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LEARNING FROM THE PAST

08 May General

INVESTORS are always looking for some sort of basis to select shares. Past performance, as we know, doesn’t tell us much and can be misleading. But we need something to work off – even as a rough guide.

So I decided to take an informal look at share price performance based on the internal rate of return ranking published in Finweek’s The Top 200 about six weeks ago. It doesn’t mean much – for one, the time period is way too short to draw any definite conclusions – but it throws up some interesting, if not too meaningful, trends.

Internal rate of return measures share price appreciation and dividends over a five-year period. So I took the top five shares in the ranking (all with an internal rate of return of more than 120%), headed by HCI. Assuming an equal investment in each share, the simple average performance of the top five shares (including negative returns) over a three-month period is 3,7%.

That’s not a bad return – in this market – over three months. And prices of only three of the shares appreciated (led by African Dawn, with 14,9%). Two prices went down; and dividends are excluded, which over time obviously makes the total return higher.

Then I looked at the bottom five shares: that is, up to number 200. Simple average return was negative 3,1%. But the average was badly skewed by Indequity – its price lost 24,6% over three months. As with the top five, three prices went up, two down.

For rough consistency I then took the middle five performers, placed from 98 to 102 on the internal rate of return ranking. Simple average was 4,3%. But that average was skewed upwards, with Illovo Sugar gaining a hefty 37,2%. Again, three prices were up, two down.

Does this indicate anything? Probably not. Except that if you use a table such as internal rate of return with other tables in The Top 200 (as we advise up-front) you probably have a good chance of picking out a few winners.

It also shows that, whether you’re looking at the top or the bottom, there will always be a few dogs. But to emphasise again: it’s a very short timeframe. I’ll repeat the exercise in six months or so.

I’ll eat to that

IT’S BECOME a little challenge to get a recipe into this column. I believe there’s a link between food and investing. As proof, I offer the following anecdotal evidence (and a very small recipe).

A highly rated fund manager I know tells me he often eats his favourite snack – hamburgers – when making investment decisions. I won’t name him, as clients might start to look at him a little askance. But his performance record speaks for itself – and if hamburgers help, that makes a lot of sense to me.

He reckons if he kept a record it would probably show a direct link between the number of hamburgers he eats a week and the performance of the funds he runs. Surprisingly, he’s quite thin. I think the emotional energy of looking after billions of rand of other people’s money burns up calories faster than he can put them into his body.

Which brings me to the recipe. I don’t know if it’s done anymore, but some time back when we still had the open outcry system on the floor of the JSE, a favourite breakfast for traders was oats and cream (not milk) topped with a shot of whisky.

Remember, trading could get pretty tense in those days. A rough day in the market had the floor resembling a rugby scrum. The oats and cream provided a solid lining for traders’ stomachs. The whisky – well, they reckon it kept them calm. But only one tot, they emphasised. Two and you might start getting reckless.

The traders’ breakfast started decades ago in Britain. I suspect traders worldwide adopted it. But probably not any more. Many firms have a strict rule that you can’t take alcohol when you’re looking after clients’ money.

Still, the recipe is great. Perfect for a Sunday morning when you’re just thinking about the market. As my art director says, oats and cream is good – the whisky can only make it better.

Source: Finweek – Shaun Harris