# Strategy question: Undervalued Blue Chips as portfolio basis?



## Paladin (14 July 2008)

Hi all!

Brand spanking new to this site, and I have to say I think I'm going to enjoy being here. It's wonderful to read all the many and varied different takes, systems and so on. And it's wonderful also to see that this is generally quite a nice community. Thanks to you who are more experienced and take time to participate in this newbies forum.

Anyway, I thought I'd briefly outline what my proposed strategy for my first portfolio is and see if anyone wants to comment.

At the moment I have a small seed investment of about $25k that I'm wanting to put into shares. I've been playing away on the market in small dribs and drabs just to have a bit of fun while I've been trying to educate myself. I'm a hopeful investor in my 30s who has no dependants, and decent equity in my house. I'm basically wanting to be a bit smarter, stop letting property do my saving for me, and start putting active regular investment into shares (and it looks like a fun hobby!).

I've been reading a lot about different trading stategies, and what I think would work best for me is to put about $15k of my money into a value investment / fundamentals style approach, basically buy and hold (within reason) over a 5-10 year term. The other $10k I want to be a bit more speculative with. I can afford to lose all this seed money if I make horrid mistakes, but it would hurt and probably put me off the market for good then, writing it off as too hard.

A year or three down the track when I feel like I know what I'm doing, I might look at margin loans and savings gearing, but for now I'm into a gentle intro.

It seems to me that now might be a good time to take the $25k out of cash and put it in the market. If things keep going south for a while - no biggie, really, as I'll try to keep in mind a 5-10 year horizon. I won't talk about opportunity costs, even though cash is doing well at the moment. I'm comfortable putting that money into something that might go backward for a while.

If it does sound feasible - any tips (and I know this is subjective, and I know it's my call in the end, and I know I'm asking a lot etc etc) on some good blue chips that at the moment seem undervalued on fundamentals? Ideally, I'd like stuff that's a good balance between franked dividends and growth. Westpac and Metway seem to me to be good banking stocks to get into at the moment - again with a 5 to 10 year horizon. Any good resources / retail / other sector stocks that I should add to my "to research" list? I want to stay away from aviation and media stocks (the former due to oil, the latter because I think 'new media' is going to hit traditional broadcast/print franchises hard, like it is currently doing to the music industry, but I don't think 'new media' itself is worth buying into until more stable paradigms emerge). The spec stuff I'll punt with on my own later - but for now, here's my $64k question:

What stocks would you advise your kids / friends / whatever to start a $15k value investment / fundamentals portfolio with?

Thanks heaps for helping with this first, unsteady step. Really looking forward to any input.


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## Caliente (14 July 2008)

Hi Paladin. I like the thought you've put into this strategy and I think it could pay off for you over the longterm. 

The interesting thing about your strategy is...you may have left things a little too late or you might actually be early.

While plenty of money has been made over the last few years, blue chips are really feeling the pump right now - and confidence in markets is at a precarious level. 

The all ords is hovering around 5000 and a breakdown while unfair is possible with the incredible damage to financials that is happening over in the US.

Perhaps, you should keep this money earning interest for a month or two while we are still feeling for the market bottom?

Take care -- its a jungle out there!
-Cali


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## nick2fish (14 July 2008)

Although a relative newbee myself (2 years is a  blink in share market terms) I am very confident in passing out this piece of advice.

You are now looking at the start of a very serious bear share market. For the inexperienced... Nothing is cheap at the moment...nothing. 

In the next couple of years this market will have more ups and downs than a bungee jump as it heads down to a point unknown. 

Blue chips will be smashed the most as people flee. 

Set up an account and built up a decent cash stake and while you are doing that watch and learn with a portfolio watchlist. 
Thats my


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## Paladin (14 July 2008)

Thanks guys. I really appreciate both your replies.

So, to summarise: blue chips are a no-no, given a potential looming crisis. Keep it in cash, eh?

