Qualiport

[ November 23, 2000 ]

Fool Portfolio Beats Market -- Shock News

By Bruce Jackson (TMFGoogly)

As of close of play last night, the Qualiport was beating the FTSE 100 in the year to date. There was lots of whooping for joy and high fives here at Fool HQ. I was even tempted to put out a press release:

"We're Winning!"

And there concludes any gloating by this portfolio manager. We've still lost money this year. We're still behind the FTSE All-Share index for the year to date. We've still lost money since 1st January 1999. And we're still lagging both major indices since 1st January 1999.

Ooops.

But at least we're fighting back. And the reason we're fighting back is because we're learning all the time. As we learn, we'd like to think that our portfolio management skills are also improving. We've made some good sells -- Marks & Spencer (LSE: MKS) and Rentokil Initial (LSE: RTO). We've made some good buys, most notably MMT Computing (LSE: MMT).

(Click here to access the Qualiport's full trade history)

But the bottom line remains the same -- to be a successful investor you first have to be a good stock picker.

Stock Picking

Stock picking is not easy. In fact, it's very bloody difficult.

Because the average private investor can never get really close to a company and its management, you have to make assumptions about things like its competitive environment and current trading conditions. And that's only two of the many things you should know about a company.

A Real Life Example

Back on September 9th, in this column I suggested Homestyle Group (LSE: HME) as a potential value play -- not for the Qualiport or my personal portfolio, but as an interesting test case. On that date, the Homestyle share price stood at 332p.

Since writing that article, I virtually ignored Homestyle. That's largely because I remembered reading this article by co-Qualiport manager Maynard Paton titled "Shopping For Retail Bargains" and spotted the Homestyle share price -- 261.5p.

That was on October 18th, the day of their interim results. Despite Maynard's concluding comments about Homestyle -- "A juicy dividend, twice covered, would keep me happy while patiently waiting for a possible re-rating." -- I thought my so-called value play was doomed to the scrap heap of failed recoveries. I mean, the shares had managed to fall 21% in the 5 weeks since my original article.

Oops.

Imagine then my surprise today when I belatedly clicked on their share price and was greeted with a quote of 369p. October 18th turned out to be their low point for this particular cycle.

369p! I've picked a winner. It's up 11.1% in the 10 weeks since my original article. Given that as an investor I'm looking for returns of between 12-15% per annum, that's pretty good going. My faith and confidence is restored. If you were skilful and lucky enough to buy them at the bottom, you'd be sitting on gains of over 40% in just 5 weeks. Welcome to super-investor land.

Does my 11% theoretical gain in Homestyle mean I'm a good stock picker? Absolutely not -- one swallow doesn't make a summer. If I'd have actually bought Homestyle shares, I'd arguably have bought them too early. Even though in early September I thought there was a margin of safety, the market thought otherwise. A 21% fall in 5 weeks is not insignificant.

Lessons

There are a couple of stock picking lessons to be learnt from the Homestyle experience.

1. When you think you've found a cheap company, be prepared for it to fall yet further, sometimes substantially so.

2. You can't time the bottom of the market. How was anyone to know October 18th was to be the Homestyle low point? Impossible!

But the bottom line is that buying good cheap companies is the ONLY successful long-term investment strategy. How cheaply you can get them and how good they are will determine just how successful you are.

Investing Psychology

One last word on the Homestyle story. My behaviour post the original Homestyle article is typical of many investors. Because the share price was going down, I ignored the company. I didn't want to face the facts -- that I'd chosen a dud. At the same time, I further questioned my ability as a stock picker. Meanwhile, the only thing that had changed about Homestyle was its share price. Nothing else.

When I belatedly (like today) realised the shares were actually trading above the September 9th price, I suddenly felt confident again about my stock picking ability, and more importantly the deep value strategy. Although Homestyle has reported interim results, year end earnings and dividend forecasts have remained largely unchanged. Again, the only thing that had changed about Homestyle was its share price.

The bottom line -- take emotion out of the equation. Take it out completely. Easily said, difficult to do. But you'll undoubtedly be a much better investor if you can do it.

Finally...

I've submitted this article for publication around about lunchtime this Thursday. At that time, the Qualiport is neck and neck with the FTSE 100 in this year's race. By the time you read this, our lead may have vanished. But I won't be changing the headline for this article. Let us enjoy our moral victory, even if it turns out to be short-lived.

Please let us know your thoughts about this article including the performance of the portfolio on the Qualiport discussion board. We're keeping our eye out for bargains in this falling market. Maynard is back on Monday.