Forum Archive Index - April 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Phaedrus,
 
>
>
>There is only
>one fair place to start this comparison - at the start, at
>listing. However tempting it is for you (or me!) to select a part
> of the graph that suits our argument, we should always look at the
> full story.
>
>



To extend this argument, if we were talking about BHP you would say 
that we couldn't argue the point on trading vs investing because I 
hadn't been invested in BHP in 1840 (I think it was about then that 
it was listed).   I certainly hadn't been thought of back then, nor 
had my father or grandfather or even great grandfather.  Yet you 
would say that the only fair comparison would be to assume I had 
invested in 1840?   I put it to you that there is nothing magic 
about the date a particular company lists on the market.  

RBD, under Pepsico ownership, had been trading for years before it 
listed.   You seem to be saying on the date of RBD listing some sort 
of significant genesis like event happened.  It didn't.  RBD just 
kept trading as it had done for years.  It merely came under the 
scrutiny of the NZ public on its listing date - that's all.   And the 
time that a member of the public chooses to invest in RBD is not 
connected at all with when it listed.   Try putting in a buy order at 
your broker.  He doesn't even mention what date the company listed 
at any stage in the processing of your order.



>
> 
> "I have regarded RBD as an income share, so the share price is
>irrelevant." It IS relevant. What use is a 3.4% yield (taxable) if,
>in gaining it, you have sustained a capital loss that is not even
>tax deductable, as in your case? The figure of 3.4% comes from the
>Saturday morning Herald - looks small to me. Do you still regard
>RBD as an income share?
> 
>



Sometimes the paper doesn't give you the full story.  RBD has 
recently changed their end of year balance date and timing for 
dividend payments.   The payment of the final dividend has been 
delayed because of this.  To compensate for the delay shareholders 
will get a larger final dividend payment than normal.  This will 
again skew the yield figure (this time upwards) printed in the paper 
in coming months.   If you annualise on going dividend payments, RBD 
plans to pay out at a rate of 10cps per year (fully imputed).  Based 
on a share price of $2.13 this gives a yield of 4.7% imputed, which 
is equivalent to a gross return of 7.1% (assuming 33% tax).   That is 
still rather better than you will get at the bank.  So yes, RBD is 
still an income share.



> 
>
>After a 70% drop in price since listing, at a time when every one
>of your purchases were showing losses ranging from small to
>catastrophic, you claim  "I was not concerned. I knew the
>fundamentals of the business had not changed". Wow, I admire your
>equanimity, but doesn't this, at the very least, prove that market
> sentiment is more important than fundamentals? 
>
>


When I said 'fundamentals hadn't changed', I was using that phrase in 
the 'Buffett' sense.  In other words the core day to day operation of 
the business hadn't changed.  One fundamental had changed.  RBD 
management issued a statement to say that they would not meet their 
sales forecasts.  Just becase they didn't meet their sales forecasts 
didn't rule them out meeting similar forecasts in future years.


>
>
>Wasn't your confidence in your stock selection method and/or 
>timing, shaken,  just a little bit, by losses of this magnitude?
> 
> 

I was shaken but not entirely surprised.  Someone, of far more senior 
years than I, once said to me:
"I have never heard a salesman forecast a decrease in sales." 

It was an interesting observation and something I always take into 
account when I listen to forecasts by salesmen.   Effectively that 
was what the RBD prospectus was.   This is why I bought in only in a 
small way.  I was well aware my investment could take a bath.   With 
hindsight the float price was set too high.   But only half of the 
plunge in RBD price was due to RBD itself as I saw it.  The rest was 
because of market malaise which I realised as providing an excellent 
buying opportunity.   

So, yes I was shaken by the magnitude of the loss.   But investing is 
not about looking in the rear vision mirror.  The question was what 
does the investment look like going forwards.  I concluded it looked 
pretty good.

>
>
>  Trading Gains. I get different figures to you. See table below.
>  Assumptions :- Initial Investment $10,000. Profits re-invested.
>  Brokerage $29.50 per trade. Dividends excluded. In/Out figures as
>  from your post.
> 
> Shares         In   Out      Buy       Sell       Profit      %
> 11078  90   130    $10,000    $14,372     $4,372    43.7%
> 10624 135   140    $14,372    $14,844       $472     3.3%
> 12346 120   213    $14,844    $26,266    $11,422    76.9% (Still
> Open)
> 
>

The main deference between those figures and my 'per share' examples 
is that you have used a flat brokerage rate which is far less than is 
generally available at a full service broker.  That does make a 
difference to the returns, in particular turning the second trade 
from a loss in my figures to a profit in yours.

