Leave emotion out of it - 2nd MAY 2007

John Synnott - The Australian

TEASING investors is a career for investment guru Peter Thornhill. He is a mythbuster who likes to make fun of people's prejudices - particularly about property being safe and shares risky.
So he issues this challenge to anyone who says property prices are stable compared with shares. If he sold their home every day for 30 days, would they pay him the difference between the top and bottom price?
No one has taken him up. Homeowners realise their property's price would be far more volatile if it were bought and sold on the market every day, as are shares.

Of course, houses are not liquid assets like shares, which are easily traded.

"That's the point: volatility is a measure of liquidity and is nothing to do with risk," says Thornhill, who is the principal of Motivated Money. Another of Thornhill's favourite shockers is, forget 1929, 1987, 2001: there has never been a stock market crash.

There has only been irrational behaviour by investors, which has led to corrections. This includes 1986-87 when the market rose 100 per cent and then fell 50 per cent right back to where it started.

Ditto with the internet boom, when US tech stocks rose 240 per cent over 18 months before slumping.

Thornhill says the share market is rational, and a very benign place to place your money. It is just investors who are a worry. The trick is to control your emotions.

Share prices might rise or fall, and even occasionally crash, but the best companies still make profits and pay dividends. A big mistake is focusing on the share price when a company's income is the key to wealth creation for an investor.

Thornhill says investors too often speculate on prices and don't appreciate the value of a company, which is what investing is all about.

Arun Abey, who with fellow guru Paul Clitheroe founded financial planning firm and fund manager IPAC, agrees with Thornhill.

"Ensure that whatever you invest in has the fundamental basis for making money," he says. That sounds simple, but the internet bubble had some good ideas and few profits. Fincorp went bust because investors did not look behind the reassuring labels that included property and mortgage security.

Yet, quality assets have to be good value. So it comes down to how much you pay, according to Abey: "Commercial television stations had a monopoly but savvy entrepreneurs still overpaid for them - Christopher Skase (Channel 7), Westfield's Frank Lowry (Channel 10) and Alan Bond paid Kerry Packer $1 billion for Channel 9 then sold it back for $270 million."

At the wrong price, no one can make money. Diversification aims to reduce risks in assessing quality and value. A good investment today can be less so tomorrow, because of new technology.

Portfolio Partners founder David Slack agrees with Thornhill that investors should aim for companies with consistently strong return on capital, plus good prospects. He cites Macquarie Bank's success in exporting niche financial products overseas, and expects it to beat market expectations on earnings. As well, the stock is currently good value at a 15 per cent discount to its historical price-to-earnings ratio.

In practice, investors should read everything, including business page gossip columns and sharemarket announcements, Wilson Asset Management founder Geoff Wilson says.

"Observe trends that are happening around you such as the drought, and think about the ramifications for companies, for which it is a negative or a positive."

Understanding the psychology of the investor versus the crowd is paramount to understanding markets, Platinum Asset Management managing director Kerr Neilson says. "We anchor and frame ourselves in the past, so we underestimate what can be. When the price of oil goes through the roof, we cannot imagine it back again at $US16-17 per barrel. That led to the current underinvestment in resources. Now the boom in metal prices is leading to overinvestment, such as in iron ore production."

Platinum is backing a judgment that mill closures and limits to recycling suggest a bull market ahead in paper pulp. "We hope it will give us an edge, but it pays to be sceptical about your own powers when they diverge from the market."

Ultimately, successful investing comes down to value and the price one pays, Select Asset Management chief investment officer Dominic McCormick says. Even high-quality companies, or entire markets, can be poor investments for extended periods if bought at the wrong price.

"Equities generally perform better than other asset classes over the long term but this comes with no guarantees and is less likely after extended periods of stellar performance and when valuations are towards the higher levels compared with history," McCormick says. Many investors handle periods of poor returns from equities badly (often selling out at the bottom) and are therefore better off with more diversified portfolios (including alternative investment areas) that help to produce a smoother path of returns and better capital preservation over time.


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