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Smart Investor: ignore the chatter, focus on the facts

Only by focusing on the financial data can you reliably identify good investment targets, says Smart Investor.

 
Smart Investor: ignore the chatter, focus on the facts

Many of us have been tempted to buy shares based on our fondness for particular brands or shops, but, warns Smart Investor, we ignore the cold, hard facts at our peril.

How do you pick your investments?

Over the years, I've come across a wide range of reasons as to why fellow investors have decided to buy a slice of a particular company.

For instance, the fact that an individual likes a particular product, such as a phone or computer, or has recently visited a busy store where the tills were ringing, have both been given as reasons for investing. I've equally heard people rule out investments with the same logic: ‘I will not buy shares in company X because I do not like their kitchens’ or ‘I went in company Y and a member of staff was rude to me.’

Of course, there is nothing wrong with these views and observations; I am not for one moment mocking them or saying they should not be held. However, I do feel that such opinions can hinder rather than help with the decision as to whether or not to buy shares in a particular company.

Unhelpful prejudices

The subject is far broader than just companies; generalisations about sectors and regions are also prevalent among both private and professional investors. For instance, various investors will not consider sectors such as housebuilders and retailers at the moment because they point to data such as the recent GDP figures which show that the UK economy continues to struggle, so it cannot possibly be a good time to invest.

Of course, if you seek low prices when buying then you should perhaps be more interested at the moment, rather than less interested.

Furthermore, countries such as the UK, USA, Japan and Europe have been written off by various investors. A lost decade or longer appears to be the consensus; my question is how do they know?

How do they know that America will not enjoy improved levels of prosperity in future years? Why should the UK suffer a ‘lost decade’ just because Japan did in the 1980s? Guessing or applying some complicated formula which can be ‘tweaked’ depending upon its inputs is simply insufficient.

In addition, there remains a view among many investors that the best reason (sometimes the only reason) to buy an asset is when its price is on the up. Admittedly, this shows that sentiment has been positive, but just because a price has gone up, down or sideways does not mean it has any impact on its future direction.

Price is not akin to company performance (i.e. profitability) where a track record of steady profit growth can reasonably be expected to continue. Price is simply a measure of popularity among investors, and history has proved that they're are not right all of the time.

Focus on value

The truth is, a reason for investing/not investing in any company, sector or region can always be found, whether this focuses on predictions, complicated formulas, past price movements, an investor's own views on the asset or whatever else. However, the best reason to invest is because you are seeking long-term capital growth and income, and believe that the asset offers good value for money.

By good value, I mean the company/asset can be classed as ‘quality’ (financially sound, performing well, viable etc.) and the price at which it is being offered is fair.

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12 comments so far. Why not have your say?

Jn

May 01, 2012 at 10:00

The way I see it, when markets come down a great proportion of companies share prices come down. Some more than others. But they come down. So, at this unpredictable time, just buy good high yielders.

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Skald

May 01, 2012 at 12:21

Rigging the market - zut alors 1st April!

Annonce d’une énorme restructuration dans ST-Ericsson ? (rumeurs)

Rumeurs et fausses indiscrétions

"D’après des milieux bien informés", lors d’une réunion top-secrète, mais dont tout le monde savait qu’elle se tenait (et que c’était la semaine dernière), la Direction de ST-Ericsson aurait annoncé qu’il courrait une rumeur persistante sur les marchés (et dans l’entreprise) selon laquelle la société ST-Ericsson licencierait bientôt plus de 10 000 salariés dans le monde.

C’est cette rumeur qui aurait permis à l’action STMicroelectronics de passer de 4.172 euros le 19 décembre 2011 à 5.626 euros le 20 janvier 2012 (cette augmentation est véridique : +35% en un mois !!!) puis d’atteindre 6.392 euros le 26 mars (+53% en 3 mois !!!!!).

Lors de cette même réunion la Direction de ST-Ericsson aurait indiqué que comme les marchés ont toujours raison, la société ST-Ericsson va en effet être obligé de licencier plus de 10 000 salariés.

Mais comme la société n’a qu’un peu moins de 6 500 salariés celle-ci allait devoir lancer un vaste plan d’embauche de près de 3 000 salariés afin de pouvoir en licencier 10 000 et satisfaire les marchés.

Vous trouvez que ce poisson d’avril n’est pas de bon goût ?

Lorsque le mois dernier un journaliste a interrogé la Direction sur le nombre de sites de R&D de ST-Ericsson, celle-ci a répondu en parlant de "sacrifices clairs" (voir l’article : Le PDG de ST-Ericsson : "Nous allons devoir faire des sacrifices clairs").

Dire qu’il faut encore s’attendre à des périodes difficiles et à une réduction du nombre de sites, cela serait douloureux à entendre mais pas inattendu vu la situation actuelle.

Mais parler de faire des "sacrifices" en parlant de supprimer des emplois, cela nous trouvons que ce n’est pas de bon goût !

Beaucoup prédisent que du fait des élections présidentielles puis des législatives, il n’y aura pas de pertes d’emplois "forcées" en France (du moins pas avant l’été).

Et beaucoup (comme nous) de rappeler que la France a investi 695 M€ dans STMicroelectronics au travers du FSI, près de 400 M€ au travers de NANO2012 (2/3 état 1/3 région), plusieurs dizaines de M€ chaque année au travers du Crédit Impôt Recherche (CIR) et encore bientôt plusieurs dizaines de M€ au travers du Grand Emprunt (déjà 34 M€ annoncé à Tours.

