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Monday, September 1, 2008
Find the right price

When we meet with a fund manager, says Ian de Lange of Seed Investments, we don’t waste time discussing past performance and ask for his assessment of future performance. “Rather we try and understand their investment process and beliefs and how this has played out in various past periods. In this way we try and understand what the manager looks for, how he is likely to respond to events and also what scenarios he is likely to avoid.”

I have quoted John Train’s book, The Money Masters. In it he summarises some of the ‘Investment Dont’s’ from his various discussions.
Some of these include:
• Avoid popular stocks. That is, stocks that are on everyone’s list. Its not that the business won’t do well or even that the stock will never rise; it’s just that you will first have to work off that overvaluation, which takes time. He refers to IBM, then selling for 300, was a ‘religion stock’ in the late 1960s. The company fulfilled its owner’s dreams: earnings went up 700% in the next decade, and the dividend rose 10%. Still for ten years the stock never rose above 300;
• Avoid Fad Industries. These are variations on poplar stocks;
• Avoid New Ventures. Venture capital is for active professional management, not passive portfolio management;
• Avoid ‘official’ growth stocks. Shares that have the official growth label are often already priced for this expected growth into the future. They are likely to disappoint;
• Avoid heavy Blue Chips.  Here they point out heavy industry blue chips with static earnings. Examples include GM in the US. “I think that this may be an over generalisation,” comments De Lange, “because it all comes back to value. An industry that has gone ex growth may still prove to be an excellent investment if purchased at the right price.”

Avoiding certain shares is just as important a decision as including others. We like to understand some of the process that a manager goes through.

Copyright © Insurance Times and Investments® Vol:21.8 1st September, 2008
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