by Dr. Greg Story
Philip Stephens’ writing in a recent Financial Times article on the turmoil in 2008 used a nice turn of phrase about how quickly “the unthinkable can become the unremarkable.” We all try to predict success with our investments. We buy on the basis that whatever we have bought will be worth more, a lot more, in the future than what we bought it for.
The optimism for this idea of ours is “remarkable” when we review the last year: oil fueled inflation, oil fueled deflation, Hillary a shoe-in, Gordon Brown arisen, India and China “saved” by decoupling, sovereign wealth funds “rule,” sayonara investment banking, interest rates down to zero, Icelandic financial innovation, an alleged $50 billion fraud. So many “unthinkable” items last year. It seemed the latest news was vying against the previous for providing the next shock. Those shocks are all now so “unremarkable.” So how do we punters do better than the experts and pick a few winners in the market?
The first thing we have to do is disabuse ourselves of “predictive powers.” So many “experts” got it wrong, what do they know that is superior? Actually nothing. There are, however, a few tactics we can apply. Picking the market or share price bottom is a pastime that will delight, except that if you do manage it, it is more likely luck than science.
We can stage our buying, though, on price dips. We can drip feed the money into the market and average out our entry cost across a number of points, rather than moving in with a single big bet on the timing of our move. Nothing is more irritating than discovering that your “steal” just got stolen by someone else. Brokerage fees are painful, though, when we try this drip feed, small-lot approach.
What we are looking for here is bad news buffeting a sound enterprise, which hopefully will not have lethal consequences. We seek a good company, temporarily unfashionable, which over the next two to three years will potentially see a formidable recovery. But that is a tricky point of difference and so hard to know when you are in the thick of things.
Limiting ourselves to a manageable number of companies to follow is also well recommended—the experts usually suggest, less than ten. There are definitely ten unfashionable companies out there that have a better than average chance of delivering by 2012.
Dr. Greg Story is the Country Head of National Australia Bank. For more information, see www.nabasia.com or call 03-3241-2144.