Investment Performance Vs Investor Performance.

I've been thinking a lot recently about why it is that many of the comments that I see and hear about people's feelings about their investments seem to make no sense to me. Intuitively, they immediately strike me as illogical. It has taken a lot of thinking but I finally feel that I have managed to understand the situation.

Intuition is not actually a concept that I really like but, in truth, it does apply if you define intuition to actually be an almost subconscious expression of a persons' accumulation of knowledge, experiences and thinking. The really hard part is to somehow go back through that thinking, experience and knowledge and then to turn it into a concept that can be written down and explained. It's a challenge that I have been wrestling with. I think I have come up with a core concept that may satisfy my need to express this.

When we measure something (eg performance), we need to have it very clear in our head both what our "ruler" is and what it is we are measuring. My thesis is that it is the second of these (what it is we are measuring) that sometimes gets blurred, resulting in illogical outcomes.

Often, it is tempting to use analogies to explain something like this. However, in my experience, very few analogies actually stand up to rigorous examination. Furthermore, in this particular case, we don't really need an analogy. We are all familiar with the basics of financial investing and can therefore very easily understand the distinction that I am making - even if we have not thought about it in these terms previously.

We need to be very very clear in our own minds when we assess our return from investing whether we are measuring the performance of our investment or whether we are measuring the performance of ourselves as an investor. Both are worthwhile candidates for critical examination but we need to be very careful about which it is we are measuring in any part of our thinking.

The performance of an investment is the actual performance of the vehicle that we have invested in. In the following I will concentrate on a share investment but all of the same logic applies to any investment.

For this logical argument to stand true it doesn't matter what metric we decide to use to measure the performance of the Investment. We might use the Share Price, the Company Profits, the Dividend Payout or even the Social Benefit. It doesn't matter. The important distinguishing feature is that the Performance of the Investment is outside our control.

On the other hand, the performance of us as an investor is very much in our own hands. We decide what to invest in, how much to invest, when to invest and when to divest. These are our own decisions - nobody  forces us to make the decisions that we make. In my world that is delicious - we can congratulate ourselves when we make great decisions and learn from the other decisions. As I may have said before, unlike a job, the share market doesn't reward us just for turning up. We stand and fall on our own decisions.

In my opinion, it is very important that we have that distinction very clearly set in our thinking. We need to see the investment as something that we may have lots of information about, on an ongoing basis but have (effectively) no control over. If we want to be in the share market (and nobody forces us to be) then we have to accept that that is the way it is. The only level of control that we have is to buy and sell the shares.

What this actually means is that it is quite possible for the Performance of an Investment to be great but the Performance of an Investor in that Investment to be poor. Likewise it is quite possible for an Investor to perform well by being invested in an Investment that, itself, is performing badly. It takes no great feat of intellectual analysis to work out that, most often, this will be due to timing.

Allow me to indulge myself by looking at some examples of what I see as faulty thinking.

"This Company is crap because I bought the shares at $4.70 and now they are only worth $2.50"


The truth is, this says nothing about the Company whatsoever. All it says is that (if your measure of performance is the share price) that you made a decision that you are now unhappy with. (Incidentally, we all make decisions that we later regret. There is nothing inherently wrong about making such a decision. It's what you do next that counts. It may even be that a decision that currently appears "bad" may ultimately turn out to be "great"). Having decided that your measure of Investment Performance is the share price then you may well decide that the reason the share price has gone down is that the Directors of your Investment have done the wrong thing. That's fine - you are fully entitled to feel that way if you so wish. However, moaning and whingeing won't change a thing. All you can do is use the only tool that you have - your right as an Investor to invest (or not) wherever you see fit. Surely you use whatever tools you trust to make decisions? It doesn't matter if you use charts, fundamental analysis or whatever - the only thing that you can do is to use the tools that you believe in to make your own decisions. Nobody forces us to invest in the share market. Nobody forces us to invest in or hold any particular investment.

As I hinted at a little earlier, our performance as investors can often be ascribed to timing (or as others have opined "time in").

Here's an interesting little tidbit. If you had bought Cellestis shares in the float at 25c, ten years ago and sold them now for $2.50 then your effective annual return on your investment is a shade less than 30% per annum compound. Now probably most of us didn't actually do that. However, we have to ask - who is to blame for the fact that the share price didn't just go up a consistent 30% each year?  That would have allowed anybody to join the party on an equal basis at any time. In fact, the share price has been all over the place between the float and now. No doubt there were opportunities in there to invest with a return of greater that 30% p.a. and there were certainly opportunities to invest with returns of much less than 30% p.a. Yes, hindsight is a wonderful thing but, in the end, all we can do is to buy and sell shares as we see fit. If our timing has made a great Investment Performance (if we are measuring investment performance by share price) into a poor Investor return then surely the only person we can assign the responsibility to is ourselves.

"This is a crap Investment. As soon as I can get my money back, I'm out!"

Gee, do I have to say it? The lack of logic in this statement is astounding. Either it's a crap investment (by whatever measure you have decided to use) or it isn't. If you have used the actual performance of the business as your measure then I guess you are hoping that nobody else will notice and the share price will go up enough so that you don't feel bad about your investment. In fact, because you need to sell your shares to somebody, you are hoping to find a "greater sucker".

Which reminds me of a little story. We have all found ourselves in this situation at a party. I am standing around in group of six or so, balancing a drink and an angel on horseback, having a nice discussion. Then one by one people drift away and before I know it, I am stuck talking to the one most boring person in the room. It happened to me many times and because I'm a slow learner it took me more than three decades to realize that, in actual fact, it may have been me that was the most boring person in the room.

If, on the other hand, you are using the share price as your measure of investment performance then you are saying that the investment is crap because the share price is not going to go up but you are holding on till it does! Sounds like a recipe for disaster to me.

