ten codes to invest by

Ten codes to invest by
By Marcus Padley
December 17, 2005
Page 1 of 2
EVERYONE wants to be spoon fed. I certainly do. For goodness sake somebody just tell me the best 10 stocks to buy for next year. That's all you need to know. It can't be that hard. With those 10 simple names you can do all your investment on January 1 and relax about the sharemarket for the rest of the year.

Keep your derivatives, keep your warrants, your options, placements, IPOs, buybacks, rights issues, research, advice, commissions, brokers, fund managers, managed funds, marketing, phone calls, stress, hassle, theories, excuses, online, full-service, rules, regulations, statements of advice and all that other crap. Keep all that faffing about. Just tell us the 10 stock codes.

The right 10 stock codes from the ASX 100 in the past 12 months would have made you an average return of 84 per cent.

One chap thought he had it. There is a theory called "Dogs of the Dow" expounded by Michael O'Higgins in a book called Beating the Dow back in 1991. The theory goes that you buy the 10 biggest "dogs" in the Dow Jones Index on January 1 each year and buy them for the next 12 months. The biggest dogs are simply the 10 stocks with the highest yields.

The popularity of the theory is guaranteed because it requires almost no effort. Keep the theory simple and it will sell.

So, let's take the 10 highest yielding stocks in the S&P/ASX 100 at the moment. Not a bad list. Telstra, BlueScope Steel, Wesfarmers, Ten Network, WA News, Pacific Brands, Telecom Group, Fairfax, Tabcorp and IAG. Not a bad list at all. And you get a decent yield.

But these are not going to be your 10 best stocks in the S&P/ASX 100 next year. They yield a lot for a reason, and often the reason isn't because the share price is too low. It may be their industries are regulated and competitive (telecoms). Or that they have no growth options (WA News). Or that they are failing to compete (Fairfax). Or that they may lose their monopoly (Tabcorp). Or that their earnings are highly volatile and risky (BlueScope Steel).

Ah. Not such a sexy list after all. In fact this list is only going to do well if the market absolutely carks it. No, to get 84 per cent we need something more sexy.

Let's have a look at the best performers in the past 12 months and learn some lessons from them. The best performers were Zinifex, Oil Search, Caltex, Woodside, Lihir, Cochlear, ResMed, Rio, Rinker, ASX.

Hindsight is a wonderful thing. All you had to do last year was take a punt on China carrying on. On the back of that you had to guess the oil price, gold price and commodity prices were going up. You also had to bet on the sharemarket going up. Was that so hard?

So, how do we pick 10 stocks for the next 12 months? Simple.

Forget detail, forget PEs, yield, value. They all rely on analysts' forecasts and as we saw last year the stocks that really make the money are the stocks the analysts get most wrong.

Movements in big drivers change forecasts. Get the big drivers right and the stocks will pick themselves.

One of the biggest drivers is China. One of the biggest mistakes analysts are potentially making is that their commodity price forecasts are still well below reality. If China carries on then this is still probably the biggest opportunity in the market. Using spot commodity prices BHP will double last year's record profit in two years. That's not in the price on a PE of 10.9. If China carries on Rio Tinto and BHP will yield more than Telstra through buybacks and special dividends.

Big drivers are everything. Make your mind up about the big drivers for next year and the stocks will miraculously appear. Get them right and you'll get the 84 per cent returns.