Q: What is your record?
This is obviously a moving target. However, to give you a snapshot of our model portfolio's performance as it stood on 2 May 2012: Of the 52 shares in the portfolio, 16 shares were showing a gain of over 30%. Of these, 7 were up more that 50%, One of those had more than doubled. Many of the shares that have been sold over the past decade have also doubled, trebled, quadrupled or more in value.
Q: Why do you need to have explanatory notes to read a newsletter?
Trendwatch is not your average 'tip sheet' (a term we hate). Not only is it packed with information that you won't find anywhere else; it's also the foundation of a coherent investment strategy.
TrendWatch isn't difficult to understand but, like anything new, it takes a bit of time to get up to speed. That's why, once you've become a full subscriber, we send you a free 'Guide' on how to get the most out of TrendWatch.
Q: Is it possible to have TrendWatch delivered by e-mail?
Yes. Just phone, e-mail or write to us to request it, and let us know your e-mail address. We’ll e-mail TrendWatch as a .pdf file attachment after the close of business on Wednesday evening. To read it, you’ll need Adobe Acrobat Reader version 4 or 5 installed on your system (downloadable free from www.adobe.com/acrobat). If you’d then like to print it, you can.
If you wish, we’ll send you a test transmission of the previous issue before you commit yourself. If you’d like to switch temporarily to e-mail (perhaps because you’re going to be away from home) and then to switch back to snail-mail, that’s no problem to us.
There’s no additional charge for this service.
Q: I understand you have a weekly update service. What’s the story on that?
Every weekend except the weekend immediately before the publication of TrendWatch, we e-mail our Weekly Updates. The updates contains the uptrend and downtrend lists, complete with asterisks and trend durations. We also give you the latest valuation of the TrendWatch portfolio, complete with updated stop-loss-limits. And we also give you a summary of the latest state of the global markets. Our Weekly Updates are available only by e-mail, and are included in your annual subscription.
So to be clear, every four weeks, you receive the main 16-page TrendWatch plus three weekly updates.
Q: Presumably your picks are based on technical analysis. What technical analysis tools do you use?
There’s no quick way to answer this question, so bear with us. First, we don’t regard ourselves as technical analysts. We employ one particular subset of the technical analysts’ toolkit, namely trend analysis, which primarily involves the use of moving averages.
For those of you just starting out on the great investment journey, let me just define technical analysis. It’s roughly the opposite of fundamental analysis.
A fundamental analyst spends hours poring over balance sheets, profit and loss accounts and company reports, trying to decide whether a company’s share price is fundamentally under- or over-valued relative to other similar companies.
Technical analysts (also known as chartists — the difference between the two terms is about the same as that between a naturist and a nudist) spend their time poring over price charts. Unlike fundamentalists, chartists would probably be quite comfortable studying a price chart without even knowing whose price chart it was. They take the view that most or all that you need to know about the future price behaviour of the share is contained in a chart of past prices. Technical analysts look for chart patterns like ‘support and resistance levels’, ‘pennants’, ‘head and shoulders’, ‘wedges’ and so on. We believe that these techniques work quite well for very short-term trading (e.g. ’day trading’ of shares, currencies, derivatives, commodities, etc). The reason they work is that short-term traders frequently use them; therefore the techniques become self-fulfilling.
Conventional medium-term investors tend not to react to technical signals, so it’s an open question how effective such analysis is for them. Alistair Blair’s excellent and even-handed critique 'Guide to Charting' may help you make up your mind.
As well as looking for chart patterns, there are dozens of other tools in the technical analysts’ toolkit – betas, Coppock, MACD, momentum indicators, relative strength indicators, stochastics, channel analysis, Andrew’s Pitchfork (honestly!)… the list is endless. It would take an army of people a lifetime to analyse which particular combinations of tools worked best in which circumstances.
We’ve therefore adopted the renowned K.I.S.S. approach: Keep It Simple, Stupid! That way, we have comparability across all shares at all times, we have a system that is relatively easy to understand, and we have a methodology that works well most of the time.
If you’ve developed your own technical analysis methodology, there’s nothing to stop you applying your methodology to our short-list of shares.
Q: So how exactly do you go about selecting your share recommendations?
Our starting-point is the new uptrends – those asterisked entries in our uptrend lists.
