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Decision Journal

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galumay:
My decision making slipped in standard today, back to old impatient habits! Saw that Pushpay had released their annual report early this morning, pre open. I had a very quick breeze thru the headlines and thought it was a very good result, saw there had been no move in the price on open so bought some more at $3.56, it ended up closing at $3.45 and the market assessed the report as being less than optimum. Had I spent more time considering the report and comparing it to ealier guidance I would have realised that revenue was at the lower end of guidance and cash flow conversion not as good as hoped. Also growth seems to have slowed a little. Must learn to be be less impulsive! I do generally have it under control but weakened today, no doubt!

galumay:
I keep mentally revisiting a thesis to sell the deeply underperforming capital and re-employ it elsewhere. Underlying this thought is the idea of recovering the lost ground in another position as psychologically it seems more likely. Of course this is nonsense and its entirely possible that whatever I swapped the capital into would fall also, and compound the loss of capital. So clearly this is the wrong way to think about it.

The consideration should be only whether the remaining capital allocated in a losing position, can with any certainty, be better employed elsewhere, or whether its just impatience at play and the thesis can still play out successfully.

So lets look at the individual businesses, ADA, trading at 64c. At the EOFY on my metrics it was well undervalued and were it not for the management issues I would see it as a good business to buy at this price, but there are some dangerous signs, cash is very low, the business is now cash flow negative and management have left the business recently. The risk of waiting until the end of this financial year is that further poor performance could see its share price collapse further.

MXI is another where it raises the question of when is the thesis broken as opposed to it just taking a lot longer to play out than expected, I think that underlies all of the poorly performing businessses and why I find them so hard to sell, being right can look like being wrong for a very long time! While there are signs of a turnaround in the business, the debt is now a huge red flag. It would not be a buy for me regardless, due to the amount of debt its carrying so for that reason alone I should sell.

MYX - A turnaround play, that turned around, and then turned back again! Had the chance to get out at a small profit, now down 50%+. Its had a big fund buying up recently and maybe the turnaround is in. I always think about what a strong conviction buy this was for an online friend ROE, he rarely got em wrong!

SRV has also fallen from grace, but they have cash and no debt, skin in the game management...

WPL is the last one on my list to consider selling, now only about 10% down on my entry some years ago, its the only 'blue chip' and the only resources business I hold, it seems silly to sell this just to buy something else, a rise in oil will see it re-rate, its steady growth and well executed core businesses make it a steady and safe investment.

So really when I go through the underperforming businesses I cant find much conviction to sell! Which is annoying because I would like to reduce the portfolio size and I would like to invest in other opportunities as well as building postions in  good businesses I already hold!

Revisting this 20/6 - I am revisiting because I have uncovered another business I wish to invest in and don't have funds on hand to do so.

Back to the dilemma - if I sell the poorly performing businesses to buy the new one, no gaurantee the new business will not fall in price compounding the losses.

But...if I dont sell the poorly performing businesses they may continue to drop - and the new business I didnt buy may go up! Opportunity cost!

Overall the portfolio is performing well, so ignoring the anchoring bias of considering the purchase price of the poorly perfoming businesses, is there a better home for the capital in another business? Without the aid of a crystal ball thats hard to say!

My inclination is that i want to sell WPL, but I am not sure the reason is simply that its much nearer its purchase price! Thats a dumb reason to sell, its definitely the best business of the ones I am considering selling.

I am also trying to think about the whole portfolio as a value point rather than looking at individual prices, so we are well up overall, made nearly 20% last FY on a TWIRR basis, up 50% TWIRR over 5 years, 90% in absolute terms including savings contributions, so anything I sell has no impact on the existing performance and if the resultant capital can be put to work somewhere better then I should sell - but that comes back to making sure I have high conviction of any postions I switch into.

Inverting that thought though, is the fact that I already hold these businesses and just because they have fallen so hard, probably means they will revert to mean at some point and again, I can consider the base price as not what I paid, but where the overall portfolio sits today. COmplicated.

I am trying to get the feel for how to look at this, one way is that given the positive overall performance of the SMSF, its reasonable to regard the underperforming businesses as costing whatever they are currently trading for today - so the decision is simply is company A the best home for that capital (regardless of price), or is there a higher conviction home elsewhere for it - either in increasing existing positions or taking new ones. This way of thinking helps remove the anchoring inherent in considering the price paid. So the question becomes is ADA a better position at 43c than say PAR at $1.50 or AER at 13c, or more @SFC at $13.80?

The best way to try to think about it is in fact remove the sell consideration for the moment, if ADA represents $5k, where is the best home for that $5k - ADA or one of the others?

galumay:
Paradigm (PAR.ASX) is the business I have been researching and considering freeing up some capital to take a position. Essentially PAR have adapted the use of an existing oral drug, that is used for urinary tract conditions, to an injectable drug that treats OA (osteoarthritis), it is made from the timber of the beech tree and the base drug is manufactured by just 1 private company in Germany. Its a gerneric drug, out of patent, but due to the difficulty of manufacture no one has successfully made the gerneric in the 10 years since the patent expired. PAR has a huge potential market with OA as well as a varitey of other related conditions like Ross River Virus that can be treated with the drug. It has plenty of working capital with about $78m in the market with cash burn of about $10m per year.

The real grunt work of research has been done by Fifty One Capital and can be read here,

http://www.fiftyonecapital.com/paradigm-201806/2018/7/16/paradigm-biopharmaceuticals-ltd-research

http://www.fiftyonecapital.com/par-201811/2018/11/24/paradigm-biopharmaceuticals-ltd

and

http://www.fiftyonecapital.com/paradigm-201903/2019/3/8/paradigm-biopharmaceuticals-ltd

I have been burnt by bio-techs previously (AHZ), but this seems to be a case where the hype and promise would seem justified and the realisation of tangible profits seems likely within 12 months.

The liklihood of a valuable partnership with a large pharma or even a total buyout is farily strong as well.

It does look to be a strongly asymmetric investment opportunity with enormous upside and small likelihood of downside. The main thing that tempers my enthusiasm is that while its asymmetric, the downside is total loss of capital - if this doesnt come off the company has nothing and will go broke in all liklihood. EDIT - funny I raised the concern about the impact of the downside and then the next morning read this article - http://tuvalu.santafe.edu/~ole/Peters2009.pdf

For this reason I think its sensible to limit the size of any initial postion to $5k and wait to see if they can actually get to market.

galumay:
So back to whether or not to sell out of some positions! Looking deeping into WPL, my back of the envelope modelling tells me it's fully valued and then some at current prices so unless there is an explosion in the price of oil or some other external factor, probably little growth to be had there. I think there are better opportunities to invest in other holdings that have more growth likely. So I am going to sell WPL and spread across some of the other positions.

Would I buy ADA & MXI at current prices, no, too many redflags even at current prices, so I will sell them also

MYX I will hold because I would be a buyer at current prices, as I would with SRV.

I am going to open a small position in PAR as discussed elsewhere and maybe also AER, also increase PPH & SFC holding

galumay:
Looked at KPG which is basically an accounting roll up, the numbers all look good, good FCF, healthy ROIC, a pathway of growth etc. My interest was piqued by a write up by a fellow #fintwit investor, https://www.notion.so/Kelly-Partners-Group-4743627e07e14940bd8461c75c568aab

As good as the business looks and as compelling as the linked narrative is, the company is operating with significant debt, above a level I would be comfortable with so its a hard no in this case.

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