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Beating the Market

Beating the Market

By Bob Kohut 03.12.2018


In 1892 US-based financial journalist Charles Dow ushered in the age of ordinary retail investors looking to “beat the market” when he began publishing financial information, an endeavor today known as the esteemed Wall Street Journal. 

Flash forward more than a century to 2013, the year two economists espousing diametrically opposed views of the issue of beating the market won the Nobel Peace Prize for Economics in the same year.

In 1970 University of Chicago economist Dr. Eugene Fama proposed the “Efficient Market Hypothesis” where share prices always reflect fair value based on all available information being processed quickly by market participants.  The implication of the theory is that beating the market is virtually impossible, since the market is efficient. 

Proponents over the years have used EMH (Efficient Market Hypothesis) to promote passive index investing, where investors simply buy a fund that tracks a market index and let the market do the rest.  EMH opponents point to the success of active investors who build portfolios through individual stock picking, with legendary US investor Warren Buffet coming to mind.

Robert Shiller of Yale University was the other winner, based on his work in the burgeoning field of Behavioural Finance, the psychology and sociology behind why seemingly rational people make irrational financial decisions.  Shiller’s believed that market prices frequently do not mirror efficient expectations, with asset bubbles being a prime example.  Shiller is one of the few market experts who predicted both the Dot Com Bubble and the Housing Bubble, publishing a book entitled Irrational Exuberance in the year 2000, right before the Dot Com crash.

While the EMH viewpoint implies attempting to beat the market is at best a fool’s game, the field of Behavioural Finance suggests it is theoretically possible for investors to curb the siren call of “irrational exuberance” and beat the market.

Each week thebull.com.au publishes the Market wrap: Top 10 Rises and Falls, based on the Friday closing price.  For the week ending on 23 November, the Top Ten Fall list included some stocks that could serve as examples of market inefficiency.  Here is the list of the Top Ten Falls:


The biggest loser for the week was Technology One (TNE), a broadly diversified software provider serving the enterprise sector.  Founded in 1987, the company listed on the ASX in late December of 1999, closing its first trading day at $0.98, and is up more than 530% since then, trading now around $6.19.  Technology One moved to a cloud computing strategy in 2010.

By all financial and market indicators, the company is a rousing success.  In FY 2018 the company posted its ninth consecutive year of record profits.  The company has posted both earnings and dividend growth in the double digits over five and ten years.  Total shareholder return over ten years stands at a stellar 28% with 23.4% over five years.  

Informed investors following the stock had the chance to “beat the market” buying on that momentary dip when the aftermath was a rebound to an all-time high in the stock price.


Rational and efficient are not terms that come to mind when looking at this chart.  The information available to all market participants that apparently led to the drop was news of insider selling in the company, without any filing from the company indicating who was selling, how many shares were sold, and their remaining holdings. 

For a retail investor to have any chance at beating the market one must be, and stay, informed, and be willing to take risks.  Conventional investing wisdom says insider buying 
is a positive indicator for the future stock price, as company employees are expressing their confidence in the growth of their company by buying stock.
Is the inverse true?  Is insider selling a portent of hard times to come? Company employees are no different than anyone else – seeking to take profits from time to time or needing cash for major expenses.  If insiders and major shareholders are dumping their entire investment, that is a different story.  In the absence of that information, the “efficient market” chose to dump the stock, only to see it bounce back immediately.

Here are two other stocks from the Top Fall list that bear mentioning. 


Orocobre Limited (ORE) is a diversified mining company with lithium, borax, and potash assets.  Galaxy Resources (GXY) is primarily a pure play lithium producer, although the company has potash as well. 
 
Lithium batteries are the power source of choice for what some call the “new energy” future, with applications ranging from mobile phones and tablets to medical devices to solar/wind energy storage batteries, and electric vehicles (EVs).

The EV market is expected to explode in the coming decades, with projections of increasing lithium demand ten times by 2025. Research organisation Bloomberg New Energy Finance provides a country breakdown through 2030.


Neither Orocobre nor Galaxy pays a dividend, so the impressive average annual rates of total shareholder return are based solely on share price appreciation.  Yet given the demand outlook the question needs to be asked why shareholders have had such a bumpy ride.


Orocobre and Galaxy have been on the ASX Top Ten Short List for some time, with Galaxy ranked third and Orocobre fourth.  The price of lithium has been up and down, but the perplexing issue is the contrasting views on the supply side, despite the same information available to all participants.  Common sense would indicate the same information would lead to similar or identical viewpoints, but that is not the case. Some analysts are claiming a supply glut, while industry experts scream drought.

Earlier in the year investment bank Morgan Stanley reacted to a major increase in lithium production out of Chile with a dire forecast of a 45% drop in lithium prices by 2021. Oversupply was their concern.

In April Moody's Investors Service saw no decline in demand for lithium and the related metals for battery production -- cobalt, copper and nickel.

In an August research note Macquarie Research threw more fuel on the fire of supply issues, stating the lithium market was “sleepwalking into a tsunami of oversupply.”

Lithium industry insiders are pushing back, not surprisingly, claiming the Morgan Stanley note -- which led to a nearly $1.3 billion market value decline for a leading lithium miner in Chile – had underestimated demand.

Finally, London-based Metals Bulletin stepped into the oversupply/undersupply debate stating in the longer term the market would be “finely balanced.”

Both companies have OUTPERFORM analyst consensus ratings, with Orocobre garnering six BUY recommendations and six OUTPERFORM recommendations while Galaxy has five BUYS and three OUTPERFORMS.

Orocobre recently announced a further expansion of its Salar de Olaroz lithium brine project in Argentina, in conjunction with joint venture partner Toyota Tsusho.

Lithium is either mined from hard rock or extracted from salt brine ponds, with Orocobre holding producing and under development brine assets in Argentina.  

Orocobre has increased revenue in each of the last three Fiscal Years and swung from an FY 2016 loss of $29.5 million to a profit of $25.3 million in FY 2017 and a reduced profit of $2.6 million in FY 2018.

Along with its borax and potash assets Orocobre qualifies as an industrial chemical producer, producing lithium carbonate in Argentina with further development plans with its Toyota JV partner for a lithium hydroxide plant in Japan.  Additional refining is required to produce lithium hydroxide, but it is becoming more in demand for use in EVs.

Galaxy Resources (GXY) mines hard rock lithium here in Australia with a processing plant as well, with a development project in Canada along with a lithium brine project in Argentina.  The James Bay project in Canada has completed drilling and resource estimation and is in and feasibility studies are underway, along with approval procedures with the Canadian and Province of Quebec governments.

The Sal de Vida project in Argentina “one of the world’s largest and highest quality undeveloped lithium brine deposits with significant expansion potential”, according to the company.  A 2016 Feasibility Study Report indicated the project would support low-cost and long-life operations for both lithium and potash, with annual revenue generation around USD$354 million dollars.  The plan calls for the completed project to include evaporation ponds, a battery grade lithium carbonate plant, and a potash plant.

The company has now completed the sale of some of its holdings in Argentina to South Korea’s Posco, with the proceeds of about USD$280 million dollars to go towards the completion of the Sal da Vida project.  

The Mt Caitlin project in Australia went into production in March of 2017.  The Full Year 2017 Financials were hopeful, with revenues of $125,603 million and a net profit of $166,000, without a full year of operation. 

There is little doubt that retail investors are at a competitive disadvantage with industry experts when it comes to beating the market.  Hard numbers are difficult to ascertain, but it appears few retail investors do beat the market.  The question is why?  Behavioural Finance may shed light on some irrational tendencies that plague retail investors. 




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