We can immediately eliminate many of these companies on the grounds that the uptrend is very weak, or that the share is just bobbing gently up and down and going nowhere in particular. Or maybe there’s no discernable ‘story’ behind the company that would lead us to believe that its fortunes had suddenly taken a turn for the better.
That leaves us with the ‘Hit!’ list on page 8 of each TrendWatch issue.
We next analyse these more deeply and reject some more. The smaller our short-list gets, the more intense our research. We factor in any information we can get our hands on that could be relevant to the future fortunes of the company. We examine the prospects for the industry in which the company operates and the company’s own fundamentals. We look at the company’s interim and annual report and accounts, its financial ratios (net asset values, forward p/e ratios, PEGs and so on) its news-flow, any management changes, directors’ buying and selling, we try to get hold of brokers’ research, we look at other press comment to see if others have come up with an angle that we might otherwise have missed… whatever information we can get our hands on, if we think it has relevance to the company’s future share price performance, we’ll factor it into our analysis.
There are times when we’re simply not satisfied with the quality of the asterisked shares. In that case, we’ll extend our search to other shares in the uptrend list that have been in uptrend for longer. We even tell you which shares we’ve been paying particular attention to – they’re the ones marked in blue in the list.
We may finish up with, perhaps, ten shares that we’d be happy to recommend. Robert Cullum, the editor of TrendWatch, has the responsibility of making the final selection and to give you the reasons why. The buck stops with him!
Q: Would you recommend avoiding share purchases during a major market downturn?
No. In a bear market, shares that you bought during the preceding bull market will tend to get stopped out at a good profit, leaving you with plenty of capital to invest as the market falls. As you reinvest your capital fortnight by fortnight or month by month during a bear market, prices of the shares you’re buying will tend to get cheaper and cheaper. So, by continuing to buy, you’ll get the benefits of pound-cost averaging. That means that every £1,000 you invest will buy more shares in the company than previously, so the average cost per share will be lower.
The big downside (as it were) in this strategy is that it’s much harder to ride uptrends in a bear market. There's a high risk that the uptrend of some of the shares you buy in a bear market will break down rather quickly and you could finish up getting stopped out at a loss. In our view, that’s a risk worth taking. If you try to guess when the market is going to bottom out, you’ll almost certainly get it wrong. Even worse, a market bottom is very often marked by a big bounce and a rapid recovery. We saw a vivid illustration of that just a couple of months after the terrorist attacks on New York and Washington on 11 September 2001. By not being in the market, you’ll miss out on the bounce and you’ll have to pay more to get back into the market.
Above all, remember this: to make a profit in anything, you should be buying when prices are low and selling when prices are high. Most investors do exactly the opposite: they’re sucked into the market by all the hype when prices are high and are scared stiff about buying when the market is low. Then they wonder why they find it so hard to make a profit.
Q: I’m a newcomer to TrendWatch and also a newcomer to investing. I can see the logic of continuing to buy as the market falls. But I keep getting stopped out of the shares I buy at a loss as the market falls. How can I possibly make money with TrendWatch?
People new to investment have a real problem in a falling market. Let’s reiterate the way the TrendWatch strategy is supposed to work. You make huge profits in a bull market. When the market turns down, you continue buying. If the market continues to fall, there’s a bigger risk that some of these new investments will be stopped out at a loss – but these losses will be more than offset by older holdings that get stopped out at a profit.
But there’s the rub: if you haven’t got older holdings, you won’t have the profits to offset the losses.
There’s no easy answer to this. New investors have three choices:
• Stay out of the market until it you’re satisfied it’s back in uptrend. The disadvantage of this is that you’ll miss the big bounce that usually occurs at the bottom, so you’ll pay a premium to get back into the market.
• Ignore the stop-loss limits of the loss-making shares in the hope that the shares will recover when the market recovers. In many cases, they will – but the risk is that the share won’t rise to its previous heights for months, years or occasionally ever (look again at Railtrack, BT, Marconi, Vodafone, tech shares, dot-coms…)
• Accept any losses you may make if the market falls as the price you pay for positioning yourself ready for the bounce.
Note that this problem only applies to new investors in a market experiencing a fairly serious downturn. In a market that’s drifting down in a fairly orderly manner, stop-loss breaches are relatively few, mainly because we’ve picked quality shares that are usually quite resilient. As for a bull market, we sometimes go for months without any stop-loss breaches, so the problem is most unlikely to arise.
