Rudi On Thursday

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

(This story was originally published on Wednesday 29 October 2008. It has now been re-published to make it available to non-paying subscribers at FNArena).

If there’s one thing I have learned over the years it is that investors habitually hold on way too long to their favourite stocks from yesterday.

It doesn’t matter whether the change in trend came gradually or quickly; long after the trend has reversed you’ll still find investors holding on to their shares, hoping that one day these stars from yesterday will shine again, and stockbrokers and analysts will still tell you it isn’t over. But of course, it is.

This is the rear-view mirror phenomenon Warren Buffet talks about in his famous quote: “In the business world, the rear-view mirror is always clearer than the windshield.” Most investors make their decisions while looking into the rear-view mirror and mistaking the clarity of what lies behind them for a better guidance than the unquantifiable in front of them.

I’ll tell you what I see when I look into my rear-view mirror, I see an iron solid Super Cycle having been blown to millions of little pieces. It will take more than 1.3 billion Chinese consumers to put that puzzle back together. But I am willing to bet anytime that in a long while from today investors will still be hoping those stocks that used to trade at prices 40%, 60%, 80% -and more!- above today’s prices will one day return to former elevated share price levels.

It aint going to happen though, unless one allows for a very long time span.

What I mean is: is Telstra ((TLS)) ever going to revisit price levels above $7? It might, but we’ll have to allow the shares a very long time to do so.

One of the main problems investors tend to struggle with, I have found, is the fact that things can change so dramatically that the company they bought a stake in sometime in the past is now different from the company they own a stake in today or sometime in the future.

When I was in Europe, earlier this month, this struggle translated into old friends and acquaintances buying shares in Belgo-Dutch bank/insurer Fortis. Only a few months earlier the shares had been trading around EUR26 and when they crashed to EUR4-ish some of them no longer could withstand temptation.

This had to, had to, had to be an ab-so-lu-te bargain. To cut a long story short: in the final week of my stay in Belgium conversations in the pub had turned sour: Fortis shares had become virtually worthless.

In essence, what these investors had failed to understand was that Fortis priced at EUR26 was not the same Fortis whose shares were priced below EUR5.

In early March this year, I wrote a story that generated quite a few waves across the Australian internet (helped by the fact it was re-published at multiple places). In essence, what I had done was to take a closer look into the relative market performance of Australian bank shares in the face of the then significant sell-off.

My conclusion was that Australian bank stocks had already peaked in 2003, yet so many investment portfolios would still have been overweight banks in early 2008, not to mention all those financial planners and stockbrokers who had been advising their clientele to buy as many bank stocks as possible up until the peak in November last year (and falling share prices did not stop them initially).

It was not that there hadn’t been any investment returns for investors who owned lots of bank stocks between 2003 and late 2007, it was merely that these returns would have been higher had they not been overweight banks.

Banks pay healthy dividends, so my analysis was up until the break-out of what was at the time called the US subprime mortgages crisis in mid-2007, a “relative” assessment.

The reason my analysis struck a chord with investors throughout Australia at the time was because most experts in the market had failed to understand the tide had turned for banks. No longer would the sector be a safe haven, or a solid investment for that matter.

I am certain many more investors in Australia have made the same mistake as some of the people I know in Europe. At $61 per share Commonwealth Bank ((CBA)) was by far not the same company it was at $50, or at $40, or at $38.

All of the above is exactly what I was pointing at when I wrote a few months ago that the same experts who had been advising investors pile in to bank shares way too long were about to be caught out again because they were promoting the Commodities Super Cycle past its due by date.

Shares like BHP Billiton ((BHP)) have arguably been sold down too far in the past weeks, but if anyone is still thinking $40 or $50 you better ask your neighbour to pinch you in the arm -real hard- because it’s time to wake up. The world has changed, and significantly so. In a matter of weeks you’ll hear the term “recession” more than any other word in the English vocabulary.

This means that BHP shares -with or without global deleveraging- have now become a $20-something stock, $31 or $32 at the most.

All this does not mean that on a long term view there won’t be any opportunities amongst commodities stocks anymore. It’s just that from now on careful stock picking becomes the rule, if not a necessity.

It’s better to not interpret any corrective bounce for more than what it is: a corrective bounce. Nothing more, and nothing less.

(Those who are interested to read my March story on the banks: see the Weekly Analysis section on the website, “Are You Ready To Face The Facts?”, 04 March, 2008. Similarly, I have written many stories in the months past about the changing dynamics for commodities. These can be found in the same section or under Rudi’s Views in the Cockpit on the website).

With these thoughts I leave you all this week.

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always firmly supported by Greg, Chris, Andrew, Joyce, George, Grahame, Pat and Todd).

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