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Why I was wrong on Medibank Private, again

G’day Foolish readers,

Last month I boldly declared the Medibank Private (ASX: MPL) party to be OVER.

At the time, the shares were languishing at $2.13, just a few cents above their float price.

Fast forward a month, and Medibank Private shares now trade at close to $2.40.

Seems I was wrong about that Medibank Private party being over. A 20% gain in a little over a month is cause for celebration.

What a difference a few days makes, helped enormously by a rising share price.

Gone are the stories of angry investors not being able to sell on day one to lock in a “stag” profit. Gone are the doomsters predicting Medibank shares will fall below $2, and stay there. Gone are the stories, full stop.

I’m on the record as saying I wasn’t touching the Medibank Private IPO frenzy with a barge pole.

I’m happy to stick by that call, but also happy for the legions of “mum and dad” investors who are now sitting on some decent Medibank profits. Well done.

Don’t get me wrong. Medibank Private is a solid company, with modest growth prospects, with a respectable fully franked dividend yield.

But at $2 it was priced at a premium to the market. At $2.40, the premium just got a whole lot bigger. The words “margin of safety” and “Medibank Private” are mutually exclusive.

Compare the valuation of Medibank Private to one of the Motley Fool Share Advisor recommended stocks, M2 Group Ltd (ASX: MTU), the telecoms company behind the iPrimus and Dodo brand names.

M2 Group shares are up over 40% since Scott Phillips tipped the stock toMotley Fool Share Advisor subscribers — easily out-performing the All Ordinaries Index, the latter being up less than 10% over the same time.

In a recent company presentation, M2 Group forecast earnings growth of 15 – 20%. Trading on a forecast P/E of under 15, coupled with a forecast fully franked dividend yield of around 3.6%, on those metrics, it leaves Medibank Private for dead.

In fact, the list of current Motley Fool Share Advisor buy recommendations is chock full of stocks similar to M2 Group — companies that have strong growth prospects, pay a decent and usually rising dividend, and trade on reasonable valuations.

In comparison to Medibank Private shares, why would you look anywhere else?

Overnight U.S. markets were as flat as a pancake.

Not so the ASX yesterday. While some of us were glued to the cricket, some canny stock market traders were making hay, pushing the S&P/ASX 200 Index back up towards 5,500.

Suddenly, in the blink of an eye, Credit Suisse’s prediction of ASX 6,000 by this time next year doesn’t look so far fetched.

In fact, at the rate this Santa rally is going, who’s to say the ASX won’t hit 6,000 earlier than the end of 2015?

Not me. I’m not hanging around, getting in ahead of the game, buying stocks now.

I’m not fussy. Growth stocks, value stocks, dividend paying stocks — they’re all the same to me, although I must point out, almost all stocks I buy have first been fully vetted and recommended to our paying subscribers by our crack team of Motley Fool analysts. I’m happy to leave my stock picking to the experts.

Some years ago, maybe as many as many as 20 years ago, I decided that if I was going to create wealth for myself and my family, I needed to take some risks in life.

So, I turned to what I knew and loved best — investing in the stock market.

Perhaps somewhat belatedly, I decided I wasn’t going to get rich leaving my money in the bank, especially in term deposits.

Back then, it should be noted, interest rates were FAR higher than they are today. In 1994, the cash rate was 7.5%, and term deposits were likely paying around 6.5% — a positive windfall compared to today’s pitiful interest rates.

Still, it was the stock market for me. Yes, as a relative youngster, time was on my side. But I didn’t own a house, wasn’t married, didn’t have children, and as always, the future was uncertain.

I’m pleased to report I haven’t looked back, and that’s despite living through the dot com bust, September 11, more stock market corrections than I care to remember, and the doozy of them all, the GFC.

I was summarily sacked from one job. At various stages in my career, I was a contractor, a temporary worker, a freelancer — paid no sick leave, no holiday leave, no superannuation, and was highly dispensable, at a moment’s notice.

I took a pay cut, twice. I left a stable, well paid job as an accountant at the BBC in London to join an upstart company with a strange name — The Motley Fool.

But all the while, I continued to live well within my financial means, saved hard, and continued to put money to work in the stock market.

My decision has served me well to date. And, I fully expect it will continue to do so for many, many years to come.

Looking ahead today, uncertainty abounds.

What happens when inevitably interest rates rise?

Will there be a house price crash in Australia, and what will it mean for our big four banks, and to our economy?

We’re well overdue a stock market correction.

What if iron ore really does hit $US50 a tonne?

What if the oil price hits $US50 a barrel?

What EVER happens now or in the future, I’ll still be a stock market investor. I’m committed to being a lifelong investor.

  • Not one day, like some Medibank Private stags.
  • Not one month, like those who will bail out at the merest whiff of loss.
  • Not one year, like those who compare the year to date return so far in 2014 on the S&P/ASX 200 Index to term deposits and determine the latter is their safest bet next year, and beyond.
  • Not three years, for anything can happen between now and 2017.
  • Not five years, for that is far too short a time period to let the power of compounding returns weave its magic.

I’m talking decades… up to, and hopefully well past my own personal due-by date. I’m putting the building blocks in place now — mostly through teaching — for my children to keep investing the family’s wealth way past when my time on this planet is up.

In a recent speech, RBA deputy governor Philip Lowe cautioned that much of the present malaise both here and abroad was because people were fearful of taking new risks, despite record low official interest rates.

Just to be clear, he likely wasn’t suggesting we all pile into the stock market.

He was encouraging entrepreneurs to start new businesses.

He was encouraging banks to lend to entrepreneurs.

He was encouraging small and big businesses alike to go for growth — create jobs, invest in something new and innovative.

He may have been even encouraging government to invest in infrastructure. To use this period of low interest rates today to build the big, bold projects of tomorrow — things that will pay the taxpayer back, largely through increased productivity, in spades in the years and decades ahead.

I’m talking about things like high speed rail. More, better, public transport. Out of town business parks. Additional airports. Take the politics out of high speed broadband — make the NBN the best, fastest, scalable and longest lasting it can possibly be.

All that said, I’m a realist. In the current political environment, where point-scoring trumps policy, getting any of the above done is more likely than Clive Palmer being re-elected to Parliament, or Virat Kohli becoming Indian ambassador to Australia.

What is likely however, is still lower interest rates.

Not as likely as when the Aussie dollar was trading above $US85 cents. But still a distinct possibility.

Writing recently in the AFR, David Bassanese said it’s possible the RBA is moving to cut interest rates further, given the still sombre outlook for the economy. He concludes by saying…

“A stubbornly high dollar and a flattening out in house prices would make the case for lower interest rates even stronger.”

In the face of what looks increasingly like interest rates next year of closer to 2% than 3%, for a lifelong stock market investor like me, it means three things…

1) Dividend paying stocks, especially of the fully franked variety, will continue their popularity.

2) Related to the above, as dividend yields are driven lower, so stock prices rise. Where once a 7% fully franked dividend was the norm, a 3% fully franked dividend yield might be the new normal. Imagine what that could do to the share prices of popular dividend paying stocks like Telstra Corporation Ltd  (ASX: TLS), even after their run up to and beyond $6?

3) In order to build wealth, and indeed to generate income in this ultra-low interest rate environment, you’re going to need to take some risks. And seeing as I’m not going to be building a high speed rail link, for me, as was the case 20 years ago, that means continuing to invest in the stock market.

Until next time, as ever, I wish you happy and profitable investing.

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The Motley Fool's disclosure policy is accountable. Of the companies mentioned above, Bruce Jackson has an interest in Telstra.

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