Sir Ron Brierley: 'You would hope in the longer run the investors who had done their basic due diligence are going to finish up ahead of the absolute gamblers.' Picture: MARK MITCHELL

Investment tips from Sir Ron Brierley

By Trevor Sykes

Sir Ron, who has been wheeling and dealing on the Australian sharemarket for three decades (and even longer on the New Zealand market), gave a rare interview to The Australian Financial Review to outline his investment views for new players in the market.

Today Sir Ron is almost the only survivor of the big-time corporate players of the 1980s. He survived at the top of the tree where contemporaries such as John Spalvins, John Elliott and Alan Bond did not. The prime reason, reflected in the following interview, is that Sir Ron has an innate wariness. He lays heavy emphasis on research. Even in the heat of the 1980s he rarely made a play without good research and a strong concept of what he was doing, whereas cowboys such as Bond frequently shot from the hip.

Research and fundamentals are tiresome stuff to some of the modern punters who are making overnight fortunes on hot internet stocks. But basically Sir Ron's message is that if you don't know what you're doing, this is an expensive place to find out. And find out you will, sooner or later.

AFR What is the most important point for investors to keep in mind?

Sir Ron One does not really know anything about 95 or possibly 99 per cent of the stocks. So first of all you are writing a cheque out in hard cash and you are getting in return a piece of paper with a familiar name on it, but in essence it is something that is now putting you at risk, and it is a risk over which you have no control.

Let's take a stock at random: BHP. If you have a share certificate for BHP you have a pretty fair idea of what the company does, but do you have any detailed knowledge of what you have put your money into?

That's my test on the market, because there is a very tiny minority of stocks I feel I know a lot about because one has done all the research. There is an even smaller minority where you are actually very anxious to exchange your money for their pieces of paper. That is when you have total confidence and you really know what you are doing, although in retrospect that is sometimes not the case.

AFR So the first requirement is to do a lot of research?

Sir Ron In my case, yes. To some extent that takes me out of play for stocks like Telstra and OzEmail, so my views are arguably very unfashionable on the current market.

AFR But investors can make a lot of money in hot stocks, can't they?

Sir Ron And you can make a lot of money in terms of following different criteria to those I have outlined. You might make money by following charts; by following world economic trends; by following commodity prices; or by following astrology. They can all be relevant for your particular purposes and very effective.

AFR You might, but astrology might let you down sooner or later. In your long experience, which do you think is the best way?

Sir Ron Never forget you are buying the company, not the stock. That is absolutely critical. Once you realise you are buying the company and not the share certificate, your total basis of investment has changed.

AFR So what is practical for a small investor to look for? Strength of earnings?

Sir Ron Good, sensible research by private investors surely has to pay off in the longer run.

AFR So they shouldn't hurry to invest?

Sir Ron The old saying is, to make money fast, make it slowly.

AFR Does that mean investors should consider unfashionable and counter-cyclical stocks?

Sir Ron Yes, that's a basic prejudice of mine. If it is unfashionable, it's presumably cheap or appears to be cheap. Therefore your downside is limited.

AFR But some stocks get cheap for good reasons and get even cheaper later on?

Sir Ron There is no guarantee of success, but at least historical patterns will suggest there is more upside than downside.

AFR Are price-earnings [P/E] ratios still a useful guide?

Sir Ron The only problem is you can be absolutely certain what the P is but the E may be a bit more suspect. E is a very subjective figure in terms of presentation of accounts.

It's easy to be critical of the accounting profession, but that is one of the real grey areas at present right around the world. We need a consistent basis of calculating genuine earnings for a particular period of time.

AFR So you would urge investors to look at quality of earnings?

Sir Ron Yes. And make sure the earnings have some correlation to cash coming in the door.

AFR Do you believe that with a bit of effort, even novice investors can learn to read accounts?

Sir Ron You would hope in the longer run the investors who had done their basic due diligence are going to finish up ahead of the absolute gamblers.

AFR Most of the newer investors on the sharemarket are in very big companies such as Telstra. Do you see that as being the best area for them in the long term?

