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The FTSE 100 and the techMARK 100 are falling fast, and any day now they surely must bounce.
Mustn't they?
Please?
Pretty please? With sugar on top?
Well, let me tell you something. NOTHING'S GUARANTEED when it comes to stock market investing. If shares in general, or even shares in an individual company look cheap, they can still get a lot cheaper.
Common Myths Exposed
Sir John Templeton once said that the four most dangerous words in investing are "It's different this time". As many people are now seeing, it's not different. The same old rules apply. Companies should always be valued on the sum of their future cashflows. During the peak of dot com mania in the early part of this year, you could almost hear adrenaline pumped "investors" uttering those very words -- "it's different this time". Oops.
There were also some classic "valuation" techniques used. My favourite was the valuation per subscription, especially when people were using one company's value per subscriber to justify the same valuation in a peer company. From memory, £1,500 per ISP subscriber was considered about the industry norm. If one company happened to have a stock market capitalisation which equated to £1,500 per subscriber, the theory went that others should be valued the same.
Tosh
What a load of tosh! Did it never cross people's minds that £1,500 per subscriber was pure fantasy? I pay Freeserve (LSE: FRE) £10 per month for unlimited Internet access. It will not be until the 13th year of my subscription that Freeserve will have earned £1,500 of ISP revenue -- not profit -- from me. Will you still be subscribing to the same ISP in 13 years time? I won't be.
Valuing one company purely in comparison to another -- even if it is a peer -- is a deeply flawed valuation technique. What it doesn't take into account is that the peer companies may be overvalued. Let me repeat -- a company should always be valued on the sum of its future cashflows.
Despite that, comparison valuation techniques are still in vogue today. The highly respected Lex column in the Financial Times used that same technique just today, when summing up the valuation of Marconi (LSE: MONI). Their final words were "...the gap between Marconi's 2001 P/E of 28 and the 35-39 of peers such as Nortel and Alcatel looks excessive." Enough said.
Highs & Lows
A feature of the Financial Times I always like to look at is "New 52-Week Highs and Lows". In particular, I like to glance down the list of lows. Some of them, perhaps very few, will be the highs of next year. The challenge for investors is to sort the wheat from the chaff.
Think back 12 months. Tech mania was in vogue. The new economy was in, and the old economy was definitely out. You can just imagine some of these companies featuring in the "New Lows" section of the Financial Times.
Sector Company
Chemicals Porvair (LSE: PRV)
Food Producers Associated British Foods (LSE: ABF)
Retailers Debenhams (LSE: DEB)
Retailers Next (LSE: NXT)
Today they featured in the new highs. By contrast, these former high flyers featured in today's new lows.
Sector Company
Software Baltimore Technologies (LSE: BLM)
Software Computacenter (LSE: CCC)
Software Geo Interactive Media (LSE: GIM)
Speciality Finance Durlacher (LSE: DUC)
Telecoms Colt Telecom (LSE: CTM)
Tomorrow's winners may well be hidden in amongst today's losers. But don't fall into another common investing mistake -- valuing a company based on a previous valuation. Invariably that previous valuation was wrong, and usually wrong on the upside. The stock market is littered with companies trading well below a previous high point. Because a company was once valued at say 3525p (or £4.7 billion), like Geo Interactive Media (LSE: GIM), doesn't mean it will EVER be valued at that level again. In fact, I'll go out on a limb and state now that it will NEVER be valued at that level EVER again.
Successful investing is all about avoiding mistakes, and that means staying calm and rational when all around are panicking. So sit back, relax, and be ready to pounce should the stock market throw an investment bargain your way.
MMT Computing
The Qualiport has not been immune to this market carnage. On Monday, MMT Computing (LSE: MMT) plunged 25% after the announced takeover talks had been terminated. Whilst that's a short-term blow to the portfolio, it should be emphasised that we didn't buy the company on the off chance it may get taken over. As far as we know, nothing has changed about the underlying company, so we're happy to hang on.
At 578p, MMT Computing trades on an undemanding forecast August 2001 price to earnings ratio (P/E) of 10. In isolation that means nothing, because the true value of MMT depends on the sum of their future cashflows. That's a number I'll leave Maynard to calculate!
The Qualiport's Cash Pile
We're sitting on over £5500 cash. We like this market wobble, because we hope it will throw up an investment opportunity. Irrational markets are the friend of the patient investor.
Happy hunting!
P.S. The Motley Fool Research Industry Focus 2001 is now for sale! We give our take on 14 sectors -- including software and the bombed out construction sector -- and identify 21 companies which may just be the winners of tomorrow. Order before December 10th and receive our 2001 Update Service free of charge.