M AS TE R C L ASS
:hot stocks
The start of a new year often presents investors with an ideal opportunity
to review their investment portfolio
The holiday newspapers often feature lists of the best and
worst performers of last year, so we can quietly congratulate ourselves
for our investing prowess in avoiding the losers and picking a couple
of the winners. As we enjoy the summer sunshine, cool glass in hand,
we can let our minds wander and contemplate the likely winners for
the coming year. And various media will feature headlines that purport
to identify the hot tips for the year ahead.
If only it were that simple! I am happy to admit that I do not
know what the markets will do this year. You may think that this is
a weakness – how can a person who makes a living out of managing
other people's money not have a view on the market outlook? Well,
here's a secret – all those people who profess to know what the markets
will bring, don't know either. They just don't admit it. If some of their
stock picks perform well during 2013, it will simply be because they
were lucky, and the stars were aligned.
After investing in New Zealand shares for more than twenty five
years, I have learned that investing is an art not a science. You can
learn all about the qualities that you must find in a company before
investing – a committed, proven management team; a sustainable
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competitive advantage (i.e. the company that does something better
than everybody else); a track record of growing profits; a strong balance
sheet (limited debt so that rising interest rates don't derail the business)
– and the share price can still fall. You can find an absolute gem, but
it might take three years before other investors recognise its potential
and push the share price up. After all, beauty, and in the case of share
market investing, value, is in the eye of the beholder. You very rarely
find an all-weather stock that every investor likes. And when you do,
chances are that the share price will be pushed to unreasonable levels
because of the huge demand, thereby raising concerns about whether
it's a good buy or not.
So how do you know what's hot and what's not? I believe that
the safest approach is to construct some investment rules that
make sense for you as an investor, and then stick to them. For me,
I have determined that earnings (or profits) are the most important
determinant of value. Just as location, location, location has become
an important maxim for property investment, so earnings, earnings,
earnings are a critical factor in share market investing. If a company
such as Ryman Healthcare has been able to achieve double-digit
