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Markets change but the fundamental rules don’t

FOR many investors, the past financial year will be remembered for the plunging share price of ‘blue chip’ stocks such as Telstra, Coles Myer and Lend Lease.

The gloomy news invariably attracts the headlines, but investors should not forget there were just as many outstanding performers last year.

They include several Perth-based companies, such as Aquarius Platinum (up 116 per cent), Wesfarmers (up 104 per cent), Bristile (up 92 per cent) and Sons of Gwalia (up 73 per cent).

Another stellar performer was Brandrill (up 80 per cent), which has the unique distinction of being a successful international mining services business run from Pinjarra.

This short list illustrates the difficulty of ‘picking winners’ in the share market. Last year’s top performers, like many of the big losers, are a highly diverse group spread across a wide variety of industries.

Individuals who are prepared to take a punt on a specific stock, in the belief that they have found next year’s Aquarius or Wesfarmers, are doing just that – punting, or gambling, as opposed to prudent investing.

Even if investors were able to pick winning industries, they are still not assured of picking winning stocks.

Looking back at the year, we can see that certain industrial sectors performed very well. However, investing in these sectors was not a guarantee of success.

For instance, the ASX’s healthcare and biotechnology sector was one of the year’s best performers. There were several outstanding stocks in this sector, led by Peptech, Ramsay Healthcare and Resmed, but many investors lost heavily from Biota’s fall from grace.

Similarly, the ASX’s retail sector rose strongly during the year, led by Woolworths, but this sector also includes the poorly performing Coles Myer.

Just last week, the shock plunge in National Australia Bank shares would have dented the faith of many investors in banking stocks.

A review of sector performance also highlights just how dramatically markets can turn. Telecommunications, media and technology companies were among the weakest performers last year, yet in the previous financial year they were among the top performers.

This illustrates the danger of judging shares based on annual, let alone quarterly or monthly, returns. Investors should take a longer-term view.

The same lesson can be drawn from looking at international markets, which had a dismal year in 2000-01.

The Dow Jones achieved a measly 0.5 per cent gain while the FTSE in London fell 10 per cent, Germany’s DAX fell 12 per cent, the Nikkei fell 25 per cent and the Hang Seng fell 19 per cent. While these results are disappointing, they should not blind investors to the strong returns from international shares over the past 10-20 years.

For investors who are still unsure of how to proceed, a few time-honoured lessons may assist.

p Diversify your portfolio so that your investment returns are not dependent on a small selection of companies. As we have seen, trying to pick winners is fraught with difficulty.

p Take a long-term view. Last year’s 5.1 per cent gain in the All Ordinaries Index (which track’s the 500 largest ASX stocks) is less than half the average annual return over the past decade of about 13 per cent.

p Don’t panic and sell when your shares fall in value. This could be a time to accumulate additional shares.

p Similarly, don’t lose your head when your shares rocket higher. This could be a time to sell in order to realise profits from some of your best performing shares.

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