QUALIPORT
We Are Concerned About Our Performance

By Bruce Jackson (TMFGoogly)
April 25, 2002

I can't take credit for the headline. I stole it from an article on The Olstein Funds website. Who are they, you may ask? They are an American mutual fund – a unit trust in British speak – which has soundly out-performed the index since its inception in September 1995.

What sort of out-performance are we talking about? How does an annualised return of 22.8% strike you? That's what The Olstein Financial Alert Fund has returned since its inception September 1995. The FTSE 100 has returned 5.2% over the same period. That's some out-performance!!

Investors can always learn from other successful investors. Warren Buffett learned his trade from Benjamin Graham and Philip Fisher. Thousands of investors have learned from the writings of Peter Lynch and Jim Slater, amongst others.

The above names are probably well known amongst keen private investors. However, there are quite a few other successful investors who we can learn from. One such investor is Robert Olstein and his Olstein Financial Alert Fund. An annualised return of 22.8% over 7+ years is no fluke. I'd say it's safe to assume they are definitely doing something right!

Defence First

In tune with about 90% of successful investors, Olstein are deep value investors. They put defence before offence, looking first at the potential downside of any investment way before considering any potential upside. The results of this very disciplined approach are plain to see.

However, deep value philosophies can periodically result in periods of short-term under-performance. Dot com boom time was one such example. Many value funds were left behind in the wake of companies like Freeserve, Baltimore (LSE: BLM) and Energis (LSE: EGS) hitting the heights of FTSE 100 membership. But, the good value funds bided their time, and eventually, once again, they have some out on top. Perhaps the management of Marconi (LSE: MONI) would have been better biding their time rather than rushing into the telecoms boom like a giant headless chicken. Oops. Too late now!

Key Investing Tenets

Back in July 2001, Robert Olstein wrote a letter to the shareholders of his fund, titled We Are Concerned About Our Performance. In that letter, Olstein listed 30 of his fund's investing tenets. They are the simplest, concise, most common-sense list of investing rules I've ever seen. I urge you to read them, read them again, read them again, and then read them once more. I must have read them 20 times and I'm still learning from them, although it should be noted here that my memory often resembles that of a sieve.

Below I'm going to highlight my favourite tenet.

PizzaExpress and Number 13

13. The timing in value investing comes with paying the right price. Unfortunately, the right price usually occurs in conjunction with negative business fundamentals and/or periods of negative psychology.

How often have you seen a company's share price falling, often for no apparent reason? Qualiport member PizzaExpress (LSE: PIZ) is a prime candidate. Over the past few days, the shares have plunged from 793p to a recent low of 660p, a 17% fall. In the past, the Qualiport has indicated that it would be interested in topping up its holding in PizzaExpress at about the 650p level. It's a close call.

BUT, what's really going on with PizzaExpress? First of all, a broker downgrades the shares and sets a 600p target price, citing a drop off in the London tourist trade. That downgrade is followed by other downgrades, allegedly after Chairman David Page held an analyst's meeting. In this particular case, all the evidence points to the share price fall being more than just an irrational pessimism.

Look back to tenet number 13 above. In the case of PizzaExpress, we're definitely looking at a period of negative psychology, which is most possibly coupled with a period of negative business fundamentals. Result? A 17% fall in the share price and a potential buying opportunity. It's close.

Beckham's Foot

However, buying now, when the share price has been falling and there are doubts about the company's near term earnings, requires you to take somewhat of a leap of faith. What happens if PizzaExpress comes out with a profit warning next week? Is the growth story over? Has the competition finally caught up with them? Will American tourists ever return to London? How long will the economic downturn last? Will people stop eating out during the World Cup? Will David Beckham's foot ever mend? The doubts are endless.

BUT, it's exactly at the times of maximum pessimism when Mr Market (the stock market) presents you with buying opportunities. We may not be there right now with PizzaExpress, but if more negative news emerges in the near future, we could just see the share price fall further. Slap a price to earnings ratio (P/E) of between 12 and 14 on forecast earnings per share of say 50p for the year ended June 2003, and you get a potential target price of between 600p and 700p. It's close.

Enough of PizzaExpress for the time being. I encourage you to join in the conversation on the PizzaExpress discussion board. The Qualiport will continue to closely monitor developments.

Market Beating Returns

As you read through Olstein's 30 investing tenets, you will see a very strong recurring theme. They firmly believe, and the results back up the talk, that value investing, over the long-term, is the only way to beat the stock market. Value companies based on a 3 to 5 year investment horizon, then sit back and wait for the stock market to present you with one of its periodic buying opportunities. Above all, you need to be patient and you need to be disciplined.

The Qualiport looks to invest in companies with strong competitive advantages at attractive prices. It's a value based portfolio. Over time, although we are concerned about our performance, we hope, through our patient and disciplined approach, to beat the returns of the stock market. Just like the Olstein fund.

Next: Have your say on the Qualiport discussion board.

Bruce Jackson owns shares in PizzaExpress.