Update No. 8 – 22/05/11

EGP Fund No. 1 Pty Ltd. Up by 4.02%, leading the benchmark by 5.8%.

EGP 20. The EGP20 index is Down by 10.32%, lagging the benchmarkby 8.54%.

S&PASX200TR The benchmark index is Down by 1.78% since April 1 launch.

I would like to talk about market forecasts this week. I often keep clippings of financial forecasts from newspapers and magazines, when I come across them. I like to look at them when the expiry date draws near; they usually serve as a vivid reminder why one should never go out into the public domain with a forecast. Now, as I pointed out in a recent update, the $1.139 trillion ASX200 indices, over the most recent 12 months (which basically captures the second half of FY2010 & the first half of FY2011) have reported total earnings of just under $86 billion according to my sums. According to consensus analysts’forecasts for FY2012, they are expected to earn over $116 billion in that period. That is a 34.88% increase between now and then. Assuming the analysts are correct, and assuming the indices trade at the same P/E ratios after reporting the results in question, then the market should have risen by about 35% by about September or October of 2012 (this is about when the proposed $116b worth of results would be reported).

Now obviously, we cannot rely on this being the case (all factors remaining constant & the analysts getting it right) or we would simply buy the market now, wait 18 months and book our 35% gain (or about 22.15% pa), we wouldn’t even need to go to the trouble of picking individual stocks. This is due to the market being a ‘discounting machine’ and if at that point, the market takes a view that the 2013, 2014 and 2015 prospects are very dim, these prospects are what will drive the market. So even if the market achieves the analysts forecast heights, prices may instead reflect the ‘dim’ future rather than the ‘record’present.

This is (among the reasons) why listening to journalists and market commentator’s blather on is pointless; they are wrong approximately as often as they are right, and are often pushing their own position for selfish reasons. Instead we must independently assess those businesses which at their current prices, regardless of the strength of the economy or the direction of the markets, we would be happy to own at current prices. Never forget that a business lies underneath your 'share price', selling should only occur when there is an obviously superior business to own at better prices, or an irresistible price is being offered, such that converting to and holding cash is viable alternative. Tony Hansen 22/05/11