Q: I can’t understand how you set your stop-loss limits. Sometimes they even seem to go down as well as up.
It’s true that we sometimes lower the limit as well as raising it. This often startles people, because it seems to be a sort of convention that stop-loss limits must act like a ratchet – they must only go up, never down. But in fact, there is no law of nature that says that limits can only go up. Our overriding intention is to keep you in the uptrend for as long us possible.
Let me give you an example of the circumstances in which we would reduce the limit.
Imagine a share that has just risen, say, 30% but has for some time been bumbling along sideways. Consequently, the uptrend may now have a very low momentum and is thus threatening to break down.
The conventional method of stop-loss setting would dictate that the limit be set about 20% below the current price. But we would probably have it set only a few percentage points below the current price, ready to ‘catch’ it if the price collapses. But suppose the share then resumes its rise. We would take this as a sign that the danger was over for the time being. So, to minimise the chance of being thrown out of the share due to its normal price volatility, we would actually ease the limit back.
Q: I’ve noticed that shares you recommend sometimes appear in the downtrend listings. I thought the idea was to sell if the share goes into downtrend.
The stop-loss limit overrides the trend. We have to take account of increased volatility in today’s markets. Shares can quickly swing from uptrend to downtrend, then back to uptrend again. We have to give our shares enough breathing space to accommodate this volatility. We carefully set the stop-loss limits so as to reduce the chances of you being thrown out of the share by normal volatility. At times, this will also allow the share to fall into what we hope will turn out to be a gentle and temporary downtrend.
Q: Do dealers mark up the price of TrendWatch recommendations, making it more expensive for subscribers to buy?
There’s no doubt that dealers know what shares TrendWatch is recommending. But you have to keep the problem in perspective.
Firstly, there are far more influential publications and organisations than TrendWatch. A buy or sell tip made by mass-market publications such as the FT or Investors Chronicle, or by a stockbroker, will have a far greater influence than TrendWatch – though I expect TrendWatch to become increasingly influential with time!
Second, if you suddenly see the latest TrendWatch recommendation rocket in value, how do you know how much of this is due to TrendWatch, how much it’s due to something someone else said about the company, how much is due to buying orders which would have gone through anyway and how much is simply due to a good day on the market?
Third, bear in mind that TrendWatch only ever recommends shares that are already in uptrend. Knowing, as we do, the tendency of trends to persist (especially uptrends in a bull market), there’s a relatively high probability that the price tomorrow will be higher than the price today.
If you’re concerned about prices moving against you, or a widening of the bid-offer spread, try delaying your purchase for a few days. By then, the price may have settled back.
But note that, if you adopt that practice, there’s also the risk that that the price won’t fall back but will continue to power ahead. In that case, you’ll have missed the boat.
In investment, there are never any easy answers.
Q: Why is it that, when you first recommend a share, I can’t find it in the valuation on page 3 of TrendWatch?
Because, unlike most other investment newsletters, we don’t regard our buying price as the price on our publication date. That would be unfair and dishonest because you wouldn’t yet have had time to act on the recommendation. And if dealers do increase the share price, that would make a publication-date price even more unfair.
The earliest practicable day for you to act is on the day most of you receive TrendWatch (on the Thursday of publication week). That’s why we set the buy price as at the close of business on that Thursday. That’s the buy price and buy date that appears in the following issue’s page 3 valuation.
Q: Do you or the staff of TrendWatch buy the shares you recommend?
Certainly! We only recommend shares in which we have the highest confidence, so why would we not buy them?
BUT… what we would never do is buy shares, then immediately issue a recommendation for them in TrendWatch in an attempt to ramp up the price of our holdings. If we did that, our regulator, the Financial Services Authority, would be down on us like the proverbial ton of bricks!
Q: Do you talk to the companies before recommending them?
No, for three reasons. First, TrendWatch is a time-sensitive publication. We want to get information out to you as quickly as possible. Many of our recommendations are based on trends that have just turned. If we spent time talking to, perhaps, 30 company directors before making our picks, we’d probably have missed the boat.
Second, a company will only tell us what it wants us to hear. It will naturally accentuate the positive and de-emphasise the negative (a bit like investment newsletter publishers!).
Third, it’s unlikely that we would learn anything that was not already in the public domain. Directors are well aware that, if they gave us price-sensitive information that was not already available to the market, they would be committing a criminal offence.
