Forum Archive Index - February 2000

[Phil Eriksen <phil@acepay.co.nz>]

> I suspect, considering the state of the NZ stock market now, that the
> days of the long-term investors are numbered. The name of the game now
> appears to be to latch on to the flavour of the week or month, buy up
> when the shares are cheap, and sell up before they start to plateau
> out.

Well, the flavour of the month is never cheap.  For it to become the
flavour of the month, it must have attracted enough attention to ensure
it is no longer cheap.  As for the days of long term investors being
numbered, how can that possibly be justified?  I agree that the New
Zealand sharemarket is a small market, getting smaller, is insignificant
internationally, and will probably not have a "boom" market in the near
future.  However, a long term investor is somebody who tends not to look
at whether the market is in 'boom" or "bust" mode (i don't care either
way really), but somebody who looks at individual companies and tries to
buy when the price is right.

Since the beginning of time, the role of business has been to generate a
profit.  Do you see that changing?  The "proper" role of the sharemarket
is to raise capital for expansion, to hopefully generate future profits
- do you see that changing?  Eventually, the value of a share is
directly tied to the profits a company produces, and how well these
profits are used to generate growth.  Despite the problems of the NZ
market, if one can identify the "right" companies, and buy at the
"right" time, and the company manages to improve the underlying
business, there will still be room for a long term investor to prosper. 
And if there are no shares with substance listed in NZ, well, look
offshore, as I and many others in this forum have done.

<whinge>

I'm totally sick of seeing media reports/company announcements that
trumpet massive growth in market share and/or sales.  The major factor
that decides whether or not a companys share price goes up or done is
how quickly they are able to grow.  When somebody recommends a share to
me, the first thing they say is "they are growing by 50% annually" etc. 
While growth is obviously important, what really counts is turning these
growth numbers into cold hard cash.  However, even growth rates (lets
take "sales") can be very misleading to an investor.  Example - lets
takes the following 3 fictional companies, say that all their shares are
$1 and and there are 100 shares(ie you can have an equal slice of either
pie), and finally, you have no other data - just what i've listed, and
your own sense. 

Free Internet.Com - Gives away access, sells advertising.  Sales growing
at 150% per year.
Joes Condom Factory - Sales growing at 15% per year.
Freds Bookstore - Sales growing at 15% per year.

Now, looking at this example Free Internet.Com is the "best" buy, of
course.  But "growth" isn't the real question - the question is "How
good is their business model?" and "Is there a long term future in this
business?".  Free Internet.Com is the "boom" share, but even a casual
observer must have issues with its model.  They may have growth, but is
it sustainable, or even a good thing? (why grow losses?)

Looking at Joes Condom Factory, they are growing more slowly.  But an
eye to the future says that (a) people won't stop having sex (b) third
world countries and their AIDS problems could offer huge growth and (c)
while not an "exciting" or immensely profitable business, it is clear
that if this business outperforms its competitors, it can continue to
grow.  

As for Freds bookstore, while (a) books are a real product and (b)
people won't stop reading any time soon, one must ponder the effect of
the internet/technology - people will still be reading, but will they be
reading books?  Could fred adapt his business quickly to whatever the
future holds?

I realise the example is crude.  But growth is meaningless without
considering what it is that is actually growing, what factors could slow
the growth, and can the growth be turned into cold hard cash.  For me,
i'd be into the condom factory.

Sure, growth is great, but the people who appear to think all growth is
created equal should realise that there is a big difference between,
say, the growth in a bank account balance, and the growth in the size of
a pimple.  Sure, the pimple may be growing at a faster rate, but I know
which one i'd rather have.  The question with shares isnt "how fast is
this company growing?" but "Is it a Pimple?" 

</whinge>

Cheers,
Phil

P.S     Would be interested in hearing other peoples views on Dorchester -
they seem to be one of few companies listed in NZ that offers both
"growth" and "value".

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