Ask Colin

I did very well with gold stocks in 2003. To what extent was this due to the strength of that sector versus my following a value approach to stock selection?

You describe using my value model to select these stocks. That so many of them came out of accumulation zones around the same time suggests that the whole sector may have been strong rather than just one company recovering from a setback. Indeed when we look at the gold price, we can see that the appreciation of gold stocks in general in 2003 was being driven by expectations of increasing profits as a result of the rising price of the output. Thus, my take on this is that you identified a good sector. However, I also think that it was the value model that took you to it in the first place, since you do not describe using a top-down sector analysis to find these stocks.

The value model approach that I use is the exact opposite of the top-down method. I use a stock-picking approach, where I am looking for good stocks no matter what sector they are in. With the top-down approach, an analyst would look to find strong sectors firstly. Then having found a strong sector, the analyst would identify the strong stocks or the value stocks in that sector and focus trading or investment in those stocks.

The problem with the top-down approach in Australia is that a few years ago the ASX sold out to S&P. We used to have smaller tighter sector indices under ASX control. However, when the ASX sold out to S&P the old ASX sector indexes were replaced with the US GICS sectors, except for one concession on Property Trusts. Thus we have a sector split that is much broader than it used to be and the sector descriptions are based on the US market structure rather than ours. The two markets are quite different - especially in the resources area. In addition, in the US market it is possible to analyse sectors at four levels of specificity. In Australia, S&P will not release the two most specific levels at a cost affordable by private investors and their data suppliers, leaving us with only the two broad levels that make a nonsense of top down analysis in some sectors. Materials is the worst sector, but some of the others are far less useful than the old ASX indices. I guess it is the price we pay for the undoubtedly very lucrative deal that S&P must have offered the ASX to sell us down the river. By the way, few other stock markets outside of the US have sold out to S&P. Sound familiar to foreign policy in recent times?