By Greg Hoffman
I spent last week in hospital. A place where the inquisitive investor can't help but be intrigued and fascinated.
''You have diverticulitis'' (a nasty but hilarious-sounding ''inflammation of the bowel'') was what I heard from the doctor soon after my CT scan.
An attentive, painkiller-free observer would have noted something different (and as author Christopher Hitchens says, language is important). ''Your CT scans are consistent with a diagnosis of diverticulitis'' would have been closer to the actual words spoken.
It doesn't sound like a major difference, does it? Let alone anything to do with your share portfolio.
But there's a hidden message in the fortune cookie of careful diagnostic language; it's an uncertain world.
Medical knowledge - despite the incredible advances traced on my informative complimentary brochure The History of Surgery - has its limitations. Like any type of machinery, medical equipment is not necessarily 100% reliable and then the human element comes into play as well.
An internet search informs me that the ''CT scan is very accurate (98 per cent) in diagnosing diverticulitis''. But with perhaps millions of cases around the world each year, it doesn't take a Labor party numbers man to work out that there will be many cases of mis-diagnosis.
Reducing risks
Like the human body, your share portfolio faces a complex set of internal and external factors which could present unexpected surprises at any time. Experience, wisdom and careful planning can reduce your risks, but never eliminate them.
Sometimes life's surprises are pleasant. The awkward adolescent one day realises he or she has developed into an attractive adult. Or that small gold miner you speculated on a few months ago shoots through the roof.
At other times the news is bad. Sharp stabbing pains in your left side turn out to be diverticulitis, or the turnaround you backed at Elders starts looking shaky. And, speaking of uncertainty, what about Telstra?
The share price staged a relief rally after the company announced a ''non-binding Financial Heads of Agreement'' to participate in the rollout of the National Broadband Network. Investors piled more than a billion dollars onto Telstra's valuation on the strength of a one-page press release.
That strikes me as a remarkable vote of confidence in response to a relatively scant release about a ''non-binding'' agreement.
Up or down?
I was discussing this very topic with Tony Scenna of Selector Funds Management when he dropped in to visit me while I was convalescing (it's sad what we investors get up to behind closed doors).
Tony's view was that the market usually ''gets the direction right'' relating to such releases. I agreed with that, but put forward the view that it sometimes gets the magnitude wrong; as it did with Tabcorp in 2008 when the Victorian government announced wrenching changes to the structure of the gaming industry. Investors sent Tabcorp shares down, but not enough.
In the case of Telstra, though, I question whether they've even got the direction right. While I'm currently reviewing the situation, it seems to me that this deal provides short term ''certainty'' (by placing a lump of cash in the company's coffers) but introduces a number of long term uncertainties.
Perhaps the relief rally was staged by those focused on the undoubtedly-impressive 8.5% fully franked dividend yield.
But that involves the annual payment of some $3.5 billion to shareholders and those with an eye to the long-term must understand that significant steps will have to be taken in order to secure that income stream beyond the next few years.
Figuring this issue out is enough to give one a pain in the...
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website. For more Intelligent Investor articles click here.