Qualiport

By the Frasers (thefrasers@bigfoot.com)

As we approach Easter, it is a time for penance and confession. So I will admit it -- I am one of Them. The Wise. I work in the trading and marketing of interest-rate derivatives -- verily, one of the inner sanctums of the Temple of Wisdom. But before I am banished from these pages forever, let me state clearly -- I believe absolutely in the core tenets of Folly. I don't buy active funds, I buy index trackers. I trade infrequently, I plan trades for the long term, I only trust my own research. I have fun with all of it. How can this apparent contradiction between occupation and investing style be reconciled?

To begin with, not all Wise are alike. Those of us working in the institutional sales and trading markets regard IFAs, stockbrokers and pension salesmen with the same sense of evolutionary superiority that homo sapiens reserves for less sophisticated forms of pond-life. (Though we would argue that pond-life has a superior ethical code.) The truest indication of the intelligence of the average endowment policy salesperson is his/her answer to the question "Do you own one of these yourself?" Ninety percent of the salespeople reply "yes" -- and as far as I can tell, most of them are not lying. Think what you, the educated Fool, know about these products. But the polyester-suited wide-boys are so stupid they buy the things themselves. They're more to be pitied than scolded.

Now popular opinion would say that, aside from our preference for natural fabrics and German cars, the only difference between the IFAs and those labouring in the trading trenches of the Wall Street behemoths is in the scale of our crimes. Financial institutions, multi-national companies, even on occasions entire Southeast Asian economies are said to be our victims. I won't spend any time here dispelling these amusing but misguided notions, but I do want to cast light on one key difference between ourselves and our pension-selling brethren with the fluffy dice. It lies in investment behaviour. When the average investment banker is done buying Versace babywear and ordering leather upholstery for the new yacht, how does he invest his own money?

The layman is convinced that our central position in the money markets gives us a distinct advantage over the regular investor. This is true; we see markets from the box-seat, watch the ebb and flow of deals and prices and have access to real-time financial information and news. Everything we see encourages us to the Foolish philosophy.

Watching the markets close up teaches you the difficulties of market timing and day trading. Only the very best market makers make more than the bid-offer spread implicit in their businesses, despite all the technological and educational advantages available to them. The reason, of course, is that all the other market makers have the same attributes, so it is difficult to gain any consistent edge. The spirit of friendly competition keeps standards high. Any poor traders in the market are savaged like a Weight Watchers starter class in a pool of piranhas. As a result, few of us attempt to trade frequently in our personal investments. We are also, as a matter of pride, deeply suspicious of any fund manager's claims to be able to beat the market. If we can't do it, why should they?

The other thing that one becomes acutely aware of in this business is the value of time. Many of the people in investment banking work long hours. What is the point of earning the GDP of a small third world nation without the time to enjoy it? The last thing your average slick banker wants to do after work is spend yet more hours in front of a computer (or, worse still, an IFA), analysing each new investment strategy, when he should be dining with a supermodel in Monaco. He compares the IFA with Claudia Schiffer and buys an index tracker.

However, most traders, as you can imagine, can't resist attempting to beat the market with some of their money. Experience in front of the screens does help, but not in the way you might expect. The day to day market information that we receive is irrelevant to long-term investing. Our in-depth knowledge of compound interest and financial mathematics can be replicated by one hour's study of the Fool's School and access to a decent spreadsheet. And insider trading is no longer legal... or fashionable.

What we may understand better than the average investor are trading realities. Traders' desks, never tidy at the best of times, are often decorated with little Post-It notes, on which are scribbled encouraging mottoes. My favourite, and the one most pertinent to the new investor is, "Plan the trade and trade the plan."

This phrase underlines two key Foolish principles. The first is to do your homework. If you want to do better than the Wise, you need to put in a little effort. A key principle in trading is never to trade what you don't understand. Indeed, as the Fool demonstrates, the more you understand, the less you may want to trade certain assets -- such as endowment policies, for example. So do your homework.

The second part of the motto points to the principle of discipline. Let's say you believe Company X is the best thing since the invention of fruit-flavoured condoms, and you are buying it as a long-term investment. In this case, changes up or down in the share price may be irrelevant. Only if your original reasons for buying Company X have changed should you reconsider your investment. But this is a necessary as well as a sufficient condition. If the reasons do change, you need to reconsider your investment. This kind of discipline and analysis is essential in a good trader.

The other key attribute of a good trader is that he/she takes responsibility for his/her results. You cannot blame others. If you lose money, take the rap yourself. This means being critical (in the fullest sense of the word) of others. Nassim Taleb (a derivatives writer) advises traders to "trust half of what you read, and nothing of what you hear." This is as true of the ideas at this website as of the mutterings of the Wise. That community which is the Motley Fool has lots of good ideas, but any decisions are yours, and so are the consequences. This is particularly true in the Qualiport. Fools should look at the Qualiport itself as one outcome of a general philosophy, not as a stock tipping service. Blind replication of the choices therein betrays the whole concept; it is the process of searching that is of use to investors, not the end selections themselves.

I finish with one more trading motto. This is more in the cheerleader vein but also subtly points out the importance of discipline and focus. "Money talks -- are you ready to listen?"

So, are you?

Company Change    Bid
DELL   -$2.25   $35.75
EMA     -0.26    13.57
IIG     -0.08     2.57
MKS     -0.03     3.72
PIZ     +0.24     8.94
RTO     -0.01     3.79
ULVR    -0.10     5.50

Qualiport Stocks

Last Rec'd  Total # Company     In At  Current Change
 19/12/97    783    Rentokil     2.55    3.79   48.6%
 17/04/98    169    EMAP        11.34   13.57   19.6%
 04/11/98    245    Pizza Exp    7.93    8.94   12.8%
 27/10/98    755    Indep Ins    2.58    2.57   (0.4%)
 17/07/98    298    Unilever     6.72    5.50  (18.2%)
 27/01/99     74    Dell (US)  $44.63  $35.75  (19.9%)
 11/05/98    368    M & S        5.54    3.72  (32.8%)

Last Rec'd Total # Company     In At    Value   Change
 19/12/97   783    Rentokil   2046.53  2967.57  921.04
 17/04/98   169    EMAP       2341.32  2741.14  399.82
 04/11/98   245    Pizza Exp  1966.34  2190.30  223.97
 27/10/98   755    Indep Ins  1972.64  1940.35  (32.29)
 27/01/99    37    Dell (US)  2007.42  1603.33 (404.08)
 17/07/98   298    Unilever   2052.54  1639.00 (413.54)
 11/05/98   368    M & S      2054.11  1368.96 (685.15)

Cash:                                       £1,711.43
Current Total :                            £16,162.09

Total Invested:                            £16,184.62
Profit/(Loss) :                             £  (22.53)

Value Per Share

                    Day      Month      Year
Qualiport         -1.24%    -1.28%     -3.85%
FTSE 100          -0.72%    -2.57%      2.28%
FTSE All Share    -0.72%    -1.34%      4.25%

Click here for the latest Qualiport share price quotes.

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