Personal Investment Strategy

I have been reading and learning as much as I can about this investing business for quite a while now, in general i have been attracted to the long term, value based, fundamental analysis approach to the subject, a number of members have attracted my attention with their outlooks and opinions on the market and investing, amongst them,

(in no particular order), ROE, Kermit345, Robusta, McLovin, Oddshot, Ves, Craft, So-Cynical have all taught me how little I know and just how important it is to have a clear plan, have the discipline to follow it, and suppress the emotional desire to speculate instead of invest.

Over the past few months i have swung between feeling I can never learn enough about analysing businesses to ever have long term success at value investing, to constructing a potential portfolio for investment, I have considered just putting my capital in an index fund and not having either the time or effort required to invest myself, I have also thought about just having a dollar cost averaging strategy, invest my capital in a small selection of stocks (5-10) and every time my savings increase by a worthwhile amount, purchasing more of the stocks in the portfolio.

I have very good self discipline, once I have decided on a strategy I will have no problem following it slavishly, I have no fear of falling markets - or rapidly rising ones! I have no need to be 'involved' in the market, if the strategy says sit tight and do nothing then thats exactly what I will do.

I have created my own spread sheets to analyse stocks and calculate IV's, largely based on the Montgomery formula,but I am not really comfortable with the outcomes, i dont have confidence that buying with a MOS below the IV will in fact prove to be valid in the long run.

I am also not sure that my ability to analyse the underlying financials of a business is well enough tuned to avoid expensive mistakes along the way.

I would appreciate some input into what direction others think might be applicable to me and my situation and what strategies, systems, and formulas would support that!

On a personal level I am 50, married, one dependent, income about $120K, wife earns about $60K with very generous salary sac. conditions. I also run a small business part time, makes money, pays for most of my vices! I have a very good defined benefit super scheme, 20 years with same employer, also salary sac the balance up to $25K into the attached accumulation fund. Free rent, electricity and water. Around $300K to invest, some will go into a positive geared commercial property where i live, some into cash and the balance into the planned investment strategy.

Anyway thats probably enough to generate some discussion! Would love some constructive feedback.

Re: Personal Investment Strategy Help.

Welcome to ASF...as you know, we cant give specific advise.

So your 50, have a bit of money thus have something to protect and appear to have discipline and patience..you should do well in the stock market...good luck.

Re: Personal Investment Strategy Help.

Hi Galumay

Can I ask, besides Monty's book have you read any others?

It sounds like you've read one have sort of whet your appetite and need a bit more direction. I think you need to get some perspective, and while Monty's book touches on the very, very basic of understanding businesses it doesn't really have any meat on it. I reckon for someone starting out you need to read, read and then read some more. Eventually certain themes will start to sink-in and you'll find there are certain guys whose ideas stand out to you. For example, I love the cycle theme that Howard Marks always stresses (probably why I spend so much time banging on about margin mean reversion).

Get a book that explains ratios (I recommend Financial Statement Analysis - A Practioners Guide, by Fridson & Alvarez) and then start working on the ratios, don't actually try and value the businesses, just do the analysis and then try and form an opinion based on your research (this is worth of investing/this isn't). It will show you how different businesses operate, for the newbie the worst bit can be that the first template they see becomes how they judge all business, but investing requires you to be circumspect and understand that no two are alike. You'll find that by crunching numbers you'll probably end up with more questions than answer but you can always use this forum as a soundboard for any analysis you've done.

Hope that helps a bit.

Re: Personal Investment Strategy Help.

I agree with McLovin. Read as widely as possible, but remember that doesn't mean read just anything! Use your intuition to figure out if what you are reading is going to be helpful for your approach - if not stop reading it and find something that will! I've enjoyed reading Greenwald and Buffett's shareholder letters the most so far. There are lots of good posters on here too as you said. Also try Hotcopper. There's a guy called Camden55. He has some great insights and is often kind to post detailed analysis in plain English. For instance, check the WES threads for his posts this week, some real gems on why the ROE approach has shortcomings. Also try Geoff Gannon on Gurufocus. He has lots of articles, written in a language that you should be able to follow from the outset. He has some good ideas, some I don't agree with, but they're there get you thinking, both about process and about how you think about companies. Remember - there are lots of ways to approach what you are trying to achieve. Rule nothing out as definitely right or definitely wrong.

What I do (and what I have been doing from the beginning) is to find boring businesses that are as predictable over the cycle as humanly possible. Something even a beginner can understand. Read lots of financial statements. Read all the presentations, annual report notes and announcements as you can! Check for trends in the major ratios like profit margins (margins - (gross and EBIT), return on invested capital, debt to equity. Figure out what drives profitability the most for each company. For some it will be volume, others it will be margin expansion, or both etc. The most important thing is cash flow. Don't always trust reported earnings, always check cash flow! Expand your group of companies that you are familiar with as you go. Start small and build positions as your comfort increases. But at the same time don't become a historian! Always question the ability of things to change. Either for the best or for the worst or somewhere in between. Never invest on hope. Always find scenarios that are probable. Longshots make big money, but they also lose a lot of money. If you want to be a long-term investor you need to find stability in your outcomes. Do some reading on the importance of cash flow (and dividends) as being the drivers of long term returns.

There's lots out there. The best way to learn is have a go, find problems and try to work them out and when you get stuck ask questions. Ask lots. I can't stress that enough!

Re: Personal Investment Strategy Help.

Welcome Galumay.

This statement of yours stood out to me, and is common among people who come from successful backgrounds..

I have no fear of falling markets

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I do have fear of falling markets, because it is likely my opinion of the investment is incorrect.

