Want to be a doctor, eat your own medicine...

Dear Reader and Fellow Investors,

My agent, if I had one, would suggest that I stop being as sadomastic as i am. However, I cannot let the issue that keeps me awake at night away from you, dear reader.

One sometimes needs to write to ensure their beliefs remain engrained in action and not thought alone. "If you don´t have time to research, you don´t have time to invest" is good to say, but better to do.

A few months ago we started a small position in Monsanto stock, a company I have been following for a number of years but refused to look into any great depth in years past due to its ridiculus market price. However, as it dropped past 70USD, 50% below its previous high, I somehow thought I was getting a bargain. How silly one can be.

The reality was I was purchasing the stock assuming a 7/8% per annum growth, and even at this rate the P/E ratio was close to 10/11 in 5 years time. Clearly this is very aggressive for the fund whose general focus is more conservative assumptions on earnings, let alone growth.

The reality was our lack of study meant we didn´t pick up on the changing market structure, especially for its agricultural productivity business. If we knew what we were doing, rather than pretending due to lack of time to do the proper research, we would have included a significant discount in valuing this business line of the company. Yet, we didn´t. The consequence is that we may be holding a position that can bleed a negative marked to market value for a long time, as the seeds business line may not show impressive growth until 2011/12.

If we value the agricultural productivity business at zero, the stock is currently trading at x20 net income not including extraordinary earnings (this is at a stock price of 49USD/share).

Conclusion: always practice what you preach, there should be no off days.
Always use 5 year average earnings as a guideline. Any difference if feel should be higher or lower should come from understanding the market structure and any potential changes. Otherwise, stay away.


Yours sincerely,

Alessandro Sajwani