Buffett devotee takes a few hits ::

Author: Christopher Webb
Date: March 22, 2008
Source: The Age.com.au

ROGER Montgomery is a Warren Buffett man. A big Warren Buffett man. His writings and reports to the stock exchange are peppered with Buffettisms. He is in fact a walking, talking encyclopedia on the legendary insurance company operator and investor.

Montgomery runs Clime Capital, an investment company that listed on the stock exchange in 2004. Since then, he has tried to make a quid for his shareholders from following Buffett's approach; succeeding and failing, depending on when you looked at Clime's share price.

He scoured Buffett's comments over decades and came up with a formula that he believes reflects Buffett's thinking; he sits in front of a computer and enters such things as a company's return on its equity, a discount rate, throws in some other things and, lo and behold, the software throws up what a share in a company is worth. Its so-called intrinsic value.

If the stock is selling at a hefty discount to the formula's number, then the stock is a buy, and when it is selling at a fancy premium, it is a sell.

Montgomery, 37, has been a Buffett fan since his mid-20s, and says the formula he constructed comes from Buffett's letters to shareholders.

"He didn't give a formula but he went through a description of what corporate America was worth back in the early '80s, and through that it's very easy to build a mathematical model that gets to the same answer that he gave," Montgomery says.

How does he know it's the same? "Well, there's only one formula that you can use to actually arrive at the same answer. It's quite straightforward. The broken-down version is really just return on equity, divided by required return, multiplied by equity per share."

Montgomery is as devout a Buffett worshipper as you could get; even decrying some books on the great man as misguided. While he thinks he follows the Buffett creed probably more closely than anyone in the investment community, he notes: "I wish my track record reflected that."

As far as track record goes, Montgomery and Clime Capital were having a lovely time last year. The portfolio's shares increased 53% — 40% if you include cash — for the June year, compared with a 41% gain in the ASX 300 industrial accumulation index. He says, as at November, he was doing an average of 34% a year since inception.

A big chunk of the gain was due to the performance of Clime's two biggest holdings — The Reject Shop and Credit Corp Group, assisted by good performances by Schaffer Corporation, Data 3, Macquarie Bank, OAMPS and Telstra 3.

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