Forum Archive Index - November 2001

["Brian & Fiona Brakenridge" <pohuenui.island@xtra.co.nz>]

A "simple peasent" somehow Gerry I think you are not. And no G'n'T wasn't to blame for my inspirational literary outburst last night. Lack of sleep was more to blame for my brain being at half mast. I simply wonder if we are not going around in circles with this FA v TA thing.

 

Yet at the same time it should be nutted out.

 

I use the term "business perspective" investing because I think it's a better title than "fundamental" and I'm in the camp that by and large suggests that investing in equities is no different from buying a business. So if you're looking at buying the common corner saw mill what are the indicators you look for. You look at it's historical financials, it's margins and returns, preferably more than 5 years, which might indicate some trends, you look at future growth potential, local and world timber markets, how strong is management, does the company have an "edge". Then you try and place a value on that business, it's assets, future cash flows, what comparitive companies have sold for, why it's being sold and maybe most important, you ask yourself why you're buying that business, what are your time frames, are you planning to flick it after 12 months or build it up and hand it on to your family to run.

 

Why can't you do the same with a company you're looking at to buy a part share in? Whether it be a 50% share or a 1/50,000,000 share why can't you use the same method of analysis?

 

I can't categorically stand up here and say TA and charting is all bullshit because I don't understand it and I have not seen classic examples of outstanding investors in the Forbes Rich list who practice this method. There may be plenty of people out there, Phaedrus included, who are multi-millionaires thanks to TA and charting. But for me personally I like to see the driving force behind what makes a company tick.

 

Nick Kearney ripped into Mary Holm a while back. Nick I could also find you a whole bunch of companies whom if you had held for the long run you would have done very well through thick and thin. The extreme case might be Coke. If you had bought Coke when it launched at $45 in the 1920's and still owned it now you'd be a multi-millionaire. If you had invested $100,000 in Berkshire in 1964 today you would be a billionaire. If you had invested in GPG when they launched you would have seen the value of shareholder equity grow at 20 something % compounding for 7+/- years. How happy today would you be if you had invested in BCH or WHS a few years back.

 

What is the difference between the companies you listed and my list? It has surely got to do with the companies fundamentals. I agree entirely with Phaedrus. You have to have an exit strategy but again that strategy should be based around the companies fundamentals, ie, has the company changed direction, has it lost sight of it's core strengths. Remember when RMG was launched, how many BCH investors exercised their exit strategy, panicked and sold their shares. Fundamentally BCH hadn't changed one bit and people speculated that this new kid on the block was going to blitz them.

 

The whole crux of this tirade is that you personally have to ask yourself "what sort of investor am I?". If you want to have a crack at making big money short term then you have no choice but to speculate. If you want to build your wealth over a period of time then you invest in a small number of companies with good fundamentals and you watch them very closely.

 

Incidentally I'm a big fan of Mary Holm. It's a brave person who openly questions the mutual fund industry. A lot of folk here are active investors and watch this space because a few of them will fire some shots of rebuttal back at me any minute now. But for a huge number of people out there who have not the time nor inclination to thrash over charts or financial statements then index funds, boring though they may be to you hyperactive types, are an extremely attractive option. If you are reading this Mary, keep up the good work, you help a whole lot of people cut through the hype and bulldust in order to make rational decisions.

 

Let me have it! Tell me how naive I am.

 

Cheers

Brian