In the end, an Investment may be good or bad but it is our own decisions that determine whether we are successful Investors, or not. We should take credit when we make good investor decisions and learn from the times that we don't. It is all our responsibility and we cannot blame anybody but ourselves when things don't turn out to our expectations.

Once and for all.

It seems that, once again, some people are a little confused about the difference between latent TB (LTBI) and active TB. The recent announcement that WHO has endorsed the Xpert MTB/RIF fast diagnostic for active TB appears to have created some (unwarranted) nervousness amongst CST investors.

Let's see if we can clearly put this to rest once and for all.

We can look at this from a couple of perspectives, the technical distinction; and the operational impact of improved Active TB diagnosis. We will discover that improved Active TB diagnostics are actually a positive for Cellestis.

Active Vs Latent.

Whilst active and latent Tb are both the results of the same bacterium, they exist in quite different states. Active Tb is, well ... active, it is destroying human tissue and has an ultimate outcome, if untreated, of death of the patient. Fortunately, the human immune system is incredibly capable and in the majority of cases is able to effectively fight the Tb bacterium. Unfortunately, the Tb bacterium has a defence mechanism which, in my simple layman terms, is implemented by building a shell around itself to protect itself from destruction by the immune system. The result of this is a stand off - the Tb bacterium is contained and inactive, protected by its shell while the immune system patrols. In this state the Tb is termed latent and is essentially harmless. Of course if the immune system becomes compromised (age, HIV, some medical interventions) then the latent Tb will "break out" and become active. It is clearly important, then, to diagnose and treat latent Tb to avoid that future possibility.

Now, here is a really important differentiation for our consideration. When Tb is active it can be found in various bodily fluids. All of the specific diagnostics (including the Xpert MTB/RIF) for active Tb look for traces of the actual Tb bacterium. However, when Tb is latent it is hidden and cannot be found in bodily fluids at all. Latent Tb cannot be diagnosed by looking for the bacterium itself. Therefore, the only way to "find" latent Tb is to look for some other indication that it is in the body. This is what all diagnostics for latent Tb do - they look to the immune system to notify them that they are currently waging a war with some Tb.

Whilst the above is clearly a very imprecise description of the situation it does allow us to understand that no amount of tweaking will ever make a diagnostic for Active Tb diagnose Latent Tb. They are totally different diagnostic methods.

So, next time somebody announces a new test for Tb (and it happens frequently), check to see if it is a diagnostic for Active Tb. In fact, I can pretty much save you the effort - there are no records of anybody having a diagnostic for latent Tb in development other than the three existing diagnostics - TST (skin test), T-Spot (IGRA by Oxford Immunotech) and QuantiFERON (IGRA by Cellestis).

Now,

The Operational Impact.

Firstly, putting aside our own desires, we should always be pleased to hear of any progress in the fight against Tb. After all, it kills around two million people each year.

However, as it turns out, better diagnostics and treatments for Active Tb are actually of benefit to Cellestis. In low incidence countries (ie the developed world) the diagnosis and treatment of latent Tb is a worthwhile and viable exercise. Unfortunately, in less developed countries, where Active Tb is rife, the first attack on Tb has to be the diagnosis and treatment of Active Tb (Incidentally, the treatment is not expensive). In these situations, the vast majority of resources must be used in this fight. It will only be once effective control programs for active Tb are in place that resources can be turned to dealing with the reservoir of latent Tb.

We should therefore give three cheers every time we hear of a new diagnostic or treatment for Active Tb.

CST Growth Projection

Well, well, well. After so many years of trying to make intelligent guesses about the future financials of Cellestis, out of the blue the Company has given us a sales forecast for the next two years. 

Now, like all forecasts, we can't really accept it as gospel and we do need to be cognisant of the disclaimer.


I do note that an earlier slide in the presentation presents what could be interpreted as an even more aggressive growth. It suggests that the number of tests sold might increase from the 1.9m in 2010 to between 2.6m and 2.9m in 2011. That represents a sales growth of between 37% and 52%. Without further knowledge I can only assume that the disparity is due to the mix of geographic sales (slightly varying prices) and some allowance for the vagaries of the Foreign Exchange rates.


Anyway, for my exercise, I have taken the (lower) financial figures of a Revenue growth of between 30% and 40%. Of course, for anybody that has watched this Company for any length of time, it is easy to make the assumption that they will have been quite conservative with their forecast. I would have no doubt that they will achieve their minimum target (30% growth) and would have a good chance of achieving the maximum (40%). Dare I say " or even more"?


Using these figures I have taken my previously released Growth Projection spreadsheet and made a couple of changes.

• I have corrected the historical figures to reflect the COGS reclassification that has been previously dealt with. I also added the forex gain to the historical figures that was previously overlooked (by me).
• I have made a change to the way that I project expenses. Previously I had these set as a percentage of Sales. On reflection, I don't think that made a lot of sense. Instead I have simply put in an annual growth figure for expenses. In the sample provided I have set this at 10%. Frankly, I don't really know how close to reality that is (Expenses growth from 2009 to 2101 was 9.9%). It's up to you to change it if you think fit.
• I have set the Income Tax at a flat 30% of Net Profit Before Tax. We do still have some tax credits in overseas jurisdictions so the tax may well be a little less than this, particularly in the next year or two. Better to be conservative than overly ambitious!
• I have set the COGS at 34% which is the figure from 2010. This may decrease slightly over coming years but once again I am keeping this conservative.
• I have not taken into account Foreign Exchange rates at all. The entire projection is expressed in Australian Dollars. Movements in the exchange rate could have significant impacts.

It's important to bear in mind that, even with the the forecast provided by the Company, we are still making a lot of guesses here. The fragility of the model increases as time moves forward, of course. I seriously don't expect growth to remain constant over a ten year period. Growth spurts (tipping point?) or unexpected events could have major impacts. However, regardless of all that, I think the projection has some value in painting a picture for us.

