Forum Archive Index - July 2002

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

Phaedrus, you have raised a number of points which I think are worth 
responding to in the "Nick K vindicated already" thread.  However, we 
are getting away from the original point of that thread, hence this 
new one.

First, a couple of points we can probably largely agree on.   The 
pure 'income share' whose share price chart is a horizontal line, 
save for the perturbations around dividend time allowing for payments 
is probably not worth trading.  Likewise the pure growth share, 
where all profits are reinvested in the company while the share price 
climbs slowly skywards probably is worth trading.  Why?  Because 
growth doesn't last forever and T/A may be useful in picking the time 
when it is faltering.  Also in a growth share there is liable to be 
more sentiment built into the share price and sentiment is 
notoriously fickle.  Fickleness means volatility and volatility is 
good for trading.

Now in the 'real world' and over an extended period of time, there is 
no such thing as a pure 'growth share' and a pure 'income share'.  
Most shares show elements of both growth and income, and sometimes 
the same share can be both a largely 'income' share and a largely 
'growth' share at different times.  Often the best way to find out 
what phase a share is in is to look at the market rather than 
listening to the directors!  Now, specifically on TEL.

TEL was floated in the early nineties at an equivalent price of 
around $2.20.  It was floated as an income type investment, but in 
those early days I never saw it that way, and I don't think many 
other investors did either.  We tend to think of growth as ever 
increasing sales, but as far as share price goes I believe ever 
increasing profits are probably a better definition.   In those early 
days the real growth from Telecom came in the form of cost cutting!  
Make no mistake, TEL was a growth company for most of the 1990s.  I 
am sure many who bought into the company in the 1990s did so on the 
idea that mobile phones and the internet would lift the business to a 
new level, without too much concern for their dividend cheques.  

Then, as Theresa Gattung came to the helm a new direction was being 
called for Telecom.  It was now to become a 'growth share' by 
expanding into Australia.  However, the result has been stagnation, 
not growth!   The market quickly adjusted the price of TEL downwards 
so that it is now very clearly an income share, despite what the TEL
management may tell you.

So why would I buy TEL today?  For income is the most logical 
answer, although there is that thought in the back of one's mind that 
if TEL gain some market power in Australia, perhaps some of that old 
growth magic may return.   If that happens, what might that growth 
rate be?   Difficult to pin down.  But if you look at a 10 year price 
history which covers the periods when Telecom was both market darling 
and market pariah (from float time to now), that is possibly as good 
a guess as one might make.  This is where my 28c per share per year 
comes in.  Because this is a fixed number as the share price moves 
higher the percentage growth rate decreases, so '28c per year' is 
perhaps not as aggressive as it may sound when taken over a 10 year 
period. 

>
>   
>(1) If you base your comparison on the expectation that TEL will
>continue to range between $4.50 and $5.50, in all fairness you
>cannot at the same time continue to count on an annual appreciation
>of 28 cents per share, benefiting only the Longterm holder. 
>
>

Fair point.  You are saying I can't have TEL 'range bound' as an 
income share and include long capital appreciation as well.   While 
what I have written may look like a contradiction, is it?   It 
certainly is at the moment!  But I'm picking that TEL will start to 
grow again 'eventually'.  When will that be?   I have no idea.  But I 
do know that if I buy and hold long enough, I will see it.  I'm 
prepared to speculate as to when something might happen.  TEL will be 
range bound for three years, but in five years time we will see the 
$6.50 mark reached again.   It may get over-hyped and run all the way 
to $7.00 which is $1.50 or approximately 5 x 28c from recent highs.  
(28c per year was the capital appreciation rate I brought up 
originally).   All this time TEL will continue paying at least 
their 5c per quarter dividend and maybe even up it to 6c, thus 
preserving their yield at the new higher price.   Does that scenario 
sound too far fetched?  Our 'buy and hold' investor does not care if 
he gets his 28c per share increment every year; only that the gain is 
there in 5-7 years time when he might want to sell.  

A buy and hold investor does not have to time the market for his 
gain.   A buy and hold investor does not consider cashing out in good 
and/or bad years if at some time along this road to wealth they are 
slightly above or below their target return rate.  The only 
requirement is that, based on company performance, the share price 
gain target is statistically likely over the period of the 
investment horizon.  So can I count income and growth in my income 
share?  I say yes.   Will a trader beat a long term investor in TEL 
in a good year for the trader?  Yes.  But that is not the same as 
saying trading TEL is a good long term strategy.  Traders don't get 
it right all the time.  How have all your trades gone (not just the 
best ones) on FBU this year?



