Qualiport

Bring on the market crash

See that button half way down the left hand side of this page? It says "Win £1000 with FasTrade."

Don't click on that button.

You don't want to be like MercedesBilly and have to decide which shares to buy with all that dosh. What an awful prospect. I bet he can't sleep -- who would want to make a Marks & Spencer (MKS) type blunder, just like the Qualiport arguably has? So, if you don't want to be like MercedesBilly (who accidentally won £1000 in our November competition), don't click on that button.

Wealth warnings over, it's on with the show...

Hands up if you're waiting, and hoping, for a market crash. Mine's up. The Qualiport's got almost £4000 sitting in the bank, and if we could pick up some shares in good companies at knock down prices, we'd be thrilled.

Just peering into my crystal ball of a computer screen, I can see lots of hands in the air. You can't tell me all those people want to see a market crash. Do you not realise that, if you are already invested in the market, a market crash reduces your net worth? Surely you can't be wishing that on yourself?

Warren Buffett famously said in his 1997 letter to Berkshire Hathaway shareholders that purchasers of hamburgers do not want the price of hamburgers to go up. That makes perfect sense. Would you rather pay £2.50 for a Whopper or £3.50? The answer is obvious. Many readers, over the course of their lifetime, will be net purchasers of shares. The Qualiport already has about £12,000 invested in the market, plus almost £4,000 in the bank, and will be adding £2,000 cash on April 1st and October 1st each calendar year. That money is not intended to sit in the bank. Once we identify the companies we want to invest in, and when the valuation is right, we will act. We are therefore net purchasers of shares. Just as if we were purchasers of hamburgers, we want to buy our shares at the cheapest possible price. We should therefore not be cheering when shares go up. Just like we wouldn't be cheering if the price of our Whopper kept going up.

This is Mr Buffett's view of life, food, Burger King (he probably would use a McDonald's analogy, as Berkshire Hathaway has shares in them) and the stock market. We should listen to him, because he is the second richest man in America and the only person who has made his fortune by investing solely in the stock market. Now, of course, there is a very valid counter argument. We are all invested in the market so we can increase our wealth. Most of us want to personally benefit from this wealth, whether that be by buying a better car, buying a bigger house, sending the kids to a better school, being able to care for the family or maybe even donating all of it to charity. At some stage, we are going to be net sellers of shares, unless we want to donate them to family or charity. When we become net sellers, we want share prices to go up. Not on the day we turn sellers, but in the five years before we want to sell. Net sellers want to make an orderly retreat over a number of years, rather than bailing out all in one hit. If you decided to sell all on October 5th this year when the FTSE 100 was at 4650, you'd be feeling pretty upset with yourself now.

As the Qualiport will be a net purchaser of shares over the next 20 years, if we were following Mr Buffett's theory, we'd want shares to go down. But we really only want them to go down for short periods of time, when, hopefully, buying opportunities will arise. Then, just like the period from October 5th to date, the chances are the shares will substantially recover those falls and continue their relentless march upwards. Anyone looking at the graph on page 27 of the best selling Motley Fool UK Investment Guide will see that clearly illustrated. In fact, the crash of 1987 doesn't even register a blip.

To sum up, we want our Whoppers to be cheap only when we're buying them. When we're not buyers, we want their price to go up and up. That's because what Mr Buffett neglected to say in his analogy is that we are collectors of hamburgers. We don't eat them.

Qualiwatch

Just to recap, we are attempting to identify roughly 6 of the best companies in the world from 6 growth sectors. Once we've done that, we will look at the valuation of the companies. The chances are that none of them will pass our valuation test right now, because we're not alone in spotting these gems of companies. We will only purchase them if, using our various valuation measures, we think they will return us 15% per annum over a 10 year investment period.

A market crash or correction will normally be irrational. Panic will often send share prices of individual companies down to a level that may be attractive. Once we've identified our chosen company, we want to be ready to pounce if and when that happens.

Hidden somewhere in the Motley Fool UK archives is the article we wrote about the first sector -- Technology. Not surprisingly, it was dominated by US companies. The four named were Cisco, Dell, Intel and Microsoft.

It has been said, and it may be true, that a portfolio made up of just those four companies, bought at any time, will outperform the indexes over an extended time period. This may be ten or more years, but each company is so well placed in a fast growing industry that the chances are they will outperform regardless of their current valuation.

But that is not the Qualiport's aim. As we saw last Friday, we think valuation matters. We think that there will be chances to buy shares in great companies at attractive prices. We may have to wait 3 months or 3 years, but every now and then a market panic creates some buying opportunities. We will have to be patient, and perhaps even a little boring. But, like many investors, we've got time on our side.

As a next step in the Qualiwatch series, we are going to eliminate two of the above four companies. It won't happen today but next Wednesday.

Portfolio Update

The Qualiport's move back into the black remained short lived. We celebrated briefly yesterday when we finished the day with a net surplus of £169.11, but today's big market fall put paid to any idea of a ticker tape parade down Kilburn High Road.

But hang on a minute. We should have been booing yesterday, because as net purchasers of shares, we want them to go down. Boo hiss to yesterday, and hooray to today.

Doesn't quite hang, does it?

What we really want is for all our shares to go up, up and up, and for all other shares to go down, down and down. Yeah, that's it. Why is the market so irrational? When it falls heavily, as it has today, why must it take most companies with it even when there's no news that could rationally cause this to happen to those companies?

On a serious note, we aren't really that bothered when the share prices of our companies fall. Unless, of course, there is a reason for it, like a profit warning. Marks & Spencer is our biggest loser, and rightly so in my books. Today they fell heavily, wiping out any minor recovery of the past few days. Such is life.

See you on Wednesday. If you're a cricket insomniac, like me, you won't be getting much sleep this weekend. Enjoy it, whatever you're up to. We hope to see you on the message boards.

Bruce Jackson (TMF Googly)

                    12/12/98 Close

               Company  Change    Bid
                EMA     -0.65    11.20
                IIG     -0.10     2.40 
                MKS     -0.26     3.90
                PIZ     -0.05     7.95 
                RTO     -0.12     3.91
                ULVR    -0.21     5.97

Qualiport Stocks

Last Rec'd  Total # Company  In At  Current  Change
 19/12/97    783      RTO    2.55    3.91    53.3%
 04/11/98    245      PIZ    7.93    7.95     0.3%
 17/04/98    169      EMA   11.85   11.20    (5.5%)
 27/10/98    755      IIG    2.58    2.40    (7.0%)
 17/07/98    298      ULVR   6.72    5.97   (11.2%)
 11/05/98    368      MKS    5.54    3.90   (29.5%)

Last Rec'd  Total # Company  In At    Value    Change
 19/12/97    783      RTO   2046.53  3061.53  1015.00
 04/11/98    245      PIZ   1966.34  1947.75   (18.59)
 17/04/98    169      EMA   2052.57  1892.80  (159.77)
 27/10/98    755      IIG   1972.64  1812.00  (160.64)
 17/07/98    298      ULVR  2052.54  1779.06  (273.48)
 11/05/98    368      MKS   2054.11  1435.20  (618.91)


Cash:                              £3,975.57
Current Total :                   £15,903.91

Total Invested:                   £16,184.62
Profit/(Loss) :                    (£ 280.71)

Value Per Share

                 Day     Month    Year    History
Qualiport       -3.61%  -0.82%   31.42%   34.38% 
FTSE 100        -2.10%  -3.52%    7.91%   10.39%
FTSE All Share  -1.83%  -3.45%    5.20%    7.41%

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