Anyway, you should be able to download the spreadsheet here. (File ->Download as-> whatever)

In the sample version provided I have set the Revenue Growth at the very lowest end of the forecast (30%). I'll leave you the pleasure of seeing what happens when you change it to a higher figure.

I won't provide any further commentary on the Spreadsheet here, other than to make one observation that is very obvious. At the Dividend payout ratio of 60%, the mountain of cash builds very quickly.

  

Logically thinking about shareholder belief.

I've previously had stuff to say about the mistaken belief that movements in the share price can tell you something about the actual business. (To find out stuff about the business you need to look at ... the business).

Now, I am thinking about the contention that seems to be common that movements in the share price tell us something about the market view (faith, belief) in the Company.

I am led to believe that about 7 million Cellestis shares have been traded in the last year. Given that some of those shares will be the same shares that have traded hands multiple times, it might be reasonable to presume that, in the last year, about 5 million shares have actually been sold. That's around 5% of the shares on issue. Now, clearly, the buyers of CST shares have been a little shy and this has resulted in the Share Price retreating.

These are just facts. However, I don't think those facts can really tell us anything at all about the shareholder faith in the business that they have invested in.

Remember, 95% of the shares in the Company have not changed hands in the last year. Those shares are not represented at all in the trading statistics, depth or on any charts. 

The holders of those shares might hold all sorts of views about the Company or business - there is just no record of those views. Not even a tenuous link through the Share Price. They might have absolutely no faith in the business but are not selling because they don't want to take a loss or they may be famously happy with the investment they have made and are quite happy to wait for the investment to reward. The point is that we don't know.

If you consider the share market to be a voting machine then those people who hold their shares have no vote. In CST's case that means that 95% of shares are disenfranchised from the "election". It's a bit analogous to having an Australian Federal election where you only get a vote if you are changing your vote from the previous election. Had that been the system then Tony Abbott would be the Prime Minister of Australia (by a huge margin).

Furthermore, even looking at those few shares that have been sold, we really don't know what their motivation for selling was. Sure, it may be that some have decided that they no longer believe in this investment. Others may just be sheep who have made a faulty (in my opinion) decision based upon a sagging share price. There may be others who retain their faith and belief in the Company but for personal reasons have been forced to sell some of their shares.

To try to draw some nexus between the trading volumes/prices and what the shareholders are thinking about the Company is just plain wrong.

The trading volumes and prices tell us nothing about the business and they tell us nothing about what the shareholders are thinking about the Company or the business.

Lab Rat

Contributor "Lab Rat" has posted a comment to my post on "Competition?". However, for some reason beyond me, the comment has not appeared on the blog.

It is such a good and useful post that I have reposted it here.

"I agree that the Xpert MTB/RIF test is not competitive with QFN-TB, but people can be forgiven for thinking otherwise when journalists and analysts write that it is. Also it is worth explaining why it is not competitive and I do so here briefly and basically.
If a person has an infectious disease they have pathogen (ie bacteria or virus) inside them. At the same time, their immune system will be fighting the pathogen using various mechanisms, divided most basically into the innate and adaptive responses. Adaptive responses are acquired during one’s lifetime and are highly specific for the various pathogens. They may be antibody and/or cell-mediated - the relative role of each varies between diseases.
The new Xpert test is designed to diagnose active TB by detecting the TB pathogen in a person (it does this by demonstrating the presence of TB bacterial DNA in a person’s sputum). QFN-TB, on the other hand, examines a person’s cell-mediated immune response to see if they have encountered the TB bacteria. It can be useful in both active and latent stages of the disease.
During latent TB, a patient does not have the bacteria in their sputum and therefore the Xpert method is unlikely to be informative (the NEJM study did not examine latent TB, but this conclusion is reasonable). The Xpert method cannot be performed on another sample type, such as blood, because the TB bacterium is not present in the blood of an infected individual. Without going into a long explanation, I can’t see how this DNA-based (ie molecular) method is likely to be useful for latent TB, certainly in the foreseeable future. Basically, it is a refined version of existing DNA tests for TB and other diseases, which though very useful, have limited applicability in certain infectious diseases - they are only reliable when performed on a certain sample type, are susceptible to contamination and rely on relatively sophisticated reagents and analysers. The NEJM article acknowledges various limitations of the Xpert method.
Even though QFN-TB is an indirect method of ‘diagnosis’ (the definition of diagnosis seems to vary, especially when TB is concerned. Some might say that if you have latent TB you can’t be diagnosed because you don’t have the full-blown disease and perhaps this is why misinformation regarding diagnostic TB methods is rife), it is still very useful. The diagnosis of many diseases relies on examination of a person’s acquired immunity to a large extent (eg, in HIV and hepatitis). In most cases, however, antibody-based immunity is examined, not least because cell-mediated immunity has been difficult to measure in the past. This is why the QFN technology is significant – it offers a way of measuring cell-mediated immunity and theoretically is applicable to a range of diseases, infectious and otherwise. The closest technology to it is ELISpot and it is much less easy to perform.
It is hard to see how the Xpert method will render the QFN-TB method redundant because of the need for latent TB testing. It is better to detect and treat infected individuals before they have TB bacteria in their sputum in order to halt the spread of disease (during latent TB the bacteria lurks in calcified regions of the lung). Also, one should not rule out the possibility that CST is working on a version of QFT-TB for the developing world that would coexist with the Xpert method. The Xpert method is the result of a public/private/charity collaboration and unlikely to be competitive in a cut-throat way.
I used to work for a biotech company that received much mainstream press coverage and it always was inaccurate, sometimes grossly so. Certainly, the New Yorker article on TB contains multiple inaccurate details.
BTW, please don’t base your financial decisions on anything I have written. I expect the topic of competition will come up at the AGM.
Lab rat "

Competition?

