‘Argument’: A discussion in which reasons are put forward.
Collins Dictionary
There is nothing so beneficial as an argument between persons of goodwill.
Old Jewish proverb, source unknown
‘Research is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment. Know when you are merely engaged in speculative activities.
Ecinya Investment rule #2/ 10, July 1997
The information you have is not the information you want. The information you want is not the information you need. The information you need is not the information you can obtain. The information you can obtain costs more than you want to pay.
"Against the Gods: The Remarkable Story of Risk" Peter L Bernstein, 1996
In preparing for battle I have always found that plans are useless, but planning is indispensable.
Dwight D Eisenhower, circa 1942
A subscriber comment/ question from Mr Bolton 3/11/2009:
‘Do you anticipate producing detailed info on companies along the lines ETrade used to or revealing a little about the logic behind your modelling?’
Editor’s initial response 4/11/2009:
‘Dear Brian
Having known you for some years now and enjoyed your capacity for meaningful dialogue and earnest debate your question requires a lengthy answer. You probably knew that, but need to maintain your reputation for mischievous behaviour. Next week’s insight issue will be devoted to our answer which should be of benefit to you, other readers, and ourselves.
But a quick response is still warranted. ‘Do you anticipate producing detailed info along the E*Trade lines’….. the answer is yes, but not until we move into our new city premises early next year. Never forget though that Huntley’s Your Money Weekly has good coy info and nearly every company has a web-site you can easily access. Our real value is our recommendations on market direction, and when, and at what price to buy stocks. Sell decisions are mainly up to you. We really just say every week the amount we are prepared to pay for a stock. We will initiate a sell reco only if we think the stock is well over-priced/ over valued.
BUT we will reveal a lot of the logic behind our modelling in our response to you next week, but not in so much detail that we give away our proprietary ‘secrets’. A bit like a Scotsman you have to imagine (or analyse) to a certain extent what may be under the kilt.’
The Bolton Response
ECINYA operates on multiple levels and these may be referred to in familiar terms of ‘top down’ and ‘bottom up’. However, it is essential that they meet in the middle as a formulated and structured basis for action. The market is so dynamic that our convictions, though firm, are changed by new information, challenged by new questions, and thwarted or rewarded by subsequent events -nearly all of which are outside our control and influence. All we are in charge of, really, is ourselves. The process of Think, Act, Review springs from our deliberations.
In the About Ecinya section we say: ‘ECINYA is an acronym for Exercise Caution In Your Affairs and is meant to remind both you, and us, that in order to get rich quickly you should endeavour to get rich slowly, as all endeavours require appropriate management of risk, and time. The stock-market from time to time appears to be an easy endeavour, but neither the economic cycle or market cycle is dead, and profits won on one adventure can disappear in the next. Folly can easily follow triumph. Those that tell you the market is easy, ‘either do not know, or do not know that they do not know’ (J K Galbraith).
Ultimately, success in the stock-market comes down to you, for no matter how much we know, the future is difficult to predict, both in relation to time and dimension. No one cares as much about your money as you do and Ecinya encourages you to develop sources that can assist you to take advantage of many sources of information. In looking at source material be mindful of confirmations and divergences of opinion. The aim of the Ecinya pages is to help you to build a set of thought processes to assist you to successfully invest, and occasionally trade. It is considered that occasional trading can enhance performance.
In defining the Ecinya approach, which is almost exclusively fundamental, our proximate matrix is 35% fundamental company, 25% the global economy, 20% the national economy, 13% technical analysis, and 7% quantitative analysis.’
OUR PRICING/ VALUATION MODELS
The Ecinya valuation models operate at both a macro and micro level. The macro involves a view on current and future interest rates, confidence, and the current stock-market. The macro inputs apply to our entire stock universe. At the micro level we have a rating matrix for operational and corporate credibility, excess growth potential, x-factors and gearing levels. The sum of the macro and micro gives us a ‘fair value price-earnings-ratio’ for each stock. We determine the EPS from Aegis Equities Research, consensus numbers, our view of company guidance, Huntleys, and our own formulated view on the company’s earnings profile. We DO NOT rate management, and instead assume that management is self-serving, engaged in self delusion, obfuscation, or outright lies. Over many years our editor has met just one trustworthy company that does not spin, or engage in market and self-deception. We read many annual reports, stock-market announcements etc. We have a wide range of confidants who have views on a wide range of industries. Our models give us a target price 6 months hence, 12 months hence and 18 months hence. Essentially, our models are really all about the macro and micro mathematics.
WATCH THE LANGUAGE
Language is important in corporate communications. So much of it is truly dreadful, and in such quantity we can only believe it is aimed at encouraging you not to read any of it. We are especially wary of euphemistic expressions like ‘robust’, ‘solid’, ‘challenging’, ‘values’, ‘governance’, ‘key performance indicators’, ‘benchmarks’ , ‘stakeholders’, etc. We are cognisant and a devotee of the ideas of Don Watson expressed in his book ‘Death Sentence: The Decay of Public Language.’ We do not like annual reports obviously written by public relations ‘experts’. Recently, we were greatly amused by the theme of the Transpacific annual report ‘365 days of progress’ following a year in which the company had to restructure, dilute shareholders, and experience a share price fall from about $10 to near $1. Also watching David Jones run full-page ads about how they were a better investment than Myer pre-float, without even mentioning their track record on EPS growth, was truly disappointing. How did responsible directors approve of such rubbish? We believe that David Jones should have received a warning from ASIC on the content of these ads. Also the Myer prospectus seemed to imply that Jenifer Hawkins was a good reason to buy shares in their over-priced float.