Sir Ron That is something that should be under constant review. Let's say you bought Telstra and you don't know much about the company and you have made a lot of money. To cash it in would be hard to argue against.

On the other hand, in the long term that might be one of the best investments you could make even at current prices. It's a matter of individual choice. Trying to give general investment advice is absolutely a mug's game because everybody's situation is different.

AFR How do you tell if a market is overheated?

Sir Ron Some people that I know are making far more money out of the market than I am and yet I feel their knowledge and experience is vastly less than mine � or what mine ought to be.

It's happening right at the moment. I know office girls who are out there punting on internet stocks and doing extremely well. I know a girl who has been buying LibertyOne at ever increasing prices, where I would be ringing a broker at weekends to get out. She is showing a huge gain, but it's all on paper, and one day all this is going to come to an end for all those people out there.

AFR The internet boom will end one day?

Sir Ron Yes, but you have to be careful making easy generalisations on that account. The whole point is it is arguably not going to collapse tomorrow or next week or next month and could go up further, so timing is absolutely critical. Often it is better to be in the wrong stock at the right time than the right stock at the wrong time.

AFR What do you think about an evenly balanced, or diversified, portfolio?

Sir Ron You won't lose much money and you won't make much either.

AFR Your fund Tyndall has been one of the best-performing in Australia and it's not balanced. It only has about 10 stocks.

Sir Ron Over the longer term it has done extremely well, but in the past 12 to 18 months it has done relatively poorly because the markets ran away from the more conventional and conservative criteria.

AFR To draw a lesson from that, do you think it's worthwhile to have, say, 5 per cent of your portfolio in really speculative areas?

Sir Ron Absolutely. Yes. Definitely. You've got to have some fun in life.

AFR There's an old saying that any fool can buy but it's a wise investor who knows when to sell. Is timing of sales important?

Sir Ron That's a very good point. When to sell and what to sell? There is a tendency to sell those you have made money on and not to sell the stocks that have gone down because you are waiting for them to come right. From time to time there is a case to sell everything and make an absolutely fresh start.

AFR A relatively high market such as the present one would seem like such a time?

Sir Ron Yes. There is not a great deal of science behind that, but I think it [the idea of selling out] has some psychological value.

AFR You would also capitalise on an overheated market by getting liquid?

Sir Ron Yes. I have always found over the years from a corporate viewpoint our greatest strength has been to always be liquid. If you are liquid it means you are not fully invested and so you must be somewhat bearish.

AFR But in a time of low interest rates, such as at present, there is a high cost to being liquid?

Sir Ron Yes. There is always a cost to being liquid, because whatever you are earning on funds will always be less than true market rates, and at current interest rates it is even more costly. That is a factor in the current market, where interest rates are so low they justify investing in the market even at historically high levels.

AFR Do you find that while history is instructive, market patterns never repeat themselves exactly? They may be similar but they're always a bit different?

Sir Ron It would be pretty dull if they weren't. But things do go in cycles, and unquestionably we are in a cycle now where blue sky is becoming very much bluer and the extremities tend to go further and further out. How many people now are sitting down this morning working out how to float something with an internet connection? And of course there is going to be something soon which sounds like it's something to do with the internet and has not the faintest connection and investors will pay fancy prices just for the name.

AFR Can you give us an overall view on equity investment?

Sir Ron Let's say you simply buy the index. That in itself should be sufficient to guarantee you are going to do better than any other form of investment because basically equities should be the most rewarding form of investment. Equities are the ultimate ownership of private entities, so therefore you should be making more money than either landlords or lenders. But that, of course, is a fairly theoretical concept.

AFR If you're just going to buy the index, should you put your money with fund managers or try to manage it yourself?

Sir Ron It depends on your circumstances and knowledge and experience.

AFR And level of interest?

Sir Ron And level of interest. Possibly a combination of the two might work. To have a professional handling some of the money but the gambling percentage to be controlled by the investors so they can back their own judgement.

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