If anyone else agrees with this consensus or has other differing opinions, I'd love to hear them. If staying the heck outta the market is the go at the moment, maybe I should look at another strategy - say, start trading small (just for the heck of it and to learn what kind of strategy suits me best: cost of an education, say)? Start seriously looking at the kind of trend buying that tech/a and others here advocate, but in amounts I'm not scared to see burn and with conservative stop loss strategies in place? Of course, brokerage will burn me if I'm buying in small dribs and drabs, but again, this is something I'd be prepared to burn at least a couple of grand learning to do.

My hesitancy is simply in my own ability (and anyone else's really) to pick the bottom, and the contrarian in me is always an issue 

Thanks heaps!


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## So_Cynical (14 July 2008)

This mite be a good place for u to start.

http://www.asx.com.au/resources/education/games/index.htm

ASX Public Sharemarket Game

The Game challenge is to increase the value of your share portfolio in a set time frame. 
Simulates real sharemarket conditions as you buy and sell shares online using "real time" share prices. 
$5,000 Westpac Broking account to be won.
Registrations for Game 2 open July 8 and close August 5.
Trading commences on August 7, 2008. 
$50.000 dollar account to play with.


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## white_goodman (14 July 2008)

hmmm and whats peoples feelings on when we will hit bottom...end of the year? longer?   do we need the financial sector to hit bottom first for the rally to start?


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## agro (14 July 2008)

Paladin said:


> Thanks guys. I really appreciate both your replies.
> 
> *So, to summarise: blue chips are a no-no, given a potential looming crisis. Keep it in cash, eh?*
> 
> ...




You should be investing in equities! whoever says cash is king is right as far as safety.. but high risk high reward,

buy when people are panic selling! thats how warren buffett made his millions in the 87 crash.. 

the market will return to all time highs even if it takes years


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## Caliente (14 July 2008)

hi agro - I totally agree that you should be investing in equities. Only problem is that this gentleman is a new kid on the block if you will. Right now the waters are dangerous...but yes there is money to be made for sure.


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## Paladin (14 July 2008)

Thanks, So_Cynical.

I'll do that. I'll also perhaps have a play with small amounts in the real world. 

I've very much enjoyed your input in a number of other threads here, by the way.

The strategy I was referring to by tech/a is (and I should have cut and pasted the URL as well as my notes - will do so in future):

"This is my entry in its entirety;

CLOSE>Mov(CLOSE,175,EXPONENTIAL) AND H>Ref(HHV(H,2),-1) AND CLOSE>OPEN

Translated into plain English it has 3 components;
1. Stock is trading above a long term moving average (= long term uptrend)
2. Today's high is the highest in 3 days (= short term uptrend)
3. Today is an up day.

That's all.

I trade the ASX300 on EOD data and use a 6.5 ATR stop.


No rocket science there, and yet the system always ends up with the strongest stocks in the strongest sectors."

Which seems to resonate with a stop loss strategy I read about elsewhere, to whit:

"I've had recently. I'm a member of an investment club, which has been fascinating to be in. One of the things we do apart from really buying shares, is each person is to have a fictional portfolio of $50000 and to keep track of it over a year. 
I really stress the importance of having a strategy (most of the group use very random methods of buying shares) and have selected a random group of shares, but with the proviso that if they lose 10% they are "sold" from the fictional portfolio and if they go up 25%, they are added to. Once added to, that new purchase price is where a new 10% loss price is calculated from. 
This random entry method but with a strict exit strategy is in front, by about 8% in a few months.Only one other of the 18 portfolios is in front. 
I guess what I'm trying to say is that a tight exit strategy and stop loss is VITAL to success, even with random entries."

What do you guys think about that sort of thing in the current market?


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## agro (14 July 2008)

Caliente said:


> hi agro - I totally agree that you should be investing in equities. Only problem is that this gentleman is a new kid on the block if you will. Right now the waters are dangerous...but yes there is money to be made for sure.




yeh but it doesn't take much thought to place money in the stockmarket into a solid company like BHP or FMG

i bet my bottom dollar you are likly to get a higher return than leaving it in the bank.. but then again, i spose you need to be involved and watch the price just in case something were to happen to the company you placed your money into (e.g. babcock or allco scenario)


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## Caliente (14 July 2008)

Of course not, but don't you think there is still significant downside risk built into a big cap like FMG?

