Forum Archive Index - December 2001

["hugh webber" <hugh.webber@clear.net.nz>]

Here below are quotes from an offline discussion between Phaedrus and myself 
which I hope he won't mind me reproducing.

"Value analysis is looking at ratios of hard data, p/e, div yield, net assets 
etc etc....
To me these factors haven't been taken into a/c. (by TA)" - Hugh
 "Thats just the point - they have. As per Dow Theory "The price discounts 
everything", it reflects the sum total of all knowlege
at that point in time. The hard data that you refer to and use is all in the 
public domain - anyone, everyone has access to it. It
has already been built into the price. 
  You look for stocks with good fundamentals that should appreciate. I look for 
stocks with good fundamentals that are
appreciating. Not so different, surely?"

The basis of Phaedrus' argument here is the "efficient markets hypothesis" 
which is a tenet of economics theory but is increasingly
questionned by economists, particularly practical economists who get to grips 
with the real world.
There is a variable gap between the actual price of a share and what it should 
be if there was costless and instant information and
if all players did their homework and equally good analysis and acted 
rationally and without favouritism (were not 'in love with a
share').

The existence of this gap is exploited by Warren Buffett to make his billions 
and to a lesser extent by other value investors.
Value investors are obviously not interested if the actual price is above or 
equal to the efficient markets hypothesis but
interested in investing if it is significantly below. 
TA investors are interested if a share can be shown in some way to have an 
uptrend but in fact most such shares are already above
the efficient markets hypothesis price level at the time of TA analysis.

There's plenty of evidence of this variable gap in the New Zealand market. Most 
of the property companies for example. In the
recent past (defined as over the last year or so) Cedenco and other 
agricultural companies. There have been, and probably still are
others. There will be others in the future.

I don't see any evidence of the TA investors actually examining the 
fundamentals, analysing whether a share is a commodity share,
how good the management is & and therefore I am puzzled by Phaedrus statement 
above.
I do see evidence of lemming like rushes into shares that have become 
"fashionable', have nice charts and get lots of publicity.
Nearly always these end in tears - e.g. AQL, ITC, - I could go on.

cheers,
Hugh

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