Bargain Hunting

Matt Brennan Whether it is in the majestic plains of the Serengeti, or in the throngs of the Wall Street trading floor, the thrill of hunting down something special makes even the most veteran monk chortle with glee. This December proved not only how short sighted the Mayans were, but how undervalued the Australian market was. The ASX 200 as an index rose a further 3% in December, with interest rates being at their lowest levels since April 2009 and the US being confident it will avoid the fiscal cliff (for more information on the fiscal cliff refer to one of my previous articles: Cliff Hanger The US Fiscal Cliff), also being key proponents of the surge. The ASX 200 has in fact been producing month on month gains since June 2012. The most enlightening facet of this bargain season however, is that the personalities of people seeking to capitalise on the value that is widely present in the Australian share market, all fit snuggly into the four systemic hunting categories.
The Recreational Hunter

This is the hunter who opts for the small game like rabbits, where there is a sense of safety in knowing that there is no need to acquire expensive tags to hunt one moose in Alberta Canada for instance, costs a non-Canadian a minimum of $270, this is before large firearm and other hunting license costs are factored in. Additionally, only a small amount of firearm knowledge is necessary to hunt a rabbit. This is what characterises the relative risk free approach of the share market recreational hunter, who adopts a Fisher & Paykel My First Share Portfolio approach to investing. These individuals usually only have a small amount of funds to invest, and are typically too time poor to do the necessary background research and would rather just go with the flow and pick the shares that everyone else is investing in. In Australia, these are the ones with the largest market capitalisation (BHP, RIO, the big 4 banks, Telstra, Wesfarmers and Woolworths).
The Sports Hunter

To the sports hunter, dead fish go with the flow, and in the hunting realm, this means that the sports hunter goes after the largest, most challenging animals, like moose and grizzly bears. This type of hunter recognises their important role in society as stated by the National Shooting Sports Foundation (NSSF) late last year, Hunters play a vital role in wildlife conservation. They are also typically not adverse to the hefty financial remuneration and ego gratification derived from winning hunting competitions. In the share market conversely, the sports hunter goes after the smallest shares in size (in Australia, typically junior mining stocks), as these have the greatest potential to make huge windfalls. These companies are invariably riskier and require a strong background knowledge and capital base, expert timing, and luck. The Sports hunters importance in the share market cannot be understated either, as these investors are the catalysts in the Australian share market, which help trigger growth driven profits through their financial backing of companies looking for that initial seed capital before they reach a breakthrough.

Poachers

In the share market, poachers are the day traders and short sellers that ASIC (Australian Securities and Investment Commission) and the ASX try to target with new legislation involving hefty financial penalties, in some cases even criminal liability. A recent example of poaching occurred with ANZ shares on the 18th of October, 2012. ANZ opened at $25.96 and with no market news or announcements surged to $27.63 (thats a 6.4% gain) within the first hour of trade. By the second hour of trade the price corrected itself to a level slightly above opening and at the end of the day ANZ closed at the price it opened at, despite positive economic news out of China which buoyed the rest of the market up by nearly 1%. Poaching erodes the integrity of the market place and saps investor confidence, proven by the fact that very few investors were willing to go near ANZ for the remainder of that trading day. This example of poaching is known as pump and dump, where ANZ was purposely inflated and then sold off heavily with those buying in cheaply within the first hour selling by the second and enjoying a healthy windfall. What exacerbated the situation was that options for ANZ were also expiring on this day so the poacher(s) would stand to have made a considerable amount if they traded these as well. The ASX & ASIC understandably was reluctant to admit that poaching occurred, as they were unable to find the culprit(s) and desperately wanted to avoid copycat perpetrators. Instead they blamed a computer glitch that they vowed wouldnt ever happen again.
Trappers

From the picture below the trapper employs a laissez faire (hands-off) approach to hunting, which secures the desired result, with reduced uncertainty. This contraption has a motion detection camera which can be set to beam real time images directly to a computer. With night vision mode and an impressive range of 32 feet, when combined with baiting tools to lure the animal into the designated zone, this device can be quite a valuable investment. The camera aspect reduces chances of misfiring on the wrong animal which looks similar to the target, (coyote are fair game provided that the hunter has relevant tags and licenses, but wolves are a protected species in North America).

Trappers are an intriguing breed in the share market world. Trappers adopt the philosophy that strong performing companies in the past will generally rebound out of a slump if given time. The trapper sets their target price (i.e.; the trap) at a level they believe is likely to be the rebound point, based on historical trends, current market sentiment and other fundamental factors. A spider-web is only effective when the fly is in the room, in the same way there is no point setting a trap for say BHP at $5, when they are currently trading at $38.00 (when this article was written). To increase their success rate, a trapper sets multiple traps with a realistic price drop across a variety of sectors due to the counter-cyclical nature of certain industries (Over the course of the financial crisis, the healthcare sector as an index slumped 14% at its worst point in March 2009, whilst this compared to a whopping 67% decline from the energy sector). When the price drops to the desired level (i.e.; the trap is triggered), the investor will then assess whether their trap was set at the right level and then execute a buy order. Timing is critical, the trapper would normally have a reserve of capital ready to deploy, and opt to receive the updated information by sms, to be sure that they can go in for the kill before everyone else does and the price re-stabilises. This approach allows the trapper to enter into the market at what is hopefully the ground floor, which provides entitlement to the largest gains upon recovery. This practise has been described as trying to catch a falling sword, so to minimise the ramifications of premature acquisition, only what is commonly known as blue-chip companies, the strongest performing companies are monitored. These companies have reduced volatility in negative times due to their underlying value and have a proven dividend history. Stocking up on these companies at an inexpensive price ensures the maximum dividend yield is achieved regardless of price fluctuations. Engaging in share buying, like hunting, requires a vast reserve of patience. Good decisions are normally based on knowing when to move in on investment as opposed to simply jumping on an investment the quickest, which is why the proverb says the second mouse usually gets the cheese. The other salient aspect of both hunting and share buying is that there is an inherent element of risk, regardless of personality type. There is the legitimate chance that things will not go the way of the individual, with some mistakes and events that could not be controlled or foreseen, causing more harm than a mere wounding of pride. The song Drops of Jupiter, by Train, encapsulates this dilemma and expresses it best when the male in the song, upon his girlfriends return from a soul searching space voyage, Does not want to be plain old Jane who told a story about a man who was too afraid to fly so he never did land.