Forum Archive Index - May 2003

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

Hi Jerry

> 
> 
> This leads to a point that I'm trying to make, that all investing is,
> in fact, speculation of sorts.  It's not a nice world out there.  With
> capitalism, the drunks are in charge of the brewery, and many managers
> of companies are neither competent or honest.  
>
>

An underlying assumption of fundamental analysis is that the financial 
information that you are pulling from the company financial reports is 
correct.   If directors are lying, then suspect figures should be tagged 
by the auditors during the independent review of the results.  If audit 
procedures do not pick up mistakes, then using false financial figures 
could get a business analyst into serious trouble.   But that possibility 
alone is not sufficient to throw up your hands in horror and say F/A is a 
waste of time or 'just speculation'.   Most published financial figures are 
accurate, despite the headline prominence given to the rogue 
exception cases.

In the most general sense you are correct Jerry in that investment is 
'speculation of sorts'.  After all, your entire life plan probably rests on 
the assumption that you will not be run over by a bus tomorrow.    And 
given that no-one ever plans to be run over by a bus, then it is shear 
speculation that you will not be.   

However this general definition of speculation, that a future result must 
necessarily be determined by unrelated future events the output of 
which is not entirely certain, is not a very useful definition to the 
investor as I see it.


>
>
> I would be a poor manager of my money if  I remained blind 
> to the fact that  things will and do go wrong with even the 
> best-run company (with the worst run, the sky's the limit in terms 
> of how much money they can lose).
>
>

Quite right, but my solution to this dilemma is to do as much research 
as I can before I invest.   Things like going back over old annual 
reports checking out what directors predict for their company's future, 
then checking up in the following years report to see what actually 
happened and how the directors justify the difference.   That is one 
way to get some kind of a handle on dishonesty/incompetence.

The second thing is to make sure that no 'one' investment so 
dominates your portfolio that 'getting it wrong' in one instance will have 
a serious overall effect on your investment plan.

Thirdly I invest in companies with at least a five year track record and 
are strong in the area in which they choose to operate.  It is very 
unlikely that a company like that will collapse completely.


>
> 
> I won't bang on again about TA vs FA ... we've all done it to death.
> However, what I'm saying, is that the inherent and extreme volatility
> of biotechs make it necessary to use every available  tool of
> investing  in order to stay in the game.  Where the investing part of
> it comes in, to my mind, is in checking out the science and scientists
> in any speculative biotech one identifies
>
>

I think you are mixing up the words 'investment' and 'research' here.

The way I use the word 'investment' is that you must be able to draw 
up a mathematical model (however crude) that shows that in the long 
term you will get more money out of the investment than you put into it.   
This might be as simple as picking a high yielding share (say yielding 
8%) and assuming that every year you hold the investment you will get 
an 8% return.    Whether this will actually happen of course is not 
certain.   But that fact that your ultimate return is not precisely able to 
be forecasted does not invalidate the original investment concept, and 
your initial decision to invest.

Now we come to biotechnology.

The problem with 'investing' in a share that is burning cash developing 
drugs is that it is very difficult to construct a mathematical model, with 
verifiable assumptions, that will show you ever getting your cash back.   
This is not the same as saying that all biotechs burning cash are 
doomed.  Undoubtedly some will be very successful and turn a huge 
profit.  The hard bit is identifying which the successful companies will 
be in advance, as history shows that the big success stories are a tiny 
minority.    This means that until a biotech share moves into profit our 
biotech investor is reliant on some other biotech investor thinking the 
prospects for that biotech investment is 'even better' and buying the 
shares off them on that basis.    This process is, by definition, 
speculation.   A good speculator will be able to get out when the 
downside risk exceeds the upside risk.  You can be lucky and get it 
right, but you have to be very good to get that process right over a long 
series of transactions.


> >
> >"If you are an enthusiast of a biotechnology share you will need a
> >bigger enthusiast to come out and take the shares off you if you are
> >to make a profit." 
> >
> To which, i say, "Yup". Except next time, chances are, I will be the
> bigger enthusiast", 
>
>


Or the 'bigger fool'?


>
> 
> The thing about investing in biotechs, is, it's very demanding and
> time-consuming, 
>
>


Agreed, which is why I personally put more time into researching other 
opportunities which as WB would say "Are easy to understand."


>
>
> If you completely discount TA, then yes, I think the biotech 
> sector is not for you. But then what is? Retailing? 
> How does one know whether increased sales are at the expense of
> margins until the final audited figures are announced?  (The Warehouse
> and Briscoes have dropped hugely these past months, for that reason. )
>
>

If you want a totally predictable investment then your only choice is to 
put your money in a bank term deposit.  

I think the idea of retailers tracking an ever upward profit line based on 
perfect stock control is a fiction.   Sometimes the retailer will get it 
wrong and sometimes they will get it right.   The question is not 
whether a retailer will be able to perfectly track their sales forecasts, as 
this is impossible over the long term.   The question is do they have 
the ability to recover from their mistakes?

Given that the Warehouse has stock problems in Australia (but has 
overcome stock problems before) , and given that Genesis Research is 
having problems showing sufficient efficacy of their psoriosis treatment 
in the US for the the product to be commercial, share prices of both are 
down.    The question for the investor is which business out of the two 
is *most likely* to be able to overcome their problems?    Wouldn't you 
go with the company that has a track record of overcoming their 
problems first?

>
>
> Insurance? (AMP, Tower?). 
>
>

A sector that has been battered by the biggest market downturn in the 
lives of many investors.    I think the game has changed, which is the 
reason I am not invested in this sector.

>
>
> Farming or forestry (risks of commodity
> cycles and currency fluctuations).  
>
>

I'm not putting any  new money there

>
>
>Mining?  (even more complex and
> volatile than biotechs).
>
>

Yes that is another specialist sector

>
>
> Infrastructure?  Low risk. but low profits,
> as well.   
>
>

I disagree.   AIA is very profitable as are many of the ports around the 
country

>
>
>  I really would value your opinion on this problem, Snoopy. 
> 
>

I think my entry in the 'Stock Guru 2003' competition goes some way to 
answering this question.    In general I seek to be involved in sectors 
that are growing long term and companies that own 'a piece of your 
mind'  which means that it will be difficult for the competition to get up 
and challenge them:

So:

Lyttelton Port Company:  Trade is growing all the time.   It is on the 
doorstep of one of the manufacturing engines of the country 
(Christchurch).  If you are a Christchurch exporter, where are you 
going to send your product?

Restaurant Brands:   Tendency to eat out more is growing.   KFC is in 
an almost unassailable position in the chicken market.  Pizza Hutt and 
Starbucks are market leaders in the pizza and coffee shop sectors.

Wrightson:   The number one supplier to what is still New Zealand's 
primary export earner: agriculture.   Does not have a great track record 
going back over five year, but is consummately cheap.

Sky City Entertainment:   Is plugged into the growing tourist sector, and 
the Sky tower is now an iconic landmark.   Dominates the casino 
market in New Zealand.  Much of the base business comes from the 
local market so it is in reality a 'defensive' share too in times of cyclical 
tourist downturns.  I notice that they reported today that there has been 
nil impact from SARS on the company, despite the downturn in Asian 
tourists.

Contact Energy:    The energy market is a long term growth one.   
Probably the best managed of the local energy companies.  As the 
marginal cost of new energy goes up the existing power stations that 
Contact has look better and better.  All the energy retailers have had 
problems but Contact's name is less mud than most!

There is my 'solution' to the problem.

SNOOPY






--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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