How do you know which shares will rocket?

Highlights in this issue:

•    Cipla and Goliath...

•    How professionals pick shares…

•    Blood in the streets… and more…

From Gary Booysen on the top floor

Dear Investment Academy Reader,

Last week, we added Cipla Medpro to our Investment Academy dummy portfolio. And looking at the price today, I’m beaming! In fact, I’m so impressed with this little fighter, I HAVE to show you Ciplamed's (CMP) graph. Check it out below:

 
Source: Share Friend

The news has been awash with the ructions caused by Adcock Ingram's hostile takeover attempt. Headlines like: “Adcock bid ‘threatens Cipla’” and “Pondering the Obsticle of the Poison Pill” sent Cipla’s share price crashing, as investors ran for the hills. Now, there’s an old adage that any investor should hold dear. It's the cornerstone of contrarian investing.

When there’s blood on the streets BUY property

Now Cipla isn’t exactly property, but the maxim holds. While other investors cower under their beds, displaying the antithesis of Alan Greenspan’s “irrational exuberance”, you should be snapping up their shares, no matter what the company.

Of course, this is easier said than done. We’re running a monkey portfolio and no actual cash is changing hands. But, where some publications throw darts at the JSE page of the Business Report or get drunk and "pin the tail on the JSE", the Investment Academy has it’s very own monkey!

That’s right, we have our very own monkey picking the shares. But, fortunately this monkey can bash things out on a keyboard and do his own share analysis. Yes that’s right, I am the monkey. So let’s see how the portfolio’s doing this week:
 
Investment Academy Dummy Portfolio at 8 June 2009                               

             
We’re looking at an overall 20.75% average gain. Over the same period, the JSE's only gained 10.04%! So far our portfolio is above average.

You’ve heard me say this before and you’ll hear me say it again: Investing in the stock market has, over the long-term, always shown the best returns, out of all asset classes, irrespective of when you bought in. Though monkey portfolios often show massive returns over time, it’s easy to gamble with money that isn’t real. The reason these portfolios do so well (and sometimes so abysmally) is that we can add massive risk premiums without a second thought. But this begs the question:

How do you really pick winning shares?

This week, I’m going to have a look at the first tip, from Fear, Greed and the Stock Market, written by MoneyWeek editor Gareth Stokes. It’ll guide you to winning share selections. Next week, I’ll take you through three more vital steps.

Tip #1 – Use fundamental analysis
 
People who like buying value shares will almost certainly be making use of fundamental analysis.

Definition: Fundamental analysis is the assessment of the merits of a company based on a thorough analysis of its trading results (past and present); future prospects; and managements economic and industry conditions in the field in which the company operates.

One of the greatest fundamental investors of all time (and a man whose name you should know) is Warren Buffett. He’s an old school investor who learnt to analyse shares properly. Today, he’s the second wealthiest man in the US. He grew his company, Berkshire Hathaway, from nothing to a multi-billion dollar group with interests in major companies like Gillette, Coca Cola and American Express, amongst others.

Buffett subscribes to a field of investing called value investing and, as such, all of his investment decisions are made after a thorough fundamental analysis of the company.

For three more great tips check out next week's Investment Academy.

Until then,

Gary Booysen
Investment Academy Monkey

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