Bull vs Bear = Blood sport -13th March 2008

Michael Pascoe - Yahoo Money Matters

Nobody says it's easy being an investor when markets are as wild and woolly as ours have been lately, but it all seems harder again when you have two experienced colleagues taking totally opposite views of what's the best way to steer through the mess.

In the red corner, Alan Kohler, my Eureka Report colleague, who last week announced that he had sold off numerous good shares in his personal superannuation fund to lift his cash level to 55 per cent. Big call.

In the blue corner, Peter Thornhill, former funds manager, author of Motivated Money, successful investor, now semi-retired and mainly living off his investments. He's sold his house and is renting while putting more money into industrial shares.

One is clearly a bear, the other a bull and I respect the opinions of both of them - but which one is right? The answer, somewhat paradoxically, is both.

Kohler is worried that the global credit crunch has another major downleg that could seriously damage the international economy, taking Australia down with it if credit is rationed further. He says he's not sure that is going to happen, which is why he's only 55 per cent in cash instead of 100 per cent, but 55 cash allows him to sleep at night.

Thornhill probably is the biggest advocate of investing in industrial shares I know. He doesn't much like property, hates residential real estate investment spruikers and can't be bothered with resources stocks, but he has built up a very nice portfolio of "boring" industrial shares to the point where he happily lives on the dividend stream.

And that's the key to his philosophy. He really doesn't care much about what the price of his shares might be, just what the dividend stream is doing. Over time, the share price looks after itself. In an interview for Eureka Report, he admits to rubbing his hands with glee as he watches the debt explosion implode - and the falling share prices present him with better buying opportunities.

The important thing is, both the bull and bear are comfortable with their stance - both have thought through their reasons and both sleep easily at night without worrying about what major gyration awaits them on the morrow.

Another friend and fund manager, Carol Austin, treads a path somewhere between the two. She can certainly see the attraction of holding cash right now - there's absolutely nothing wrong with picking up 8 per cent without risk from some of the internet bank accounts - but the problem with being out of the market is that you'll be the bounce when it does occur.

Shares have certainly been falling quickly over the past two months (but also rose quickly this morning), but there's a pretty good chance they will bounce quickly once the credit markets re-establish trust after clearing out the deadwood. Avoiding falls on the downside is nice, but you can pay dearly for missing out on the jump on the upside. And there's also the question of the capital gains tax you incur selling out of profitable positions now.

Of course there is more to successful investing though than just buying the market and being patient. You also have to avoid as many of the inevitable disasters as possible. I've recently been interviewing Perpetual funds managers as part of a road show for financial advisors. Perpetual, like Peter Thornhill, had no Centro, ABC, Allco, MFS or Citi Pacific in their portfolios, albeit for slightly different reasons.

The common ground was not liking heavily-indebted companies, not liking companies with confusing and opaque structures, not liking companies that can't pay their dividends out of free cash flow and not liking companies whose business cases are hard to understand.

The bottom line remains, good, sustainable companies providing solid dividend streams outperform over time. That should let us all sleep at night.


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