Go with the flow and you should bag a valuable catch

If success in the sharemarket is being right 51 per cent of the time, then you don't need much of an edge to succeed. How do you get that edge? This is how we do it in the Marcus Today portfolios. You might like to try it.

If success in the sharemarket is being right 51 per cent of the time, then you don't need much of an edge to succeed. How do you get that edge? This is how we do it in the Marcus Today portfolios. You might like to try it.

We start with a top-down view of a sector. This is step one and the crucial bit.

Getting the sectors right is an attempt to go fishing in water flowing generally in the right direction. Focus on the stocks, the fish, without an eye on which way the tide is running and it is a recipe for disaster. We see that in a lot of "value" portfolios in the market, good-looking stocks picked in bad sectors.

Recent examples include a lot of resources-related and especially mining services stock picks. Yes they have high ROEs, but they are falling. Yes, they have high yields, but they aren't sustainable. Yes, they had good management and a good track record, but the tide has turned. The water is flowing in the wrong direction.

After completing step one it is then quite easy with the right filters (we have built extensive models to filter hundreds of stocks) to identify the quality stocks in the chosen sector. Those will be the stocks with a high return on equity, sustainable earnings, sustainable dividends, a good track record in a number of departments and low debt. You know the story.

That's the fundamental work done. Of course, what usually happens now is that the research says buy and the average (emphasis on average) investor buys it. Punters reading buy recommendations and buying. A mistake.

What we do instead is call these stocks "preferred stocks" (wish we had something catchier), stockpile them, not automatically buy them, and then set about the last part of the equation, trying to time them. In other words we don't just do the "what", we do our best to do the "when" as well. It's more than half the equation and when it comes to getting it 51 per cent right this bit of the equation is worth its weight in gold, not so much because it gets it right but because it is brilliant at identifying when you are 51 per cent or more wrong. Essential stuff to keep you on track.

So let's have a go at the first step. Pick sectors. Get this right and we'll be swimming with the tide. Here are a few sector ideas.

On Treasury forecasts, backed by the legislated increase in the superannuation guarantee plus inflation, super assets are going to grow from $1.4 trillion now to $7 trillion in 2030. That seems outlandish, 12.5 per cent compound growth in super assets for 17 years, multiplying super assets by five times. But, barring a market malaise, it is realistic.

All the Treasury is taking into account is the increase in contributions to 12 per cent, adding on a little bit for inflation and letting the miracle of compounding do the rest. Then you have the 5.5 million baby boomers retiring and moving into pension phase in the next 18 years.

So the first sector is any industry exposed to the growth in super assets. It's a bonanza for financial services and wealth management.

Next. You might have noticed in the budget, amid all the politics, a few nuggets based not on forecasts and conjecture but on a simple statement of fact from a blunt apolitical Treasury analysis of which sectors of the economy are expected to thrive. They should interest you. Tourism, housing and education. That's four sectors we've picked.

Then let's add the retirement services sector, the most exposed to the baby boomer wave. The obvious listed companies include companies that develop independent living communities. What about funeral homes. Add anything to do with healthcare, hospitals and pathology. That's another three sectors.

Then there's leisure. I reckon the P&O and Harley-Davidson share prices are underwritten as well. Then there's the explosion in telecoms services companies as the NBN hands out billions of dollars of work and we continue to move to a mature and acceptable level of telecoms and internet services for business and consumers. We still aren't there by a long chalk.

There is lots going on and plenty of water flowing in the right direction. Your next job is to list the stocks in those sectors, pick the pearls, put them on the list and get on with timing them. I'd do it for you but there's only so much I can fit into 760 words.

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