I can see it dropping to the 8's/7's in this wild market.

Likewise, BHP could fall to mid to low 30's. While less likely than the call on FMG, BHP might touch $35 over the coming weeks.

What I'm suggesting is that right now is still uncertain waters for the first-time investor.


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## Paladin (14 July 2008)

agro said:


> You should be investing in equities! whoever says cash is king is right as far as safety.. but high risk high reward,
> 
> buy when people are panic selling! thats how warren buffett made his millions in the 87 crash..
> 
> the market will return to all time highs even if it takes years




Hey Agro, all. Yep - that's basically where I'm coming from, in that I'm happy to take a short term bath in the confidence that things will go north eventually. I have enough assets that $25k is a relatively small bump, albeit one I'd hurt from *if* I wiped myself out and it didn't look like long term I'd recoup my investment. Realistically, what are the chances of a total meltdown (I ask that in all honesty - I can't find anyone who really seems to be able to call it). The problem is, of course, the opportunity cost of going backwards while cash is so good versus the opportunity cost of staying in cash while missing out on the possibilities on offer and the triksy nature of picking the lows. I dunno. Cali has me picked right as a newbie entering in weird times (and from his/her other posts, I respect hir opinion very much), so I'm really trying to inform myself as to all different opinions around and see what feels right. 

That said, I *do* want to be in equities soon, all the risks considered, and understanding that the timing itself might not be. . . ahem. . . _muy caliente_. Given that blue chips might not be a 'safe' basis at the moment, I'm interested in hearing how other people would gently enter the market at the moment with the sort of amounts I'm talking. I get it that now isn't the time to think 'gentle' - so maybe the best way is to say I'm happy to lose some while learning, but not all. In fact, I kinda expect that to happen. I'm also happy to wait a couple of months if there is a chance of things going really south. I'd like to be in a good position skills wise (if not portfolio wise) when things curve out (and I'm talking about the market here like it's some kind of homogenous lump, which it clearly isn't - surely there are *some* ways an idiot like me can dip a toe in at the moment?) - so any advice, again, on what you'd advise a mate to do would be appreciated. I'll make my own decision at the end of the day, of course, but the hive mind here seems a good 'un so I'd be silly not to pick it, eh?


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## Paladin (14 July 2008)

Caliente said:


> Of course not, but don't you think there is still significant downside risk built into a big cap like FMG?
> 
> I can see it dropping to the 8's/7's in this wild market.
> 
> ...




See - thanks. That's great to overhear. So would BHP be good to chuck on a watch list at the moment, with a buy at $38 and a stop loss at $34? As an example. I notice that consensus broker estimates seem to have it as a buy at the moment. That would beautifully fit my criteria of a presently undervalued 'blue chip' that might suit in a 5 year window, short term volatility notwithstanding.

Sorry if I'm being at all pushy. Really trying to learn. Feel free to tell me to rack off if it needs to be said. This is as fun as sitting with the smart kids after class, though


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## Julia (14 July 2008)

Paladin said:


> I'm happy to take a short term bath in the confidence that things will go north eventually.



Just hard to know why you'd want to do this?   Why not sit safely on the sidelines, accept that you might miss out on a small amount of profit when a reversal eventually occurs, and await a return of an uptrend before buying anything?

If you can't resist the urge to jump in now, then I'd suggest you pick a sector which is doing OK, rather than buy the traditional blue chips like the big banks.


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## Paladin (14 July 2008)

Julia said:


> Just hard to know why you'd want to do this?   Why not sit safely on the sidelines, accept that you might miss out on a small amount of profit when a reversal eventually occurs, and await a return of an uptrend before buying anything?
> 
> If you can't resist the urge to jump in now, then I'd suggest you pick a sector which is doing OK, rather than buy the traditional blue chips like the big banks.