Just a quick one.


I see that the current "fear and loathing" being expressed in forums has led to a totally mistaken assumption about a new test for TB that has recently been announced by an American Company. 


I'm really not going to waste any time on this other than to point out that this is just another diagnostic for ACTIVE TB. It may or may not be better than the diagnostics for Active TB currently available but it has no direct relevance to us at all - QuantiFERON TB Gold from Cellestis is a diagnostic for LATENT TB.


It's really important to understand the difference. Any level of understanding would preclude the ludicrous suggestion that "maybe this new diagnostic can be modified to detect Latent TB".


Sorry for being so blunt but anybody that is willing to hold a speculative stock for multiple years must be willing to do the necessary work to really understand what they have invested in.

Reply to Elleburra

In response to my recent blog post, Elleburra made the following comments. I thought it was worthwhile developing that further as a blog entry.

"The directors in my view have done an excellent job of promoting the product to the target markets but appear at the same time to be very loath to promote the company to the investment community. We have to face the fact that very few investors even know of Cellestis let alone know the very exciting story developing.

After many years in investment banking I probably look at this from a different perspective to most. I often ask mtself what does the long term future hold for Cellestis? Hopefully it will be a very prosperous future, maybe even involve substantial aquisition/s or perhaps even there could be an attempt by a bidder, hostile or otherwise, to gain a substantial, controlling interest.

Will it at some stage need the broad based solid support of shareholders and the investment community as a whole to promote and bankroll a substantial aquisition or resist a takeover?
Looking at the continuing downtrend in the shareprice this support is presently lacking.

This is where the maketing of the company itself is important and in that respect I was very concerned to read the preamble in the Intelligent Investor article. If the I I version of events is correct the company did not even bother to return the analysts call. Cellestis appears to do very little towards establishing relationships with the financial press or the investment community as a whole."

The above develops the conversation in a thoughtful and meaningful direction.

You suggest that the Company have done a credible job of promoting the product to the target markets. This is, in my view, a major part of their job and I am happy to accept that contention. As I guess is very clear from my posts, it is the development of the business that I consider of utmost importance and it is this that I watch to assess (and maintain) my faith in the Company. I know that there are others that suggest that they should be more aggressive in this area (buy one get one free?) but those of us who have followed this story for many years and have developed an understanding of the marketplace that the Company is addressing understand that the approach that the Company have taken is most likely the correct one.

Now, to investor communications. Unlike others, it seems that you have thought about this a little more carefully and have not developed an argument along the lines of "The Directors should ramp the Company so that my shares are trading at a higher value on the Share Market".

I am happy to admit that your proposed justification for requiring more investor communications has made me think. In essence, you are suggesting that better investor communications will develop more investor loyalty and an attraction of substantial (institutional?) shareholders. You contend that both of these are required to protect the company from a hostile takeover and to raise additional funds if the Company decides to make a substantial acquisition.

Whilst this has merit, I don't actually think (and I have spent some time absorbing your suggestions) that it really works.

Re a takeover. Institutional investors are not necessarily loyal to the company in which they are invested. Generally they will take a path that leads to immediate (monetary) gratification. It is also worth pointing out that the Directors alone hold enough shares to prevent a takeover. The Directors shares plus the shares that I know are in safe hands amounts to some 50% of the Company. That is not to say that a takeover could not happen - it's just that there are enough holders with an understanding of the potential of the business to prevent a takeover at a silly price, regardless of what the Sharemarket may be saying at any point in time.

Re an acquisition. I assume that should the Company decide to make an acquisition then they will be able to fund it with cash and/or debt. If the acquisition was such that they did need to do a capital raising then it would be the Directors job at that time to convince the market of the validity of that decision. I doubt that any further consolidation of shares into institutional hands would really make a difference to the outcome here.

You make the suggestion that the current share price indicates a lack of investor loyalty to the Company. I am not sure that it can necessarily be read that way. There are actually a lot of loyal investors (I am one) that are having no real impact on the current shareprice because they are simply holding their shares. I just don't think that Share Price is a valid measure of investor loyalty. After all, the current share price is purely a result of the changing of hands of a single digit % of the Company. The remaining 90% plus remain held by "loyal" investors.

As to Intelligent Investor's suggestion that Tony Radford did not wish to speak to them, we can only take their word for that. The fact that they have somehow managed to get their nose put out of joint doesn't really mean anything to me at all.

Again, thanks for the thoughts. I enjoyed reading something "fresh".

The Gump Returns

G'day all,


As you may have noticed, I have been quiet for a while. I just felt that after ten years of continuous posting on Cellestis that I deserved some "Long Term Service Leave". A few weeks on a driving holiday through France and Italy has been most enjoyable - I may even post something about my experiences at some point. 


Whilst I haven't been posting anything during my break, I have (of course) been keeping up with Cellestis developments and forum postings with my whizz bang new Android smartphone.


There seems to be a lot of angst being expressed in the forums at the moment. I have some thoughts on that that I would like to share. However, just before I do, let me qualify the context, meaning and purpose of my comments. Many of my comments are totally contrary to those being made by other posters. The fact that I disagree with them should not be taken as to mean that I have any disrespect for those posters, their comments or their right to express an opinion. In fact many of the posters that I disagree with have earned my respect over long periods of time. We all have the right to have our own opinions. The fact that sometimes those opinions differ means nothing more than that we have developed different opinions. There are numerous reasons why our opinions can (and should) vary. 


In short, my following comments should not be interpreted as being an attack of any specific poster(s). They are simply my thoughts that have developed in response to the general angst that seems to have permeated much of the Cellestis investor community.


It seems that the main criticism being made against the Company (or more specifically, the Directors) is that they are not providing enough information, often enough. There are a number of aspects to this criticism that I will address.


