A company and a book to cheer you up
Posted on June 19, 2008 by Richard Beddard
Filed Under Companies, Investing, Markets, Reading list |
If you thought my last post on Dairy Crest was a reluctant vote of confidence, you’re right.
Posting links to news stories like the ones in the right sidebar of this blog it’s hard not to let gloom seep into my stockpicking brain. Sadly hysteria is an occupational hazard, which explains why journalists don’t make good investors*1.
Headlines like RBS issues global stock and credit crash alert are driving me to listen to techno music as I write, just to ward off all the negativity.
Editing articles like Peter Temple’s latest Growth Portfolio update doesn’t help. Over the long-term his portfolios have done very well, but the growth portfolio is in retreat. He’s sticking by Claimar Care (CCGP), a company profiting from our aging population. You might think it’s the mother of all growth markets but the shares are down 60% since he bought it, and he’s not usually one for overpaying. He’s cutting Zirax (ZRX) just because it’s a smaller company.
They say “elephant’s don’t gallop” but when the prices of smaller companies are galloping in the wrong direction and just about every company looks like a burnt-out cyclical, an ex-growth stock, or a fantastically overpriced hole in the ground, you know the psychological bunker’s caving in and the Jerries are coming to get you.
Education Development International
But surrender is not an option and panic definitely isn’t, so I keep looking for opportunities. The good news is I’ve discovered a promising share, Education Development International (EDD). It markets qualifications, tests, and examinations and the textbooks and crib sheets that go with them. It’s quadrupled in price over a year or so, it’s on a price earnings ratio of less than ten and there are as many letters in ‘education development’ as there are millions of pounds in its market capitalisation. Too good to be true? We’ll see. I’ve much research to do, but I got the idea from the best possible kind of tip. Not the:
Psssst! This one’s gonna make us rich
…kind. I learned about EDI from an admirer of the company, who works for a rival.
That’s the first glimmer of hope, that there are still stocks worth buying. The second comes in the form of therapy, a book to help us see through the fog.
Turtle Trading
I asked our bookshop to send me a review copy of The Complete Turtle Trader by Michael Covel because:
- Fellow blogger, Todd Sullivan liked it.
- It’s going to teach me about the dark side, momentum investing.
It’s also a good reminder of the importance of shutting out noise, and sticking to your system. Richard Dennis, the Chicago trader at the centre of the tale, was a reader of ‘Psychology Today’, not the Wall Street journal.
The book documents a unique episode in investing history when, to settle a dispute in the early ’80s, Richard Dennis and his partner trained a diverse band of recruits in a simple momentum trading system. They wanted to prove whether great traders are born great, or whether trading is a skill that you can learn. Their results give us hope. According to the jacket blurb, Mr Dennis made £100m from his Turtles.
Momentum traders buy assets that are going up in price, and sell assets going down in price, regardless of the fundamentals (i.e. what those assets might actually be worth or how much they might earn). It’s the antithesis of value investing. I should hate it, but I’m about 60 pages in, and I love it so far.
But I think momentum traders have more in common with value investors than either side cares to admit. Both seek to exploit behavioural anomalies. That’s to say markets tend to extremes or exuberance and disgust. Momentum investors seek to ride the exuberance. Value investors seek to plunder cheap shares, when other investors won’t even consider them.
Just as the existence of anti-gravity might validate the physics of gravity, an analogy I’ll not push any further because I don’t actually know it’s true, if momentum investing works then value investing should too.
At its most extreme, the efficient market hypothesis, which I’m guilty of bashing at every possible opportunity, says that knowledge and experience cannot help an investor beat the market. The lesson of the Turtles is, apparently, it can. Interesting, I think, even if you don’t subscribe to Dennis’ system. And comforting too, if you’re on the wrong end of a lesson in humility from the stock market.
More books to mend the soul next week.
Footnotes:
- Just a supposition. It’s why I tell the ed-in-chief I’m an investor first and a journalist second. You really can’t let all the bullshit get in the way.
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2 Responses to “A company and a book to cheer you up”
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Heyy, great article. I’ve done extensive analysis on EDD as follows:
1) I wanted to give my lad a birthday prezzie.
2) He calls himself Edd
3) He’s just passed a load of exams.
So guess what I’ve just bought for him.
And not many of us are doing this at the moment -volumes are tiny, and I had to negotiate the trade on iii. So, hope we are joined by a few more now.
Hi Hoodless,
Good luck with it. Expect to hear more from me in the coming weeks!