Thanks Julia. I guess my answer is twofold: 

(1) One of my priorities is learning. If I get in during a muddy market, then I may lose some, but I imagine I'll not only be recouping (if stocks are chosen well) that when the market turns, but also be learning a lot more than getting in when everything is a surefire winner. And, if I want to do this long-term, then that will stand me in good stead when the cycle comes around again when (presumably) I'd have more exposure.

(2) I'm not confident in my ability, or in many other people's, to predict when a reversal has happened. I imagine that by the time it's fully in swing and is being talked about all over the place that a lot of potential gains have been missed. Missing a small amount of profit would still rely on being able to accurately predict the bottom, no? 

And to make this useful - what sectors do you personally like at the moment? Food? Energy? I'd really appreciate your input.


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## Paladin (14 July 2008)

Sorry Julia - just re-read my last post. I didn't mean "and to make this useful" as being a dig. What I'm getting at is that I'd value your take on what sectors you feel are presently the best bets.

Also, of course, the reality is that I can put half in now, and half in when the market looks better. Small amounts only, but it gets me learning.


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## AlterEgo (14 July 2008)

Paladin said:


> What I'm getting at is that I'd value your take on what sectors you feel are presently the best bets.




I personally wouldn't be buying anything at the moment. There may be a bit of a rally soon, but I think the market has further to fall yet. I'd be looking at short-selling, not buying.


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## Tysonboss1 (15 July 2008)

I think we are pretty much hitting the bottom now,..

I think he understands that the longterm growth is more important than short term ups and downs, So even if he bought in today and the market did drop a bit further it wouldn't really matter,

However if he waits to long into the up swing he is going to miss some good opportunities,

My suggestion- Spread your money accross 10 companies that are under valued and sit back everytime you have saved another $2000.00 add to your investments,

keep away from the speculation rubbish for now,... continue to build your foundation on solid assets.


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## Julia (15 July 2008)

Gee whiz, Tyson.  That's a brave call.  I'm more with Alter Ego at this stage.

Paladin, re sectors have a look at the charts for the XEJ (Energy Index)
and XXJ (Financials).  That will give you an idea of what I mean.


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## korrupt_1 (15 July 2008)

Tip: don't try to pick bottoms.. you'll get smelly fingers

Very few traders will enter the market at the very lowest possible entry... if you do, i'll say you just got lucky!

Maybe rather than go all in with your 25K now.. why not dribble it in slowly?

I've heard rumours that fund managers have plenty of cash sitting on the sidelines waiting to buy up blue chip financial stocks, but are just waiting around a little bit more... perhaps after the reporting season finishes?


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## Tysonboss1 (15 July 2008)

Julia said:


> Gee whiz, Tyson.  That's a brave call.  I'm more with Alter Ego at this stage.




It's might be a brave call. but thats how I am playing at the moment. I not expecting a fast recovery, and certain sectors may have a bit more unwinding to do, But I feel the areas that I am investing in are now extremly good value and I feel slowly between now and the end of the year the tide will be slowly turning.

I am happy to make selected investments against the general sentiment.


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## Paladin (15 July 2008)

Hi all! 

I just wanted to thank everyone for their help here. In case anyone ever wonders, this has genuinely had a big impact on what I'm planning to do, and has possibly saved me a lot of money - so thanks. Just to give a little back, if anyone who has helped me out here thusfar would like advice or info on the writing/publishing industry (which is my own area of expertise) please PM me and I'll do what I can. I'd offer to mow yer lawns, but I'd do a ****e job.

Anyway, after hearing all this what I'm thinking is:

Abandon my initial strategy.
Set up a watchlist for some of the stocks I was already interested in, and research some others.
Place one or two low-quantity conditional buys here and there on stocks I'd be happy to hold for 5 years or so (say, BHP at $38 just as an example), and be prepared for falls on whatever I place now.
Drip feed the 25k in slowly over the next year or so (with maybe one 2k buy a month for the next couple of months while taking the temperature and then some larger buys on a more ad-hoc basis if things seem good), with that 'year' to be altered if the market tanks or rallies.

I'm pretty happy with that.