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Maverick

May 01, 2012 at 12:34

Yeah but, yeah but, yeah but . . . . .

You can't fight the market. If a company's fundamentals look good, it has a niche business, an "economic moat" (or whatever your term is) and exposure to emerging markets, but the market doesn't like the company, you will lose money if you buy its shares. Fundamentals are only one factor you need to take into account.

"Price is simply a measure of popularity among investors, and history has proved that they're are not right all of the time." Perhaps not. But you go ahead and buy the unpopular shares, and I'll buy the shares the fickle and unpredictable market likes at the moment, and we'll see who ends up better off. Because I monitor what the market is doing, if one of your fundamentally sound dinosaurs starts to perform (e.g. Reckitt Benckiser at the moment), I can buy it anyway.

But you will probably miss out on the Pursuit Dynamics and the XP Powers.

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Maverick

May 01, 2012 at 12:42

Skald - Er - shouldn't you be writing in Icelandic?

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Hotrod

May 01, 2012 at 18:29

By the term "facts" do you mean performance history, or as some would explain the figures on a balance sheet, simply, "form"

To my mind that's only part of the story. A professional racehorse trainer places more importance on the present health and condition of the animal and its fitness to perform well on a chosen course, rather than rely on how well it has run in the past.

Likewise when I choose a particular stock I'm interested in how well it is doing dynamically. (how the market evaluates it, in terms of trading volumes etc) It's a complicated mental computation which is hard to put into words. Its the sum total of experience and knowledge which drives an investor to make a decision. You can't describe that knowledge as "facts" it's much deeper than that.

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Francis Wilkinson

May 07, 2012 at 13:20

A lot depends on your timescale. In my case I often hold stocks that are solid for over 20 years and invariably I find that value will out irrespective of fashions in the market, assuming management capable and assets tangably above share price.

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Maverick

May 09, 2012 at 16:10

Francis - I have a horrible feeling you won't find the next 20 years are anything like the last 20 years. Now that all dealing is done electronically in .00000001 of a second the landscape has fundamentally changed.

I keep, as a salutary lesson, a dummy portfolio of the shares I started with in January 2006. It is showing today a total rise of just over 7%. If you take inflation into account I would probably have been about 20% down.

Even really good solid companies like Weir Group have poor patches. Holding the shares regardless is a good way to get mediocre returns.

Unfortunately you have to duck out and buy (e.g.) IP Group until Weir is performing again.

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Scorpio15

May 10, 2012 at 15:23

I should be grateful if some of you geniousses could please advise me which funds to choose in these uncertain times. I am looking for Asia, Global ,UK and Latin America.

Thank you.

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Maverick

May 11, 2012 at 10:54

Scorpio 15 - Uncertain times are not the times to be buying funds, whether unit trusts or investment trusts. They always under-perform the market when the market is dropping.

Wait till the next bull market and then pile in.

Don't trust anyone's advice, least of all in internet chat rooms. Do your own research. The figures are all available free on the internet if you do a bit of searching. Start with Trustnet.

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Francis Wilkinson

May 11, 2012 at 11:23

As a contrarian I choose to differ from Scorpio 15. Uncertain times are the times to pick up bargains-once everybody knows we're in a bull market it's generally too late. Remember Buffet-'be greedy when others are fearfull'.

Bear in mind you might not pick the bottom , but the first move off the bottom is often massive and missed in a blink.

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Hotrod

May 11, 2012 at 12:29

@Scorpio15

Your request seems to be so casual, and your area of interest so diverse, that the questions you ask are professionally almost unanswerable.

If you are really serious about increasing your wealth through investment the first thing you have to do is develop an enquiring mind.

Part of your education should be basic economics and accountancy, but pathethogical and psychological reasoning also have roles to play.

Once you have grasped what you wish to achieve you would no longer have the necessitity to ask the questions you do. A logical staircase would present itself to you.

You must realise that less than 20% of all you read and hear is genuine knowledge you can act upon, the rest is obscure opinion, half-truths, and bare faced lies.

As Bertrand Russell once said: "The world is a horrible place, once you understand that, you can begin to happy"

However you have come to the right place for help. There is a wealth of knowledge and important information available here on the Citywire website. A lot of the hard grind of research has already been done, but you have to learn how to navigate the site first. If you can't do that, then you shouldn't be investing. Put your money in a deposit account, and get your kicks by having a flutter on the gee-gees.

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Maverick

May 11, 2012 at 15:39

Francis - If you do the maths, you soon realise the easiest way to lose money is to buy a share while its price is still dropping. For example :

You have identified that Weir Group has been oversold and its fundamentals justify a much higher share price. Its shares are now at £15 per share. You buy the shares. They continue to drop till they are at £8. You now have a potential loss of 47%, but you grit your teeth and hold on. I see the shares have started to rise, and by them at £9. By the time the shares get back to £15 I have made a 66% gain and you have made 0% (probably less, if you take account of inflation). If the shares continue to rise to £20 I have made a gain of 122% and you have made a gain of 33%. But in fact while I was waiting for the Weir Group shares to recover I bought Oxford Instruments and made another 50% on those . . . . .

The first move off the bottom is massive and missed in a blink, as you say, but if you're nursing a 47% loss it'll do you a fat lot of good. It'll only benefit you if you are a day trader, and I've got better things to do with my time.

People keep quoting Warren Buffet, but he operated in a different era and in a different market. If you want to be greedy while others are fearful I won't stop you, but I don't think I'll be joining you.

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