A G&T’s the key

The great thing about the sharemarket at the end of the year is that you can look back and see everything that you should have done. Hindsight is wonderful.

Every year you realise there were a handful of things you needed to know, things that cut through all the financial theory that the industry relentlessly and urgently throws at us.

There are a few themes and events that, had we stopped for a moment a year ago and taken the time to consider while undisturbed by a pool with a gin and tonic, we just might have guessed. All you needed to know was that the market would spend the whole year focusing on safety and income, having a bet on US recovery and that there would be a resurrection in some cyclicals – sectors such as builders and retail. The net effect (and all these are total return numbers including dividends): the NAB and ANZ returned 41 per cent, the CBA 44 per cent; Westpac 52 per cent.

With the market up, the ”stock-market stocks” such as Macquarie returned 68 per cent, the ASX 34 per cent, and AMP 45 per cent. On the income theme some of the most unlikely boring stocks have flown, including Telstra with a total return of 35 per cent. On the safety theme, stocks such as CSL have returned 60 per cent, Ramsay Health Care 63 per cent and Primary Health Care 92 per cent.

Then there was a resurrection in the retailers: Harvey Norman returned 37 per cent, Myer 42 per cent, Woolworths 29 per cent; and cyclicals rallied on the US recovery theme. Brambles returned 38 per cent; James Hardie 46 per cent. Then there were individual resurrections such as Flight Centre, up 134 per cent.

On the flipside, all you had to know was to avoid almost anything to do with resources. Atlas Iron has lost you 60 per cent over the last year, Oz Minerals 48 per cent, Lynas 44 per cent, Whitehaven 40 per cent, UGL 32 per cent, Fortescue 24 per cent, WorleyParsons 13 per cent, Monadelphous 13 per cent and PanAust 9 per cent.

Yes there were a few surprises,including Cochlear losing 11 per cent and Bluescope Steel returning 185 per cent, and if you missed those you could be forgiven. But when you look at the list you realise that at the end of any investment period you can produce a list of the best- and worst-performing stocks and the reality is that the only thing you ever really need to know is what is on that list and why, and as we look forward to 2013-14 all we need to do is guess what’s going to be on it in 12 months’ time.

How do we do that? Simple. Over any period the stocks that move are the stocks that do things that weren’t expected. Share prices move on new information; on surprises rather than on expectations being hit and forecasts being fulfilled. There is no money to be made out of consensus forecasts. What moves share prices is changes in consensus forecasts and changes in expectations.

In which case, in order to make money next year forget what everyone expects and imagine instead what’s going to happen that no one expects. That’s where the money is. So your job running into the end of July is not to pore over earnings and dividend forecasts and work out what has a low price-earnings ratio and high yield.

Your job is to get a gin and tonic, sit by the pool, shut your eyes and imagine what’s going to happen next year that’s unexpected. That’s where the money is.

Marcus Padley is the author of stock market newsletter Marcus Today. Click here for a free trial.

The original release of this article first appeared on the website of Hangzhou Night Net.

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