Ask Colin

Shares magazine gave your predictions a bit of a drubbing in the February 2005 edition. How do the large losses in some predictions fit with your investment plan?

It is unfortunate that several of the stocks that I predicted to perform in 2004 did poorly over the 12-month period. However, predicting the stocks that should do well in the next year is not something I claim to be able to do. I am actually reluctant to write for these cover stories and I only do so because the editor asks me to do so. My first preference would be to decline and only write educational pieces as usual, but since prediction is an endlessly fascinating sport for the punters, I submit my best guesses.

My investment plan is based on a clear assumption that it is impossible to predict the stock market. I do not buy a share with the intention of holding it for a specific period of 12 months, as is assumed in the Shares article. Instead, my investment approach is based on finding uptrending stocks which seem to have a reasonable margin of safety and I buy them. If the trend persists, I hold and build a full position. If and when the trend fails, I get out. I actually try consciously not to predict the market, because it sets me up psychologically to defend my prediction through unconscious selective reading of information and interpretation of the evidence on the chart. I would prefer to be without that pressure and to simply buy and sell as the market prompts me to do so.

I actually owned each of the shares I covered in the 2004 article at the time that it was printed. However, several hit my sell stop afterwards and I sold them and reinvested the funds in other shares. The sales were shown on my website on the day that I made them. The losses were only a small part of my total portfolio as is anticipated in my investment plan. These losses are a normal consequence of my investment plan. My portfolio exceeded my target return (12.5%) in 2004 by a wide margin as is set out below.

The shares that I selected for the 2004 predictions and the way they performed over the year were:

Company ASX Code Price 16/1/04 Price 31/12/04 Change%

Ausdrill ASL 0.85 0.51 -40.0

HGL HGL 1.90 2.02 +6.3

HomeLeisure HLD 0.63 0.355 -43.7

Integrated Gr IWF 1.69 2.55 +50.9

Oroton Group ORL 2.87 2.40 -16.4

Here is a brief summary of how these shares fared in my portfolio, which is a true reflection of my investment plan:

Company ASX Code Average Buy Price Average Sell Price Gain/Loss (% of Total Portfolio)

Ausdrill ASL 0.84 0.61 -1.0

HGL HGL 1.94 1.84 -0.1

HomeLeisure HLD 0.63 0.52 -0.7

Integrated Gr IWF 1.08 1.51 +0.9

Integrated Gr IWF 1.83 1.69 -0.2

Oroton Group ORL 2.97 2.60 -0.2

Note I bought Integrated Group on two separate occasions. I made a good profit on one lot, but a small loss on the other.

Notice that, in line with my investment plan, the maximum loss in this group was 1% of my total portfolio.

My investment plan envisages that I will make losses like this. However, I should also make profits on other investments. The aim is for the net total to be strongly positive. To put these specific shares in perspective, with respect to my investment plan, it is therefore necessary to look at the performance of the overall portfolio. I measure my performance for the Australian July-June financial year, rather than the calendar year and it is a big job to go back and recalculate it for a calendar year. Calendar 2004

overlaps two financial years, one of which is incomplete as I write. The performance of my total portfolio was:

2003/04 +17.48

2004/5 to 19.1.05 +26.77

So the investment plan is working pretty well. The problem was that I chose some bad predictions to make for Shares magazine. This highlights my strong conviction that it is impossible to predict the stock markets and that it is counter productive to do so. Consistent with this, if I ever try to take credit for making good predictions in Shares magazine, please remind me that predictions that came out well were not due to skill, but to sheer luck.

The investment plan that underlies the performance shown above is set out in my book, which is being published progressively on my subscription website. It is almost complete on the website as of early 2005 and should be available in print by mid 2005.