Private Investor Advantage

8 November 2021 By PDSNET

Finding winning shares is not just about looking for quality. It is about finding quality when it is cheap – which usually means finding it when it has fallen heavily and is out of favour with institutional fund managers. We advise you to look for the “mountain behind you” in the chart.

As a private investor you need to be aware that about 90% of the trades on the JSE are done by the big institutions (unit trusts, large portfolio managers, pension funds and insurance companies) while only about 10% are done by investors such as yourself. For this reason, it is very important to have some understanding of how the fund managers, who manage the massive portfolios of these institutions, make their decisions.

The first lesson to learn is that fund managers tend to move like a herd of sheep. When one crosses the bridge, they all cross the bridge. Being a maverick and acting independently can get you fired as a fund manager. If you make a mistake – buy the wrong share or buy it at the wrong time - then you are far better off if other fund managers working for other big institutions made the same mistake at the same time – because then you are in good company. You cannot really be fired for making the same mistake as the fund managers at Old Mutual or Sanlam.

So, fund managers tend to stick together. They will tend to cross that bridge, even if they think it is wrong to do so, because being left on this side of the bridge, when everyone else is on that side, is how you can lose your job as a fund manager.

As a private investor, your livelihood and your job do not depend on the decisions that you make in the share market. You are simply trying to do the best that you can with your life savings.

The second important point to understand about the fund managers at big institutions is that they are almost all fundamentalists. In other words, they spend hours poring over company financials, but they pay little or no attention to the charts. This causes them to miss critical turning points in share prices. There are dozens of examples of this in JSE history, but perhaps the clearest recent example is that of Steinhoff where the fund managers completely ignored a blatant “descending triple top” formation which occurred in 2016 (in March, May and August) well before the collapse of this iconic share. For a more detailed explanation of this read our article  - Learning from Steinhoff. It has been estimated that the fund managers collectively lost at least R200bn as a direct result of not seeing the importance of that triple top.

In another article, Two Interesting Shares on 6th September 2020, we drew your attention to two companies that seemed to us to have been over-looked by the fund managers and which both had strong potential. Those shares were Massmart and Blue Tel. At that time, in September last year, both of them had fallen from glory and were wallowing in the valley of desperation. The fund managers as a group didn’t like them and had sold them down to very low levels. Consider their charts:

Massmart

 

Massmart Holdings (MSM): January 2018 - November 2021. Chart by ShareFriend Pro.

 

Blue Tel

Blue Label Telecoms (BLU): August 2016 - November 2021. Chart by ShareFriend Pro.

 

You can see the similarities in these charts. Both shares had fallen heavily from great heights indicating that they were out of favour with fund managers – which made them relatively cheap in our opinion. At that time, they had a “mountain behind them” as we like to say. Also, at the time we saw both of them as offering an opportunity for the private investor to profit.

In the case of Massmart, the newly appointed CEO, Mitchell Slape, had bought 300 000 Massmart shares at R29 for himself personally, with his own money. This has surely got to be a sign of great confidence. In the case of Blue Tel the share had performed an almost perfect “reverse head-and-shoulders” formation – which is a strong positive indication of a powerful new upward trend.

With the advantage of hindsight we can now see that Blue Tel has risen 69% and Massmart has risen 134% in the 14 months since we wrote that article. So, our message to you is to study the collective behaviour of fund managers, because when you make money in the share market, you will almost always be making it at their expense.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly

CA Sales Revisited

Retailing in Africa is difficult with many of our leading retailers having attempted to open stores in countries to the North of us without notable success. These countries are often unstable and volatile politically. Getting adequate stock to branches has proved problematic and expensive.

It is not surprising therefore that a company has been

Bluetel

Bluetel (BLU) is a company involved in pinless top-ups, prepaid electricity, ticketing and universal vouchers. As such it is a company with substantial repeat business from existing customers. This type of business model is attractive to investors because it implies minimal working capital and strong cash flows.

Bluetel’s purchase

The Debtors' Book

A BIT OF HISTORY

Many years ago, in 1982 when I started this business (which became “PDSnet”), I ran advertisements in both the Rand Daily Mail (RDM) and in the Star – which were the two most widely read newspapers in Johannesburg at the time. At that time, we were a very small business and had no credit rating at all. Despite this the RDM immediately