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Thursday, 7 September 2017
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Things that don't waste your time

I wrote a 3300 word article recently about how precious our time is. The article highlighted 12 things that waste an investors time. They include:

  • PowerPoint presentations. Powerpoint has empowered even the most unimaginative, reclusive, bland but credentialled introverts to present “well”. It is that good. Which is bad.
  • Click Bait. I really hate the way Click Bait journalism has degraded the integrity of financial content which is now being written for the internet not for the reader. It’s an insult having to title my article “10 things that waste your time”, but it is a necessity in a search engine world.
  • Media talking heads. We may look good and put on a good show, but we have no more ability to predict the future than you do. Take it for what it is, an entertainment, a show. But we are not clairvoyant.
  • Anyone injecting urgency into the investment process. There is no rush when it comes to the core purpose of a stock-market investor, picking stocks over long periods, not snagging a lucky rise tomorrow. Being urgent is really rather pathetic in a stock market context.
  • Warren Buffett emulation. Sorry but you are not Warren Buffett and you cannot do what he does or someone would be doing it for us and we would all be billionaires. So stop pretending you can.
  • Correlations. Some stocks don’t need to be researched in detail. They are driven by one or two major drivers and you just have to get those right. Fortescue Metals and the iron ore price for instance. To name just one. In depth research is pointless.
  • Human emotions. They do nothing for the investment process. Don’t let them get in the way. There is no “liking” or “hating” stocks. What you feel about a stock is irrelevant. Think like Spock. Be an algorithm. Dispassionate analysis is the goal.
  • The price you paid. What you paid for a stock is completely irrelevant. Whether you are in profit or loss has absolutely no bearing on the future share price. So be detached. Take a profit as quickly as you would take a loss and vice versa. A client once said to me “Telstra owes me five dollars”. No it doesn’t, it’s not your brother-in-law.
  • Economists and strategists from big institutions. Sorry but the economists and strategists of the big banks and the big fund managers are all biased to optimism. They have to be. They have a mission, to keep the clients of their large product selling wealth management companies happy and invested. They do that by generating a perception of control and certainty whilst over-emphasising the market’s relentless rise in the long term. They cannot afford to speak their minds and they simply cannot tell anybody to sell, ever.
  • Macro crap. We all spend too much time spent worrying about Janet Yellen and Philip Lowe. Knowing when interest rates are going to rise all fall pales into insignificance compared to stock picking. Worrying about ‘Macro Crap’  would be time better spent deciding which stock to buy and when.
  • Broker research. 90% is marketing and sucking up to a company, the rest is independent advice. Read it with your eyes open to the corporate purpose.
  • Consensus estimates. You will never make money out of knowing what everybody else already knows and is already in the price. The only thing that moves share prices is the unknown and the unexpected. If BHP hits its consensus forecasts the share price doesn’t move. So to make money out of stocks you have to predict the unexpected. On that basis the consensus is not going to make you money.
  • Stock-market gossip forums. A good idea but the reality is that they are too short-term, anonymous and because of that are mostly lacking integrity.

Click here for the full article:


Time to move on and look at something more positive, things that don’t waste an investors time, your time. I have ten. Here are three:

In the last few weeks in this article, we have looked at ten things that waste an investor’s time. Time now to look at something more positive, things that don’t waste an investors time, your time. I have ten. Here is one.

Following fund managers

When you understand that you will never make money out of knowing what everybody else already knows and is already in the share price, you begin to realise the only thing that moves share prices is the unknown and the unexpected.

If BHP hits its consensus forecasts the share price doesn’t move. So to make money out of stocks, you have to predict the unexpected. How do you develop that insight? There are a few ways, but one of them is to follow the people that spend millions of dollars finding the insight.

The most obvious are boutique, mid-cap, stock picking fund managers. You may not know this, but there is a game in town called “Buy a stock and then tell everybody about it” and it is a game played aggressively by these mid-cap boutique fund managers.

I first understood this when another broker told me a story about his first week in stockbroking. He had been employed as an apprentice dealer working as the assistant of one of the legends of the Melbourne stockbroking industry. On his first day, his mentor took him out to lunch.

It wasn’t quite the Matthew McConaughey scene from Wolf of Wall St, they didn’t order two Absolut Martinis every seven and a half minutes, and another two every five minutes until they passed out, but otherwise it was similar.

He told him, “The way this works Sonny Jim is this. You find a stock that has half an inkling of a business idea, where the share price is under one cent. You buy millions of it. You then spend the rest of your career marketing it”.

My stockbroking colleague did just that turning $60,000 into $2.2 million at the top. He was still under 25. Unfortunately for him, there are more than one or two lessons you have to learn in the stock market game, and not falling in love with a stock is another. He held it until it fell to zero, but that’s another story.

