Qualiport

[ June 14, 2000 ]

Those Obviously Great Investments...

By Maynard Paton (TMFMayn)

Carburton Street, London --The Qualiport discussion board has sprung into life after the disposal of our 266 Unilever (LSE: ULVR) shares on Monday. The decision to dump Unilever appeared contrary to some of the earlier enthusiasm for the company published in one of our Foolish books.

DemonSlayer remarks in this post:

"So, Unilever has been dropped from the portfolio. You see, I find it hypocritical that companies like Rentokil Initial (LSE: RTO) and Unilever get such tremendous recommendations as long-term buy and holds in TMF books like the UK Investment Guide, but are soon sold off. Boy, that book is getting outdated really fast. Anyone buying it now and reads it and then comes to the TMF website and sees that these stocks have been written off, will be disillusioned to say the least. So much for Foolish education!"

Embarrassment

Okay. Let's get our embarrassment out of the way. The Motley Fool UK Investment Guide has a chapter entitled "Obviously Great Investments". The chapter covers, amongst a few other companies, Unilever, Rentokil and Marks and Spencer (LSE: MKS). As regular readers will know, the Qualiport has had brief encounters with all three of these companies, losing varying amounts of money on each. The disappointing corporate performances from the three are well documented throughout the Qualiport archives.

So what gives? How can the Motley Fool preach a long-term blue-chip investment strategy in the book, but then ignore it all by selling its Obviously Great Investments (OGIs) within a year or two of purchasing them?

What's not clear, neither in the UK Investment Guide, nor on the Motley Fool website, is how the chapter on OGIs relates to the Qualiport. There was, of course, an obvious similarity between the two, with some companies appearing in both.

Firstly, the UK Investment Guide is undergoing a re-write at the moment. Undoubtedly, there are improvements to be made, especially in terms of clarifying the objectives of the OGIs. The book does give the impression that the success of every OGI is guaranteed. I don't think it was ever really the intention for all of them to be taken as obviously infallible. And this point could have been made more clearly. But, collectively, you should have expected the overall group to do well.

And indeed, if you had bought an equal share of the OGIs mentioned -- including the likes of Vodafone AirTouch (LSE: VOD) and Ericsson (Nasdaq: ERICY) -- you would have done pretty well. It's perhaps just an unfortunate coincidence that the Qualiport picked the three worst OGI performers and our "bad luck" led to some U-turns further down the line.

Back to basics

Let's go back to basics for a minute.

Every Fool should know that, over the long-term, returns from the stock market will outperform all the alternative homes for their money. But when it comes to the stock market, investors range across two extremes.

Firstly, there is the "know-nothing" investor, an investor who doesn't yet have the knowledge or confidence to select individual companies that will hopefully outperform over the long-term. If this is the case, then a low-cost index tracker fund is the investment solution.

At the other end of the spectrum, there is the "know-something" investor, an investor who spends a large amount of time researching and learning about different companies and investments. Taken to the absolute maximum, this investor would be able to select a handful of individual companies that should substantially outperform.

Different aims

The UK Investment Guide is primarily aimed at the first group of investors, those who are starting out and want to take the first step beyond an index tracker. The general idea behind the OGIs was that a diverse portfolio of established blue-chips, fitting certain operating and business criteria, would match or slightly exceed average returns from the stock market. Admittedly, this basic long-term principle wasn't clearly stated in the OGI chapter.

The UK Investment Guide takes the view of the investor being largely passive and not concerned with valuation. This being the case, if you tuck away a dozen or so OGIs and then forget about them, then there's bound to be winners and losers over the years. But overall, the winners ought to outweigh the losers, and you should come out just ahead of, or in line with, the stock market.

The Qualiport is different

The Qualiport is different. It takes on an "active" investment policy, rather than a passive one. But let me stress that it's more in terms of active thinking rather than active trading. The Qualiport is taking the "know-something" approach. Whereas the passive OGI investor will be happy with a touch of long-term outperformance, the Qualiport is aiming for significant outpeformance.

Although the characteristics of the companies selected within the UK Investment Guide and the Qualiport are very similar, the big differences are in terms of valuation and the monitoring of the corporate stories. These differences should lead to a superior performance from the Qualiport.

Firstly, valuation. Sooner or later, it counts. If you pay too high a price for a company, the investment performance will suffer should the company disappoint or the stock market become a little less optimistic. Unilever is a great example of where we've stumbled on this score. If you really want to outperform the stock market, then you must take valuation into account.

Secondly, if things change for the worse at one of our holdings, the Qualiport will try to seek better opportunities elsewhere. Take Unilever again. Bruce and I think there are more rewarding investment opportunities away from the Anglo-Dutch giant. We're not convinced over the Bestfoods (NYSE: BFO) purchase. We consider the operating characteristics of Unilever, with its slow sales growth, persistent corporate activity and enormous restructuring charges, to be distinctly average.

That being the case, with the aim of trying to really outperform the stock market in mind, why should we hang onto a company with average prospects and economics? Why not concentrate our efforts and money on those companies that have the above-average prospects and financial attributes? Like PizzaExpress (LSE: PIZ), for instance. Again, to really outperform, we need to concentrate on the superstars and not the also-rans.

Our selling of Unilever shouldn't be interpreted as meaning that the company has lost all of its positive investment attributes. It's a great, steady, safe company to hold. I've written before about my liking for the predictability of washing powder and having a soft spot for the company's boring, but very stable, business. It's a safe haven should the economic clouds start to darken.

But, soft spots aside, Unilever, Rentokil and Marks and Spencer just don't fit into the Qualiport philosophy anymore. The stories changed at all three after we bought them. And so we sold, because there were better investment opportunities elsewhere.

PizzaExpress

As announced on Friday, and in accordance with our Foolish trading rules, the Qualiport has today purchased 226 PizzaExpress shares at 659.5p each. Add in £15.00 commission and £7.45 stamp duty, and the total transaction comes to £1512.92.

Your thoughts and comments to the Qualiport discussion board, please.

Related Links

• Motley Fool UK Investment Guide discussion board
• Food for Thought -- Selling Unilever
• The Predictability of Washing Powder
• Uncertain Growth or Static Certainty
• Controversial Motley Fool UK Investment Guide