API (ASX) Australian Pharmaceutical Industries

Here is a company which we think is attractively valued. Fundamentally, the difference between the market price and the fundamental value of the business gives us confidence in the attractiveness of the investment for the medium to long term. With a comfortable margin of safety, we think it is worth accumulating below 50c.  

This company could easily belong to a focus portfolio with a 3/5 years horizon. 

As usual, it is important to note that this is not a recommendation or an advice, just an opinion and it is recommended that you do your own research before taking any action.

http://www.api.net.au/investor_relations/2012/ASX-FINAL-Financial-report-for-YE-31-Aug-2012.pdf  

Some basic rules for active smart investing

• Think of stocks as businesses.
• Invest only in a very few select companies which offer a large margin of safety.
• Buy a meaningful amount on each stock selected.
• Keep a very low portfolio turnover (avoid transaction costs).
• Invest for the long term. You should be prepared for the inevitable market ups and downs which often represent opportunities.
• Ignore market forecasts.
• Never leverage.

Lessons to be Learn: Focus investing

First and foremost, when scanning the market for investment opportunities, there are only a very few securities offering a substantial margin of safety (where the valuation of the company is well over the market price). It is only in these securities that you should deploy capital.

* Equities portfolio should be concentrated around a few select companies where you have a very high level of confidence.

* A large part of capital should be deployed for each security chosen.

Over a 30 years period, you may only find a handful of companies where your level of confidence is very high. So it is necessary to be patient. Another advantage of portfolio concentration is that you will pay less in brokerage and commissions. You will also be able to delay taxable income.

How to calculate your compound annualized investment return

It can be difficult but to keep it easy, you can apply the following formula:


10^(LOG(PV/C)/(D/360))-1

where

PV: Value of your investment at the end
C: Capital invested
D: Period of investment (in days)

It can be a lot more complicated if you have added or withdrawn capital from your account. In this case, to have a back of the envelop idea of the figure; you can modify the capital invested to take into account the transactions which did occur during the period.

It is worth to do the calculation for different periods (last year, last 3 years, last 5 years …) using the financial statements sent by financial institutions and you will probably be surprised to find out that your figures differ from the returns advertised. This is because financial institutions don’t advertise the compound annualized investment return … Yet, it is really what counts!

Market Update

The market is now positive which means that we will start to scan the market for investment opportunities. We will accumulate equities only if we find the right candidates. As usual, we follow a disciplined approach at the juncture of fundamental and technical analysis. 

Market Update

We have entered an unfavourable environment. From Monday,  no new position will be taken, apart from gold securities if they present an investment merit.

End of Quarter Update

We are still in a favourable investment environment holding us 85% equities and 15% in cash. The market environment for precious metal is still positive despite the recent volatility. We continue to hold Gold securities. As usual, we follow a disciplined approach which gives us comfort in our investment decision. We never try to second guessing the market and never rely on forecasts. Our approach is at the juncture of fundamental and technical analysis.

End of Quarter Update

Once again, in 2011 the Hypatia methodology has beaten the ASX 200 Accumulation Index by a nice margin. Of note, it is important to remember that the methodology does NOT use any leverage. This is the result of a robust and disciplined approach which allows us to avoid most of the volatility of the market. In the long run, less volatility means better long term return.
Recently, the market environment has turned positive. We are now 10% equities, 90% in cash, looking to increase our holdings when opportunities appear. We never try to second guessing the market and never rely on forecasts. Our approach is at the juncture of fundamental and technical analysis.