Ann: Trading Update, page-66

Congrats to all who have contributed to this thread; it's one of the best discussions about targeted investing that I've followed. Although I've collected an expansive portfolio over many years, it's only since I retired last year that I've 'taken control' of my investing, learnt to understand a company's books and how to rake through the ASX register to find value. SDI was one I had been considering, which is how I found this thread. My journey is early still and I appreciate the time & effort put in by others on this forum.

The topic I wanted to add to is that of Risk; or more precisely, the difference between risk and uncertainty. Risk is best thought of as Success v Fail, Yes v No or Black v White. You invest in a company or don't. The company goes broke or it doesn't. If we understand the risk (the probability that the event can happen) then we can make a rational choice about why we would invest at all, and how much we can afford (to lose) in order to be exposed to a positive result. IPO investment is an example.
However, most of what we aim to value is better described as uncertainty, and the perceived range of that uncertainty should help us to appreciate the potential high and low outcomes going forward. This is not about trying to predict, but to highlight how robust companies might be to a downside future, or how rewarding an upside could be. For instance, BHP's exposure to a wide range of commodities with numerous long-lived low-cost projects suggests that the company will be resilient to poor prices, but is also not well exposed if a single commodity booms. Summed up, it will have a relatively narrow uncertainty range which should be reflected in the share price. So when it was less than $16 two years ago we should have all filled our boots.
More typically, however, the companies that are of interest have a much narrower focus and a potentially wider range of upside and downside, even if the range is less obvious. For example, SYD is practically a licence to print money, except that most goes to feed its debt. So how much uncertainty is associated with the building (or not?) of the second airport? How is the company preparing itself? Can we estimate that value range (+ve and -ve), or can it be ignored as being too far out? What is certain is that none of these estimates used to evaluate ranges will be "the answer" - it's not about being right - the aim is to better understand the value proposition for each company.

Having spouted forth, I confess that this is a process/method that is still developing, primarily to evaluate the stocks within my current deck (mostly ASX200 stocks), to decide which ones are most vulnerable to disappointment and to turn those into stocks that are "better" by my criteria. This is as much about when to leave certain stocks as much as when to get in to others.

So much to do, so much to learn, so much uncertainty. Who said retirement was boring.

mutineer