Patience Grasshopper

I think I've been letting my exuberance get the better of me recently. Luckily the recent jump in prices put a brake on things for a while, so I haven't made any investments I might come to regret.

Here are a couple of reasons why I think I've been letting the excitement of investing get the better of me.

Bond International Software
Yes, back to that old chestnut. It's down about 20% when I bought it. And I've been thinking: "should I cut my losses" rather than "I should buy more". If I even need to ask myself the question, then I shouldn't have bought in the first place.

In contrast, when RBS was down 25%, I bought some more - the only reason I hesitated and/or didn't buy more was that I thought it might go down further and give me a better opportunity. I know enough about the company that I'm certain that it's undervalued and a lower share price only gives me a better buying opportunity.

I'd be gutted if RBS doubled in price tomorrow, because I want to buy as much of their stock as possible. I'd be over the moon if BDI did, because I want to make a profit on it and get out.

In future before I buy any shares in a new company, I'm going to ask myself the question: "how will you feel if the share price falls 25% tomorrow? Will you buy more?"

Shell vs GlaxoSmithKline vs Taylor Wimpey
My method for comparing companies in different industries has been quite haphazard. I've basically been picking a P/E for an industry - high for stable low-risk industries such as beverages or supermarkets, and low for cyclical higher-risk industries such as banks or housebuilders. However, there are other fundamental differences which need to be taken into account, and which I don't think I've been rigorous enough in calculating.

RDSB, GSK and TW are all well-established companies on a good underlying P/E ratio. However, I would still expect a decent rate of growth from any of them - at least keeping up with inflation and preferably outpacing it by a fair margin. So where will that growth come from?

• GSK spends £3bn per year on R&D. It has a strong pipeline of drugs in development. It needs this R&D just to maintain its position, but we can also expect decent growth over time.
• Shell spends £13bn per year in capital expenditure to maintain and grow its future oil production.
• Taylor Wimpey is currently depleting its land bank to generate cash, but over the cycle it should maintain/grow the size of its land bank.

Now comes the interesting bit: GSK funds R&D out of costs. GSK made £5.5bn last year, bought £3.75bn worth of its own shares and paid £2.8bn of dividends. It also borrowed in order to invest: £1.5bn in property/plant/equipment and £1bn in acquisitions (mainly ID biomedical at about £900m). But mostly that juicy profit is there for the benefit of shareholders - it doesn't need to be reinvested in order to secure growth.

Shell, on the other hand, counts £6.5bn of its investment against depreciation and depletion, but the other £6.5bn comes out of its profits. It's expected to keep that investment up for years to come, and will see the benefit over the very long term. If it wasn't investing like this, its oil production would be declining.

Taylor Wimpey presumably passes land prices straight on to housebuyers, so the value of its land bank can increase with inflation without any additional investment. Growth is possible by simply buying more land - not nearly as speculative as pharmaceutical R&D or oil capex.

Now, after all that, which is better value, GSK, RDSB or TW? I don't know - and yet I've been pontificating about their discount to my valuation. More research required - and more number crunching.