27/09/2005 - 22:00

Tim Treadgold: Briefcase -

27/09/2005 - 22:00


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It's not every day that a new, and successful, investment theory emerges. But Briefcase is delighted to inform its readers that it has discovered a system called “do nothing” or, in more fancy language, the ‘procrastination equals profit’ approach to success on the stock market – hereby known as PEP for short.

The key element to PEP is sleep. Variations also work well, such as staring blankly out a window for a year or so.

Stockbrokers, who make their money from buying and selling pre-loved shares, will not like PEP. If everyone used it nothing would happen – except share prices would rise inexorably.

For proof that PEP works, Briefcase directs all Doubting Thomases (hereby known as DTs) to a couple of local examples – Portman and Foodland.

Portman, for anyone who has woken from a well-earned year-long slumber, received a $3.40 a share takeover bid on January 10 from the US iron ore miner, Cleveland Cliffs. Months of haggling eventually led to the offer price being levered up to $3.85, at which most members of the board sold and so did many other shareholders.

But not everyone. At last count there were about 20 per cent of Portman’s shares outstanding, forcing Cleveland Cliffs to keep the stock listed.

More interestingly, the price of Portman is sitting around $4.47, 31.5 per cent higher than the original takeover offer, and 16 per cent higher than the agreed price.

For followers of the PEP theory of investment this is excellent proof that it is often better to do nothing than to do something.

Example two, Foodland Associated, is almost as much fun as Portman, though the degree of procrastination has reached greater heights.

On December 6 last year (yes, dear reader, it was almost a year ago), Metcash Trading launched what will probably rank for all time as the most complicated, convoluted, complex and elaborate takeover bid in the history of world business.

Briefcase will not re-publish the details of the offer, which involved selling some bits of Foodland, keeping other bits, and doing strange things with what’s left over.

All you need to know is that, roughly 290 days after baffling everyone, the Foodland saga drags on with rumours of further complications as a side deal with Woolworths is questioned, and Coles Myer is said to be circling.

For followers of PEP this is a delightful situation, because the closing price of Foodland on the day before the Metcash bid (of you can call it that) was $19.21. The closing price on the day of the bid was $23.35.

Since then, as the legal fees ratchet up and anyone not directly involved wanders away to find something more exciting to do (weeding the rose garden is a useful time consumer), the Foodland share price has risen to around $26.80, and even got as high as $27.79 on July 25.

These share price movements produce the following PEP calculation. For anyone who took the $23.35 on the day the Metcash proposal was reported – tough luck, because you’ve missed out on an extra $3.45, or a bonus 14.7 per cent.

Given that the stock has already risen as high as $27.79, and could get back up there, the theoretical PEP gap is an even more remarkable $4.44, or an extra 19 per cent on your money.

Briefcase, as we all know by now, does not give investment advice.

But, when you look at the Portman and Foodland examples there is a clear message. For the best returns on your portfolio go to sleep for a year – but don’t expect a Christmas card from your stockbroker.


If the PEP theory of investment is too radical, then how about considering another Briefcase suggestion to liven up your day; let’s try and identify the most dim-witted category of business operator in Australia today.

Frontrunner for this prize has to be the farming community, where it is considered perfectly normal to be operating an asset worth $1 million for a profit of, say, $20,000 a year, or even a routine annual loss, to generate a return on investment of around 2 per cent or less.

True believers in the nobility of the man on the land will argue that it’s being done for the good of the country, a sort of ‘Australia-needs-us’ argument.

Hard-nosed business types will argue that Australia might need some of you, but it’s getting pretty expensive keeping everyone in business, especially now that rural Australia is getting an even bigger subsidy on its telephone and Internet services courtesy of the Telstra sell-off deal.

While farmers are probably still in front in terms of not knowing how to run a business or, at least, not knowing how to sell and re-invest the capital more wisely, there is another fast-emerging class of not-too-bright business operator; the truck drivers of Australia.

Like farmers, these chaps argue that we can’t do without them. Perhaps, but we can obviously do with a lot less of them, as demonstrated by comments during the recent fuel-price protests such as: “we’re working for nearly nothing”.

Well, Mr Truckie, if you’re working for nearly nothing then sell your $1 million rig, re-invest the proceeds and enjoy an annual income of, say, $45,000 at bank interest of 4.5 per cent, or $51,000 if you buy National Australia Bank shares – a return that can be made to look even better depending on your tax status.

Briefcase doesn’t mean to be nasty to our farmers and truck drivers. Most are wonderful people. But when it comes to running a business the claims they make, and the stories they tell, are a joke.

If you own an asset worth $1 million (and more) then make it perform, or sell it and do something sensible with your money, but don’t bleat about it.


Just a little heads up, but definitely not investment advice, it’s worth noting that the spot price of alumina has been rising strongly in recent weeks.

According to what Briefcase has seen, recent sales have been around $500 a tonne compared with $380/t in January. This is good news for the alumina factories in WA and interesting news for the only listed alumina producer, Alumina Ltd, which has a share price essentially unchanged from January.

There are many factors at work in the Alumina Ltd share price, and it is never wise to assume that spot prices are reflected in long-term sales contracts; well, not immediately anyway. But, the spot price move is interesting for alumina watchers (all three of you!)


“Psychiatry enables us to correct our faults by confessing our parents’ shortcomings.”

–        Laurance Peters.


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