Fundamentals - Mon, 23 Aug 2004

This email I would like to talk fundamentals. Yes fellow chartists, heretical I know, however...

I have found it worthwhile to know something about most stocks. I learnt this back in the late eighties poring over what were called the red books, asx company filings, kept in red bound covers in the public library at the top end of Swanston Street. With an accounting background, it wasn't hard for me to extract the figures I needed to find undervalued companies. (Although was the info put out by the coy accurate - that is another story) Bless the librarians i might add, always the most helpful beings on earth. Can't say the same about the asx though, who after about 1994 or so made it harder and harder to get the info for free, until eventually you had to buy it from the exchange. You can do that when you have a monopoly, which is why Buffet likes to buy one of course.

Anyway, to the points of the story: two points
first, though i might well have found an undervalued company, I will not make a capital gain on the shares unless the market thinks like i do as well. Therefor, though i may well be right, the coy is undervalued on its fundamentals, p/e and things, as compared to the market, I am actually wrong unless, or until, the rest of the market comes around to my opinion also. Having identified, then bought in, I did note my beloved stock often went sideways, even further down. I would try getting the broker to start a rumor - a cure for aids, takeover impending of the stock or some such, but alas my few thousand shares bought did not seem to move the stock up much. Hence the timing. This led, thank heavens, to a reading of Gann, the first thing of which I picked up being his point about buying breaks of accumulation: the timing in other words. (Further study brought out mid points, and the better breaks of accumulation being breaks into all time new highs - ie no overhead resistance). GUD is a great example. Buy breaks into all time new highs.

The second point - really the point of this email - is to do with earnings, and buying for a long term hold.

Some stocks will have better ability to increase earnings over a sustained period of years than others. This will show up in the chart as a trend. Compare say asb to gud. asb, from memory, builds boats i believe. This may or may not be a good business, but it will make their earnings 'lumpy', ie each profit is dependent on the next order for a boat. now look at gud. They sell consumer items, mowers and much more. Far easier to sustain a trend up in their earnings - and the chart shows it. Consequently, and here is the point, it is better to buy a break into new highs in a coy like gud, than it is for asb, if you are thinking of trying to hold for the longer term. At least that is my view anyway - at least for a long term holding. The trend on both, asb and gud is up, time will tell whether asb really moves or not, but i doubt it.

Now look at a chart of ann (not sent here). ann, the old pacific Dunlop, make rubber gloves, condoms and things (pretty stable demand there i reckon) More importantly, (if my studies are correct) it is a high margin business. All it needs now is for management to get its act together, and away it will go. The last thing needed is for the big fund managers to like the story, then they buy in, in greater quantities than you or I will. My opinion - my studies of the stock - is only correct though once the stock breaks new highs. This is happening, so we have a potentially good trend in place now (and two higher lows on the monthly chart)

So there you go. I managed to learn this by sitting two nights a week at those red books, then I subscribed initially to several market magazines, and read all i could about the market from publications already at the library, of which there were plenty. Then i had to learn about charting. These days i recommend reading, and subscribing if you find it useful, to the intelligent investor magazine.

( It is a good one - you can even try a few free issues first. From there, I always refer their opinions to the chart i have - becomes easy to see if they are too early in their view of any company being a buy (price still below the moving average), or their opinion too early as a sell (stock still making higher highs), etc etc. I have found this helps you to find stocks to buy, sell or trade. You can never study too much. And whilst I have found charting and the Gann stuff of most use, a knowledge of both fundamentals and charts has always been extremely useful to me. I urge you all to do the same. Learn all you can about stocks

Then of course, if you get it right, you just have to know when to sell, which leads to the next email, soon


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