"So here is three instances of businesses chasing work to keep...

"So here is three instances of businesses chasing work to keep their employees going. I know it’s only anecdotal but I hope this is an aberration and not a 3 for 3 indicating a sharp slow down in discretionary expenditure generally across the economy."

Normally, I would discount isolated points of anecdotal evidence as not being meaningful indicators of anything, but in this case, your experiences are backed up by the factual data which point somewhat unambiguously to a slowdown in discretionary spending.

But that is all known now.

And it is the reason GUD's share price is no longer $15, which is where it was 12 months ago when the current economic slowdown was not yet "known".

Point being made is that making investment decisions on the basis what one sees presently is not a very reliable way to invest, I don't believe, because it tends to cause one to fall victim to the psychological traps of what the behavioural finance specialists call the Recency Bias and the Prevailing Narrative Bias.

Which exactly what happens to stockbroking analysts (and the majority of investors, for that matter) that causes them to say BUY at the top of the cycle (when the prevailing narrative - aka sentiment - is positive and optimistic) and SELL at the bottom of the cycle (when the prevailing narrative/sentiment is negative and pessimistic).

Which is why, to eliminate (as far as possible) the emotional anchors and biases that form part of the human psyche, a far preferable approach to investing is to look almost exclusively at valuation for one's investing cues.

To demonstrate the Recency and Prevailing Narrative Biases in action, let's look at recommendation performance of those esteemed stockbroking analysts:

This time last year, the narrative was positive: the economy was strong, business conditions were good for GUD and the analysts were saying BUY.

In July 2018, the average target price for GUD was $14.70.
12-month prospectus EPS forecasts are the time (so for FY2019) was around 74cps

=> Prospective P/E based on Target Price
= 14.70 / $0.74
= 20 Times


Fast forward to today, and we have an average target price of $10.00.
And 12-month prospectus EPS forecasts (i.e., for FY2020) are around 68cps

=> Prospective P/E based on Target Price
= 10.00 / $0.68
= 14.8 Times


In other words, analysts were saying:

BUY when the P/E multiple is 20 times
But SELL when the multiple is 14.8 times.


Put another way, the advice from the specialists is effectively:

"We recommend you should BUY a stock when its valuation is 35% higher than when we think you should SELL it."


That, right there, is demonstration of the powerful influence of the Prevailing Narrative Bias.

And as extraordinary as that is, it is not an isolated case; it happens all the time. And not just with stockbroking analysts, but with the great majority of investors.

Which is why I always feel that the thing on which to focus at all times is valuation, and not what the analysts or the financial media are saying (and especially not when the headlines are overwhelmingly negative and gloomy because, as we all know, it is bad news that attracts the most viewers and sells the most newspapers).


And so, in terms of the fresh investment decision that needs to be made today:

Sure, the prevailing narrative is negative (housing slowdown, sluggish consumer sentiment, competitive environment, weak A$ pressuring GP margin, etc. etc.), but what does the valuation look like?

.