For investors in the share market, being able to stick to a proven strategy over the long term, and having the investment discipline to ignore inconsequential day-to-day events, is often a major challenge.
Across its varied content, Eureka Report has always advocated the importance of having a rigid investment methodology that, when adhered to, will help deliver long-term growth.
That same philosophy has been the driving force behind the spectacular investment returns over the past 15 years achieved by the equities research and investment team at Intelligent Investor.
John Addis founded Intelligent Investor back in 1998, but it wasn’t until 2001 that the business started auditing the performance of each of its share recommendations.
Fifteen years have elapsed since that first report and the latest audited figures from Grant Thornton have recently been released. They show an average annual return of 13.9 per cent from a total of 486 Buy recommendations over the last 15 years. That compares favourably with 10.2 per cent annual return for the All Ordinaries Accumulation Index (adjusted for franking).
A 3.7 percentage point outperformance may not sound like much but it adds up. A $100,000 investment in the All Ords index on 1 June 2001 would have produced $432,000 by 30 June 2016. Intelligent Investor members following all recommendations over the same period would have an additional $280,000.
Many fund managers, stock-picking newsletters and research services publicise their hot stock of the month but far fewer track, independently audit and then publish the ensuing performance of each recommendation. Why does Intelligent Investor bother?
Addis says it comes down to accountability. “Understandably in my view, there’s not much trust in financial services companies. It’s always been important to us to build trust with our members and an independently audited performance report is one way of doing it.”
Research director James Carlisle puts the success of the team’s picks down to two factors. “All the analysts in our 10-strong research team have first-rate analytical skills but there’s one crucial test each has to pass. They have to really get value investing – not in the superficial way but in a ‘read a ton of books and fly to Omaha for the Berkshire Hathaway AGM kind of way’.”
Carlisle, however, doesn’t classify the team as Buffett-style purists, saying that the practice of value investing is less about the teachings of any one individual and more about the difference between price and value – specifically, how to get more of the latter in return for the former.
“There are different ways of going about this,” says Carlisle, “but many more ways of not going about it.”
Whilst the mainstream media and financial community talk of betas, capital asset pricing models, moving averages and retracements, Carlisle believes these are dangerous distractions. “Successful value investing means disregarding the white noise of daily market commentary and sticking to basic principles. We’ve been doing it for a long time and we’re living proof it works.”
Of the hundreds of recommendations made over the years a few stand out. Four-wheel drive accessory maker ARB Corporation, up 368 per cent (including dividends) since it was first recommended in August 2004, is an example of a good business purchased at a fair price that has grown through exceptional management and industry tailwinds.
RHG, the former RAMS Homeloans, was as a deep value play originally recommended at $0.95 that subsequently fell to just 4.6 cents. “It was a challenging time,” says Addis, “but the value was there even if the sentiment wasn’t.” The stock was eventually sold at $0.56 after returning $1.13 in dividends, a total return of 78 per cent.
The second aspect concerns the longevity of team members. Senior analyst James Greenhalgh joined in 2002, James Carlisle arrived in 2003 and deputy head of research Gaurav Sodhi in 2009.
“There’s a Hotel California feeling about the place,” says Addis. “Once a genuine value investor realises they’ve found their spiritual home they tend not to leave. Very few analytical teams have the kind of corporate memory we do. I think it gives us a bit of an edge.”
Still, the performance report does have its shortcomings, something Carlisle is keen to point out.
“It’s impossible for investors to follow every buy and sell recommendation we make and the report assumes you don’t have to sell any stocks to buy the ones we recommend. It’s a transparent, audited tool for evaluating every recommendation we’ve ever made but as a proxy for our overall stock-picking skills it falls a little short.”
Instead, he suggests using the performance of Intelligent Investor’s model Equity Income and Growth portfolios as a more realistic guide, which have returned 13.3 per cent and 10.2 per cent per year since inception in July 2001 and August 2001, respectively. These returns compare favourably to the annualised 7.6 per cent return of the All Ordinaries Accumulation index over the last 15 years.
What of the next 15 years? Addis isn’t keen on making any predictions.
“I think it’s a mistake to think the next 15 years will play out like the past 15 years. But one of the great things about value investing is that if you just focus on buying cheap stocks, everything else takes care of itself. That’s what we’ll be concentrating on.”
Over the next few months we will be highlighting the winners and losers over the last 15 years and what members can learn from them.
InvestSMART and Eureka Report subscribers have full access to Intelligent Investor’s Buy, Hold and Sell recommendations and extended research.
Click to read Intelligent Investor’s full Recommendations Report 2016.