Forum Archive Index - August 2003

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

Hi Morgy,
 
>
>I believe that the current market conditions do not warrant
> longterm analysis, the cycle is currently too volatile, 
>
>

There are two ways to look at volatility.   If a share you own suddenly 
plunges in value, that is bad.   But if a share you own suddenly leaps 
in value I find there are very few complaints.     I am on the look out for 
the potential of the latter type of volatility.   It's good for investors!

>
>
>in todays
> market the players for the future are still emerging, if you read the
> article on Vodaphone in the paper over the weekend you will see how
> difficult it is for companies to establish a global footprint within
> 20 years of their consolidation. I think it said if my memory serves
> me correctly that only 3 companies had joined the world top 100
> companies since 1985. Given the globalisation of the world economies
> in the last decade I find this amazing and relevant to the following
> strategy
> 
> I therefore suggest the following  methods for short term investors
> (up to 12 months) that may allow them exposure to better performing
> stocks than second guessing the commentators. Firstly cyclical
> analysis and later sector relative strength.
> 
> Cyclical analysis dictates that certain industries do well at certain
> times of the economic cycle. This is fairly well known but is also
> simple to follow and prove. The GISC standard which has been
> developed, now allows investors and traders to compare world markets
> on an apples and apples basis, the info is easy to get and a little
> reading will give you the basis of this investment method.
>

Can you give us a thumbnail sketch as to what you understand the 
GISC standard is?    I'm not familiar with it, and I expect many other 
sharechatters may not be either. 

>
> However rather than just invest in a sector that traditionally
> performs well at certain times I believe that this must prove itself
> at every point in the cycle,
>

I agree that the business cycle this time around will not be an exact 
repeat of the business cycle of the past.  I also believe that a business 
must prove itself and we cannot rely on the fact that because the share 
price is down it will inevitably bounce, simply because 'it must have 
bottomed out'.     So perhaps our philosophies are not as far apart as I 
thought Morgy?

However, the ways we exploit the low points in the business cycle 
differ.  Let's take retail in general and WHS in particular.     Retail goes 
up and down in cycles.  You Morgy would wait for enough institutional 
support in the market to push a share like WHS into an uptrend before 
you jumped on the bandwagon.    If the Australian Yellow Shed 
situation sorts itself out then I am sure this will happen.

I, OTOH have bought in already.   Why?     Because the share has 
already received a hammering this year ( I don't have to predict when a 
share price hammering will occur.  I merely have to be ready after it 
has happened and have some cash in the bank to take advantage of 
the situation).   

I am already confident that Stephen Tindall has has the wherewithal to 
get the right marketing, right product in store and right stock turn mix to 
make a success of *any* retail operation.   I don't think that fund 
managers can teach Tindall anything about retailing.   So the fact that 
fund managers aren't flat out buying WHS shares doesn't put me off.   
And I don't think the popularity of Warehouse shares over the next 3 
months (say) will have any bearing as to ultimately how successful the 
Yellow shed operation will be.    IMO Stephen Tindall, with his track 
record,  *has* proved himself at every point in the  retail business 
cycle.   I do not need the the WHS share price to move at all to 
convince me of that he can do it again.

If fund managers are determined to sell down the WHS, ignoring 
Tindall's past record of building a retail business from scratch and 
managing through the difficult ups and downs on the way, why not take 
advantage of these fund managers short sighted thinking?   If these 
fund managers offer their shares cheaply enough to the market why 
not just buy 'em?  I did!

>
>Your point
> on different companies doing well in the next market push is highly
> relevant and if one was to just invest on a cyclical basis you could
> be in the right game but at the wrong park, i.e a bit like being a Man
> City fan for the last 20 years when all the action is down the road at
> Man United.
> 

Yes, very good point.    I can't predict where the next great 
'Manchester football club' will come from.  But I do know that I would 
put my money on 'Manchester City' to make a better fist of a comeback 
than 'Morgy and Snoopy's Manchester Back Street Boys'.  I'm not 
saying that you and I, Morgy,  couldn't come up with a football team to 
challenge 'Manchester United'.  What I am saying is that it would be a 
lot tougher for us to get the sponsorship and players in behind us than 
it would be for 'Manchester City' club which has a track record in the 
football business.

Reverting back to the stockmarket 'game', this is why I tend to steer 
clear of new issues.   This doesn't mean that new issues or companies 
moving into new markets can't do well.  Just that it is more difficult if 
you are an up and coming company.  And from an investor viewpoint 
more importantly, it is very difficult to pick which of the up and coming 
companies are the ones that will go on to become the major players of 
tomorrow.

>
> If we suspect that an industry group or sub group is doing well then
> we must investigate exactly what groups are doing well and by what
> measure. This introduces the second part of the startegy, which is
> Relative Strength measurement 
>

I whole-heartedly agree again.  This is exactly what I do!   However, 
despite the goal being the same our methods differ again Morgy.   I 
look for a relative advantage of the business (that is what all those 
focus investment group screening criteria are about).    You on the 
other hand look for outperformance of the share price on the share 
market.    An important difference.

>
> Mid Caps
> have been performing extremely well , on a cyclical basis we know that
> they lead the market in recovery because they are leaner and meaner
> than the blue chips, they are also where the next line of blue chips
> come from. 
>

Indeed, there are studies around that show that mid caps do 
outperform blue chips over five to ten years periods, which is why I am 
a big fan of mid-caps.

>
> Next step, what industry group within Mid Caps is doing
> well, as it happens financial services have been doing well
> particulary small and mid cap companies. An example is  RCD:ASX  (a
> small to mid cap financial services company) see the run that this
> stock has made in the last year or so. All of this information is
> available to both the professional advisor and the private trader.
> 

Yes, but is the fact that a mid cap financial company 'is doing well' 
sufficient if a slumbering giant big player decides to wake up, roll over, 
and squash them?

>
> I believe that we do not have the information that
> Buffett does to examine companies in his manner 
>

I would disagree with that.   Ever read one of the 'Buffettology' books?
They constantly emphasize that the information Buffett uses is not 
overly complex or technical or secretive.    Indeed the opposite.  He 
only invests in shares that are 'easy to understand'.

>
>and I also believe
> that his level of investment allows greater due dilligence than
> generally available to the average investor, one would imagine he gets
> many invitations to sit with companies that want his money, one can
> afford to be selective if the cake is always on the table. 
>

Everyone can be selective Morgy.  The simple matter of just keeping 
your hands in your pockets is one way to do it.    I think Buffett himself 
has admitted there are long lengths of time where he just doesn't see 
anything on the sharemarket worth buying.

>
>The NZSE is  so small that perhaps you also have 
>an advantage in that the market is
> fairly incestuous but also limits a broader strategy.
> 

The NZX is almost certainly too small for Buffett to worry about.   In 
fact a couple of the shares I hold are probably too small for even most 
NZ fund managers to worry about.     But as you suggest Morgy, it is 
up to us to adapt our investment styles to suit the market that we have.

Regards, 

Snoopy



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