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The Only 3 Guaranteed Winners from the Medibank Private IPO

The stock market…

“A great place to get rich slowly, and an easy place to lose money very quickly.”

Never have truer words been spoken, these coming from Anton Tagliaferro, QV Equities Investment Manager, as featured on Livewire.

Mr Tagliaferro was buying stocks in the early part of October, when markets were swooning, naming ASX Limited (ASX: ASX), Shopping Centres Australasia Property Group (ASX: SCA) and Bank of Queensland Limited (ASX: BOQ) as companies he bought.

It’s not rocket science — buy good quality companies when they are trading at attractive valuations.

Yet we know from experience that most investors do the exact opposite. They buy when the market is riding high, and sell in a fit of panic when markets fall.

Except, when it comes to the Medibank Private IPO frenzy — more on that below…

Peter Lynch ran the Fidelity Magellan Fund from 1977 to 1990, delivering an astonishing 29% average annual return.

Lynch is widely acknowledged as one of the best investors ever. His book, One Up on Wall Street, was one of the first investing books I ever read. It has sold over a million copies, and is still as relevant today as when it was first published in 1989.

To put Lynch’s amazing returns into context, $25,000 compounding at 29% per annum for 13 years turns into more than $675,000.

It’s a fortune-maker investment. Yet, despite his remarkable performance, Fidelity determined that the average Fidelity Magellan Fund investor actually lost money during Lynch’s 13-year tenure.

Sounds impossible, right?

Not when you take into account the irrationality of individual investors.

According to Fidelity, investors would run for the doors during periods of poor performance and come rushing in after periods of success.

It never ceases to amaze me how perfectly smart, rational, measured investors turn into panicked, fearful psychopaths when stock markets go through one of their regular, periodic wobbles.

As far as corrections go, the early October swoon was a walk in the park. Heck, the S&P/ASX 200 Index didn’t even reach official correction status, defined as a fall of 10%. It fell a mere 9%, a tiny blip in the lifetime of a long-term investor.

Here at The Motley Fool, we’re uniquely positioned to see how individual investors like you behave during periods of extreme stock market volatility.

How? Subscriptions to our market-beating Motley Fool Share Advisor premium stock-tipping service, lead by our own Scott Phillips, drop off a cliff — despite us offering 60% off a two year subscription — when markets fall.

Madness. But true.

You may remember in October, when the market was having its little panic-attack, I wrote one of the most controversial emails I’ve written, saying…

“Yet, it’s EXACTLY at times like these you need to decide whether you want to make the BIG money that’s on offer, or whether you’re just a GREAT BIG scaredy cat.”

scaredy-cat 2

Whatever readers thought of being likened to a four-legged, furry, domestic pet — it worked.

In terms of new subscribers to Motley Fool Share Advisor — outside the frankly overwhelming response to the recent launch of Motley Fool Dividend Investor — it was one of our most successful messages yet.

Yes, even we were surprised…

TS 13 nov 14

Source: Telegraph.co.uk

Fast forward to today, and the ASX is going nowhere fast — in fact, it’s down again today.

Funnily enough, a flat to down market doesn’t seem to be dampening the Medibank Private IPO frenzy.

Let’s be clear. Although the share price is likely to trade higher than the IPO price on day one, there are only three guaranteed winners from the Medibank Private IPO…

1) The seller, in this case, that being the government.

2) The stock brokers, who never fail to take their piece of the pie.

3) The media companies who are benefiting from the massive marketing splurge promoting the IPO.

If nothing else, the Medibank Private IPO is a triumph of marketing and greed over investor rationality. Invest accordingly.

Back to the markets. Most investors can handle flat to slightly down markets. They sit there and do nothing, presumably waiting for the “all-clear” a rising market will signal to them.

Sadly, for investors in the mining services or junior iron ore sectors, it has been anything but a flat to down ride. While I feel your pain, I have NO sympathy for you.

You took a punt, likely in the hope of making a quick buck — just like many Medibank Private punters — and lost, big time. Return to Go and re-read Anton Tagliaferro’s quote above, with particular emphasis on the “get rich slowly” section.

Regular readers of our free Motley Fool Take Stock email will know we’ve long been warning investors off those sectors. If you’ve taken our advice, we trust we’ve saved you a serious amount of money, and heartache.

If not, you’ve only got yourself to blame for getting into a rather sticky investing predicament…

  • Do you sell, and lock in a massive loss?
  • Do you double-down, hoping this is the bottom and things can’t get any worse?
  • Or do you stick your head in the sand, do nothing, and hope the problem goes away?

My bet is most will do the latter. It’s the easy option. Ignore and pretend it never happened.

As for those thinking about doubling down, think twice.

Take iron ore producer Mount Gibson Iron Limited (ASX: MGX) for example.

Its shares are down 60% so far this year. Awful, but not as bad as the punishment meted out to other junior iron ore producers, specifically Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI), both down over 80% in 2014.

Mount Gibson is now trading at close to its cash balance, meaning the market is effectively placing zero value on its iron ore assets and its yearly production of close to 7 million tonnes. As for the historical dividend yield of close to 10%… let’s just say it doesn’t tempt Andrew Page at Motley Fool Dividend Investor.

Nor does Myer Holdings Ltd (ASX: MYR), trading on trailing dividend yield of 8.6%, fully franked — and that’s after it cut its most recent dividend.

With sales flat, profit margins under pressure, increased competition from David Jones, new competitors in H&M and Zara, and consumer confidence riding at GFC levels, there’s simply no light at the end of the tunnel for Myer.

Andrew calls such companies dividend traps. Sure, you might pocket a very juicy dividend yield, but the capital loss will more than offset the yield. Myer is a case in point — so far in 2014, its shares are down a whopping 36%.

Dividend trap indeed.

It’s a completely different story with the ‘under the radar‘ stock Andrew has just released, exclusively to Motley Fool Dividend Investor subscribers.

Trading on a fully franked dividend yield of 5.4% (7.7% when grossed up for franking credits), despite its dominant market position, this ASX stock is ignored by the vast majority of investors.

When the Motley Fool’s strict trading rules allow, I’ll be jumping in too… which is more than can be said about Medibank Private…

Discover our top dividend stock for 2014-2015

Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential. Just click here to download your free copy of today.

Of the companies mentioned above, Bruce Jackson has an interest in Shopping Centres Australasia.

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