Forum Archive Index - September 2000

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

John and Beth Schwartfeger wrote:
> 
> I have difficulty understanding why certain shares move in value.
> Take Warehouse. The talk of them moving into Aus. made their share
> price rise. That I can understand as it broadens their income base.
> However, on talk that they might be going to buy K'Mart (I think thats
> what I read) their share price did a nose dive. Granted it has pegged
> back again but none the less the movement was there. Surely if
> competition is removed here that should have a positive rather than
> negative impact on share price.
> Now I see here that RBD might be taking over Cobb and Co. Would one
> therefore assume that would have a negative effect on share price.
> (Hypothetical exercise)
> I seem to guess the directional movement of shares wrongly upon
> different announcements being made.
> Any ideas or comments?
> Thanks..John.

My only comment would be that it can be very hard to guess what
direction an announcement or action by a company will have on its share
price.  Being able to anticipate what reaction the "market" will have to
something is vital for trading, but I believe it is a big mistake for
long term investors.

I think the best thing a long term investor can do is look at each
announcement or action, and think of the probable outcome for the
underlying business.  Forget it is a listed company - pretend you own
the whole thing.  Would you be making the same move?  Will it increase
or decrease earnings in the short and long term?  Will it
encourage/discourage competitors?  Watch the implementation - if
possible, be a customer of the firm - are you being positively or
negatively affected by what the company is doing?  

I think it is really important to "visualise" the impact on the
underlying business rather than on the shareprice.  Example - people
were throwing money at internet ventures like there was no tomorrow, and
some still are.  Profitable "offline" businesses were funding internet
ventures that would eat up cash their profitable divisions were churning
out.  Will these decisions limit their investment options down their
track (ie less cash to fund their "real business")  Will they end up
needing to do a large write-off at some stage?  Will they convert their
profitable offline customers into unprofitable online customers thus
murdering their existing business for no tangible benefits?

Using The Warehouse as an example - If they had announced a $100 million
investment in a "warehouse.com" the share price may have rocketed, or
may have suffered.  But surely the important thing is what this
investment would do to the underlying business - would it be the right
move?  Would it help or hinder the rest of their business?  The
Warehouse guys made the right call - and both the share price and the
underlying business are better off for it.

Bottom line - Many times, what is good for the share price is actually
bad for the business.  Those with a good understanding of the "herd
mentality" may be able to guess what will be good for the share price,
but its a dangerous game.  I generally prefer to avoid this game and say
"stuff the hype - 2 years out, what will result from this?" because for
a long term investor, 2 years out is what counts.

Cheers,
Phil

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