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OPINION

Pickers and takers

Pickers and takers
February 15, 2013
Pickers and takers

Now, I know what you're immediately thinking, and it's the word 'saver' that does it. It's as though Bearbull is the teacher and starts with a few preliminaries explaining to the class how deferential, naive and passive savers are; and how critical, sophisticated, and active investors are. Then he asks: "Who wants to be a saver?" There would be no takers; just curious faces surreptitiously glancing around to see if anyone is stupid enough to say 'yes'. Next, I ask: "Who wants to be an investor?" and everyone yells: "Please, sir, me."

So, first rid yourself of the notion that savers are passive victims and investors are active winners. Granted, it's understandable why anyone should think this. After all, few folk would want to be labelled 'passive', 'naive', 'price takers' and so on. That's like volunteering to be the guy who always gets the fuzzy end of the lollipop. We all want to be the sophisticated price pickers; the big shots, the main men, the movers and shakers. Dream on.

In practical terms, the categories overlap. Most of us are savers in some spheres and investors in others. Sometimes we are deferential price takers, other times we are smart price pickers. The important thing is to understand which sort you are in a particular circumstance. Grasp that and you are less likely to over-reach yourself in some situations and more likely to maximise your opportunities in others.

If the difference between savers and investors distils down to one factor it is this split between 'price taking' and 'price picking'. Essentially, a saver takes the prices he's offered. True, there is a bit of price picking. If I switch a lump of capital from a savings account that offers 1 per cent to one that offers 2 per cent, then I have picked one return in preference to another. But most of the time savers accept the prices they are offered, and that holds true especially when they are putting capital into shares, bonds and property. In effect, a saver says: "It's good to put some long-term capital into emerging market equities and forget about it. So I won't worry about the price I might pay today as opposed to next week or whenever."

That's sensible enough, but an investor can't take that view. The price he pays is vital because he has a clear idea of the returns he wants. If he targets, say, 10 per cent a year then, for a given investment, he must pay 20 per cent less than someone who targets 8 per cent.

Sure, in the investment process it's better to be approximately right than precisely wrong, so too much attention to detail can be more confusing than helpful. But it's still crucial that an investor knows why he says 'no thanks' when the market offers, say, Marks and Spencer shares at 380p, yet snaps them up when they are offered at 300p. And he can only do that if he has a decent idea what Marks's shares might be worth and that, in getting from their market price to their theoretical value, they will meet his return targets.

And, as I say, sometimes we are savers and sometimes investors. In Bearbull's case, I am 100 per cent investor when I run the Bearbull Income Portfolio, but more a saver when I manage the Bearbull Global Portfolio.

For the income portfolio my target return is 8.5 per cent a year. That figure drops into most of the valuation models I use and helps generate the prices I am willing to pay. As a result, I spend most of the time rejecting the prices that the market offers.

For the global portfolio, the process is rather vague. Sure, I say that I target a 6 per cent annual return, but that's really shorthand for saying I target something modest yet worthwhile. It's unrealistic to be more demanding because I don't apply a rigorous valuation process to the funds I buy. That's not as lazy as it sounds because the global fund explores investment themes via exchange traded funds (low-cost collective vehicles that track a financial market index), which prompts the question: just how do you value an exchange traded fund?

For some funds - especially those that track equity market sectors - the exercise might be feasible. For others - especially commodities and currency funds - it's not. For example, the International Cocoa Organisation says most analysts expect demand for cocoa to exceed supply as the 2012-13 season draws to a close. But that cannot lead to a rational expectation that cocoa is cheap at current prices around £1,430 per tonne. In which case, it tells me nothing about what to do with the global fund's lossmaking holding in ETFS Cocoa (code: COCO).

Still, what should I expect? In running the global fund, I am a saver not an investor and I've just got to get used to that. It won't necessarily mean worse investment returns, although it does leave the nagging worry that there will be no point in ever changing the portfolio. Why would there be? If I'm just a price taker, then who is to say if I'm ever being offered good value or bad?