GLOBAL and LOCAL ECONOMICS
We read books, we subscribe to various web-sites and magazines. The Dismal Scientist is an expansive and expensive web-site that provides global data on a daily basis. We build macro-economic models from these sources, looking for trend and absolutes. Data is hardly ever meaningful until you have accumulated a lot of it and attempted to make the macro data fit with the market cycle and the micro stock views. The fit is never easy, but the data analysis causes you to determine confirmation or divergence. Timing is always the problem. In relation to the national economy we generally pay particular attention to ANZ Economics and Westpac Economics as we have timely access to their publications and have developed a view as to the reliability of their conclusions.
TECHNICAL ANALYSIS
We always look at a chart and have developed a set of principles around which we can analyse and interpret charts. Charts are described by Carl Swenlin as "a wind-sock, not a crystal ball". Our interpretive principles involve measures like moving averages, price channels, bollinger bands, trend lines, support and resistance levels, momentum etc. What we are looking for is confirmation, or divergence, from our calculated fundamentals. If our model says a stock should be going up and it is going down, it is generally clear that the market is either mistaken, or knows something we do not know. Can we find the question? Can we find the answer? The market is not always right; there are frequent divergences between price and value. We also consult with a gifted chartist whom we call ‘Compass’ and we seek his views on a regular and on-going basis. We read various chartist web-sites, mainly in relation to our global proxy, the S&P 500, as well as charts on commodities and currencies.
QUANTITATIVE ANALYSIS
One of our former employees developed a model built around the principles enunciated in publications by Victor Sperandeo. This was originally called the SM model, but our editor added some bells and whistles and it is now called the SMS model. It is updated daily and calculates a daily forecast on the All Ordinaries and S&P 500 indices. Inputs plus algorithms generate an answer. We describe the results as giving us confirmation, divergence, or extreme divergence. It is then up to the market to agree or disagree with the extrapolated results.
ICE
ICE is a simple acronym for interest rates, confidence, and earnings. Having a view on each is a handy guide to formulating our views.
STRATEGY
Our strategy is to be long the market and to switch between stocks and cash. We do not like the expression long-term, believing that the long-term is the result of the accumulated short-term (less than six months) and the medium-term (less than 18 months). The Ecinya Market Barometer is our short-term view reduced to a simple picture and is available on the web-site. We break our stocks into 3 broad categories: Investment Accumulate, which is about 60% of our total portfolio positions; Situations, which is about 30%; and Speculative, about 10%. In relation to Speculative this would include small and mid-cap oil stocks, gold stocks, commodity stocks other than majors, takeover targets, recoveries such as Elders, a bio-tech stock such as Bionomics, or Clean Seas Tuna. We are accumulating modest positions in a few lithium stocks at present that are very speculative, but there is an underlying story. We try to avoid ‘tips’, but are always interested in ideas and concepts.
Our Portfolio Menus under the Stock Recommendations tab segments our 135+ recommendations into Core Investments, Core Potential, Major Cyclicals and Situations, Resources, Secondary Cyclicals and Situations, Small Caps (under $250m), and Speculative.
TACTICS
Our tactical stance determines the shares/ cash mix. It is covered under the Strategy tab each week and comprises five tactical positions: (1) Going with the flow, with conviction, (2) Going with the flow without conviction, (3) Going against the flow with conviction, (4) Going against the flow without conviction, (5) Ambivalent, uncertain, relatively clueless.
IDEAS/ CONCEPTS
…..spring from discussion. Sir Alex Cairncross, talking about ‘ideas’ and John Maynard Keynes said: "I remember particularly a lecture in 1933 when he tried to convey how new ideas were born. Never did they arrive, he said, with the hard edges that later critics came to attribute to them when trying to define their terms. Ideas were apt to be like fluffy balls of wool with no fixed outline and the relationship between concepts when first perceived was likely to be equally wooly." Keynes mistrusted intellectual rigour of the Ricardian type as likely to get in the way of original thinking and saw that it was not uncommon to hit on a valid conclusion before finding a logical path to it.
OUR CONFIDANTS
An exchange of views between long-term colleagues is always useful. Our confidants are frequently mentioned in the Ecinya pages: DOG (the Duke of Glenorie) a macro-derivatives trader and expert on the Middle East, SOT (the Sage of Toukley) a long-term investor and short-term trader with specialist knowledge on commodities, the Delphic Oracle – a Greek fund manager of some fervour, Compass the chartist and market participant, Vector a quant analyst… There are others. We share insights, debate direction and quiz one another on fundamentals.
POLITICS
Much of modern economics centres around the role of government and the action, inaction, and misguided and occasionally successful outcomes of politicians. We like stability, quiet achievement, low taxes, sound fiscal policy, and sounder monetary policy from an independent central bank.
Paul Krugman in ‘The Great Unravelling’ 2003 said: "To talk about economics requires, more and more, that one write about politics."
Governments fight wars with taxpayers’ money, social inequality, and build commercial infrastructure, institutions, fly people to the moon and back, educate our children etc. All of this is understandable but there is a real problem when the private sector is squeezed by government excess, and the ‘invisible hand’ of private enterprise and innovation is stifled. Once government gets beyond about 22% of the economy we are generally troubled.
THE DESIDERATA
Exercise Caution IN Your Affairs (ECINYA) is an acronym derived from The Desiderata, which was written by Max Ehrmann in 1927. It is in our foundation document and has been for about the past 30 years. As is everything else that we can think of, it is available via Google.
No Doubt
…..Mr Bolton will be relatively satisfied with our response, but we are expecting more questions over time. We thank him most sincerely for his interest and the role he has already played in the evolution of the ECINYA pages. He has made us think; in turn, we hope we have made him think.