, IMF, IVC, JIN, KRS, LMC, MAP, MAU, MFF, MLB, MQG, MTS, NABHA, NBL, NWS, PLA, PTM, QBE, QTI, RCU, RHG, RNY, ROC, SDG, SDI, SFC, SGN, SGT, SHL, SKI, SRV, TAP, TGP, TIM, TIMG, TRG, TRU, TWE, TWO, VMS, WBC, WDC, WHG and WRT. This is not a recommendation.

INFormAl eduCAtIoN

Hands-on portfolio management in both private and public capacity. Running my own businesses for two decades.


October 2002.

prevIous employers

Perpetual Trustees Australia, Harper Bernays.

hobbIes/INterests

Business reading, general news, sport, football (soccer) coaching.


Philip Fisher’s Common Stocks & Uncommon Profits.

INvestING hero(es)

Not heroes, but I admire Phil Fisher and I doubt that anyone could communicate the language of investment and human psychology better than Warren Buffett and Charlie Munger.


‘If you think about the panoply of risks in investment—economic risk, interest rate risk, industry risk, management risk or time risk, etc.—Wall Street often treats time as the highest form of risk, which it isn’t. In fact, it’s just the reverse—it’s really your lowest form of risk …’ —Henry Berghoef

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