We are all grown ups. We need to make our own decisions based upon our own interpretation of what is going on around us. It seems that some people want Tony Radford to visit their home each night, tuck them up into bed and whisper into their ear "things are going to be just fine". I'm pretty sure that is not going to happen (frankly the mental picture is just a bit spooky). Seriously, it has been our decision to invest in Cellestis. We did it because we want to make money by doing so. It is our responsibility and we cannot rely upon anybody else to make us feel better about our own decisions. Putting aside illegal, immoral or criminal activity (of which there is not even a scent) then the only person that we can blame if our investments do not meet our expectations is ourselves.


I have to wonder (but not for too long) what it is that has brought on this spurt of negativity from some investors. It's pretty obvious that it has been brought on by the current share price. It really seems that people sometimes lose sight of the business and are driven only by the share price. If the current share price was $5, with nothing different about the business, would people still be complaining? People are suggesting that the Directors should be out there promoting the stock to other investors. Why is that? The Share Price of Cellestis is essentially made up of two components, an intrinsic value (based on current earnings) plus a speculative premium. Now, you can calculate the intrinsic value in any way that you wish but let's say it's currently about one dollar. That means that if you buy the share today then you are paying about $1.30 speculative premium. That is, you have decided that the future prospects of the Company are good enough that you are willing to pay that much to buy those future prospects (absolutely nothing wrong with that). So, therefore people are saying that they want the Directors to increase that speculative premium by making some predictions about the future (that, incidentally, they can be accountable for). Why do you want the speculative premium to increase? So that somebody else will be willing to buy your speculative premium at a higher value than current. In fact, what you are asking is for the Directors to push the speculative premium above the value that you believe it is worth, so that you can sell your shares on to somebody else and you can bank a nice profit. 


That just doesn't make sense to me. If the Directors came out next week and made categorical statements about next year's profits then it is up to you, and only you, to decide whether you want to hold, buy or sell the shares. To buy or sell you will need to meet the market. If you are planning to sell then you are hoping that the market will have greater faith in the future of the Company than you do. If you don't have faith in the Company then why are you holding the shares? 


What if the Directors make a prediction about next year's profits that turns out to be wrong? Then you would be pissed off!


Personally, what I want for the future is for the Company to continue progressing so that the speculative premium that I have paid becomes converted to intrinsic value. That will mean that I will be receiving bigger dividends and should the situation ever arise that I decide to sell some of my Cellestis shares I will receive what I consider a fair price for them. 


I don't think that there is any validity in criticising the Directors for not promoting the stock - that is not their job. Their job is to run the business in our best interests. If people have any concerns with the way that the Directors/Management are running the business then that is what they should be discussing.


Another way of looking at it. Aren't you saying something like "CST is worth more than the current Share Price. If only the Directors would shout it from the rooftops then everybody would know this". Well, if that is what you believe then surely you should buy as many CST shares as you can afford? The definition of a great buy is when the market undervalues a share. Eventually, the market will get it right (maybe just for a moment).


If you think it is "fair" that the Directors should let people know when the market has undervalued a share then shouldn't they also do this when the market overvalues a share. How would shareholders react if the Directors of a Company came out and said "We think the shares are not worth as much as the market is saying". 


Again, it is we the market participants, who determine the share price. It is up to the Directors to run the business in the best way possible and to ensure that everybody has access to the same information about the company.


Okay, let's look at it from a slightly different perspective. I note that several people have expressed the desire that the Company release sales figures every 3 months. I have no real objection to that but I don't actually see it as being of any benefit to us. There may be some good reasons why they are not doing this - it has been suggested that the "lumpy" characteristic of CST sales patterns may create incorrect impressions. Whether that, or any other reason, is true is immaterial. Look at it in simple terms. If the Company released astoundingly good figures for a quarter, how would that benefit you? You would assume that the share price would go up. What will you do? Sell? Why would you sell? After all, surely your long term faith is being rewarded. A similar scenario can be painted for the reverse.


It often seems to me that people are looking for "the bigger fool" to offload an investment that they decided to make and are no longer happy with. Not only that, they want the Directors to encourage this "bigger fool" to buy their shares. That's just plain silly. The Company does not benefit from that action, the Directors do not benefit, the existing shareholders do not benefit and the purchaser does not benefit. The only person that benefits is you - the seller. The share market is not there to unconditionally make you rich - it is there to allow people to make investments in Companies based upon their own opinions, regardless as to how they came to them.


In the end, even if they wanted to, I doubt that the Directors can make any firm prediction about next year's profits. I am quite content with the information that the Company currently provides in it's annual and half year reports and investor briefings. Augmented with my own research and that performed by others (a special thanks to Roger) this is enough for me to make my own well judged decision about my investment in Cellestis. Not that it is relevant to you but I have actually purchased more CST shares recently.


Note that all my comments are made from the perspective of an investor. Traders are big boys and girls - they can look after themselves.

Cellestis: Predictive.

I have mentioned before that the predictive value of the QFT diagnostic is extremely important in proving its value.


This longitudinal study by Diel confirms the ability of QFT to identify all of those contacts of a case of active TB that subsequently progress to Active TB.


It is actually quite difficult to conduct a study like this where a large number of people are identified as having TB but are not treated. Therefore these results should be treated like "gold".


In essence, in a group of 903 people exposed to TB, the TST reported a huge number of positives (604 or 229). QFT only reported 198 positives.


The crucial part, however, is that whilst reporting less positives, the QFT did not miss a single case that progressed to Active TB over the subsequent years. The TST missed 2 of the 17 cases that progressed to Active TB.


