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Decision Journal

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galumay:
Ok, confession time, poor decision made yesterday - notably a decision made without writing in the decision journal!

I decided to buy more shares in AHZ for both the portfolio & SMSF. Rationale was that share price was near historical lows, provided opportunity to average down parcel cost, and critically, FOMO  - fear of missing out, with the 4C due out today I figured a strong result would see the price take off ...and honestly...I really didnt consider the impact of a poor result nor its liklihood!

So i bought more at 26c and then today they released the 4C, growth was less than predicted, revenue not growing as expected, sales flat, cash burning...blah, blah. So SP fell by up to 13% and closed down over 11%.

I never seem to get it right with this business! In the past I have bought after good news and a bump in the SP - only to see it drop back to a new low a few days later! This time I bought before the bad news and paid the price!

In hindsight I should have seen the FOMO bias and the blind spot it created to a potential cheaper entry post announcement.

Overall, its a small error, with a small cost. Its not like the business is in trouble - just not growing as fast as the market expected and had priced it for. As long as it becomes Cash Flow positive and profitable next year as predicted then it will do much better and we will still be in the black!

Still its an annoying rookie error and failure to use the journal.

galumay:
I am thinking about selling some of the poorer performing stocks in our personal portfolio at significant losses to reallocate the capital to a speculative play  we already have in the SMSF - LPE.

The temptation is to offload TGA which has turned into an absolute dog of a company, or rather probably always was, and I should have got out of long ago, and also VOC which I bought against my better judgement about the sector, and in hindsight bought far too soon as they dropped a lot further after my entry.

The rationale is that LPE is likely to be a multibagger if it becomes profitable and has very little downside even if it doesnt do as well as expected. Therefore a double bagger result would just about cover the losses on TGA & VOC. While they may well eventually turn around and recover its also possible this may take many years or even fail to materialise. So the opportunity cost may be significant.

My concern is that if I sell them at a loss, and then LPE goes bad, then I am compounding my capital losses!

Thinking some more about it today and re-reading everything that I can about LPE, I think the downside is very low now, they will be at nearly 150GWh sales which makes them profitable into the future, they would have been cash flow positive last 4C except for one off expences to launch a new division which will start delivering profit on a 20% margin after December.

It may take a couple of years to see real appreciation as there is a fair bit of future growth already built into the SP, but it seems more likely than either TGA or VOC turning around in the same time frame.

Some of my reservations are that I sell 2 underperformers to buy another, and that there is some combination of anchoring bias and value bias in play - the idea that selling poorly performed shares and buying something that is as 'cheap" as LPE at 0.024c per share offers the chance to make lots of money quickly - because if a share priced at 0.024c moves even half a cent its a large % move.

Its worth noting that while 0.024c sounds cheap, the company is now valued at around $60m on potential earnings in the next 12 months of say $1m - so a PE of 60, which doesnt sound cheap at all!

Another risk is consolidation, wouldnt surprise to see LPE consolidate 10 for 1, so relist at say 23c, very often in these cases the SP then drops significantly - say to below 20c.

I think I have talked myself out of any extra allocation of capital to LPE, my consideration now is to instead direct the capital to KPT, I think the upside is greater and the downside less. The upside is incredible if the wharf gets approval as seems most likely, the downside is not so much even if the wharf is blocked, the value realised from the timber would still support a share price around current values. It also gels with the idea of concentrating the portfolio in the businesses with the best chance of sustained growth that can be compounded by reinvestment by the business.

There is an argument that it would be better to wait until KPT announce the success of the EIS into the wharf before committing more capital to the business, but there will be both opportunity cost and a real cost of waiting for that certainty. The SP should rise very strongly on that news. Secondly the extension of that argument is that waiting until the wharf is fully approved would further de-risk, as would waiting until the wharf was operational, as would waiting until KPT started exporting timber... if you wait long enough the business will have all the risk removed - and have a share price that is near to intrinsic value!

So the question for me becomes, is the risk of the business being worth less than the current share price in the medium term, minimal, even in the worst case scenario for KPT. In other words, can they make money by barging the timber product to ships offshore?

Ok, did some more research, emailing Tony Hansen & KPT directley about the questions I had. As a result I am more confident that even in the worst case scenario, with no wharf and barging the timber to ships, KPT would make enough profit to justify a share price in the range it is currently trading. (based on an EPS of around 20c.) It was pleasing that my query to KPT was answered by the Managing Director, John Seargent - one of the benefits of dealing with smaller businesses. He made the point that he is confident the wharf will be approved and that he has 55% of his personal wealth in KPT. The fact that Tony also has KPT as a significant position in EPG Capital gives me futher confidence to take a conviction position in KPT.