>
>(2) The figures you give regarding estimated trading profits
> are PER TRADE.
>The overall profit will depend on the number of trades executed -
>you have assumed only a single trade per year. A range trader such
>as you describe would not consider that a viable proposition. 
>


I am speaking aimed at the point of view of a long term investor who 
thinks that doing a bit of trading may increase their return.  Being 
a range trader who may go in and out of a share 5-6 times per year 
is an entirely different psychology and method of working.  Generally 
the people who do worst out of trading are those that act on a hot 
tip make a heat of the moment decision and don't really do their 
homework, and haven't read all the necessary trading books.  It is to 
this audience that my comments were meant to be addressed.  

>
>
>(3)
>You have charged the trader brokerage of 15 cents per share per
>completed trade. A much fairer figure would be 2 cents, or even less
>if the trades were for more than 3000 shares. (At a flat rate of
>$30/trade) This means another 13 cents profit per share per trade,
>every trade. A substantial increase, particularly since the putative
>trading range here is a relatively narrow one. 
>
>


The long term investor tends to not move all of their capital in and 
out at once, and tends to use a full service broker.   So these lower 
brokerage rates may not be available to them.  Have I used a narrow 
trading range to fudge the figures?   I wouldn't describe a near 20% 
gain in one year as that!


>
>
>(4) You seem to assume that anyone using TA or trading at all,
>NO MATTER HOW INFREQUENTLY will automatically have their capital 
>gains taxed. Not so.
>I think you would find that very few ShareChat participants are
>paying tax on their gains, for example.
>
>

Probably true.   But do you remember the days when it was up to you 
to declare any interest earned on your bank account in your tax 
return?   I am sure many people didn't pay tax on that money either.
Share registries are public documents.  It wouldn't take that much 
effort to go through them and find out whose shareholding levels were 
yo yoing about.  Just because some of the share traders on this forum 
haven't been 'caught' yet, doesn't mean you can suggest a future 
strategy that assumes they won't be.


>
>
>Snoopy, If you were trying to convince anyone of the wisdom of
>buying and holding "Income" shares, you could hardly have found a
>worse example than Telecom. Longterm holders of this stock have
>seen the value of their "investment" HALVE in three years.
>
>


Yes, but that is because the shareholders who had TEL shares three 
years ago, thse shares that they *thought* were income shares, were 
wrong.  These investors didn't realise that the high debt levels of 
the company, plus the capital spending requirements for new equipment 
and cost of bolt on companies bought at inflated values would take 
such a toll.  I don't mind admitting publicly that I was one of those 
people and screwed up.  But that was not because I didn't follow the 
trend line closely.  It was because I didn't do my fundamentals 
homework properly!  This is a fault I am in the process of 
rectifying.  It is easy to be lulled into a false sense of security, 
seeing a share price steadily going up and assuming you don't have to 
do any homework on it.   I will not be making that mistake again.


>
>
>Now lets look at your long term investor. The same $11,000
>investment is now, ten years later, worth $24,750, to which should
>be added about $10,000 in dividends making a total of $34,750, a
>gain of $2375 per year. This is HALF the annual return achieved by
>a lazy chartist using only the very simplest of technical analysis
>tools, trading ONCE in six and a half years! 
> 
>


Actual dividends per $10,000 worth of shares, as shown on your chart, 
 totals $16,113 dollars since float time. 

You aren't making the distinction between the long term growth 
investor and the long term income investor.  I am not disputing that 
a growth investor who had done their homework (which means a lot 
of work in the case of a telco) would have had ample chance to sell 
out at a good profit three years ago.  I am not disputing that T/A 
might be a good tool to decide precisely 'when'.


>
>
>This result shows that a long term investor buying and holding is
>likely to be far worse off than one that keeps an eye on the chart
>(even only once a month) and acts to preserve their profits, should
>the need arise.
> 
>Moral of the story:  Buying shares and holding on to them no matter
>what, is a wealth hazard.  Don't do it Jefley!
> 
>


Agreed, and this isn't in contradiction to what I said previously if 
you look carefully.  But assuming that Telcom will have the same 
volatility it has had in the past, and so is a good example of a 
share to trade for that reason is, I believe, not a good idea either. 
The 'easy growth' (cutting costs) has gone. 

SNOOPY



             
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