|
![]() |
|
Andrew Quinn
Wren Investmment Advisers
|
The speed and flow of information through the share market is
not an issue that most of us think about very much. Nowadays,
we just assume that the news and stock prices on our computer
screen are live, or pretty close to it. The same goes for order
processing. If your broker takes longer than a few seconds to
record your bid or offer, you wonder what the problem is.
Yet in other ways, investors act like we're still living in
the 1870s, waiting for the London metal prices to arrive via
the Darwin telegraph. For instance, most people are comfortable
with the idea that they can make profitable trades by analysing
historical price charts, or by performing ratio analysis on
a company's past financial statements.
This is particularly surprising given the recent financial dramas
at Enron, WorldCom, Global Crossing, Tyco, Adelphia, HIH, OneTel
and Harris Scarfe. While the media and regulatory focus in these
cases has understandably been on shortcomings in corporate governance,
the wider issue is the shortfall in information. And that's
what really matters in terms of investment research.
Don't give me statistics, give me information!
Unfortunately, many people confuse new information with
new analysis. Generating a stock chart on your computer
is not new information. Adding a moving average to the chart
is not new information. Comparing the 100-day and 200-day moving
averages, subtracting the oscillation index and multiplying
by the high-low differential is not new information. It's probably
not even new analysis. Yet most technical analysts (chartists)
miss this distinction, blaming their mixed trading success on
peripheral things like the number of days in their moving average,
the software they use, their level of experience, or some perceived
inadequacy in their trading psychology.
Fundamental analysts often make the same kinds of mistakes.
Although they tend to think their work is more intellectually
rigorous than charting, the two approaches are more similar
than dissimilar. Both involve slicing and dicing publicly-available
historical information to forecast the future. Torturing the
data might make it confess but academic studies suggest that
it wont help you achieve above-average returns in the long run.
So does this mean that all financial analysis is useless? Not
at all. Just that when you use an 'analysis-only' approach,
your winners and losers will tend to cancel out over time and
you'll probably end up with below-average returns once trading
costs are taken into account. If that's the case, there's a
strong case for saving money on research and buying an index
fund.
How am I supposed to get new information?
You often hear parents advising their children to run their
own race. Don't worry about what other kids are doing,
just focus on what you're doing. The same adage applies
when investing. Many small investors come to grief by trying
to follow or guess what the smart money is doing instead of
using their own firsthand knowledge.
In particular, they don't take advantage of their knowledge
as consumers. You might not have thought about it explicitly
but you probably know more about consumer spending than most
economists or analysts. For a start, you know what you like.
And you know what you buy. With a little effort, you could probably
make a list of the products, retailers, suppliers and shopping
centres that seem to be popular or have impressed you. If you're
involved with a business, you'll be able to put figures on many
of the things that financial analysts look at, such as prices,
sales and costs.
All this is valuable information. According to US experts, most
people can generate two or three investment leads a year by
examining these kinds of trends. For example, how many times
have you driven past retail stores like Bunnings Warehouse or
Harvey Norman and thought: that place is always crowded, or
those shops are popping up everywhere? If you were alert, you
could have used this knowledge as a prompt to check out Wesfarmers
and Harvey Norman shares.
Likewise, how many times have you heard that the share price
of a particular stock plunged after the company issued a profit
warning? How does this happen? Maybe the downgrade was a surprise
for fund managers and analysts but a lot of customers, suppliers
and contractors must have known or guessed what was happening
well beforehand. Finding new information might sound difficult
but it can be straightforward once you know where to look. The
trick is to notice opportunities when they arise.
Of course, this approach is not always foolproof. If you bought
One.Tel shares because you liked their cheap call prices, you
wouldn't be too happy right now. But more often than not, you
will improve your investment returns by supplementing an analysis
of the publicly-available data with your own private information.
The helicopter view
While company research is perhaps the most obvious area to apply
your own knowledge and experience, it's certainly not the only
one. If you look carefully, you can probably find market
information which is equally valuable. This might also allow
you to avoid some of the company-specific risks outlined above.
When economists try to forecast GDP, they spend countless minutes
looking at past relationships, extrapolating trends and estimating
variables. But what is GDP really measuring? It essentially
summarises what you bought, what you earned, and
what your business did. For this reason, many consumers
and businesses will have a better idea of what's happening in
the economy than economists and financial analysts.
One of the surprising things about professional analysts is
how little firsthand knowledge they have of business and consumer
trends. Most rely exclusively on other people for their information,
especially government statistical agencies, the media and securities
exchanges. Collecting your own information is considered too
hard, too time-consuming and too expensive. And hey, if the
government is collecting figures on employment, inflation and
business conditions, why reinvent the wheel? Despite this reliance
on historical public information, most are convinced that they
can 'out-analyse' everyone else.
This presents a number of opportunities. If you're a business
owner, you should be alert for trends on prices, employment
and the level of sales. Not just in your own firm, but others
in the neighbourhood or industry as well. The chances are that
you will notice signs of a pickup in the economy or the beginnings
of a downturn much sooner than analysts who rely on government-provided
information.
Similarly, consumers should keep an eye out for general trends
when buying goods and services. Do prices seem to be going up?
Are businesses in your area closing down? Are people in your
firm or neighbourhood being sacked? Are you becoming worried
about your finances? If you're feeling more pessimistic or optimistic
about the economy, others probably are too.
If US studies are any guide, the most important business indicator
to watch is jobs growth. On a scale of one-to-ten, it rates
about ten. Next in importance is the trend in wholesale prices
(about 8 out of 10), followed by retail prices, retail sales,
business orders, and business and consumer confidence (all around
6 out of 10). With a bit of basic detective work, literally
thousands of business people and consumers will be able to tell
what's happening in the economy before economists and analysts
figure things out.
One other point is also worth noting. Government statistics
are generally collected on a monthly or quarterly basis and
listed companies usually report half-yearly. For most professional
analysts, this means there are long dry spells before new information
arrives. People who deal with customers everyday, and firms
that conduct more regular surveys, will often be much quicker
to spot new trends.
In fact, exploiting this information lull is probably easier
in Australia than most other developed countries. Take inflation
as an example. There are only two countries in the 30-member
OECD who don't manage to produce a monthly consumer price index.
Guess who they are? The Oceania twins: Australia and New Zealand.
We're strong performers on GDP as well. Although the US has
287 million people and is 27 times bigger than the Australian
economy, it publishes GDP figures about one month after the
end of each quarter. Australia takes twice as long to release
its GDP statistics.
What really counts
Financial markets are generally very efficient at processing
information. To have any serious chance of achieving above-average
returns, you need new information and you need it faster than
other market participants. No matter how smart you think you
are, raking over historical information using charts or spreadsheets
is unlikely to give you an investment edge. It's new information
that counts, not new analysis. Luckily, obtaining new information
is within the grasp of most people.
|
|
| |
|
| |
|
