Qualiport

Almost in the Money
Wednesday, 4 November 1998

Qualiwatch continues

We were celebrating in the street of London on Monday evening. For the first time since September 1st, the Qualiport was back in the black. Between December last year and July 17th this year (that was one trading day before the market reached its absolute peak -- great timing, hey?) we invested a total of £16,184.62 into this real money portfolio. At its absolute height, when measured by pure cash balances, we hit £19,043.05. Not surprisingly, that was on July 21st.

It is interesting to look back on the share prices of our original Qualiport Quartet on that date.

Rentokil Initial 445p
EMAP 1247p
Marks & Spencer 533p
Unilever 677p

After their poor results of yesterday, it looks a long way back to that level for Marks & Spencer. More on that later.

The Qualiport hit its nadir on October 5th, when it was worth £13,720.99. That's £5,322.06, or 28%, off its peak of just 3 months previous. At that time, it would have been easy to be depressed, think of what might have been and count the lost pounds and pennies. Sure, if we had been lucky enough to sell at the absolute peak and buy back at the absolute trough, we could made ourselves a little money.

We've said it before and we'll keep saying it until we are blue in the face. It is impossible to time the market. When the FTSE 100 hit 4648.7 on October 5th, how many people were buying? When it hit 6179.0 on July 20th, how many were selling?

This is a tale of what typically happens to a market timer. John sold everything at he beginning of 1996, having made some stellar returns during that bumper stock market year. "Knowing" the crash was coming, he sat on the sidelines as the Footsie smashed through 4000, 5000 and then approached 6000. This all within the space of eighteen short months.

Having missed out on all the gains of 1997 and the first half of 1998, the patience of our market timer would have finally given up on about July 20th this year. John would have jumped back into the market, and at the same time, would have been so bullish that he would have persuaded all his mates to invest their savings in this bull market of the century.

Oops...

The market timer trying to pick the bottom of the market still has his cash sitting in a building society current account. It has been sitting there since the 1987 stock market crash. He's waiting for the next crash, "and this time" he's going to buy big just after it happens.

Oops...

So, whilst we can think about what might have been for the Qualiport, we're very happy continuing our buy and hold strategy. We try to buy great companies and hold them for the long term.

Back to our Monday evening celebrations. They were cut short, very short indeed, when I read that day's Daily Fool. A week ago today, we announced that we were buying shares in PizzaExpress, when the share price was 768p. A few short weeks before then, they were quoted at "only" about 640p. Imagine my delight when the shares jumped 58p to 818p on Monday. But -- and here's the BIG but -- I hadn't yet placed the buy order! Delight quickly turner to despair. Then, on Tuesday, Marks & Spencer announced what was effectively a profit warning, and the Qualiport was again back in the red.

The Qualiport is a real money portfolio. Unlike tip sheets and magazines, we put our money where our mouth is. We buy the shares and cough up the brokerage charges and the stamp duty. We buy at the higher ask price and quote our daily portfolio returns at the lower bid price. We also place our trade in the five days following our buy or sell announcement. Our aim is to beat the market, just like yours ultimately should be. However, we are not tipping shares, and we don't want or expect you to go out and buy them just because we have. We are going through our though processes and calculations to hopefully educate people. It's all part of our Foolish aim -- to amuse, educate and enrich the individual investor.

Today we finally placed the buy order for PizzaExpress. We bought:

245 shares at 792.5p each, plus brokerage of £15 and stamp duty of £9.75 = £1,966.38. The numbers on this page don't yet reflect this transaction, but we will have it all sorted for Friday's update.

How nice it would have been to pick up these babies at 640p just a few weeks ago. The delay has cost us a 24% gain. Ouch. This is far from the end of the world, though. It wouldn't surprise me to see PizzaExpress shares back in the neighbourhood of 600p over the next few months. It also wouldn't surprise me to see them challenging their all time high of 950p over the next few months. What really matters, however, is that they keep executing on their business plan. Over the long term, consistent profit growth ultimately translates into consistent share price appreciation. If the PizzaExpress share price is the equivalent of 3000p in 2008, I don't think we'll be worrying too much about our buying price.

