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When The Investing Gets Tough, The Tough Get Investing


The Motley Fool Take Stock fool@foolsubs.com.au
12:15 PM (8 hours ago)
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When The Investing Gets Tough, The Tough Get Investing

By Bruce Jackson | Thursday, May 10, 2012
Dear Fellow Share Market Investor,
Bruce JacksonThese are testing times for sharemarket investors.
Stocks are down, across the board. The Dow has just fallen for the sixth day in a row. The local S&P/ASX 200 index is down 4% since last week’s high.
All that hard work…gone in the twinkling of an eye.
And there may be more pain to come.
European sovereign-debt fears are back.
Although euro-zone governments are currently effectively keeping Greece afloat, some commentators are predicting the small Mediterranean country could leave the euro as soon as next month.
What were they thinking?
When markets wobble, there’s no place to hide.
Even gold, The Motley Fool’s least favourite asset class, has slumped to a four-month low.
On Bloomberg, Frank Lesh of FuturePath Trading said…
“Capital is going to where it’s safe, and it hasn’t been safe in gold.”
And there we were thinking gold was supposed to be a safe-haven?
Maybe we’re wrong. After all, gold has had a great run since 2000, easily outperforming Warren Buffett’s company Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) 466% vs 120%.
Gold bugs will no-doubt keep the faith. We simply keep away, focus on the long investing road ahead, and not the rear view mirror.
It’s the future that counts, not the past, and it's our view that gold is yesterday's hero.
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Keep out!
Speaking of keeping away, we’re largely keeping away from the mining sector, agreeing with James Montier of global hedge fund GMO who said in the AFR
“Resources are hard to value because you cannot assess them independently of the commodity price. And they’re only set by what someone is prepared to pay for them -- by marginal demand.”
As if to emphasise the point, this week alone we’ve seen the shares of market darling Iluka Resources (ASX: ILU) slump after reporting it was reducing production of zircon because the global outlook remains unclear.
Worse, Mirabela Nickel (ASX: MBN) dropped 30% before entering a trading halt as it considers its capital raising alternatives. Market speculation is that Mirabela could follow fellow miner Kagara (ASX: KZL) into administration.
Many smaller resources stocks have been sold down below levels seen at the depths of the GFC.
But where normally we see opportunity in seemingly irrational sell-offs, we’re continuing to steer clear of the hundreds of highly-speculative loss-making mining company, most of which will never, ever, make a profit.
Greater fools? Not us
Investing in such stocks relies on the greater fool theory -- a theory that states it is possible to make money by buying shares, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.
The theory can work really well, until it doesn’t, like now.
As Warren Buffett says, you only find out who is swimming naked when the tide goes out...and for many small mining companies, the tide is receding fast -- almost as fast as their dwindling cash balances.
Down 20% but not stirred
As if to emphasise the tough trading conditions, one of Dean Morel’s recentMotley Fool Share Advisor recommendations, a cheap but growing mining services company, has slumped around 20% in the last 6 weeks.
But rather than panic, or sell just because some arbitrary stop-loss was breached, Dean double-downs on his research, with a renewed focus on downside risk and a good dose of humility.
With 25 years of investing experience behind him, it’s fair to say Dean has lived through more than one of these situations -- and prospered to tell the tale.
Dean likes to keep things simple.
If he finds holes in his original analysis, he sells. If his thesis remains solid, he holds or may even increase his holding.
It’s called common-sense investing -- easy to say, hard to execute, especially in these choppy markets.
Sky-high upside
This cheap but growing mining services company has been totally unloved by the market. In his original analysis, Dean said…
“Turbo-charged potential of P/E expansion combined with solid long-term growth prospects. It’s so cheap that the downside is limited, while the upside is sky-high.”
Baby thrown out with the bath water
Dean has no reason to believe anything is amiss with the company, given there has been no recent news. But, as part of his double-down process, he’s put a call into the company’s CEO.
Of course, Motley Fool Share Advisor subscribers will be the first to be updated. Could this be one of those rare opportunities, where the baby has been thrown out with the bathwater? Stay tuned, Fools.
Coolly generating outsized profits
Irrational sell-offs present cool, calm and collected investors the opportunity to generate outsized profits.
The mining services company highlighted above may be one such opportunity.
Another might be Dean’s top ASX biotechnology pick, now trading below the price it was when recommended to Share Advisor subscribers precisely 2 weeks ago.
And another might even be Harvey Norman (ASX: HVN), a company Motley Fool Investment Analyst Scott Phillips recommended a few weeks back.
Although Dean is no big fan, the AFR reports Deutsche Bank has a buy recommendation on the stock, with a 12-month price target of $2.55.
And with the “school-kids bonus” set to hit bank accounts in the coming weeks, who’s to say they won’t be right?
After all, which school-kid doesn’t need a new couch, flat screen TV, washing machine or vacuum cleaner?
Until next time, as ever, we wish you happy, profitable investing.
Foolish Best,
Bruce JacksonBruce Jackson
General Manager
Motley Fool Australia
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The Most Profitable Bad News Ever

