Qualiport

[ May 19, 2000 ]

Optimism & Distress

By Bruce Jackson (TMFGoogly)

Warning...

Sob story time...

In an attempt to finally hit a writing deadline, I began typing this report yesterday. As a serial procrastinator, this was a huge development, one of which my mother would have been proud. Through my formative schooling years, she suffered greatly as my homework essays were habitually done at the last minute. Needless to say, I scraped past my school and university final exams, merely doing the bare necessities to pass.

By late yesterday, I'd written a fair chunk of today's article. I was feeling rather chuffed with myself, patting myself on the back with admiration at the rarity of my forward planning. Today I could simply top and tail the article, and get on with other Fool work, of which there is plenty.

Then tragedy struck. The lights here in Fool HQ flickered. We'd had a power cut earlier this week, so I feared the worst. I fumbled for the "save" button. As the cursor hovered, the lights cut, and the once-flickering computer screen flickered no more. Gone. All those words. Those lovely words. Well, they were lovely to me. My bicycle ride home was a little slower than usual, and to top off my evening, I got caught in one of those intermittent London thunderstorms. My evening was complete!

Optimism

But I didn't mull over this tragic loss. "There's no use crying over spilt milk" is my favourite saying. No matter how much you think and worry about it, the words won't come back. Move on. Pop group Oasis titled one of their songs "Don't look back in anger". I couldn't agree more.

I like to think I'm an optimist when it comes to investing. I do look back, but not in anger. I look back and try to learn from my successes and failures. With the Qualiport struggling, unfortunately the latter are more common.

Guts

The Qualiport's long-stated aim is to buy quality companies at low prices, and hold them for the long term. Although that's the aim, so far we've failed, mainly because we haven't bought our companies at low enough prices.

The time to buy shares is in times of distress. That could come when the overall stock market is getting hammered, or when an individual company is having a rough time. Last year, the market went through its somewhat regular October tumble, with indiscriminate selling across the board. That allowed the Qualiport to pick up some more Emap (LSE: EMA) at 788p. There was nothing wrong with the company itself. The shares had fallen because the market was falling, and they fell just that bit further than others.

Those buy decisions are relatively easy, because it's almost certain there's nothing drastically wrong with the underlying company. It's a macro thing. Even still, it takes some guts to buy a company when its share price is collapsing. Things can go wrong. The old saying "where there's smoke there's fire" often rings true. Look at Parity (LSE: PTY). Yesterday the shares lost 23% of their value on no news whatsoever. This morning, the company issued a profit warning. Don't try and tell me insider trading doesn't exist!

A falling market and falling share market brings with it fear. In the case of the individual company, you wonder whether a Parity-type profit warning is just around the corner. It's the fear of the unknown.

Distress

Warren Buffett has made many of his big and most successful investments when the company has been in a state of distress. That takes a lot more guts than buying a company that's been indiscriminately marked down in a general market sell-off, à la Emap last October. You have to be certain that the state of individual company distress is temporary, and that they are strong enough to recover. You also have to make sure the possible investment downside is minimised. It's not easy, and that's why there's only one Warren Buffett.

Panic

The stock market is going through periodic panic spells. The FTSE 100 is now down about 12% in 2000. The Techmark index is down about 15%. Falls of this size are commonly known as corrections. I call it reality.

A few weeks ago, I could see very little evidence of serious market mis-pricing, on the downside. Good companies were still valued very highly, and poor companies were deservedly in the doldrums. Serious buying opportunities seemed few and far between.

How quickly things can change. Only yesterday, before today's market falls, I was getting a gut feeling that a few buying opportunities may be not too far around the corner. There's not much science involved. It's just a feeling in my bones.

And you know what? We could just see some buying opportunities in the technology and telecommunications sectors. Most companies are significantly off their 52-week highs, although that alone probably proves nothing more than they were massively overvalued at some time over the past 12 months. We have our own Qualiport real-life example, called Misys (LSE: MSY). They peaked at 1292p in early February and now stand at about 540p, a fall of 58%. The underlying business is largely unchanged over the last 3 months. Were they over-valued at 1292p? You betcha. Should the Qualiport have sold? That's a debate for another day, and the discussion board.

Finally...

Have a great weekend, and feel free to join the ongoing debate on the Qualiport discussion board. View the current stock market wobbles as potential buying opportunities. Don't look back in anger. You can't change the past.

Related Links
• The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy, by Robert G Hagstrom
• Stock Ideas -- Industry Focus 2000