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## mayk (15 July 2008)

Technically  BHP can go to 34-36, read the BHP thread on this forum. Not saying 38 is not a good value long term. 

Sane decision anyway. 

I am new to stock so just listen to advise of pro's here.


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## Tysonboss1 (15 July 2008)

Paladin said:


> Set up a watchlist for some of the stocks I was already interested in, and research some others.
> Place one or two low-quantity conditional buys here and there on stocks I'd be happy to hold for 5 years or so (say, BHP at $38 just as an example), and be prepared for falls on whatever I place now.
> Drip feed the 25k in slowly over the next year or so (with maybe one 2k buy a month for the next couple of months while taking the temperature and then some larger buys on a more ad-hoc basis if things seem good), with that 'year' to be altered if the market tanks or rallies.
> 
> .





sounds pretty good


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## white_goodman (15 July 2008)

Tysonboss1 said:


> sounds pretty good




yeh does sound good but id bump it up to 2.5 k per stock or else brokerage will be too high a percentage of your outlay...

but yeh i wish i had seen this site before i started last year... and yeh i could easily see BHP going mid to low 30's


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## Paladin (15 July 2008)

white_goodman said:


> yeh does sound good but id bump it up to 2.5 k per stock or else brokerage will be too high a percentage of your outlay...
> 
> but yeh i wish i had seen this site before i started last year... and yeh i could easily see BHP going mid to low 30's




Thanks Mr Goodman  Love the icon by the way. 2.5 is pretty do-able, and I'll definately both avidly read the relevant threads here on whatever stocks I've got an eye on and not buy if something is clearly in a downward swing. Still, I do take the point about being able to pick bottoms. I like to keep my fingernails clean 

It's been so helpful to run this strategy past everyone here BEFORE starting to trade.


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## ernesto (18 July 2008)

Good on you for taking time to consider your strategy before diving in, Paladin.

One thing that struck me though, in reading your posts, is the number of times you mentioned that you felt ok losing money, e.g.

_"I can afford to lose all this seed money if I make horrid mistakes"_

_I'm comfortable putting that money into something that might go backward for a while."_

_"I'm happy to lose some while learning, but not all. In fact, I kinda expect that to happen"_

I would question the use of this philosophy in being able to trade successfully. What you are describing is more like the sort of attitude many take before walking into a casino. 

Regardless of whether you perceive that you can 'afford' to lose this 25k, this money took work to earn. And this money has the potential to earn you a lot more if invested in the right way. So, in a way, you owe this money the respect of holding it, even if it might be burning a hole in your pocket, until you can back yourself on an educated investment.

If you are saying that you feel comfortable parting with some money, then why not invest it in educating yourself by buying some books/subscriptions/taking some courses etc?


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## johenmo (19 July 2008)

Paladin said:


> Regardless of whether you perceive that you can 'afford' to lose this 25k, this money took work to earn. And this money has the potential to earn you a lot more if invested in the right way. So, in a way, you owe this money the respect of holding it, even if it might be burning a hole in your pocket, until you can back yourself on an educated investment.




Paladin - I'm similar to you and started in just recently.  Which was too early.  I'm waiting now for a bit more sideways movement in some watchlisted stocks before buying.  With a longer term view like yours I feel that what I may lose in a month or three will be covered in the longer term.  

An earlier post mentioned beware of purchases like BNB.  I got a very small parcel after they dropped a lot but got caught (and it was before finding ASF), which would have kept me away from them.  So whilst having some financials I am waiting before going for any more.

I agree with the above.  The money took work to earn, why be prepared to lose it.

There's a lot of support for books like Adaptive Analysis by Nick Radge.  Local library doesn't have it anywhere so I may have to buy it.  Have purchased 3 books so far and have a couple of others to read.  Between these and ASF, a stop loss is a fundamental of a strategy (guess who didn't have one with BNB!!!).

If you want some software - try Incrediblecharts.com or HUBB2.  We have HUBB2 but I think Incredible is better.  Roger Kinsky's "Online Investing on the Australian Sharemarket" contains lots of useful info - and our library does have it.