By Scott Phillips
The US is still sunk in its sub-prime mess, Europe is a set of dominos, and only a couple (Ireland and Greece) have fallen, with many left to go -- Portugal, Spain and, maybe many more including France.
Closer to home, China might be about to stall and Japan has a seemingly intractable growth problem.
If that wasn’t enough, here in Australia retailers are struggling, housing starts are soft, the dollar is punishing our exporters (and those competing with cheap imports) and interest rates are too high.
The icing on the cake was that we got headlines earlier this week reminding us how many billion dollars were wiped off the ASX after a Friday night fall on Wall Street.
Is it really that grim?
When that’s the message, it’s tempting just to sell up and hide.
Humans can be a terribly pessimistic species when we set our minds to it. Ever on the outlook for danger (thanks to an evolutionary experience that taught us to be vigilant for predators), we’re ready to jump at shadows.
Even though crime rates are falling, you wouldn’t know it -- we overemphasise the negative, even in the face of overwhelming evidence to the contrary (for the record, Australian Institute of Criminology figures show per capita crime rates in every category falling over the last decade, except assault, which has remained steady).
So it can be with investing. Ask people about the stock market, and you’re likely to get answers ranging from volatile, risky, dangerous to mentions of the great depression, 1987 stock market crash, tech crash or -- more recently -- the tough years of 2008 and 2009.
The problem – again – is that while the market can be those things for the unwary or misinformed, and those events did in fact happen, the far more accurate answers should be centred on wealth, independence and opportunity.
Looking through the gloom
The stock market has grown, on average, between 10% and 11% per year (including dividends), since the turn of the last century. It’s a return that, to my knowledge, is unmatched by any other asset class. Yes, it’s an average, and yes, it can be volatile. It’s no place for money you need in the next 3 - 5 years.
But for building real wealth, investing in shares is hard to beat.
Turning our attention back to the list of woes at the top of this article for a second, you might be wondering why anyone in their right mind would invest in shares -- or anything -- in such a difficult environment. It’s a fair question.
To answer it, here are some things you may not know.
The real news
As at the end of last week, 20 companies in the Dow Jones Industrial Average had reported earnings. Not one had missed analyst estimates.
The chairman of Goldman Sachs Asset Management recently put Greece into perspective. He reminded us that “China creates the equivalent of a new Greece every four months”.
It’s true that the issue is rarely Greece itself, but what would happen to the interconnected global economy should Greece fail, but neither Greece nor the EU has shown any real likelihood of that happening. Even if it did, the recapitalisation of the world’s banks continues at pace.
China’s growth ‘problem’ is a problem we’d all like to have. When talk turns to a China slowdown, the discussion centres around growth falling a couple of percentage points to ‘only’ 7% or so.
If worst comes to worst
More significantly, even if the worst case does eventuate, the stock market has always bounced back. Consider the past 110 years or so. The average return mentioned earlier of 10% - 11% is the average return even after including all of those economic and market shocks I mentioned.
That bears repeating. Despite the great depression, wars, oil shocks, bouts of inflation, numerous recessions and regular bouts of market pessimism, $100 invested in 1901 and compounded at 10% (let’s be conservative) would be worth $3.57m today.
Sure, but…
Yes, $100 was worth much more then. The fact remains that the 110 years at 10% would give you 36,000 times your money in pre-inflation returns.
Yes, inflation will eat at your returns -- but inflation will happen whether you’re invested or not, so you might as well invest in the highest average return you can find, to maximise those after-inflation dollars.
Foolish take-away
By the time better days arrive and all of the scary news has gone, the share prices will have already risen. As Warren Buffett is fond of saying, “you pay a very high price...for a cheery consensus”.
Achieving the average return over time has required nothing more than buying a representative sample of shares and simply waiting. Buying good companies when pessimism abounds can deliver market-beating returns -- and improve on that average.
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Bruce Jackson and Scott Phillips own shares in Berkshire Hathaway. Scott Phillips owns shares in Harvey Norman. The Motley Fool's disclosure policy is accountable.
Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns. Performance figures are not intended to be a forecast and The Motley Fool does not guarantee the performance of, or returns on any investment. All figures are accurate as of 10 May 2012.
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