One of our key rules to investing is that it can and mostly likely, will take time to see the results you want. While some believe in trading in-and-out of shares and riding trends and other lines we believe in investing in business. Business needs time.
The problem with time is you never know how much you need or have. Today’s car crash for AMP saw the final vindication of an investment decision we made all the way back in 2011.
Back then we suggested selling AMP Limited (ASX: AMP) shares on the back of the soon-to-be acquisition of AXA Asia Pacific and that a better investment would be Challenger Limited (ASX: CGF).
The basis of our decision at the time was that in Purchasing AXA Asia Pacific at the time AMP had paid for a large amount of Goodwill (which means they paid more than the assets of the business are worth) which isn’t uncommon. For AXA, it was too much.
In 2011, we felt the amount paid was too much, the savings AMP said it would make in joining the businesses (by sacking staff) were unlikely and that ultimately, it’ll all be written off which means a big hit to profits. In fact, I covered this in a series of presentations and seminars I did that year showing the following chart:
The key point in the chart was that the AXA purchase saw Equity double while Profit barely registered an increase.
Today AMP made the following announcement:
“Goodwill attributable to the Australian wealth protection business is expected to be fully impaired by $668 million when preparing the 2016 year-end financial statements. This reflects a decline in the potential recoverable amount for the Australian wealth protection business in line with reductions in embedded value”
And there it is, 5 long years later we can congratulate ourselves with a pat-on-the-back.
Although, it’s more than just that look at the relative performance:
In the time since we made the call, CGF (black line) has more than doubled in price while AMP shares would see you down 20% over that time (although you would’ve received some dividends to lessen the pain).
Now, it goes without saying that
- In 2012 we were wondering whether we made the right decision; and
- We were wondering (for the last 2 years) if the Goodwill will ever be written off…
As an investor is important to remember that you won’t always get it right and that sometimes you will need to reverse a decision you make but always make sure you give your decision the right amount of time to prove you right.
As Warren Buffett says “how comfortable are you with your investments if the market closed for 5 years”. Perhaps Warren has been telling us all along that it takes that long for the proof to finally be in the pudding!
AMP, thank you for (finally) proving us right.
By: Nick Rundle