The point being, this formula of buying a stock and telling everybody about it is as old as the hills and is being aggressively pursued by the funds management industry on a daily basis. A particular fund manager recently listed a micro-fund for instance. A month later the interweb carried a story from this fund manager about the top micro-cap stock picks you “Have to hold”.

Every day, fund managers tell you, through the media, on their websites, and in conference presentations, what they have bought. It is perfectly legal, in fact, it’s almost negligent of them not to broadcast their stock picks. But from your amateur point of view, it is golden information because if they have bought them, they must have done the work.

So rather than dismiss this activity, your game is to take advantage of it.

To do that, it is simple enough, just keep an eye on the stocks that fund managers are pushing because they have done a heck of a lot more work finding and understanding them than you ever will.

If you consider that a fund manager running $1 billion earns maybe $20 million a year which is spent on employing analysts to improve their stock picking, you need to be listening to these people. They have more time and more focus than you ever will. Time spent on the one thing that matters, stock picking and because most of them can't trade mid-caps in size, the liquidity isn't there, the stock picks have to be medium to long-term. So when you hear about it, it is usually early in the piece, early in the investment cycle.

Follow the fund managers. They have more insight than you, they have done more work than you, and they are smarter than you, and the good thing is, they are more than willing to tell you what to buy. So Listen. It is, in a world of financial market treachery, as inherently honest an insight as you are likely to get.

Unless they are sellers of course. But you can check that.

Small and mid-cap stocks

Of course the big fund managers don’t play this “Buy a stock and then tell everybody about it” game because their job is not about stock picking but about slightly outperforming the market through asset allocation or, in the equity market, by going underweight and overweight sectors. They have too much money to be stock pickers. When you run $10 billion or more you simply can’t buy a mid-cap stock in any size without blowing it out of the water. And if you did it would make very little difference to your overall performance because the liquidity would prevent you buying a material holding. So there are two ends of the market, the big end funds which offer you average returns, and the small end. If you are taking responsibility for your own investments and buying individual stocks then your game is at the small end, in stock picking, not buying a diversified portfolio. If you want a diversified portfolio these days, you can get that sort of exposure in a thousand places. There are more unlisted managed funds than there are stocks in Australia, they are everywhere. There are a host of listed exposures as well (LICs and ETFs). If that’s what you want it’s best you pay your 2% and get a letter once a year telling you how much money it’s turned into. It’s a lot more relaxing with less risk and less stress. But for the rest of you the only point in taking an interest in the stock market is to significantly beat the averages and you have the best chance of doing that in small and mid-cap stock picking. We run the MT Top 50 portfolio which has outperformed the market by a few percent and we do it not by stock picking but the opposite, by not holding rubbish stocks rather than picking the heroes. But if you have any stock-market ambition and are going to commit the time and energy to the stock market game, focus on the small and mid-caps. It is the heroes that pay because there is no edge to be had in the big stuff.

Being objective about stocks in a sentiment hole

There are two elements to a share price, value and sentiment. You will find a host of fund managers and commentators that hide in the idea that the only thing that matters is value, but the truth is, it is sentiment that offers the most opportunity. You have to develop a feel for sentiment. As Karl Seigling (Cadence Capital) will tell you, there are 2200 stocks in Australia but only 700 were profitable last year. Out of those, 630 are trading around fair value, 35 are cheap and 35 are expensive and this is where you need to be looking. Looking at the 5% of stocks on both ends of the valuation spectrum. Karl calls them the good stocks and the bad stocks but I would call them the oversold stocks and the overbought stocks. Stocks get overbought and oversold on sentiment and when they do, that is the opportunity. You have to feel when the herd is rushing too far and fast in a particular direction. For instance the bank sector, CBA in particular, are in a sentiment hole at the moment. That doesn’t mean you buy them, you have to respect the trend. That means you simply recognise the hole they have fallen into and watch for the turn in the trend. These are high high-quality companies. One day they will come out of the sentiment hole. You need to develop the same feel for stocks that you already hold which the market is euphoric about. They are easy to spot, high PEs and low yields. Domino’s Pizza is an obvious example of a stock that we knew was overpriced, everybody was saying it was overpriced, for literally years. We noted that risk, that sentiment bubble (a technology stock...yeah right) and the fact that it was overvalued, but we held on and held on until the trend changed then we sold it. We didn't sell it just because it was on a PE of 70x. We sold it because it was on a PE of 70x and the share price was falling. It a golden rule of investment timing. Appreciate the fundamentals, know that you can never predict a top or bottom using fundamentals alone but you can react to a top or bottom when it happens and that’s what we do. That is not to say you chase any crappy stock that bottoms. You have to have a quality filter. You are looking for quality stocks, not any stock, that falls into a sentiment hole and you wait for the bottom or a stock you hold, that finds itself in a sentiment bubble, and wait for the top. Sounds simple.

Next time - another seven things that don't waste your time.

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