AT THE end of any investment period, take this year for instance, you can produce a list of the 10 best-performing stocks and the 10 worst-performing stocks.
And the reality is that despite all the highbrow debate, financial theory, complications, opinions and incessant blah blah blah, the only thing you ever really need to know is what is on that list. And as we look to 2013, surely a better year, all we need to do is guess what's going to be on it in a year's time..
How do we do that? Simple. Over any period the stocks that move are not the stocks that do what was expected but the stocks that do things that weren't expected. That's what you have to work out.
If BHP Billiton hits its consensus forecasts, for instance, it won't be on the list. Share prices move on new information and by definition unexpected information, on surprises rather than on expectations being hit and forecasts being fulfilled.
On that basis there is no money to be made out of consensus forecasts, they don't move share prices, what moves share prices is changes in consensus forecasts and changes in expectations.
In which case, to make money next year, forget what's cheap or expensive on current forecasts, forget what everyone expects, imagine instead what's going to happen that no one expects. What's going to surprise us.
By definition you can't know what will, but that's where the money is. Not in what everyone knows but in what everyone doesn't know. So ask yourself, "What does everyone expect?" and having answered that, ask yourself, "Where are they going to get it wrong?"
So your job for 2013 is not to pore over the earnings and dividends forecasts and work out what has a low P/E and high yield. No, your job is to get a gin and tonic and go and sit by the pool, shut your eyes and imagine what's going to happen next year that no one expects.
This year the ASX 200 was up 11 per cent and the themes were pretty obvious. Anything to do with resources underperformed, and anything to do with banks, REITs, healthcare, utilities, infrastructure, defensive stocks (gambling, food) outperformed, in some cases massively - CSL and ResMed are up more than 60 per cent.
Although most people reading the list of 2012 performers will tell you that this is a "safe income" list, the truth is that it isn't safe income. A lot of these stocks have below-average yields. It is a "reliable earnings" list. Westfield, for instance, has no earnings growth, a low yield (4.7 per cent) but is up 33.4 per cent. This year was not a chase for growth. On the contrary, all these stocks were bought because they represented businesses with low-risk earnings, often regulated earnings and not necessarily earnings growth.
If you look at the detail, a lot of the stocks that have performed well and are perceived as "quality" stocks have performed well despite rather pitiful 0-to-5 per cent earnings growth.
So last year all you had to know was that everyone would spend 2013 relentlessly moving money from risky stocks to reliable stocks. The question now is what's going to happen that no one expects. Here are some possibles - don't laugh:
Someone sells a term deposit and puts the money back into equities. Imagine that!
The new Chinese regime upgrades official GDP growth forecasts. The resource sector goes into uptrend.
The US housing market leads a US economic recovery driving cyclical growth stocks.
Fear subsides and the "safety bubble" deflates. Suddenly a lot of boring stocks with no growth are going to look heavily overbought.
The $A falls and currency stocks come into focus.
Retailers have a good Christmas.
At the moment there is no faith in retail earnings forecasts. But what if retailers move talking about a "challenging outlook" and "we cannot provide any earnings guidance" to an "improving consumer outlook" and "expecting earnings growth of x per cent for the full year". Consensus forecasts have some big retail stocks on a 10-13 per cent gross yield. Imagine if that turned out to be true?
Now get yourself a gin and tonic and see what you can come up with.
For a free trial go to marcustoday.com.au. His views do not necessarily reflect those of Patersons.