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The psychology of picking stocks

A selection of market commentators explain how their stock picks are doing at mid-year.

SIKI MGABADELI:  As I mentioned, we are roughly halfway through the year so we are catching up with some of our market commentators – in fact, we’ve spoken to some of them already this week just to find out how the stocks that they picked at the start of the year are doing, how they feel about their choice, and then also we are going to talk about the psychology of picking stocks.
    Gerhard, before we go into some of those stock picks, is there a science, a psychology, to picking stocks?

GERHARD LAMPEN:  Ja, definitely. Stock-picking is a science. It’s definitely something that you learn through experience more than maybe knowledge. But you have to do the sweat as well. In recent years the behaviour of finance became very important, especially for stock markets as well. So it’s very advantageous to study the behaviour of finance. There are some do’s and don’ts and some real biases that you have to be aware of. I’ve been a stockbroker for more than 25 years. You get a lot of clients who, for instance, phone you and say well, I bought this stock and I’m in a bit of a loss now – should I hold it? I’ll always say, the price you bought the stock at has got no bearing on whether to stay invested or to sell it. Whether you are in a loss or a profit doesn’t matter. You have to make a decision as to what is the best stock to be in to make a profit for your time horizon. That is just one of the behavioural finance things that you’ll pick up.
    It’s a very interesting field, it’s very exciting. We get so many emails today about how much they enjoy the competition, because to see the market going up and down and shares going up and down is really exciting and it can be rewarding as well.

SIKI MGABADELI:  Yes, sometimes we talk about loyalty. Some people get quite tied to a stock because they like the company and then even if the price has gone way, way down they say, “we know it’s going to get better because we love that company”. Is there such a thing as too much loyalty to one stock?

WAYNE McCURRIE:  Certain people and groupings have shown over time that they actually know what they are doing in running companies. So it’s not a bad philosophy that, well, I’m going to stick with this grouping or that family or this type of share or this industry because they’ve been successful over time. And there is nothing wrong with that. But here are some pointers.
    Look, the one-minute guide to investing. There are two ways to invest. You either do what everyone else is doing, which is called momentum investing – where you don’t care what’s happening. If the price is going up and other people are buying, you are buying. And if the price is going down and other people are selling, you are selling or you are staying out.
    And then the other way of investing is where you actually use your head and do some investigations and try and work out what’s good or what’s bad.
    And quite frankly over time I’m not sure which is best because the so-called momentum investing is actually incredibly successful for very long periods, but unfortunately that kind of investing – the dotcom bubble, the resource bubble – ends in tears. And when it ends it ends hugely and dramatically and people get destroyed.
    There’s another kind of investing that might be very mundane or show poor returns for years, but it never gets totally and utterly destroyed. But if you know when to sell, momentum investing can make you a lot of money.

SIKI MGABADELI:  All right, let’s hear what our stock-pickers, some of our regular market commentators picked for the year and how they feel about where things are now. We are going to start with Nkareng Mpobane, who is fund manager at Ashburton Investments. She picked Bidvest at the beginning of this year.

NKARENG MPOBANE: My stock that I picked at the beginning of this year was Bidvest. To date it is down 1.8%, and whether we still believe that it is still going to end on a high at the end of the year – we still support the story quite strongly. The share has come under pressure due to the interim results that were released and this is really driven by the South African side of the business, which is disappointing. This is obviously led by a muted economic environment that we currently see as South Africans.
    But their offshore side, so the foods division side, primarily across Europe, that did very well where revenue was up 20% with profits up 30%. This is still very strong and it does make up about 40% of the overall business. The story that we are supporting is that if you want to buy a diversified quality stock at sensible valuations this is the stock to be in. So if you are looking at valuation, its one-year forward PE is at 14 times, giving you a dividend yield of around 3.3%. Now, having discussed with management, they continue to see momentum in that offshore business and I think that’s the exciting part of the story and it should actually recover as the year progresses and it is expected to show quite good returns by the end of the year. The kind of multiples that you are getting the stock at do give you some comfort in buying at these kind of levels.

SIKI MGABADELI:  Gerard, what do you think of Bidvest?

GERHARD LAMPEN:  It’s a quality stock, definitely. And management is obviously highly rated. As Wayne mentioned, if you get married to your stock and it’s because of the brand or something, it can end in tears. I think if you get married to a stock with good quality, proven management, and that management stays intact, then you will probably not end up in tears too much. So I think what she also mentioned is that the offshore component is doing very well.
    So, looking at our market, and what’s happening here at the moment, I would tend to look more at something with a bigger offshore component, more of a rand-hedge thing. But there is no question about Brian Joffe’s leadership and the quality of management. And so I won’t be too concerned about it being down slightly.

SIKI MGABADELI:  All right, the next stock pick was Sasol and, Wayne, you also picked that. What do you think of it now?

