I am frequently critical of the funds management industry, as I pointed out in my post, routinely, when you factor fees into the equation, over 80% of managers fail to beat the most suitable benchmark. The key reason for this is fees & charges, of course, but it at least warrants consideration of how useful the advice of brokers/analysts in general is.
I found this article on the US version of the MSN-Money website. It ably demonstrates the issue I have with broker recommendations, which in-turn reflects on the fund management industry. It points out that the 10 stocks analysts hated most routinely beat the 10 stocks analysts loved best. In thinking about this article, you may decide a contrarian position is likely to be more profitable. I tend to often agree, but my opinion is most ably captured in the quotation from A. A. Milne (Author of Winnie the Pooh):
"The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first-rate mind is only happy when it is thinking.”
Rather than trying to think with the majority, or the minority, I try hard to be completely objective when examining an individual stock for investment purposes. This can be hard to do with very popular stocks that get a lot of coverage, but it can definitely be done. By far, however, the easiest way to ensure your analysis of a stock is not ‘coloured’ by others opinions, is to spend much of your time examining stocks in the area of the market that analysts and the financial press virtually ignore. The very best discoveries are there and await the inquiring mind. I thought it might be worth having a look at some highly regarded analysts selections for 2011 in Australia. To have Goldman Sachs Picks for 2011 are attached.
For those of you who couldn’t bother opening the link, the picks were (same order as the article, I’m not sure if it was a preference order):
- AMC – Amcor. Amcor over the last 5 years have reported earnings per share (EPS) of $2.04. Over the 5 years prior to that, they reported $1.96. To my way of thinking, for a company to justify a P/E multiple 17.17, which is about 20% above the market, they must show better historical performance, or brighter future prospects.
- BHP – BHP Billiton. It’s hard not to expect, barring a major collapse in the world economy, that BHP will do better than the broader market over the next few years. But it must be remembered that BHP are the 4th biggest company in the world (By Market Cap) and as well as they do, many smaller, more nimble companies will do better.
- JHX – James Hardie. I am agnostic here; lumpy sales and earnings, in a difficult business make analysis difficult.
- NWS – News Corporation. I have been a long-time bear on NWS, however, they have migrated their business substantially away from newspapers and can probably be expected to marginally outperform the market over the coming years now they are trading on a more sensible P/E multiple.
- QAN – Qantas. I say no to airlines as a general stance. Qantas are one of the best in the world, but as a long-term investor, best avoided. If they ever divest their frequent flyer program, then the rest of the business should be strongly avoided.
- AIO – Asciano. Trade on too high a multiple due to ambitious forward earnings expectations. Hard too imagine them beating the market over the next few years.
- CPU – Computershare. At $10.10, there is probably a lot more upside than downside in the longer term with CPU. If the next couple of years (as generally expected) turns out to be strong for M & A, they will do better than the broader market.
- LLC – Lend Lease. $10,000 invested 5 years ago here would now be worth $7861. LLC have been a huge disappointment, nothing tells me they are likely to do much better than the broader market over the next few years. I don’t think they will under-perform as badly as they have historically either.
- OST – Onesteel. I like OST, they have been an historically excellent performer, with management that acts generally in shareholders best interests. I do not like their industry. Chinese, Korean and Indian steelmakers have considerable competitive advantages & input prices will squeeze margins. Still, likely to out-perform over the medium term.
- WPL – Woodside. Hard to bet against the energy industry. I think over the medium to longer term, WPL will do well.
The 10 selections are not terrible, and depending on how well the best 2 or 3 go, could even slightly outperform the market. But going back to my earlier point, the safest route for anyone who can ably analyse the future prospects and financial reports of a company is to look where less people have already looked (i.e. outside the top 150 or so companies). You are less likely to find a gem looking under a rock where dozens have already looked; you need to find the rocks that haven’t been looked under.
The most important thing is to deeply and critically analyse any potential investments regardless of popular opinion, or invest with someone who is properly incentivised to do just that. To do anything else would be to risk being known by another A.A. Milne quotation as “A Bear of Very Little Brain” – Tony Hansen 31/01/11.