Rationale: Only limited data are available on the predictive value of Interferon- release assays (IGRAs) for progressionfrom latent tuberculosis infection (LTBI) to active tuberculosis (TB). Objective: To build on our initial study comparing theQuantiFERON®-TB-Gold In-Tube assay (QFT) with the tuberculin skin test (TST) in close contacts of TB cases and evaluating progression to active TB for up to four years. Methods: A cohort of close contacts of smear-positive index cases established between May 2005 and April 2008 was tested with QFT and TST. Through April 2010, progressors to active TB were consecutively recorded. Results: Of the 1,414 contacts (141 children), 1,033 were still resident in Hamburg at the end of the study period, and results of both tests were available for 954. QFT, but not TST results were associated with exposure time (p < 0.0001). For QFT, 198/954 (20.8%) were positive; 63.3% (604) were TST positive at > 5mm and 25.4% at > 10mm. 903 contacts refused chemoprevention and 19 developed active TB. All 19 (100%) had been QFT-positive with a progression rate of 12.9% (19/147) over the observation period. Corresponding values for the TST were significantly lower: 89.5% (17/19) and 3.1% (17/555) at > 5mm, and 52.6% (10/19) and 4.8% (10/207) at > 10mm, respectively. The progression rate of 28.6% (6/21) for QFT-positive children was significantly higher than 10.3% (13/126) for adults (p=0.03). Conclusions: Results suggest that QFT is more reliable than the TST for identifying those who will soon progress to active TB, especially in children.


(finally, I beat Rog on one)

Mea Culpa.

Judging by the comments that I have received privately and the public comments that have been posted on my blog since I released my CST Projection Spreadsheet, I have done a terrible job of explaining exactly what that spreadsheet is all about. It seems that the consequence is that many people have misinterpreted what the spreadsheet is saying. I did say that the spreadsheet is a projection not a prediction. Perhaps I should have been a little clearer. Hopefully I can correct that here.


Firstly, none of us can predict or forecast the future with any level of absolute accuracy. All we can do is assimilate all the known information, make some realistic assumptions and process it all to achieve a reasonable "feel" for the potential future that we can comfortably use to make decisions. Even the "gospel" that is regularly published by our brokers and analysts is no more than that. They may use all sorts of esoteric formulas, metrics and methodologies but in the end their forecasts are even less accurate than the seven day weather reports that we see on TV each night. It's nobody's fault, it is simply an outcome of the fact that nobody can predict the future.


Having said all of that, if we approach the problem of assessing where we should invest our hard earned with a level of thought and logic we can make superior decisions.


Okay, back to Cellestis and my Spreadsheet.


Having received the 2010 FY Financials and Briefing Papers last week I am able to add a further level of confidence to my investment in Cellestis. In addition to all of the business potential that I have seen in the business, it excites me that we are now starting to accumulate a contiguous set of financial numbers that I can use to better glimpse the future through the fog.  That is, I now find myself invested in a Company that has both a spectacular potential for growth and a demonstrated ability to translate even its early success into profits and dividends in my pocket. I have to say that after almost ten years of faith based practically wholly upon my assessment of the potential of this business, it is exciting to see the financial kinetics come to life.


So, to make a long story short, if we sit back and really look closely at what we have here we can see that we have both a financially successful, sound Company and the potential for outsized growth. For many years we had only the second of these investment assets.


As I have said many times in the past, my various spreadsheets and calculations are tools that I use to make my own assessments. I often provide them to others so they can, if they wish, use them themselves. I expect each of us to make differing assumptions and thereby achieve different outcomes. 


The actual figures that I provided in my spreadsheet could, if you wish, be described as a "worst case". That is, they are nearly totally the type of numbers that you might apply to any Company, based upon their known financial track record, without applying any knowledge about the actual business operation. Admittedly, I have performed a small amount of fine tuning based upon available financial knowledge (eg the tax situation).  Whilst,  in my eyes, the results from even these conservative figures are better than satisfactory, my personal belief, based upon my accumulation of knowledge about the business and its market, is that reality will prove to be substantially better than those figures show. 


If you go back to that spreadsheet and change some of the assumptions you will be quite surprised at the impact on the bottom line (ie the profits, dividend and ultimately share price). Start with some of the suggestions made in the comments that others have made. Increase the sales growth to 40%, 45%, 50%, whatever. Take a stab at when you might expect a "tipping point" and put in the growth spurt that you think may be resultant. Take a look at those marketing expenses and think about how they will decrease as a percentage of  sales as we move forward. Have a look at the enormous amount of cash that the Company accumulates and think about the dividend payout. I really can't tell you what those figures might be - if I did then I would be predicting the future and that would not be fair on either of us. 


In conclusion, may I just point out the following.


Even a dividend of 10c next year, at the current price of $2.50 provide a yield of 4%, fully franked (5.7% grossed up). Frankly, that is not a bad yield from a Company that is in the early stages of exploiting its market and has spectacular growth potential. 

Cellestis: More Data.

I have made a small addition to the Cellestis Growth Projection Spreadsheet.


We know that the Sales for 2010 equated to 1.81m tests. Because our Sales Growth percentage represents the growth in native currencies it is a proxy for volume growth also. Therefore, we can apply the same growth factor to the number of tests sold to have a look at the projected market penetration.


I have included these figures in the spreadsheet.

Cellestis Growth Projection

With the release of the 2010 FY figures, I have updated my Cellestis Projection Spreadsheet.


I must point out that this is a PROJECTION, not a PREDICTION.


