Eeny meeny miny moe…
Is this really how the majority pick their investments?
I hope not. But I wouldn’t be surprised.
Of course you wouldn’t do this, dear reader. At least I hope you wouldn’t with significant sums of money.
Surely you want to bet when the odds are in your favour and not rely on luck alone?
I would be lying however, if I said good investing involves no guess work at all. Because let’s face it, isn’t this what we’re all trying to do? Make an educated guess of the future?
What does the recent Eero purchase by Amazon.com, Inc. [NASDAQ:AMZN] mean for smart-home devices?
(Eero is a small device that extends internet connection range in your home.)
What could the passing of the asylum seeker bill do for Aussie English language course providers?
Or what about Trump’s intentions to extend the trade truce with China? What does that mean for trade related stocks globally?
Now, you and I could probably put our heads together and come up with some reasonable conclusions. But they could all be entirely wrong.
That’s just part and parcel of investing in stocks, or so we’re told.
But what if investing didn’t have to be so unpredictable?
What if you could inject a large dose of certainty into your stock picks?
Today, I’m going to show you how…
Can you outsmart the crowd?
You’ve likely heard the old saying…
Buy when there’s blood in the streets.
Nathan Rothschild, who the quote is thought to originate from, took his own advice following the battle of Waterloo.
With early knowledge of the outcome, Nathan rushed ahead to London. By spreading fear that the British had lost, or so the legend goes, Nathan was able to panic the market.
Then, when prices hit painful lows and the streets were filled with blood, Nathan reversed tactics and cleaned house.
If only you had the opportunity to earn such certain returns (although you probably want to make it more honourably).
Instead, we’re stuck trying to guess what might happen next to CBA or Apple.
According to Sharesight these were the 10 most traded stocks by retail investors (investors like you) last year:
- Afterpay Touch Group
- Coles Group
- The a2 Milk Company
- National Australia Bank
- Telstra Corporation
- BHP Billiton
- Citadel Group
Maybe it’s not a surprise. You probably know every name on this list.
Guess how many of these stocks were also the target of million- and billion-dollar funds with whole teams of specialising analysts on a sector by sector basis?
More than 60% of them.
That means when the average Aussie buys a stock, more often than not they are competing with hundreds, maybe thousands of professionals with decades of experience, who’ve spent weeks and months analysing a single stock.
How does the eeny meeny approach stack up now?
I’ll give you a hint: not well.
That doesn’t mean you can’t beat the professionals. They have some pretty horrendous track records, after all.
But it does mean you have to outsmart others with more time, specialisation and expertise up their sleeve.
So, what’s the alternative?
Look at what the million- and billion-dollar funds aren’t!
Look for the small and ugly
If you’ve read this far already, I’m guessing you’ve got all your plans in place.
You know what day it is today, right?
Got the chocolates, flowers and a table booked?
If you haven’t already, go ahead. I’ll wait…
All good? Great, let’s keep going.
Netflix, Facebook and JD.com (a Chinese e-commerce company).
These are the stocks the mainstream wants you to buy. I haven’t recently had a detailed look into any of them, so I can’t say these are unequivocally bad picks in my opinion.
But these are exactly the same picks experienced fundies have their eye on.
Are you going to read the last 10 annual reports for either of these companies cover to cover? No?
Well the fundies are. Usually, they’re going to know more about these giants than you. And without specialised knowledge you’re competing at a competitive disadvantage.
So, what aren’t the fundies looking at?
They’re generally not looking at the smaller end of the market. That’s because the volumes are too small for them to buy or sell anything meaningful that would dint their funds’ performance.
So, they ignore these small stocks completely.
What else aren’t the fundies looking at?
They’re generally not looking at the ugly stuff. These are the stocks with no or negative sales growth. Stock that are in declining industries. You get the picture…
Fundies don’t buy ugly because they’re generally not in it for the long haul. They want returns fast and sweet.
Their business is all about attracting as much client money as possible. It’s what pays the bills and their fat bonuses. The aim of the game then, is to pick what’s hot now.
With great short-term returns, funds keep their existing clients happy and may even welcome a few more through the doors. A horrible quarter does the opposite.
So, the fundies try to pull off the impossible. They try to pick the stocks that are going up right now and will continue to go up, at least until the end of the quarter.
It’s why there’s such a big hubbub about quarter numbers. Quarterly beats are great for short-term rises. And that’s exactly what these fundies are looking for.
This is not where real returns come from, though. The really big gains come from holding stocks for more than three months.
When Paul Sonkin says, ‘small is beautiful, especially when ugly’, he’s 100% right.
Almost no fundies are in this basket of small and ugly. That gives you a massive advantage if you’re willing to dig down and look for big gains.
(Our small-cap specialist, Sam Volkering has also been able to find huge gainers in the small end of the market. His latest idea is a cannabis player that could rise multiple times higher. You can check out the details here.)
To prove the point, the other day I decided to go dumpster diving. And I found something quite interesting…
Please note, this is not a recommendation. I heavily suggest you do your own research and come to your own conclusions when buying any investment.
Triple your money with a company that does nothing
Have you heard of MG Unit Trust [ASX:MGC]?
I had no idea who they were before stumbling upon them. Not only is this stock small, with a market cap of just $62 million, they are very ugly also.
MG Unit Trust was in the business of milk processing. But they sold that business to Saputo.
Now, they do nothing.
Not long after, MG Unit Trust found themselves in court. The details aren’t important. The end result was MG Unit Trust paying the Australian Competition and Consumer Commission (ACCC) $200,000 in legal fees.
Former managing director of the company, Gary Helou also had to chuck in an extra $50,000 for the bill.
With no operating business and $200,000 poorer, who’s going to buy this beautiful company? Whoever does could walk away with three-times their original investment!
Or at least, that’s what MG Unit Trust’s annual report implies…
MG Unit Trust is thinking about delisting and winding up the company. Seems reasonable right? They don’t have an operating business anymore.
Why try to jump into another industry management may or may not understand?
The process of winding up the business involves selling all assets. MG Unit Trust kind of did that already. All they have now is cash.
With this cash, MG Unit Trust would pay off any liabilities and then return what’s left to shareholders.
As at their most recent annual report, MG Unit Trust had $222 million in cash, 2.7 million in liabilities and 206.8 shares outstanding.
That works out to be $219 million in distributable cash to shareholders, or about $1.06 per share.
At time of writing this stock was trading at 30 cents a pop…
Small and ugly really is beautiful. It’s almost as good as Nathan’s bet after Waterloo.
Again, please remember this is not a recommendation. Anything could happen from the time this article was written that could change the facts of MG Unit Trust. Please do your own research whenever buying an investment.
Editor, Money Morning
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