23 February 2000

Our analysis^* of 109 share selections made once a month since September 1990 by the ShareFinder Royals module, and ShareFinder 2 before it, for the Prospects investment newsletter, highlighted such consistently high growth rates that it is no surprise that numerous readers asked for additional details.

One of the most telling observations of all was that our insistence that investors should NOT buy in times when overall market conditions were unfavourable, has on the face of it not been justified during the past decade. To derive the above figures we assumed that the top Royal selection was bought each month, or in the absence of a Royal selection, the topmost Blue Chip selection. The only time we did not buy was when ShareFinder's assessment of the overall market outlook was "A sell signal is imminent", "Prepare to Sell", "Sell" or "Sell, Sell, Sell".

Had we ignored the overall market outlook recommendation entirely, the average share price gain would have been 0.11 percent better. Bearing in mind that the period of analysis included a number of quite extreme overall market declines, including the April 1988 decline which was one of the worst in the past 50 years, the inference is that the quality of the Royals and Blue Chip shares is such that they are virtually immune to negative phases of the market as a whole.

I would, however, caution programme users against taking this view. During the period that the ShareFinder programmes have been operational all the sharp downward corrections that have occurred have always been followed by fairly swift recoveries. In effect then, these statistics have simply masked a situation, merely extending the growth periods of shares during market downcycles. Actually the Royals tend to fall as sharply as the rest of the market and high-bias Royals tend to outstrip the rest as they plunge.

Bias

For example, during the April to September 1998 market plunge, which clipped 47.22 percent off the JSE Industrial Index, the average decline of the top five Royals at that time (see table) was 49.96%. Note that only Gencor had a bias value of less than 1.

For those who do not understand the concept of market bias, a bias value of 1 represents a share whose market price performance is precisely the same as its growth of corporate earnings. So, predictably, the three shares with the highest bias, Comparex, Didata and FirstRand fell the furthest. In contrast Gencor, with a bias of just 0.7, and Bidvest fell the least. The low-bias shares were the quickest to recover, but on average most took as long as the JSE itself to recover.

Now it might well be that the nature of markets has changed fundamentally and that swift recoveries will always be the norm in future. However, it has not always been the case in the past and I would not like to simply assume that future markets will behave the same way. If you had opted to ignore the overall strategy and lost half of your capital and then had to wait 11 years for prices to recover as did investors back in 1969, you would certainly have cause to regret that you ignored the overall signals.

Strategies

Another very important observation is that a majority of share price peaks that we identified as short-term selling points would NOT have triggered the ShareFinder Royals module into issuing a "Sell" signal. The reason is that in the great majority of cases the shares were still "Underpriced" relative to their peers at the time that they experienced a short-term price reversal... and all went on to even greater heights. Note, however, when held through a series of long-term price cycles there was an inevitable slow down in overall share price growth. The average annualised gain in this latter case was 77.58 percent derived from an average gain of 143.79 percent in an average period of 83.8 weeks.

Noting that the effect of holding such shares for long periods is to suffer a significant reduction in overall capital growth, three strategies suggest themselves for investors who would like to maximise their share price gains:

1. The least onerous approach would be to employ the ShareFinder Royals component to make your share selections and subsequently rely upon the ShareFinder Trader to identify short-term selling points.

2. An alternative approach would be at the time of purchase to set selling prices by the simple process of calculating a realistic percentage increase and waiting for it to happen. Noting that the average gain was 39.44% in 21 weeks one would, by this method, simply pencil in a conservative 30 to 35% and wait for the share to get there.

3. The wisest method of all would be to combine both approaches by buying low-bias high-index shares from the Royals list, calculate a possible price target and daily examine the messages generated by the Trader programme in respect of each share in your portfolio.