Some assumptions/guesses that I have made:

• Sales growth is 35% year on year
• I have adjusted the figures for 2009 to account for the change in accounting method of COGS (Selling expenses are now represented in selling expenses, rather than be included in COGS)
• Dividend payout remains at 62%
• Tax in 2011 is less than 30% because we still have some tax credits overseas. For subsequent years I have allowed a tax rate of 30%.
• I have set future shares option expense to zero. It is my understanding that the new rules make it almost impossible for companies to issue such options in the future. I do have to admit that I don't understand the accounting that is used for this anyway.
• I have set "other income" (ie interest) at 5% of the cash balance at the end of the previous year.
• In calculating Cash on Hand, I have not taken into account the timing of debtors/creditors or dividend payment dates (it's not material anyway)
• Everything else is an intelligent guesstimate.
• I have not projected a "tipping point". It's just to hard to know when or if this might come and what its impact might be.
• I have not included any foreign exchange impacts. It's just not possible to guess the future forex numbers. If I had to take a stab, I really can't see the $AU going too much higher. Therefore the chance of a negative impact from forex might be quite low.

I am sure you will play with it to reflect your own thoughts/guesses/knowledge. Have fun.

Comments/corrections/additions welcome.

I know what you mean, Rog.

I know what you mean, Rog. When I see pictures like this I can only think "What's not to like?"

Cellestis Data Sheets 2010.

The Cellestis Data Sheets updated to include the 2010 Full Year Data are now available through the link at the top of this page.


As usual, any notification of errors, typos greatly appreciated.

Cellestis - Some quick observations.

I guess everybody has seen the full year figures by now and have made their own assessment. Of course we would all have preferred bigger numbers but the numbers are what they are. Once again, the foreign exchange rates have taken the gloss off our 38% increase in sales, year on year.


If we are a little forward looking we might be greatly encouraged.


Let's make a couple of assumptions.

• That next year we "only" achieve a further 38% sales Growth. (conservative)
• That the A$ gets no "worse". (not unreasonable)

So, that 38% Sales increase would bring our Sales to $56m and Gross Profit to $39m. Let's be generous and allow $20m for expenses. Net profit before tax is therefore $19m and Net profit after tax is $13.3m - a 60% increase year on year.


The Company seems to also be demonstrating that they are not shy about paying a decent dividend. On the above figures it would not be at all unreasonable to expect a full year dividend next year being doubled to 10c.


Of course if our sales increase is more than a "mere" 38% then ....

I can see clearly now.

I suspect that, for most of us, if we are able to cast our minds back to when we very first embarked upon our adventures in the share market and, furthermore, if we are able to be totally honest with ourselves, we probably approached the market with a thought something along the lines of "All I have to do is buy shares and then sell them for more than I bought them for and I have made a profit - all good".


I am pretty sure that we would now look back on such a position of being one of naivety. We know that it is certainly not as easy as such a view implies and regardless of where we find ourselves today, would now realize that there is so much more to it.


I believe that, broadly, between us we would have ultimately found ourselves in one of three groups.

• Those who lost enough money to become discouraged with the whole "game" and moved on to other ventures. (The people in this group are probably not reading this blog).
• Those who found that they are in that very small group of people who have developed the skills, perseverance and tools to consistently make profits by buying and selling stocks (ie trading).
• Those who ultimately took a different path and became stock market investors. Just like the traders above, they developed the necessary skills to become investors.

As I say, the first of the above groups are unlikely to be reading this blog. I have seen figures that indicate that a distressingly high percentage of people "burn out" in this way - often within 12 months. It is interesting to consider what happened to their money - clearly the majority of it has gone to those in the second two groups above.

I am not a trader. There are a number of reasons for this - most of which would be tedious and boring (and probably boorish) for me to go into here. I offer no criticism of traders - if it works for you then all's well. I can't really offer you anything of value.

I consider myself to be in the third group - an investor. My apprenticeship (of multiple decades) is far from over. I suspect that in my dotage I will still be able to enjoy the thrill of an "Aha!" moment or two. 

I have seen many attempts to define "an investor" (usually done as a comparison to "a trader"). I don't think there is any one definition that can clearly define all of us who consider ourselves to be investors. Maybe that is as it should be - after all it is what we think of ourselves that counts in the end (in this and all things). However, if pressed, my definition of an investor (or at least me) is somebody who is interested in becoming a part owner of a business with the ultimate aim of receiving the financial returns that the business makes (this is important and hopefully will become a little clearer later in this article). That does not mean that I do not sell the businesses that I have bought - it just defines the reason why I bought the business. There are multiple reasons for selling a business, including; the business no longer is a good business in the investors' eyes; somebody is willing to pay a substantial amount more than the investor believes the business is worth; a better investment comes along; personal financial reasons; and so on. Certainly, the length of time that a stock is held does not make the differentiation between trader and investor. There is probably no reason why a trader could not hold a stock for several years and there is no reason why an investor might not sell an investment after one day.

The rest of this article is purely about investing in the stock market. (Traders may leave now, if they wish, and draw another chart)

After due consideration and much thought I have now managed to reduce the investing process down to two (yes, just two) simple steps. Basically, they are just two questions that need to be asked and answered.

1. Is this a good business?
2. Can I buy the business at a price that makes financial sense for me? (note the bolding of me - hopefully I will remember to address the importance of that later on).

Now, the above may seem trite at first glance. However, it is my hope that I can flesh that process out enough that you might even consider writing them on a piece of paper and tacking it to the wall above your desk. 

I should also say that none of this is revolutionary, new or even startling. It is, in fact, just the distillation of the knowledge that the greats such as Warren Buffett, Charlie Munger, Philip Lynch, Roger Montgomery and many others have been trying to push into my head over a number of years. Perhaps Roger Montgomery may be slightly embarrassed to be included in this list but I have included him specifically because he has demonstrated in his book "Value.Able" an ability to think clearly and better still, to explain his thinking and knowledge in an understandable and resonant manner. I don't agree 100% with everything he has to say but I would highly recommend his book to anybody that wants to really think seriously about the investment process. I hope to find the time to write a review of his book at some future time.

Back to the two step investing process. 

Is this a good business?

