Roger Montgomery is the founder of Montgomery Investment Management Pty Ltd.
We have managed to catch him for an interview where he shared his insights about value investing.
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What is your investment philosophy?
We are fortunate at Montgomery to have the combination of 15 highly intelligent people, with decades of collective business experience from around the world, to run an investment process that is repeatable and consistent.
The first step in that process is the narrowing of a global universe of businesses to those of the very highest quality. We then rank them by an automated version of our valuation model before allocating the highest ranked opportunities to analysts who subsequently perform due diligence on the opportunities and feed their findings back into the valuation models to override the earlier automated version.
In short, we search for quality before anything else.
The advantage of high quality is that when a portfolio is filled with them, good things tend to happen. By that I don’t just mean in terms of the underlying business or individual stock performance, but also the profile of the portfolio returns we generate.
For example, since inception of the Montgomery fund, it has captured 92% of the upside in markets and just 43% of the downside.
What was your process in becoming a profitable investor?
Make your biggest losses very early in your career so they are not too expensive and you have plenty of time to recover.
More importantly however, I was learning from those losses. Having started, built, operated and sold a number of businesses, I believe it had helped me become a better investor. For example, we tend to ask questions of management that many analysts (who haven’t run businesses) don’t ask.
Where do you find your investment ideas?
Our process is half quantitative and half qualitative (what value investing process isn’t?).
Our special brand of value investing however starts with an investable universe (selected through liquidity rules) that is then scanned for quality metrics.
These quality metrics, of which there are over 30, are combined to score a company from A1 (best) to C5 (worst). Only A1, A2, A3 and B1, B2 B3 make the grade and this list contains our investment ideas.
Companies with satisfactory Montgomery quality scores tend to have fewer ‘liquidity’ events. In other words companies with the highest A1 Montgomery quality score have the lowest incidence of liquidation, bankruptcy etc.
After ranking these companies by margin of safety, we only research those with the greatest margin of safety. As an aside, the process means we can be very efficient and cover a lot of ground with a very small team of people. In turn, that means our people are working on interest things all the time and our business enjoys the benefits of being more efficient and productive.
If a company passes the full due diligence process, they are pitched by the analysts to the investment committee. At that stage, they may pass or fail or be sent back to the analyst for further refinement of and to have questions answered.
What is the toughest challenge you have faced as a value investor?
Strongly rising markets are always difficult to navigate because the temptation to drop your standards is ever present.
Fortunately we have been very selective about who we accept as clients and this means we all understand the menu, all eat the same cooking and all realise that there will inevitably be periods of underperformance.
But this is just a reflection of the temporary irrationality of the population as expressed financially in an environment many treat, unwittingly, as a casino.
If there is an advice you can give to an aspiring value investor, what would it be?
The best piece of advice is to patiently build a portfolio of businesses, not stocks, bought at rational prices and simply wait for them to be materially larger.
It’s boring but you don’t need excitement to become a millionaire. The destination is exciting enough, the journey doesn’t have to be.
What would you be sharing at Invest Conference 2015?
I will be sharing the steps to finding the best global opportunities and then I will be sharing some the global opportunities I have found.