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The market was down a shade over 1% this week, and frankly there wasn’t and isn’t a huge deal to report on.

I’ll work through the week just gone in a minute, but I was thinking to myself that the trends of the last month are quite revealing for portfolio investors like ourselves and yourselves, as much because they demonstrate how mean reversion works and how patience is almost always rewarded.

PATIENCE & TIMING

When they say ‘timing is everything’, few statements could be appropriate when it comes to investment markets.

Timing exit and entry points when it comes to your investments is invaluable in the sense that you want to maximise the utility of your capital.

Secondly, in timing your exist and entry points well, you maximise the risk/reward of each trade.

Taking each of these two statements a little further.

Capital can be deployed across many different opportunity sets, so it is crucial that you choose the right opportunity at the right time.

Because of this fact, you want to ensure that your investment performs within the time horizon in which you set. If it doesn’t, then you are diminishing the utility of that capital by tying it up in an investment that isn’t providing returns that you otherwise might achieve elsewhere.

Secondly, if you time your exit and entry levels well, you minimise your downside risks and maximise your potential returns.

Clearly this sounds super obvious, which intuitively it is, but I mean this in a far more practical sense.

Which is to say, if you buy or sell well it means human emotion as an influencing factor on your investment decision is reduced to a minimum.

Following?

If we buy BHP at $30 with a target price of $40, it doesn’t mean so much to us that it might go to $28 first.

But…. If we buy BHP at $33, with a target of $40, and it goes to $28, we might feel decidedly less comfortable in our original decision. Human emotion can then get the better of us. Doubt takes over. And no matter what commonsense reason made us BUY BHP with a target of $40, we instantly have doubts as to our original investment decision.

It’s simply human nature.

So when we get the mean reversion that so often happens in investment markets, even the ‘pretty girls get hurt in the bus smash’. The late buyers of the good quality names get panicked out by falling asset prices, not because the quality of the company is any less.

For those prepared to wait it out for opportunity to arise, most often, that patience is rewarded.

In the last month or so, companies like CSL, Brambles, ANSELL, AMCOR, REA Group, SEEK, Magellan Financial Group, IAG, Suncorp, Oil-Search, Medibank or Platinum have all fallen significantly.

It is not because there is anything wrong with these shares, but merely that the incremental buyers were exhausted. Valuation had become less attractive. Momentum had stalled.

For those that have been patient, great opportunity will arise in the coming month or so to participate in good quality Australian shares with a far better risk/reward scenario than has been offered on these stocks in much of the last 2 years.

It’s hurt not to have been onboard some of these shares this past 12 months as they have raced higher, but the discipline of not being dragged in at higher levels will now be rewarded we hope, by the opportunity to get set in good quality names at far more prudent levels and time.

Without wanting to get over my ski’s, there are several shares that have retraced to levels at which you would be mad not to at least run the ruler over them.

Oil-Search (OSH) is a classic example. If I was to say to you that OSH is now at virtually its lowest level relative to the broader ASX200 in 5 years, most would be surprised to hear that. Particularly since in that 5 year period, OSH has delivered on-time and on-budget one of the greater corporate development achievements of any Australian company in the past decade.

I’m not saying it’s yet a BUY, but it sure as heck looks as interesting as it has done in some time.

And there are others.

THE MARKET THIS WEEK

As to the market, the ASX200 is down perhaps 1.5% on the week. Banks the super-markets were the laggards, falling a little worse than the market. Healthcare was a standout on the upside, with some of the recent weakness reversed.

Cochlear (COH) led the Healthcare names, jumping 10% after its major competitor in the hearing-device industry, Sonova, declared on their earnings conference call that they saw significance evidence that COH was back and aggressively competing in the US implant market.

RESMED (RMD) rebounded 3-4% too after the disastrous fall late last week. We remain committed to the name for now, as discussed, but are keen to understand from the company and analysts just what, if any, impact will be felt on the core sleep apnea franchise from this peripheral study result.

Wesfarmers (WES) held its 2015 strategy day. Little came of the day, however the typically common-sense WES attitude should fill shareholders with some comfort that if opportunity for incremental returns can’t be achieved by investment, then funds would be returned to shareholders.

James Hardie (JHX) had a ripper week and rose 12% on Thursday alone after it announced plans for a share buyback, special dividend and continued strength in profits. Adding in that payments from its asbestos fund were coming in lower than expected, was also encouraging.

Insofar as PRIME’s favourite names were concerned, Crown Resorts (CWN) continues to slip. We remain 100% committed to this share, and feel significant latent value remains. The Australian assets are likely to surprise favourably, and we think its only a short matter of time before the groups Macau subsidiary, MPEL, catches a tail breeze from momentum improving out of China.

On the positive front, Carsales.com (CAR) had a great week again, jumping another 4.5% as more positive sentiment follow through from the Budget helped the shares. IOOF (IFL) was also good and has been an absolute ripper for the client base – this week it continued higher on press reports the company were set to sell parts of their underperforming Perennial funds management business. IFL still looks like an $11 stock before we would consider lightening the load.

Bonds and the currency didn’t do a huge amount this week. 10-year Australian government bonds are 2.92% and the AUD is a shade over 79c.

The RBA released the minutes from their recent meeting and stated ‘the lack of guidance doesn’t limit the scope for a future rate move’ – recall how we were disappointed the RBA failed to keep an ‘easing’ bias earlier in the month.

This is them foxing, and I am pretty sure that they will resist with all their might, the need to lower interest rates again this cycle.

Sadly, I expect that by the end of the year, they may well be forced to cut again, particularly if the Australian dollar remains so stubbornly high.

Anyways, that’s it from us. As always, shout out if we can be of assistance.

Key Dates: Australian Companies

Mon 25h May 
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Tue 26th May
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Wed 27th May 
AGM – Adelaide Brighton (ABC)
Thu 28th May
Div Ex-Date – Orica (ORI)
Fri 29th May
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