Aside from recent interest rate rises, other worrying numbers have emanated from the Reserve Bank.
For the first time in more than two years, total margin lending increased in the September quarter. And, in a more traditional sign of investor optimism, a number of companies have successfully floated on the ASX.
Even more tellingly, money is now finding its way into speculative “blue sky” stocks.
Take Acrux, a biotech company. It lost $7.7 million in 2009 (even more than the $5.0 million it lost in 2008) and has accumulated some $53.9 million in losses over the course of its life. Yet Acrux’s share price has soared from 43 cents on March 6 to more than $2.50 recently.
Or how about the unprofitable Berkley Resources, which hopes to develop some uranium mines in Spain? Berkley has $28.5 million in accumulated losses and less than $13 million in tangible assets. On March 6, Berkley’s sharemarket value was less than $45 million. Now it’s $133 million.
Such gains are a measure of the incredible turnaround in investors’ willingness to invest in faith-based stories. On Friday last week, millions were tipped into new raisings from risky tiddlers including Pulse Health, KUTh Energy and Castlemaine Goldfields. March’s fear has given way to November’s “fear of missing out”. The herd is becoming greedy again. Speculation is back.
Were you to follow the advice of the 19.5 per cent man, Fidelity fund manager Anthony Bolton, outlined in Monday’s column, it may pay to start becoming at least a little fearful. Perhaps your emotions may well be pulling you in the direction of running – Pamplona-style – with the bulls. But, as investors, our herd instincts can betray us.
Our team at The Intelligent Investor has a natural contrarian streak. The cyclical stocks we were picking in March have now given way to some of Australia’s highest quality businesses; those with bulletproof market positions and share prices that, comparatively speaking, have been left behind in this year’s rally.
Many cyclical and speculative stocks are currently priced for a full – if not fierce – economic recovery. These appear to have “momentum”, just as the defensive stocks did earlier this year. To remain one step ahead of the herd, it’s important to fight the urge to simply “do today what you should have done yesterday”, as Bolton might put it.
Yesterday, or any time since March, was the best time to be adding cyclical and speculative issues to your portfolio. Now you should be asking yourself whether that’s what investors like Bolton, if they were in your Australian shoes, would be doing right now.
Our team’s view is that the investment equation has swung back in favour of Australia’s steadier, large, high-quality businesses. And those are exactly the kind of opportunities we’ve been highlighting in recent weeks.
On Friday, I’ll bring you details of one such blue chip buy recommendation about which I’m quite excited.
This article contains general advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website.
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