James Burns: From FastJet investment to tracker funds

The Investment Club had another discouraging month as it watched its unit price plunge once again. It fell to £2.89 with the fall due solely to our investment in FastJet; without this loser we would be about even.

FastJet is trying to break into markets on the African continent such as South Africa, which is thwarting its ambitions and so adversely impacting FastJet’s share price. South Africa is 
currently in a similar economic position in respect of uncompetitiveness that the United Kingdom was back in 1979.

South African Airways, for instance, serves as a shining example of this characteristic when comparing the number of 
employees per aircraft with other carriers. EasyJet and Ryan­air have 45 and 29 employees per aircraft respectively. But these are cut-price carriers. Even then, the figures for, say, Qantas and British Airways, both international scheduled carriers, are 129 and 154 employees per
 aircraft respectively.

South African Airways has 957 employees per aircraft. So it is easy to see why the South
Africans are putting so many obst­acles in the way of FastJet’s take over of South Africa’s bankrupt 1time Airline – South African Airways just could not compete against FastJet and it too would be out of business, putting thousands on to the dole queue.

However, it is pointless railing against the politics of a country. The club must try to navigate a way round its woes. To this end we have come up with a
couple of alternative ideas to stock picking. Firstly, because the club’s paper and pencil analysis (papa) is quite good at divining the directions of stock markets – and the club’s resources are too small to cover a market – we should start investing in funds that track markets. Either pure trackers that are invested in one or other financial market or managed funds that are heavily invested in the FTSE 100 or FTSE 250, in which case they are 
de facto trackers.

Alternatively, instead of trying to buy shares at their lows we could buy them at their highs. This would normally be considered foolhardy. However, new research suggests that the traditional, more logical method of limiting risk and losses and making a profit would lose you more money than buying shares at their highs.

The paper, by Mebane Faber, has turned tradition on its head. Taking a century of weekly data on the S&P 500 index in the US (excluding dividends) reveals that, for those buying after the stock market hit a 52-week high, the average compound annual gain over the next year was 9.6 per cent. Those taking the traditional “buy and hold” approach would have been up just 5.6 per cent.

Applying this strategy to buying stocks within 6 per cent of their 52-week low delivers a compound annual gain of 0 per cent. Taking the research back to 1971 yields similar results – from 1791, buying on new highs returns 5.5 per cent a year thereafter and buying on new lows yields 0.9 per cent. From 1950 onwards the respective figures are 8.5 and 6 per cent closer, but still a significant gap.

Therefore, the investment club this month will attempt to restructure its portfolio towards tracker funds or equivalent. This it will do with the sale of stock we hold in profit plus using some reserves of cash we have in the hope that the new strategy yields better results.