Forum Archive Index - May 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

This week it looks like 'sharechat' has become a gold forum, so 
I thought it was time for a post from someone that doesn't advocate a 
position in gold.

When growth isn't flavour of the month, many daily investment 
commentators write maniacally about defensive strategies:  buying US 
dollars, buying gold, sit on your cash etc.  But there is another 
strategy that gets less headlines which I believe is a superior way 
to go for most investors, this being 'value investment'.

Sharebrokers talk around this issue when they make comments like 'now 
is the time to move into cyclicals'.   If you classify a share as 
either a 'value' share or a 'growth' share then one group will 
usually be headed up while the other is headed down and vica versa.

In truth, there is no such simplistic distinction, as all shares have 
some growth and value aspects.  In New Zealand we have what is almost 
a unique opportunity that is not available in most other OECD 
countries.   There is a good range of 'value' shares available that 
have dividend yields roughly equivalent to what you would get by 
putting your money in the bank.   The fact that the yield of these 
shares is so good means there exists a floor through which the 
value share price is unlikely to fall.  Yet if you pick carefully, 
many of these shares do have a modest ability to grow their profits 
out into the future, which eventually means a higher share price to 
go with your high yield.

Investing using yield as a basis of value is not a sexy strategy, 
nor is it something that Warren Buffett would follow exclusively.  It 
is in effect the complete antithesis of the 'Stock Guru Competition' 
as potential for share price appreciation as a goal in itself is 
ignored.  So how would such a strategy stack up compared to a growth 
strategy?   Not too badly at all if my entry in the Stock Guru 
competition is anything to go by, for this indeed was the strategy 
behind my share picks.

Four of these shares, Telecom, Sky City Entertainment Group, 
Restaurant Brands and Contact Energy have dividend yields that 
compare very well with bank deposit rates.  These four also have 
growth strategies in place.  The fifth, Scott Technology, is 
delivering slightly below bank returns but has an historic (as 
recently as year 2000 ) dividend yield of 6.8% (based on a $2 
share price, including imputation credits) and my belief is that this 
will become attainable again as business conditions in the US 
improve.   

My goal for the year ended 31st March was for a 10% return on this 
portfolio over the year.  So far 3 months into this strategy I am up 
6.6%, and well on the way to my goal.   I am already ahead of 
where I would be if I had left my money in the bank for the whole 
year.

So with war a prospect between India and Bangladesh, and Osama Bin 
Laden still on the loose, why am I not 'taking profits' and flocking 
to gold?   

Whatever happens overseas, New Zealanders will still be making phone 
calls ( good for TEL ), buying energy ( good for CEN ), buying 
takeaway meals ( good for RBD ) and they'll still enjoy having a 
flutter ( good for SKC ). Furthermore I can't see the US consumer 
suddenly refusing to buy new washing machines and refrigerators ( 
good for SCT ).   It is true that any war will almost certainly 
result in a short sharp shock for all the world's markets, but will 
small dairy owners all over the country suddenly be flocking to quit 
their businesses because of it?  I don't think so.  Likewise I won't 
be quitting any of 'my' businesses - those income portfolio shares.   
I don't have to sell them, and I am quite happy to keep the income 
rolling in.   

Two years out, five years out, I have no idea what the value of gold 
will be.  The only thing I do know is that the value of gold will be 
based around what other people think. That far out, I'm not 
prepared to make that call.  So no investments in gold for me.   I 
won't be letting short term media noise cloud my longer term 
investment vision.

SNOOPY




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