Just before Christmas we sent out a brief email to some contacts asking for their thoughts on 2009. The response was woeful. The only comment we got back was from Rob Mulcahy, senior foreign exchange dealer at CMC Markets in Sydney. Well, based on today’s Australian Financial Review and articles from The Australian over the past week, we are obviously mixing with the wrong crowd. There are predictions left, right and centre. Is there anything to be learned from these predictions? Will they make us any money? Or should we just take the advice of our old pal Chris Tate who thinks predictions are about as useful as “picking Tattslotto numbers.” According to The Australian newspaper, its best stock picker for 2008 was Geoff Wilson from Wilson Asset Management. He returned a stunning 42% drop in the value of his recommendations for 2008! Oops!! Of course, we are sure Wilson will claim that portfolios and asset allocation was amended throughout the year. Over at the AFR, eight of their expert economists are bullish on the market for this year. That makes us worried. To be fair, we have also gone on the record to say that we wouldn’t be surprised to see the S&P/ASX200 back up around the 5000 point level by the end of this year. But we wouldn’t bet our house on it.
But let’s be honest. Predictions aside, in the world of blue-chip investing, there really isn’t any excuse to return a 42% drop in client funds - regardless of market conditions. An actively managed portfolio should have been drawing client funds out of the share market from at least late 2007. Naturally, fund managers will claim that it is ‘time in the market’ not ‘timing the market.’ Tell that to investors who have lost half of their wealth in the last twelve months. But the one thing we notice in today’s AFR is the absence of one section of the market. There is not a single mention of the small cap sector - not that we’ve noticed anyway. This is amazing. Considering that since the market bottomed out on the 20th November, our small cap portfolio in the Australian Small Cap Investigator has brought in a healthy 20.88% return. Of the 18 stocks in the portfolio, over half of them have outperformed the broader blue-chip index. The S&P/ASX200 by comparison has only returned 10.76% since the November low. Will this out-performance continue into 2009? We think so. Here’s why… The smart money in the market will be doing two things. It will be looking for value and income. “Doesn’t it do that all the time?” you may ask. It tries to. Remember, investors were trying to do that throughout 2008. The only problem with that is the market kept going down. So, the smart money will look at the blue chips and say, “well, I know you’ve taken a beating, but even if you do cut your dividend I’m happy to buy because the Australian economy is likely to recover in 2009/2010.” As for value, well, you can bundle that up with growth at the moment. And the best place to look is the small cap sector. That’s why we are seeing such a strong bounceback in our portfolio. Let’s put it this way, assuming I have picked my income generating shares for my portfolio, I now want to balance that with some growth potential. But only for a small part of my portfolio. So how do I do that? Well, it’s been a dirty word for the last twelve months, but the word is ‘leverage.’ But let me clarify that. I’m not talking about margin lending or securities lending or options, futures or CFD trading - although if that’s your bag, go for it. What I’m talking about is ’synthetic leverage.’ By that I mean taking positions in the market that will give you a magnified return. Yet unlike some other forms of leverage, using this strategy, your downside is known. The most you can lose is the amount invested if the share price goes to zero. The best place to get this ’synthetic leverage’ is in the small cap market. It isn’t for everyone, and it certainly isn’t a sector that you would tie up a majority of your portfolio. But that’s the beauty of small cap investing, you don’t need to bet your house on it. You can get away with just putting in 5% or 10% of your portfolio and potentially see that grow by 50%, 100% or 200%. We’ve shown that’s possible with a 20% return in two months! And if things don’t work out? Then the downside is only the amount you’ve invested. If you do that, and actively manage your blue chip investments, chances are you’ll pull off a better return than the fund managers staring into their cracked crystal balls in today’s AFR. Cheers. Kris. This article is contributed by Money Morning. Click on the link below for more information and to subscribe to their free newsletter. http://www.moneymorning.com.au/20090105/where-to-invest-in-2009.html#more-1143
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