Last thing.  I will go Blue Chip - it's just a question of when and then what.

Cheers


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## Paladin (19 July 2008)

ernesto said:


> Good on you for taking time to consider your strategy before diving in, Paladin.
> 
> One thing that struck me though, in reading your posts, is the number of times you mentioned that you felt ok losing money, e.g.
> 
> ...




Hi Ernesto!

Thanks very much for the thought, and of course you make an excellent point. As for eductation - I'm a massive believer in it. I have several bits of parchment on the wall, work in research, and my natural inclination is to try and think things through before acting. I'm buying LOTS of books etc on the subject at the moment as well as trying to educate myself via chats like this and whatever other online resources I can eat. My inital 'strategy' that started this post arose from trying to work out what my natural investment temperament would be - which in turn led me to reading lots about fundamental and value investing  

I guess where I'm coming from is that I know, from knowing myself, that any mistakes I make on the market itself (even if playing with small amounts) will be cemented in my mind forever. Theories I find easier to discount or simply forget.

I assure you I am NOT comfortable with consistently losing money in the market. I do think I've come off as viewing the market as a slot machine - which is something I clearly need to be mindful of. I am trying to tell myself, however, that it's OK for me to lose a bit while learning the ropes. So maybe the little mantra you've astutely picked up on is just me reassuring *myself* that it's OK to make some mistakes at this point so long as it means that over the longer term I'll make less of them. And of course it's a problematic time to be trying to learn the ropes, but them's the breaks - and if nothing else, now seems like a very good learning environment.

You're absolutely right though that life has a way of rising or lowering itself to our expectations of it. Thanks for reminding me of that.


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## Paladin (19 July 2008)

johenmo said:


> There's a lot of support for books like Adaptive Analysis by Nick Radge.  Local library doesn't have it anywhere so I may have to buy it.  Have purchased 3 books so far and have a couple of others to read.  Between these and ASF, a stop loss is a fundamental of a strategy (guess who didn't have one with BNB!!!).
> 
> If you want some software - try Incrediblecharts.com or HUBB2.  We have HUBB2 but I think Incredible is better.  Roger Kinsky's "Online Investing on the Australian Sharemarket" contains lots of useful info - and our library does have it.
> 
> ...




Hi Johenmo. Thanks heaps for the book tips. One of the first things I did on this site was see what books people were recomending, and I've already gotten through a few of them. I'll put yours on the list!

Yeah - this forum has been invaluable for me too. I'm amazed how much nicer this community seems to be than other Aussie online stock forums. I've really noticed a difference, just from reading them all.


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## prawn_86 (19 July 2008)

Paladin said:


> Hi Johenmo. Thanks heaps for the book tips. One of the first things I did on this site was see what books people were recomending, and I've already gotten through a few of them. I'll put yours on the list!
> 
> Yeah - this forum has been invaluable for me too. I've only made one poor purchase thusfar (MRE), but if I'd come here first would have been spared that too
> 
> I'm amazed how much nicer this community seems to be than other Aussie online stock forums. I've really noticed a difference.




Glad to hear you are liking ASF Paladin.

In order to support it, please purchase your books from the ASF bookstore, as this sight relies soley on advertising and the bookstore to keep up and running.

Prawn


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## Paladin (19 July 2008)

prawn_86 said:


> Glad to hear you are liking ASF Paladin.
> 
> In order to support it, please purchase your books from the ASF bookstore, as this sight relies soley on advertising and the bookstore to keep up and running.
> 
> Prawn




Oh! Cheers mate. Will do. Oooops. As an aside, would be more than happy to donate to keep the forums running (say via paypal) if that were ever an option you guys implemented or needed. This has very much been of real worth to me.


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## prawn_86 (19 July 2008)

Paladin said:


> Oh! Cheers mate. Will do. Oooops. As an aside, would be more than happy to donate to keep the forums running (say via paypal) if that were ever an option you guys implemented or needed. This has very much been of real worth to me.




If you do wish to donate i suggest you conact (Private Message) the site owner and supervisor, Joe Blow. I am a mere volunteer lackey


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