Q: When discussing your share recommendations, you often mention PEGs. What’s that all about?
The PEG (Price/earnings-growth ratio) is a development of the price/earnings (p/e) ratio. Both ratios are ways of determining whether a company is undervalued or overvalued relative to its peers.
For the benefit of those of you that are new to investment, let’s start at the beginning, with p/e ratios.
The first step in calculating a p/e ratio is to calculate earnings per share (eps):
eps = post-tax profits* ÷ no. of shares in issue
Now we can calculate the p/e. The formula is:
p/e = current share price ÷ eps
In plain English, the p/e tells you how many years-worth of current earnings it would take to arrive at a company’s current market value.
If the p/e ratio is calculated on the basis of the latest published earnings, it is said to be historic. Historic p/e ratios are next to useless because the stock market is not much interested in the past, and is far more concerned with trying to anticipate the future. If the p/e calculation is based on future profits as forecast by brokers’ analysts (however imperfect such forecasts may be), the p/e ratio is said to be the prospective or forward p/e. Paradoxically, forward p/es are both much more useful and much more prone to inaccuracy than historic p/es.
Other things being equal (which, in investment, they usually aren’t), a low p/e suggests that the share is cheap. You then have to decide whether the share is cheap because it’s an overlooked gem, or whether it’s cheap because it’s a malodorous pile of manure that nobody wants in their portfolio.
There’s one particular shortcoming with p/e ratios (even prospective ones). They tell you nothing about the rate of growth of a company. This is a serious limitation. If a company is growing very fast, you’d probably be happy to buy it even if it had a high forward p/e, secure in the knowledge that a rapidly rising eps would soon bring the p/e ratio back down to a reasonable value. If it isn’t growing fast, you’d probably steer clear and try to find a ‘cheaper’ share. But how do you know whether the forward p/e of a particular share is appropriate to the company’s projected rate of growth, or has been driven up to absurd levels by some sort of investor feeding-frenzy?
It was to address this limitation that investment guru Jim Slater popularised the price-earnings growth factor (PEG). We calculate the PEG as follows:
PEG = p/e ÷ forecast eps growth rate over next 12 months
In general, the lower the PEG the better. A PEG of 1 implies that the p/e is about in line with its earnings growth rate. A PEG of well below 1 (0.6 or lower, according to Jim Slater) is attractive, implying that you’re buying a high rate of eps growth relatively cheaply.
PEGs are not the be-all-and-end-all, but we certainly regard them as a big comfort factor.
Q: What sort of broker do you suggest I use? Can you recommend one?
You don’t want a traditional broker that gives advice. You’re paying us for better advice than you’ll ever get from a broker.
Ideally, you want an execution-only broker. If you’re online, online brokers are best. They’re usually cheaper and they often offer a lot of useful facilities such as charting, and useful information such as broker research. The investment magazines frequently do surveys of brokers, both online and offline.
Q: What’s your opinion on where the market is headed over the next few weeks and months?
We’ve left this question until last because it’s probably the one we get asked most often. The answer we give is always the same: I haven’t the foggiest idea – and nor has anyone else.
Thousands of analysts and journalists make a good living satisfying people’s insatiable desire to read the future. Unfortunately, almost all of them are useless. The forecasting record of economists and analysts, even for such clearly defined targets as future interest rates or inflation rates, is very poor. The success rate for forecasting stockmarkets is abysmal. Most scribes couldn’t even see that we were in the middle of a technology bubble until it burst over their heads. And hands up all the ‘experts’ that correctly forecast 11 September 2001.
Occasionally, people do get things right. The trouble is they’re only right by chance. It’s no use using them as your guru because their next pronouncement will almost certainly be proved wrong.
Do you really think that, if analysts and journalists could predict the future, they’d be writing about it in newspapers or financial journals? Of course not! They’d be trading by satellite from their luxury Bahamas mansions, and doing it very discreetly so as not to frighten the taxman.
We may not possess crystal balls, but we do have one valuable tool that takes us as near as we’ll ever get to the crystal ball. That tool is the trend. Trends represent the consensus views of thousands of investors worldwide. If the trend is up, investors are optimistic. If the trend is down, they’re pessimistic. And because we know that trends tend to persist into the future, they represent the only window into the future that we have.