WAYNE McCURRIE:  Well, it has done OK this year. It has maxed the all-share index. It has fallen from R650 to below R400 last year and then it went up a little bit. That’s why I bought it, because it has fallen so much. But the main reason, the reason why the oil price fell from $110/barrel to where it is now, $63, $64, is because of the excess gas coming out of America, the so-called shale gas. Now the shale-gas industry has caused a surplus in the energy market, which caused the prices to fall, but that production is grinding to a halt rapidly. There was an article out this week that there is no more money to invest in new shale gas there because the banks won’t lend to the people because they think it’s a risky investment at the current oil price. So the existing wells are still producing, but they’ll stop producing by the end of this year, they’ll run out of gas. And there is no new gas coming on. So it is a risky thing. If you go into a competition like this, where you pick one stock, you can pick a safe stock but you are never even going to come close. In these sort of things you are not actually managing a portfolio, you are picking one share. I picked Sasol and I think the share price can go up quite dramatically because I think oil at the end of this year could be at $72, $73, $74/barrel and the gearing on Sasol is massive. So I might just come from behind at the end of the year and then pip everyone to the post there.

SIKI MGABADELI:  All right. Simon Brown from JustOneLap picked Calgro. Let’s hear what he had to say.

SIMON BROWN:  My first stock was Calgro M3. Of the three that was the one I was most confident of. Yes, today it’s up 40%-odd so far, so really meeting expectations. Let’s take it a step further. Recent results show it’s doing incredibly well. They’re into the burial park at Nasrec, which will play out in the longer term. But they are doing a lot of top structure and that means a lot more revenue coming through for them at the moment, and that revenue is going to be significant. Their pipeline remains north of R16bn, so I am looking for a good second half of the year and beyond.

SIKI MGABADELI: Just on that point, Gerhard, when you are picking that one stock, do you agree with Wayne that rather go for something that might be slightly riskier but at least there will be some action going on there, rather than picking something that’s safe that might just trade sideways for the duration?

GERHARD LAMPEN:  If you want to win a competition then you have do something out of the ordinary. I remember one year we had a virtual competition and the only shares that went up in the three-month period were gold shares. The guy who won was 64 years old, beating all the CA students that we normally get, to win. He bought gold in the beginning and he just held on and nobody could catch him. It was a period where the whole country went down and gold went up quite dramatically. So you have to take a chance like that, yes, for sure, if you want to win.
    If your intention is like in the competition to learn more about share trading, and if you don’t reckon you can win the competition that easily, then I think you must try diversified shares and learn a bit more about how they react. Then I wouldn’t go for just one share. But for sure, if you want to win, you have to do something outside.

SIKI MGABADELI:  Yes, take a chance.

Earlier the following market commentators also explained the status of their selections.

Maudi Lentsoane, managing director, Lehumo Capital on Sasol:

MAUDI LENTSOANESasol was my pick back in January and, looking back, looking at it now, it has make a very nice recovery as we thought it would back in January. There are two things that actually happened over this past six months. One, the rand has depreciated obviously by around 7%, so we know that also benefits Sasol. But also and very important is the fact that the oil price has also recovered just over 40% from the freefall that we saw late last year and it bottomed around January of this year. So around the same time we thought Sasol was a buy. It looked like we were taking a bit of a gamble but what we saw on the stock in January was obviously a stock which was beaten unfairly in sympathy with the falling oil price. We did not anticipate that the oil price was going to stay that low for a long time. We knew that there was big tension between Opec and the American shale-gas industry. That war was the reason the oil price was under pressure. On a long-term view we realised that despite everything Sasol presented a great opportunity at R370, and of course we’ve seen a nice recovery in the oil price. We’ve seen some depreciation in the rand; all good things for the share price of Sasol.

 

Chris Gilmour, investment analyst, Absa Wealth & Investment Management, on Sasol:

CHRIS GILMOUR:  When I picked the stock at the beginning of the year, it was very much out of favour, particularly because the oil price was plummeting. Now, a number of things have happened since then. In those days the Sasol share price was round about R430. It’s currently also round about R430. But in the meantime, a couple of months ago, it got to a high of about R490. So it increased quite significantly. And I think that was because the oil price increased quite significantly from the lows that we saw in January and February. And it looks like it’s not going to go back to those lows. So that’s certainly good. And more recently we had the revelation that Mr David Constable, the CEO, isn’t going to renew his term when it expires in 2016. So that was taken I think rather badly by the market. Longer term, we are still very, very positive on it. Sasol has tremendous technology, home-grown technology that really is the envy of the world.
    While we have a relatively poor outlook for the oil price, unfortunately, I think that’s going to weigh on Sasol. People see this as being a good bet for the long term – which we do – and we will continue to hold this one, we have no problems about the medium to long term. Short term there might be a little bit more volatility but I think once we get the announcement of a new CEO as a successor to Mr Constable I think that will settle things down a bit and on balance we still remain very, very positive on the stock.

 

Mohammed Nalla, head of Strategic Research, Nedbank on the db x-tracker Euro Stoxx:

MOHAMMED NALLA:  My stock pick at the beginning of the year was ETFs, the db x-tracker Euro Stoxx; that gives you exposure to the Euro Stoxx 50. But effectively I get it in rand terms. And how they’ve done from where we first spoke – I think we spoke around the middle of January – to now it’s done reasonably well. As it stands at the moment it’s around 15% up, but it actually got to north of 20% at one point in time. So obviously in terms of that am I still confident in that view? I am.
    Very recently I’ve become quite concerned around it because it has run very hard and there’s a fair amount of geopolitical risk around the Greece situation. I think maybe taking profit on that if you have a shorter time horizon would certainly be prudent. Over the longer term on a relative basis I do still expect European stocks to outperform some of the other developed market peers.

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