I do not plan, here, to tell you what makes a good business. The important thing - and this is probably the most important thing in this entire article - is that any determination of whether a business is "good" must not in any way include any examination of the listed stock of the company on the stock market. It is absolutely essential that we have a clear and unambiguous distinction between the business and the representation of the company on the stock market. If I could say this 100 times I would. If I could come around and shout it in your ear, I would. I even feel inadequate that I am unable to find the words and explanations that would make this resonate with you. Hopefully, one day, I will find the right words to convey this basic tenet. In the meantime, allow me to make some observations, some of which, hopefully will resonate with you.

The basic descriptors of a business' financial affairs are the Profit and Loss and Balance Sheet. Have a look at them. Is the Share price represented in them in any way? No, it isn't. Movements in the Share Price have absolutely no impact on the finances of the business. Therefore, movements in Share Price do not change the value of the business one little bit. 

The shares that are listed on the share market do not belong in any way to the Company. Listing a company on the share market is essentially a "one-time" operation. The shares are sold into a third party market (the share market) and from that point on the Company has nothing more to do with that third party market. The shares will change hands within that market at a variety of prices over time - this has nothing to do with the Company. It is entirely discrete from the business and from the point of view of operating the business in the best possible way should, ideally, have no impact. (In fact, a business that spends large amounts of it's time and resources in performing actions that are wholly designed to impact the share price, instead of running the business in the best possible way, may well be validly excluded from our category of "good" businesses.)

So, in assessing whether a business is a good one we must avoid looking at anything that is derived from the Share Price. We should not be interested in the current Share price, the historical Share Price, the price chart, Price/Earnings Ratio, Yield, "expert" price projections etc etc. It's not as hard as it sounds - it becomes second nature after a short while. In the meantime, just ask the question - "Does what I am looking at change when the Share Price changes?". If the answer is "Yes" then do not let it impact your consideration of whether this is a good business.

We can look at all of this from a slightly different perspective. Our aim should be to be smarter than "the market". That is, we want to back our view against the view of the market. As soon as we include the market view (ie the Share Price) in our calculation of the value of a business then we are accepting the view of the market as part of our considerations. It makes no sense to put the market view on both sides of the equation My View Vs Their View.

As I said, I am not planning, in this article, to tell you how to identify a "good" business. It is a big thing to discuss. There are many different ways of doing this and many different factors to consider and weight. I hope to address that in more detail in future articles. In the meantime, I can offer no better advice than that of Warren Buffett - ask yourself the question "Would I be happy to own this entire business". Once again, a statement that is easy to dismiss as trite, however, the exercise of visualizing yourself as the owner of the business goes a long way towards approaching your assessment with a clear head. (It also assists with that important task of dissociating the business from the Share Market in your mind).

One final observation that goes some way towards linking the above with the second question that follows. A crap business is still a crap business, regardless of the price that you can buy it for. That is, if the business does not meet your definition of a good business then your should not be interested in investing in it. The following question need not be asked. Move on. There are plenty of good businesses available - keep looking.

Can I buy the business at a price that makes financial sense for me?

Once you have identified a good business then all that remains is to find out whether you can buy it at a price that makes financial sense for you. Now (finally!) you can log on to your broker and have a look at the share price.

Again, the purpose of this article is not to take you through the process of deterministically answering that question. It is actually a fun topic and one that I want to address in a future article (I promise). However, here, we can look at this in general terms.

Let's not lose sight of our central aim of investing in the companies listed on the share market. It is to make money. It is to make more money than we could make by using our money in other ways that we might choose. As such we clearly need to identify how the investment is going to financially reward us and when. Our rewards (I'll stop saying financial rewards from here on) may come to us as our share of profits being paid to us (dividends) or through the value of the company increasing to the extent that we can find somebody to buy some or all of our shares at a price that it makes sense for us to sell them at. Most likely it will come as a combination of both. Of course one of our basic beliefs (that I have not explicitly expressed but have implied) is that the market often "gets it wrong". That error can be either way. It may mean that an increased value of the Company may not become reflected in the Share Price for a long time. It may also mean that there are times when the market is willing to pay more for the Company than what we consider the true value. Both actions of our investment, buying and selling, need to be made with those considerations in mind. Personally, my preference is to buy a company that will reward me excellently through the payment of dividends, forever. I've forgotten where the "Sell" button on my brokers' screen is. (My "other" two step investment strategy is: "Buy good shares; Lie on the beach")

Of course we now look at Yield, PE and so on. These tell us about the actual returns in our hand from the investment that we might make. Again, the purpose of this article is not to drag you through these (quite simple, in the end) calculations. If you can't wait for me to get around to doing that via my rather haphazard approach to this blog (you don't pay me enough to be anything else) then there are many other resources that will take you down that road.

I highlighted the me in the question that we are examining. i.e. Can I buy the business at a price that makes financial sense for me? The simple point that I am trying to make here is that the method and timing of returns from an investment suit each of us differently. An exaggerated example demonstrates this. 

A Company that requires that a significant proportion of it's profits for some time to come be reinvested back into the business with a promise of outsize returns some time in the future may be quite acceptable to a younger person who has a living income from wages. On the other hand, a retiree who is dependant upon receiving regular income in the form of dividends to be able to support their lifestyle would probably not find that to be an appropriate investment. 

There are many variations and nuances that make the investment considerations of each of us quite different. Each potential investment is quite different for each of us. I firmly believe that there is such a thing as a valid speculative investment. Often I see the speculative investment disparaged and somehow confused with a trading methodology. This is wrong. A speculative investment can be assessed via the very same investment process that I have outlined here. For the individual, any speculative investment may or may not make financial sense, depending upon the individuals' personal circumstances. This is no different from a "non-speculative" investment (if such a distinction can be clearly made). Of course we could very easily drift into a discussion of risk and risk/reward - topics that are often completely misunderstood (even by those who purport superior knowledge). I have some quite strong views on this topic that, once again, will have to wait for another time.

As always, comments welcome.