It's a constant search for that perfect pearl

In the quest for the best we are always looking for stock that will take its place among the Coca-Colas, Gillettes and Microsofts of this world
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The Independent Online

The perfect pearl, the flawless diamond, the purest gold nugget. Dedicated divers, miners and panhandlers risk their lives in this quest for the best. Of course the money matters but the main motivation is the thrill of discovery, the reward for effort, the knowledge that hidden amongst the mundanity they have found greatness.

The perfect pearl, the flawless diamond, the purest gold nugget. Dedicated divers, miners and panhandlers risk their lives in this quest for the best. Of course the money matters but the main motivation is the thrill of discovery, the reward for effort, the knowledge that hidden amongst the mundanity they have found greatness.

It's the same with shares. We are constantly searching for stock that is going to make the others pale into insignificance as it zooms from being just another good idea to take its place amongst the Coca-Colas, Gillettes and Microsofts.

It is pretty certain that in the immediate future at least some of these gems are going to come from the world of information technology. But with forecasts that around 80 per cent of high-tech companies will fail, and scary statistics that 60 per cent of start-ups backed by venture capital will go bankrupt, the trick is to identify the winners from within the morass of hype and hope that underpins this high-risk sector.

For an investor who is fast approaching his sell-by date and has trouble sorting his dots from his coms this is a daunting prospect. It seems an alien place out there dominated by machines and populated by strange young folk who shave their heads and wear denim and earrings to mask their gender.

Nobody said it was going to be easy. When faced with a challenge which threatens to expose my ignorance I remember the example of the late Geoff McLean, maverick boss of McLeans the housebuilders and sadly no longer with us. "Beware experts" was his motto and he always questioned the advice of his army of highly-qualified engineers, architects, surveyors, solicitors and so on. "We're only building bloody houses," he would explode. "Putting one brick on top of another can't be that difficult."

So this summer, in an effort to identify the genetically-modified perfect ears of wheat from the chaff, I am going to spend time researching the IT stocks. I'm going to talk with those who know and understand, ask questions, have jargon explained, read prospectuses and annual reports, comb news archives, visit web sites, hold discussions with people whose common sense and investing abilities I respect. And as I investigate the potential of each company I will ask myself these basic questions:

Do I understand what this company does? I must be completely clear in my own mind what the product or service is, because if I can't make head nor tail of it, how will anyone else? And frankly, if it is so complicated that it will only appeal to a select band of experts, I will probably consider its market is so narrow that it is unsafe.

Do its potential customers really want it? There must be a demand if there is going to be a profit. So I will talk to the customers to see where the company stands in the market place and at the same time find out about the competition.

When will the shareholders begin to benefit from profits? Forget the basic share price, I want to know about dividends. I accept that it is unrealistic for shareholders to expect annual payouts when companies are at the research and development stage but sooner or later dividends must be part of the plan. Dividends can only come from profits, which are the lifeblood of business.

Who is in charge? I need to be happy with the board of directors and the management. Starting with the chairperson, I will feel comfortable if I recognise the name or I can look up his or her other interests in Who's Who. I need someone with an established reputation to protect, on the basis that he or she will have been convinced about the company from the outset. Then I will examine the CVs of the management looking for the name of an experienced and previously successful business person. This is a dog-eat-dog world and you need to know all the tricks of the trade to survive.

Who else is buying shares? I like to see directors who have put their money where their mouths are, and it is good to know that some of the bigger investors, the institutions and the funds, have faith.

When I have the complete picture I will sit down in my rocking chair in the sunshine of my garden, arm myself with a glass of a double single malt, and think. Is this going to be a great company? Am I so confident about it that I would be prepared to stake my worldly goods and my reputation on it? Very few, if any, shares can pass this test but if one does I will buy a substantial shareholding. And on the Saturday following the purchase, dear reader, I will tell you what I have done and you can then make up your own mind about it.

Incidentally, if you know a share which you believe might fit my criteria and be worthy of examination don't hesitate to let me know. My e-mail address is at the end of this article.

***

Advisory and discretionary brokers employ analysts, who examine the current situation of companies and make recommendations to brokers who in turn advise their clients what to do. To add a touch of mystique and to confuse simple souls like me they use a special language.

BLOW means "buy lower down" but BOW means "buy on weakness" (they don't explain the difference). GBUY is "gentle buy" and UNB is "unbundle" but no-one says what unbundle means and it isn't in the dictionary. STB is "short term buy" and STS is "short term sell" but how long is short term? Does STB this morning mean it is an STS after lunch?

According to my calculation there are 67 sets of these capital letters and I defy anyone to give a meaningful definition for more than half of them.

Of course BUY and SELL are easy to understand but you will rarely find many of the latter. That's because if analysts rate a share as a buy the brokers can ring their favoured clients and earn some juicy commissions. If the recommendation is to sell the broker can only ring existing shareholders. Or am I being cynical?

terrybond@hemscott.net

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