Avoiding the bear trap

Sentiment, preconceptions and bear traps: Burrell Stockbroking & Superannuation’s Chris Burrell offers a survival guide to the stock market

Following the Melbourne Cup interest rate cut by the Reserve Bank, Chanticleer commented in The Australian Financial Review, “Do not expect this interest rate cut to lead to any sudden renewed interest in the Australian stock market. That will not occur in a modest way until the S&P ASX Index reaches 5,000 and in a concerted way until it reaches 5,500!” From a market level of 3,850 a few weeks prior, this would indicate investors are prepared to do nothing while the market increases 45 percent.

How could this be?

Tip 1: Be a value investor, not a sentiment investor

The Chanticleer comment suggests investors have moved from being value investors to sentiment investors. Is the Australian stock market good value? The independent chair of Burrells recently commented that he could not remember when the dividend yields on Australian shares had been so high. High dividend yields, low price-earnings valuation ratios and strong balance sheets indicate the market is good value indeed. A reason for the move to sentiment investing may be a broader participation by investors who do not work in tandem with a professional advisor. Banks, industry super funds and others have spent millions of dollars in publicity campaigns proudly championing their non-advisory products.

Tip 2: Work in tandem with an advisor who is active but not recommending high turnover trading of your portfolio.

It is quite difficult to achieve satisfactory portfolio returns from a selection of shares. After all, one is selecting 20 to 30 businesses from a total population, involving analyses of those businesses and their management, business strategy, intellectual property, balance sheet, cash flows and red-flag risks. Achieving satisfactory portfolio returns is akin to making a soufflé rise — it is much harder than one thinks. For these reasons, we recommend you work in tandem with a competent advisor on your portfolio. But what should be the style of that advisor? Many have the view that trading the market is the way to fame and fortune. Analysis by our firm in 2003 showed that only a small set of client trading strategies (maybe 10 percent) consistently produce better results than portfolio returns. There are a small number of wizards who are able to trade the market and make excess returns. Those successful strategies form the basis of the trading group at Burrell, led by Richard Herring. For the most part, an active portfolio strategy supporting a medium to long-term portfolio will result in better returns than a high turnover trading strategy.

Tip 3: Spend more time avoiding bear traps

When investing, we are all interested in the winners. But the winners on average might increase 25 percent per annum rather than the market average of 13 percent over 30 or 50 years. What is more important is to avoid the bear traps – that is, those stocks that fall by 50-100 percent. How do we avoid bear traps? By relying on independent research and minimising biases. Often investors let preconceptions close their mind to good research.

Tip 4: Rely on independent research

An example at present is the property sector. In March 2009, the greatest falls were not in equities but in property trusts. Following the collapse of Centro, the sector fell 75 percent on average. Recovery since that date has been modest. Yet the physical property market is recovering with rents rising, transaction volumes returning to satisfactory levels and valuations improving. The Melbourne Cup interest rate cut will help with this trend. So the property trust sector is cheap and we expect two years of at least 15 percent returns.

It is a common reply to a discussion on property to say “I’m not interested in that”. Investors should let the research lead their decision making, not preconceptions formed some years previous.

Happy Investing…

Chris Burrell

 

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

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