>
>
>  Accepting that your average entry price is $1.26, the same $10,000
>  has bought you 7936 shares, currently worth $16,904. That's $6904
>  profit versus $16,266. Less tax = $10,951.
>
>

I don't disagree with your bare figures, but there is one difference 
between your proposed trading scenario and my buy and hold scenario 
that you have forgotten to mention.  

In your case you used a sum of $10,000 from the start of the first 
trade.  In other words your $10,000 has been working for you over the 
entire period.  Your trading profit won't materialise unless you 
have your $10,000 to trade with in one chunk.  In my case I have been 
dribbling in the $10,000 in small chunks.   So although at the end of 
each scenario both of our bank accounts have been drawn down by 
$10,000, in my case the *average* money that I have used to earn by 
lesser dollar return is far less than $10,000.  This is why I say my 
return ends up more or less the same as yours.  It is because I have 
used propoprtionately less average capital to earn my 
proportionately lower capital profit.

>
> 
>  Your statement that "My results are pretty much line ball with
>  yours, ignoring dividends, and rather better if you include
>  dividends" is simply not true. 
>
>
I disagree.  See my comment on average capital used to earn the 
capital profit above.  As a specific example consider when you bought 
into your first trade in late 1998.   At that time I only had 35% of 
the shares in RBD that I had at the end of last Friday.   We both 
rode the share price up in late 1998, but of course you did better 
than me in straight dollar terms.  You had almost three times the 
money invested that I did! 
>
> 
>  Dividends. You state "In addition I have collected 30.5c in
>  dividends that you have mostly missed" Not so. By my calculations,
>  there have been 9 dividend payments since listing. 
>
>

Partly the reason I disregarded dividends that the trader would 
earn in the trader's scenario is that you yourself seem to disregard 
them .  I do accept your criticisim that they should be added back in 
to the trader's profits.

>
>
>The Trader as
>  per this example would have received 6 of them, and on more shares
>  each time than you have had at any point. Hard to compare, 
>
>

I'll make it easier for you.  Here is the complete list of dividends 
declared since RBD listed.

25th Sept 1998 3cps
16th April 1999 3cps (*)
24th Sept 1999 4.5cps
28th March 2000  5.5cps
30th March 2000 1:12 taxable bonus issue priced at $1.24 per share
22nd Sept 2000 4.5cps
28th March 2001 5.5cps
28th Sept 2001 4.5cps (*)

Looking at the timing of your hypothetical trades, I think you only 
got two of those dividends.  These are the ones I have asterisked.

>
>
>but in
>any case the amount of money involved either way is not large,
>especially in comparison with the capital gains involved. 
>
>

That depends on your understanding of large.

>
>
>That's
> why I ignore dividends. I presume that in your calculations you 
>deducted 33% tax from your dividends. 
>
>

You presume wrongly.  All dividends have been imputed.  In other 
words the company has already paid the tax on them.  There is no 
further tax to deduct.
 
> 
>
> Tax.
>Never forget that paying tax on profits is only half the equation.
>All losses I make are tax-deductable - yours are not. All my costs
>are deductable, textbooks, newspapers, journals, courses, phone,
>Internet etc. A percentage of rates, power, home maintenance etc.
>The taxman pays for my PC and software and upgrades. You have to
>buy your own, using tax paid dollars. 
>
>

True.  Certainly as an investor unrealised capital losses are not 
deductable.  Of course this would only be of concern if your 
unrealised losses consistantly were greater than your unrealised 
gains.  And if this were so, you might not be an investor for very 
long!   The whole point is moot with this RBD example anyway.  You 
have made a profit, therefore you must pay the tax.  It's that 
simple.


>
> 
>Time. Your $6,900 profit has taken 5.5 years in the market. That's
>$1255 per year. 12% per annum. Tax free. The traders $16,266 profit
>took 2.4 years in the market. That's $6778 per year. Over 45% per
>annum. AFTER TAX. Conclusive? I think so.
>
>


I can't agree with that logic on your trading timeframes Phaedrus.  
Think of it like this.  

Your trading strategy requires you to have $10,000 ready to buy in at 
all times in order for it to work.  You can't say that just because 
you didn't buy into the share before the end of 1999 you didn't need 
the money.   You can't tell in advance when your trading strategy 
will give you a 'buy' signal.  You will have to wait until the right 
signal is given by your indicators.  It is true to say looking back 
on the graph *now* you didn't need the money before the end of 1999.  
But that is with hindsight.   You didn't know that at the time.   At 
the time you knew you had $10,000 to invest.  What if you had had 
that $10,000 working for you somewhere else when the buy signal was 
given?  Your whole strategy would collapse.  I'm not arguing with the 
*amount* you earned.  I am saying you took the whole 5.5 years to 
earn it.