Its been a difficult decision to sell down TGA, VOC & WPP - TGA I should have sold much earlier, in fact should have put it into CCP instead, VOC was a investment that was not sufficiently well thought through and was against my better judgement in that I had resisted investing in the sector to that point because of the structural problems, WPP I should have taken the profit when it was there earlier in the year, it was always risky and pretty fully valued. The strength of my conviction about KPT is sufficient to believe it justifies selling all these positions at losses to put the capital into KPT, I dont expect the benefit to be obvious within 2 years but I couldnt see any of those businesses making a turnaround in that timeframe.

It has also consolidated my personal portfolio into less businesses which is preferable IMO.

galumay:
I have been thinking about averaging down in my holding in SDI, as i posted in the SDI thread,


--- Quote ---SDI have really struggled to translate their plans for transitioning the business into reality, the latest check came with a very significant profit downgrade this month for H1 2018. Essentially it was a profit downgrade for 50% from circa $2m to circa $1m. I see an opportunity to increase my position at a much lower cost as the SP has fallen below 50c from my average cost of 75c.

While I am tempted to pick up some more it might be better to wait until the EOFY to see what happens for the full year results.
--- End quote ---

I was listening to the Farnham Street interview with Ray Dalio and his ideas about deision making and looking for second level consequences ( slightly different to 2nd level thinking), and somehow my mind drifted to this decision.

This is the great thing about slow thinking, as long as you consider the opportunity cost, slow thinking allows all sorts ot thoughts and ideas to permanate your decision and potentially substantially change what you think about something.

One thing that occurs to me is that a second level consequence of buying more SDI would mean NOT buying more of something else, or NOT taking a new position in another business. So one of the procedural checks in the process of deciding to invest is to consider whether that is the very best opportunity you can find for the allocation of that capital - and because of the availability bias its very easy to think of buying one thing and completly ignoring the fact that there may be better homes for the capital.

So off the top of my head there is the possibility of adding to my high conviction postition in KPT, averaging down into poor performing holdings like RFG or RCG, adding to high priced high conviction businesses like DDR or entering something new like BWF.

I have run my ruler over BWF and while it looks to be trading at around fair valuation at $1, my spreadsheet doesnt really allow for the sort of growth this business looks to be generating. I will have a bit more of a look into it.

LPE is one of my high conviction stocks in the SMSF and I think one of the options is to increase the holding there by about 30% and also put some capital into LPE in the personal portfolio. I believe the share price will get a strong rerate when the next 4C is released and the business is confirmed to be cash flow positive.

I dont have enough confidence in the future of either RCG or RFG to put more capital into those businesses, my inclination is probably more to sell than to add to them.

The more I consider it the more I think that I am confident SDI is definitely undervalued at current prices, the question really only remains whether its better to buy now or wait and see if they fall more on the results.

LPE is more compelling to add to in the immediate timeframe because they are on the cusp of profitability and will almost certainly see a rerate.

LOL! Well there is the issue with patiently using a disciplined process to reach decisions about investments - SDI spiked 15% up today on no news!

I added LPE to my private portfolio and increased the position size in the SMSF both at 0.23c.

Still tossing up BWF.

galumay:
Today I once again confirmed that I still make impulsive decisions without really working thru a process - like using this decision journal.

LPE released their latest 4C and announced the business had cracked the positive cash flow threshold. I saw the price had barely moved and decided to add another $10k into the business in the SMSF. The heuristic of FOMO was the most obvious one at play here, I should have balanced that by inverting the assumption that the share price hadnt risen much because the market hadnt yet priced the good result in - and questioning why the market didnt place much value on the achievement.

Had I taken even a couple of hours to work through a decision process I would have most likely picked up the shares for 5% lower price - while still arriving at the same decision! Regardless, i need to work on the self discipline and reduce the impulsive decisions.

galumay:
Looked at a little company called Spectur,

"Spectur Limited designs, develops, and manufactures monitoring systems. The Company offers camera-based security systems with remote solar powered and cloud recording features for construction, remote and non-powered, and agricultural sites."

I saw a comment about them by Dean Morel on twitter and it piqued my interest,

I didnt get very far before I realised I wasnt interested at the moment,

This is my analysis,


--- Quote ---I already have as much exposure as I am comfortable with to small, speculative, loss making businesses with good narratives!

In thinking about the business itself, I can see a big risk of margin squeeze as its hardly a particularly innovative or unique product and could easily have a competitor squeeze them. This is more of a risk given SP3's small size - there are lots of very big players in the security cam market.

I dont even consider the other products in the R&D pipeline because the business already runs at a loss with its existing products and there are too many unknowns with products not even brought to market yet.

I will keep SP3 in my watchlist, if it can transition to profit successfully then I will run my ruler over it again.
--- End quote ---

My prediction is that if they can become cash flow positive this year, they will see a significant re-rate, but there is so much uncertainty that its not investible at the moment. So the probability is too low of significant capital gain, and the probability of capital loss too great.

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