Hear our thoughts on some of the important aspects of the proposed merger. This is likely to get you talking about the issue. Also, we thought you might like to hear what some investors do when they hear about a takeover or merger announcement. Click here

Share market floats, also known as IPOs, are back in the spotlight again with the launch of the QR National by the Queensland government. This float will be the biggest since Telstra T3 was spun off in 2006 and the question being asked is will this one go down the same path?

Given that subscribers to all three Telstra floats must already be feeling like they should have jumped off that train long ago, you can understand they would be questioning the risk in taking on something like QR National. History shows us that the chance of being in profit after twelve months from the date a stock is launched into the market is around 50%. Therefore, in my opinion, the answer to whether you should invest in QR could be determined by tossing a coin.

I find that most float documents are really more a marketing exercise than something an investor can use to make an informed decision with. As such I have a general rule of thumb to not buy into floats, but rather to wait until the market tells me what the stock is really worth. This way, at least 50% of the time it is possible to buy into a company below the offer price, or in the case of Telstra, to put my money elsewhere and invest in something that has proven value. If you are considering buying into QR National be sure to do your research and then maybe flip a coin.

So what do we expect in the market?

In my last report you will remember I suggested that historically the All Ordinaries Index falls into a low approximately every 20 weeks. I further suggested that over the past 18 months this reduced to around 17 weeks, and then over the past nine months reduced to 15 weeks. It has been 18 weeks since the last major low on 21 May, and the next two weeks will reveal whether the low came in on 25 August at only 14 weeks or whether it is coming in now.

If the low has occurred the market will be bullish, if it has not occurred then we will see it fall away. That said, a fall is likely to be minor and in the order of approximately 200 points. Either way, I still believe it is possible for the market to rise to between 4800 and 5000 points by the end of the year. Again, as we have seen so many times in the past three years, in the wake of the GFC anything is possible.   

All too often we get caught up in short term thinking rather than focussing on the bigger picture, and this is especially so when it comes to investing. To illustrate, let’s consider what can be achieved with good shares and a little time. Put simply, had you invested one dollar in BHP shares at the start of January 1999 by 31 Jul 2010 your investment would have increased 592 per cent. During the same period other top 20 shares like CSL grew 599 per cent, Woodside Petroleum 473 per cent and Woolworths experienced a gain of 386 per cent. These figures are only for capital growth, and therefore dividends received or re-invested would have increased these returns. Of course not all shares are suited to a buy and hold over the longer term. The same dollar invested in Telstra experienced a loss of 57 percent, and 60 percent with AMP, not including dividends.

The key to investing or trading the share market is not to look for the next big thing or to find a new way of trading or even trying to pick the short term moves. With over four hundred years of world share market history to guide us, one thing we know with certainty is that nothing has changed in terms of the mechanics of markets. People continue to react to information and therefore the market will always do what it does. Regardless of how smart we think we are or how much new technology we have the other thing we can learn from the 400 years of market history is that we do not learn from mistakes.     

So what do we expect in the market?

You could be forgiven if you are thinking that the movements in our market are very much like driving your car with the handbrake on. You know something is wrong but you just can’t figure out what. Our market is trading at just below 4,600 points, which is the same level it was three months ago despite having two strong moves of 10 per cent plus and two nine per cent plus moves. The problem is that only half of those moves were up. Whilst this is exciting for short term traders, the same cannot be said for medium to longer term investors.

The longer this volatility goes on the more likely it is for the Australian share market to move down over the next few weeks. If the market fails to continue the current rise we could see it fall to below 4,200 points and possibly to 4,000 points. I would expect that a move down would be short and sharp with the eventual low occurring between 20 August and mid September 2010. Given this, it might be wise to take a cautious approach to investing until we can confirm which way the market is moving.      

I have said it before and I will say it again, for the life of me I cannot understand why anyone would want to own Telstra, it just does not make good investment sense. The government doesn’t want it, that‘s why they sold it, and recently the Future Fund sold out its holdings in this company.

So why do investors continue to hold onto Telstra? Many say because it pays a good dividend, but this is simply an excuse to justify why they didn‘t sell out earlier. There are many other good stocks on our market that pay solid dividends, and contrary to Telstra have actually risen in price over the years. It takes a lot of dividends to recoup from a fall of over 60 per cent, which Telstra has suffered over the past tens years. If you look at the real return investors received by holding onto this stock in the past 10 years, you would find most, if not all, would have been better off investing their money in a bank account.

The announcement this week that the government is forcing Telstra to break up its operations has compounded the fall in the share price, although in my opinion it is a good idea and one which may see the share price actually start to rise. That said you would have to wonder if those in charge of the Future Fund were aware of the government‘s intentions given that it is less than a month since the Future Fund dumped their holdings. It seems like perfect timing if you ask me.

So what can we expect in the market?

The All Ordinaries has continued to defy logic and over the past two days has risen strongly to now be trading near its highest levels in a year. Whilst the rising market is good for investors, what I am seeing is a false sense of security emerging from the general investing public. Many investors are now rushing into the market thinking that they are missing out on this current bull run. Some are even borrowing money in an effort to make up for the losses they experienced over the past two years.

In my opinion these investors are taking too higher risk because as the old saying goes ╘the amateurs buy at the top while the professionals buy at the bottom. Right now the amateurs are taking a boots and all approach to the market, while the professionals are being more cautious, which is evidenced by the low volumes being traded on our market over the past few weeks. 

I still believe the market will fall for at least two weeks, which should start to occur any time now. I am also convinced that the market will fall into November to below 3800 points. Only time will tell if I am correct, but as always protect capital by setting stop losses. Finally be patient because those who are will reap the rewards.

Over the years I have had numerous discussions about whether or not Telstra is really a good investment. Many investors have continued to hold this stock over the past 11 years, despite its poor performance, mainly because they continue to receive a dividend. However, I believe this is simply justification to make them feel better about holding a share that has averaged an annual loss of 1.51 per cent per annum from 1 January 1998 to 31 December 2008. In fact Telstra has suffered a 67.17 per cent fall from its all-time high of $9.20 in February 1999 to its recent low of $3.02 in April 2009. 

In the past 11 years, Telstra has only risen during 6 of those years, while suffering negative returns during the other years. If we include this year, it is currently down 7.83 per cent to 31 July, which means Telstra is a really 50/50 bet. Interestingly, Telstra is not the only stock that has performed poorly over this period. Investors only need to look at the likes of NAB or AMP to see that these solid companies have roughly achieved a 50/50 gain/loss record.

Holding on to a stock simply to receive a dividend can be detrimental to an investor?s portfolio especially when there are many other good stocks that have performed far better and also pay a dividend .The example of Telstra also highlights why buy and hold is not necessarily a good strategy and why using a simple stop loss can effectively minimize any downside risk to a portfolio.

So what can we expect in the market? 

Last week the All Ordinaries has risen to its highest level since October 2008, although the market is now displaying signs that the current bull-run is slowing. There is an old saying that what goes up fast usually comes down fast, and the All Ordinaries Index has moved up at a faster rate over the last 5 months, since the low in March 09, than what occurred following the long term low in March 2003. Given this we need to expect the market will fall away very soon, as it cannot keep rising at this pace.

As I mentioned last week, while I don╒t believe the bullish run will last for too much longer, I need to accept that it may move up further into August than anticipated. If the market continues to rise, probability suggests that it will fail to push through my upper target level of 4600 points. When it does fall, it could move down to between 3500 and 3700 points by mid September - how far the market moves down will indicate whether we can expect further falls or whether the next bull-run will commence. As usual only time will tell, but for now make sure you set stop losses so as to protect your capital.