>
> 
>Risk. If you view time in the market as risk (as I do) then the
>trader has run appreciably less risk than the longterm holder.
>Neither has the Trader had to endure massive drawdowns as the
>longterm holder has. Neither does he run the risk of massive
>drawdowns in the future. The system will pull him out of the trade
>before losses become large. Less risk.
>
>



It is interesting to read the philosopphy of others Phaedrus, but I 
guess it will come as not too much of a surprise that I do not share 
yours on risk.   I regard being out of the market as far more risky 
than being in it.    This is because long term the sharemarket has 
been shown to outperform all other investments, especially cash.   So 
from where I sit, holding large amounts of cash is actually the 
riskiest strategy you can have.   Cash can be greatly diminished in 
value by inflation and exchange rate movements.   Having your capital 
in shares is a good hedge against both of these. 



>
> 
>The future. RBD is in a nice uptrend at the moment. No one knows
>how long this will last, but we do know that it will end sometime.
>The Trader has an exit strategy in place - you do not. 
>
>



Actually I do have an exit strategy.   I said in a previous post 
that I couldn't see the share price ever going above $1.88 in the 
short/medium term.  So with the price now at $2.13 why haven't I 
sold? 

Basically because, unlike you, my exit strategy does not rely on 
price alone.   I evaluate the current share price in relation to 
probable future earnings, and the probability that future sales 
strategies will pan out.  While it is true that RBD is trading near a 
four year high in price terms, it is also true in my judgement that 
RBD has never been cheaper.  I think it is in the process of being 
revalued from purely an income play to a growth share.  That is why I 
have bought in recently, that is why I am holding what I have too.  
If I am wrong the downside is that I will 'only' get 7.1% on my 
money.   Yes I could see a drop in capital but so what?  I am under 
no pressure to sell if that happens.  I can ride out any short term 
downturn.  It may even give me another averaging down 
opportunity.  Overall, RBD seems quite an attractive 'punt' (for 
want of a better term) to me, even near its four year high price.

>
>
>>From past
>experience we know that you are willing to ride out downtrends that
>erode up to 70% of your capital. No-one knows how big the next one
>will be. But we do know that you will wear it, ride it right to the
>bottom, no matter what its magnitude. Confident that the
>fundamentals of the company have not changed. 
>
>


You assume I learned nothing from the big fall.   Not so.   I will 
assess the upcoming results, keeping any saleman's bias very much in 
the front of my mind.   I'll be watching company debt closely.  If 
the share price rises too fast relative to everything else out there, 
(and taking into account the specific business outlook on RBD),  I 
will look at reducing my position.


>
> 
> Many
> longterm traders chose a 200 day moving average. Few trades, and
> very little monitoring required. 
>
>

Your point is noted.  But isn't a 200 day moving average still 
calculated every day?   reducing the volatility of your indicator 
doesn't mean you don't have to keep monitoring it.

>
>
>Snoopy, do you realise that you have traded more actively with RBD,
>and spent more on brokerage (8 transactions) than a longterm
>"Trader" would have? (5 transactions to date).
>
>

No I haven't.  In order to be a share trader I have to buy and sell.  
I have not sold.  I have merely bought.  I am not a share trader. 

>
> 
>TA system. These assumed results were obtained using the simplest,
>crudest most straightforward longterm trading system I could think
>of. A worst case scenario. The use of a slightly more sophisticated
>system gives results that are appreciably better. If we are going
>to allow backtesting, optimisation, stoplosses etc results are
>better yet again. I was trying to keep this example as simple as
>possible, rather than trying to maximise gains.
> 
>

I appreciate that.   I hope you appreciate that my 'buy and hold' 
strategy makes no claim to optimality either.  But it is something 
that was achieved under real market conditions. 

>
>
>You state "I have never said 'buy and hold regardless'. You made
>that last bit up. I don't buy 'whatever the price' ".  True, but
>you HOLD whatever the price. You hold regardless of 70% of your
>initial investment being wiped out, for example. 
> 
>
70% of my *initial* investment was wiped out (note the emphasis).  
My initial investment was kept low because I knew there was a 
significant risk. 
>
>
>Snoopy, I thought I had presented a rather conclusive argument,
>with regard to RBD at least. If this does not convince you, I doubt
>that anything will. We will just have to agree to differ. At least
>we each have some understanding of the others viewpoint. That's
>something.
> 
> 
Well, I'm not trying to convince anyone of anything Phaedrus, except 
that there is usually more than one way to look at things.  I doubt 
you'll be giving up share trading any time soon.  You obviously make 
a reasonable living out of it, so good luck to you.  My only 
gripeiwith you is that you constantly talk of share trading as though 
it is the only way to go.  It isn't, it requires more time sacrifices 
than a simpler buy and hold investnment program using Buffettt type 
companies and it isn't for everyone.  I guess that last comment, that 
share trading isn't for everyone, is really my point.

SNOOPY



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