Fools should not underestimate just how difficult it is to actually beat the market. We all make investing mistakes, but if we get everything right, the big winners will, over time, make the investing mistakes pale into insignificance. Finding and having the conviction to buy a truly great company in the early stages of its development is every investor's dream. It is much easier to say than to do.

Speaking of investing mistakes...

It is appropriate to comment on the Marks & Spencer results. As a shareholder, I thought they were pretty dire. I haven't had a chance to look at them in any great detail, and because they are only interim results, the company does not have to supply a full set of accounts. The lowlights for me were: normal operating margin down from 11.4% to 8.6%, and accounting operating profits of £263m translated into normal cash operating profits of just £113m.

An increase in working capital of £240m did the damage. In the previous year, accounting profits of £428m translated into cash profits of £346m. Again there was a buildup of working capital, but not to the same extent. You expect a retailer like Marks & Spencer to have larger stock balances at the end of September, as they gear up for the vitally important Christmas trading period. Still, this is hardly encouraging.

Marks & Spencer is not going to go away. They are an integral part of British society, courtesy of their enormous brand name. We all know that you can usually substitute the words Quality and Value for Marks and Spencer. However, they have to keep delivering these core values if they are to maintain their aloof position in the eyes of the British public. As for their expansion abroad, where they haven't got such a huge and established brand name, it will be that much harder.

The Qualiport is not about to dump Marks & Spencer because they've had a poor quarter. I want to go in depth into their numbers, however, and keep a closer eye on their performance than I would have liked.

Qualiwatch 6

On Friday I introduced the concept of the Qualiwatch 6. That will have to be carried over until this Friday, when Unilever also unveil their 3rd quarter results.

To get you thinking, for starters I'm after companies that are number one in their industry, have got a sustainable competitive advantage and operate in a growing market. I'm not necessarily restricting myself to UK based companies, and for the time being I'm completely ignoring valuation. Know any candidates? If so, let us know on the Qualiport message board.

Here's a suggestion from me -- Yahoo.

See you Friday, or at the party.

Want to win a £1000 brokerage account? Click here to register, then enter. It's easy and fun.

Bruce Jackson (TMF Googly)

Qualiport Numbers

                    4/11/98 Close

                 Company   Change    Bid
                   EMA      0.02    10.10
                   IIG      0.08     2.90 
                   MKS      0.10     4.12
                   RTO      0.13     3.88
                   ULVR     0.20     6.25 

Qualiport Stocks

Last Rec'd Total # Company  In At  Current  Change
 19/12/97   783      RTO     2.55    3.88    52.2%
 27/10/98   755      IIG     2.58    2.90    12.4%
 17/07/98   298      ULVR    6.72    6.25    (7.0%)
 17/04/98   169      EMA    11.85   10.10   (14.8%)
 11/05/98   368      MKS     5.54    4.12   (25.6%)


Last Rec'd Total# Company  In At     Value      Change
 19/12/97   783     RTO   2046.53   3038.04    991.51
 27/10/98   755     IIG   1972.64   2189.50    216.86
 17/07/98   298     ULVR  2052.54   1782.04   (270.50)
 17/04/98   169     EMA   2052.57   1706.90   (345.67)
 11/05/98   368     MKS   2054.11   1516.16   (537.95)


Cash:                                   £5,925.16
Current Total :                        £16,238.26

Total Invested:                        £16,184.62
Profit/(Loss) :                           £ 53.64

Value Per Share

                   Day     Month    Year    History
Qualiport         2.66%   11.08%   35.40%   38.45% 
FTSE 100          2.16%   11.03%    9.49%   12.01%
FTSE All Share    1.95%   10.40%    7.37%    9.63%

For an explanation of Value Per Share accounting, please click here.