Invest Like A Woman, Trade Like A Man

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By Rudi Filapek-Vandyck, Editor FNArena

The past four years have taught investors one important lesson about investing in the share market: not only are the companies behind listed equities different in terms of growth and market opportunities, they do not all carry the same gradations of risk either.

Those differences in corporate risk profiles have dominated investment returns in the post-2008 era. Whereas risks are never too far away during bull markets, the actual times when they dominate overall market sentiment seldom stretch farther than a few days or weeks. In the context of the post-2008 framework however, weeks can easily turn into months or into quarters, or worse.

Which is why the usually pretty straightforward relationship between earnings growth and share price performance has broken down on so many levels, on so many occasions, and to the disappointment of so many in past few years. Recently, I had the opportunity to scroll through various recommended equity portfolios from well-established market experts and I can confirm it doesn't make for a happy sight. That's not even mentioning the billions of dollars in superannuation funds that have largely chased the market heavyweights in Australian equity indices to ever lower prices, and to dismal returns.

Not everyone has performed equally poorly though and I am very happy to report that many who have taken my market analyses and views on board are today looking back at a markedly different experience as stocks such as Coca-Cola Amatil ((CCL)), Amcor ((AMC)), Ramsay Healthcare ((RHC)), Dominos Pizza ((DMP)), McMillan Shakespeare ((MMS)) and Transurban ((TCL)) -to name but a few- have not only kept investors' capital intact during turbulent and uncertain times, they have at the same time added a positive return on top of it.

Those who are familiar with my past analyses know what I am talking about: All Weather-Performers. Companies whose business models and market positioning lead to highly reliable streams of income and profits, virtually regardless of what happens in China, with global risk appetite, or with sovereign risks in Europe.

A second category of investments has proved equally beneficial: solid, reliable, low-risk dividend payers. Personally, I like to combine categories one and two. This explains why I have been positive, but less enthusiastic about investing in Telstra ((TLS)) or pure yield play Real Estate Investment Trusts (REITs), though most of these securities have performed remarkably well at a time when higher risk options failed to perform.

There is a third category of stocks about which I have talked and written regularly in years past: providers of services to miners and energy projects. I am certain many investors today have rather mixed feelings about these stocks as the recent sell-down has seen share prices correct by 20% and more, but I remain of the view that high quality stocks such Monadelphous ((MND)), Fleetwood ((FWD)) and WorleyParsons ((WOR)) should remain on every investor's radar.

Last year I wrote these stocks were experiencing the only true bull market in Australia. It was for this reason that I predicted a bubble would ensue and that's exactly what has happened. Remember January-March this year? Every stock linked to this sector saw investment funds flowing in and many share prices went stratospheric in some cases in a matter of only days. Of course, bubbles eventually deflate and for Australia's resources services providers the after-party has come quickly and hard. I did warn about inflated and too expensive share prices, but I did not foresee the magnitude of the carnage that followed.

I guess it's easier to anticipate and observe a bubble developing, but very difficult to know when exactly the downfall kicks in. Recent research by the likes of UBS and RBS confirms my own analysis on this sector and that is that revenues and profits should remain secured for the better players in the sector due to the built-in lag between contracts and execution that is so typical for these engineers and contractors, but investors now also have to take into account that the market psyche towards these companies has now irrevocably changed.

Silver is a still a long way off last year's bubble peak of more than US$45/oz and we all know what has happened to all those predictions that crude oil futures by now would be revisiting the elevated price levels last seen during the mania of 2008 (they were terribly wrong). I think that in similar post-bubble fashion it will take some time before investors will again embrace services providers while the lower quality names may never ever see those dizzying share price levels again. Importantly though, this won't have the slightest effect on solid profit growth for the likes of Monadelphous with analysts at RBS projecting the company will double its profits over the next four years.

Even if these RBS projections prove too optimistic, Monadelphous shares still offer more than 6% in (fully franked) dividend yield for the year ahead and that's after recent sessions have pushed the share price back up from $19 to $22. I hope many of you are loyal shareholders. I have mentioned Monadelphous on many occasions over past the years and on my analysis the stock has likely been the Ultimate Super Performer in the Australian share market during the first ten years of the twenty-first century. While this likely implies Monadelphous' performance between now and 2020 won't be of the same divine-like character, the stock still looks like a solid performer for the years ahead, and it has been over the past three years.

Yet, it is stocks such as Monadelphous that have sent a very important message to investors this year: with higher share prices comes higher risk. In other words: yes, Monadelphous is a wonderful stock to have in one's longer term investment portfolio, and long term shareholders surely find it difficult not to worship current management at the helm, but -and this is equally important- the higher the PE-multiple the more risks climb on board.

The same applies to other star performers such as Dominos Pizza, Ramsay Healthcare and Coca-Cola Amatil. One look at share price versus stockbroker price targets should be sufficient to warn investors these stocks are not to be chased at current elevated share prices and PE-multiples. This in particular applies when the gap in relative valuations between these star performers and the more risky "losers" in the share market is at an all-time high, as some market analysts believe it again is today (There's an all-important lesson to be learnt from mining services providers rallying into March).

Right now, the odds favour relief rallies. One day, no doubt, one of these relief rallies will last longer than we all dare to think of right now and it will look like "risk" back on is the only way to go (supported by a whole army of cheerleaders on the sidelines, as is always the case). Smart investors, however, draw valuable lessons from the past. Remember March-November 2009? The first four months of 2011?

What makes you think the next rally will be fundamentally different?

I was once again reminded recently by yet another survey that when it comes to long term investing, women consistently outperform men and this latest survey again concluded with that same statement. What is it that makes women so much better than men? You all know the answer: whereas women carefully weigh the pros and cons and never forget to look at the potential downside, preferring to seek a rather conservative risk-reward balance, men just cannot suppress the drive to take a punt, to seek higher risk, higher reward options, to stare themselves blind at the potential upsides, while ignoring the potential consequences in case things go awry.

I might be reading too much into this, but it just so happens to be that female investors tell me they own stocks I mentioned above, while men (only men!) have been rejecting my analyses, instead seeking arguments with me about dividends, the banks, energy and mining stocks. I have no doubt whatsoever the first group, once again, has slept better in the past four years while achieving better results too. I know these are generalisations from admittedly too small a group to be sufficiently representative (even though survey after survey comes to that same conclusion), but I do think there's a valuable message in all of this for investors who want to survive and avoid too many errors and disappointment while the world is sorting out its problems.

That message is: of course you should grab an opportunity when you see one. But be smart and don't confuse shorter term trading opportunities with lower-risk, long term investments. Be smart and don't bank your financial future on the potential for a sustained return of risk appetite. In other words: invest like a woman, trade like a man. Make sure the woman gets the largest piece of the pie. Talk to your inner-woman if you are a man.

And always be mindful of valuations. Which in the current context means you should always keep some of your powder dry. The best thing both women and men should hope for is a Big Rally in risky stocks. That way the men can combine their adrenaline kicks with some healthy trading profits, while the women know which stocks to keep an eye out for because when these stocks temporarily lose some of their current lustre, these women know that's when truly successful investors jump on board.

(The story above was originally written on Monday, 18th June 2012. It was published on that day in the form of an email to paying subscribers at FNArena).

Readers should note all names are mentioned for educational and informational purposes only. Investors should always consult with a licensed professional before making investment decisions.

P.S. I All paying subscribers now receive two e-booklets with their FNArena subscription. The team is currently working on an update on "All-Weather Performers". This e-booklet is estimated to be completed before the end of June and will also be made exclusively available to paying subscribers. If you are a subscriber and you have not yet received your copies, send an email to info@fnarena.com

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