Qualiport

[ March 31, 2000 ]

e-Carnage Opportunities?

By Bruce Jackson (TMF Googly)

Melbourne, Australia -- The Qualiport aims to buy quality companies at reasonable prices, and hold on to them for the long-term. Sounds simple, but as our record to date is showing, reality is a bit different. Since the beginning of 1999, we've been soundly trounced by the market, and at the same time the Qualiport has actually lost money. Not good! We've made a couple of mistakes along the way, but on the surface I'd like to think we haven't made too many really poor investment decisions. Or, perhaps we have! Anyway, the experiences here just go to show how difficult this investing lark can be.

I've already put my hand up and admitted we should never have bought Marks & Spencer (LSE: MKS) and we paid far too much for Unilever (LSE: ULVR). We should have sold Rentokil Initial (LSE: RTO) when we first detected a sharp deterioration of their sales growth, at a time when the shares traded at around 350p. If we'd have been brave enough to make that decision, I'm sure we would have been left feeling a little bit stupid as the shares soared even higher to around 450p, but would have had the last laugh. Hindsight, hindsight, hindsight...

But what about the companies we failed to buy? We missed out on Freeserve (LSE: FRE), Baltimore Technologies (LSE: BTM), ARM Holdings (LSE: ARM), Vodafone Airtouch (LSE: VOD) and Psion (LSE: PON), amongst others. Detect a common theme? Yep, the above companies are all highly valued now, as they were 12 months ago, but that didn't stop their share prices shooting up into the stratosphere. And that's despite the recent wobble in the prices of technology shares.

The Qualiport's returns would have been looking decidedly more healthy if we'd invested in any one of those above companies virtually any time over the past two years. All are at the cutting edge of the technological revolution -- yes, even Freeserve. I was a long time bear on the company, not to mention its valuation which I thought was completely outrageous, thinking of them as a pure ISP, and not as a portal, a gateway for lots of people to lots of things on the Internet. I admire what they've done in such a short space of time. And, this is only the beginning.

However, the Qualiport would still struggle today to invest in Freeserve and any of the other companies mentioned above. That's because we place a great deal of emphasis on a company's valuation before taking the plunge. And part of the problem with the companies mentioned above is that they are very difficult to value. Most are in a state of hyper-growth, operating in hyper-growth markets. They are all market leaders, though not necessarily global market leaders. The stock market recognises that, and values the companies accordingly, hence their lofty market capitalisations.

Much of their future growth is already priced into many of these high flying companies. Some future growth may not be priced into some of them, but that is the exception to the rule rather than the norm. Over time, we've all seen high flying companies bid up and up and up as the market and individual investors look at them through rose tinted glasses. It's hard to imagine now, but sporting goods retailer JJB Sports (LSE: JJB) fell into this category less than 2 years ago, long before the current infatuation with all things technology. I've italicised the word retailer, because as Maynard said on Wednesday, and in the Fool's Industry Focus 2000 (only £17.50!), this is a notoriously fickle industry, where long-term success is indeed very rare.

Could the same fate happen to technology shares? By heck it could. The valuation shake-out of the past few weeks may be the start of things. However, unlike the sharp dip in the share price in JJB Sports, the current technology wobble is not being caused by any company specific problem. It's just general nervousness about valuations, and we're seeing the selling momentum increase as people start to panic. It's greed on the way up that drives share prices to levels far above their true potential, and panic on the way down. Panic often leads to opportunities, as the share prices of some companies are indiscriminately thwacked in a general market sell-off. The Qualiport will as ever have its finger on the pulse -- check out this great article by Qualiport co-manager Maynard Paton as an example of just what may be...

Games Workshop

On Wednesday, Maynard said that a company's protective moat was more important than its management. I'd say the two are equally important. If you can find them both in a single company, and be able to buy that company at a reasonable valuation, you're as close as you'll ever be to investing nirvana. That's what Buffett found when he first invested in Coca-Cola (NYSE: KO). Buffett often waxes lyrical about the great managers which run Berkshire Hathaway's (NYSE: BRK.A) many subsidiaries. It's hard to imagine him investing in a good company with poor management, although he has said a poor company with good management will always be a poor company.

I've never played toy soldiers, so haven't got any sort of affinity with Games Workshop (LSE: GAW). That's not to say they may not be a good investment. However, with the doubts over their management and their finances, I for one remain to be convinced. As some of the posters on the thriving Qualiport discussion board have said, I'm also sceptical of the future growth prospects of Games Workshop and its toy soldiers. But, I've been wrong before...

I'll leave with one parting comment, coined by ex-US Fool Randy Befumo. "Cheap crap is always crap." Don't buy a company just because it is cheap.

Finally...

Have a great weekend, and a wonderful All Fool's Day tomorrow. I'll be back in old Blighty next week, where I can have a closer look at the e-carnage of the past couple of weeks. You never know, we may find something out there which looks attractive for the Qualiport, although I suspect not quite yet. On Saturday, we'll be adding another £2000 into the Qualiport cash pot, as we do every 6 months. This is a real money portfolio, and we've been saving our spondoolahs so that we can constantly keep dripping money into the stock market -- the best long-term investment vehicle out there.

Keep posting your thoughts and comments on the Qualiport discussion board.

Related Links
• 10 steps to investing Foolishly
• Industry Focus 2000 -- £17.50 from FoolShop
• Games Workshop 1
• Games Workshop 2

Note
The Qualiport was launched on December 19th 1997 with an initial investment of £4040.63, all in Rentokil Initial. Further cash was added as holdings in Emap, Marks & Spencer and Unilever were bought during 1998. The vagaries of the value per share accounting method caused percentage return calculations for calendar 1998 to be somewhat distorted. To avoid confusion and somewhat misleading figures, the Qualiport's returns are being measured from 1/1/99, at which point the total portfolio value, including cash, stood at £16,809.60. An additional £2000 cash is added to the portfolio on April 1st and October 1st each year. The total cash investment in the portfolio to date has been £20,184.62. To access the Qualiport's total trade history, click here.