As has already been suggested, read, read, read. Though I would add that reading a wide variety of topics would be far better than just one theme. Eventually you will be able to start separating the wheat from the chaff.

Re: Personal Investment Strategy Help.

So_Cynical said:

Welcome to ASF...as you know, we cant give specific advise.

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Thanks, sorry if I came across as requesting specific advice on stocks, more looking for feedback on potential strategies and processes.

So your 50, have a bit of money thus have something to protect and appear to have discipline and patience..you should do well in the stock market...good luck.

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Well, I claim to have discipline & patience! I suspect I am not the first to make that claim here, the proof is in the pudding. I guess one confirmation of it is that I am still in a cash position as I learn.

I did trade/speculate when I was younger, made a tidy sum and then lost the lot, so I do have some experience of what not to do!

Re: Personal Investment Strategy Help.

McLovin said:

Hi Galumay

Can I ask, besides Monty's book have you read any others?

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I have read a few, Intellegint Investor, and a bit of Buffet as well as some general self help type investor books.

I think you hit the nail on the head when you say I seem a bit lost, I have a sense of what I want to learn and know, just not a clear path to get the knowledge. I will look into your other recommendations. Thanks.

Re: Personal Investment Strategy Help.

Ves said:

What I do .......

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brty said:

Welcome Galumay.

As has already been suggested, read, read, read. Though I would add that reading a wide variety of topics would be far better than just one theme. Eventually you will be able to start separating the wheat from the chaff.

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Thanks again for the detailed feedback, your responses give me the chance to articulate one of the dilemmas in my mind, is it worth the enormous amount of learning and research as well as ongoing commitment to the process? That is, are the returns likely to be so much better than say a small portfolio of selected stocks and dollar cost averaging with excess income?

The reason I ask is because I work full time, run a small business, have a family, have a couple of other passions and would have to sacrifice time and effort to embark on the sort of journey required to become a proficient value investor.

Re: Personal Investment Strategy Help.

galumay said:

Well, I claim to have discipline & patience! I suspect I am not the first to make that claim here, the proof is in the pudding. I guess one confirmation of it is that I am still in a cash position as I learn.

I did trade/speculate when I was younger, made a tidy sum and then lost the lot, so I do have some experience of what not to do!

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Your comfortable with the 'value' approach so explore that, some people seem to like the complexity of the number crunching, some people seem to get confidence from that, perhaps even need the confidence that a great set of numbers can give them.

What i have come to understand is that everyone needs something, a comfort factor that enables them to make investment/trading decisions 'pull the trigger' and for everyone its slightly different, while broadly the same when looked at as groups and sub groups.

You need to find your risk comfort zone and implement a plan that works within that, a profitable plan...it will involve some trail and error so start small and scale up as results come and confidence builds.

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I did some bush fire training years ago and learnt something that i often apply to my investment decisions, when arriving as a first responder to a fire you need to asses the risk factors, slope, terrain, fuel, wind speed and direction, RH, and approaching weather and based on that assessment ask your self...do i need to go there? (to the fire) put your self and crew at risk, or radio in and wait for back up and equipment to arrive.

Before i buy a stock i like to ask myself...You i need to go there? have i assessed the risks adequately? have i forgotten something? what's important here? etc etc etc, always conscious of the fact that the markets not going to kill me so i don't need to over think it.

Re: Personal Investment Strategy Help.

Ves said:

There's a guy called Camden55.

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Camden is great, reading his posts got me off a bad habit I was developing of staring at PE's.

So_Cynical said:

What i have come to understand is that everyone needs something, a comfort factor that enables them to make investment/trading decisions 'pull the trigger' and for everyone its slightly different, while broadly the same when looked at as groups and sub groups.

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This.

You have to find what works for you.

Re: Personal Investment Strategy Help.

McLovin said:

Get a book that explains ratios (I recommend Financial Statement Analysis - A Practioners Guide, by Fridson & Alvarez)

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Just downloading it now, will have a squiz!

Re: Personal Investment Strategy Help

Hi Galumay,

All I can say is read, read and read some more. It is interesting what you pick up from what you read - I learnt risk from Mohnish Pabrai, not to take the market seriously from David Dreman, the importance of probability from Buffett and have only one master from Craft.

IMO private investors try to be too smart (myself included). Get your head round a simple strategy that suits your personality and time constraints.

Not everybody is Buffett or Soros, so I recommend reading Stephen Bland from the Motley Fool UK. Good practical advice from a grumpy old man! His HYP (High Yield Portfolio) and Value Trader strategies are interesting reading. There is a lot of information on the Motley Fool UK discussion board so no need to post it here – just use Google. See below for a recent interview:

http://www.fool.com/investing/international/2012/08/21/which-is-better-value-or-yield-part-1.aspx

I reckon over a 20 year period his HYP will beat 99% of investors and it requires little or no work. Remember the odds are stacked against you

Cheers

Oddson

Re: Personal Investment Strategy Help.

Ves said:

Also try Hotcopper. There's a guy called Camden55. He has some great insights and is often kind to post detailed analysis in plain English. For instance, check the WES threads for his posts this week, some real gems on why the ROE approach has shortcomings. !

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Ok, got round to following up on that reference, it raises two points, you were spot on, a great insight and I learnt a very important lesson in one post, secondly this almost reinforces my concern about my ability to develop enough investment wisdom to be able to properly assess a businesses financials and determine its real value.

Every time I think I understand something its like an onion - it just exposes a hundred more layers to understand!

Re: Personal Investment Strategy Help.

galumay said:

Ok, got round to following up on that reference, it raises two points, you were spot on, a great insight and I learnt a very important lesson in one post, secondly this almost reinforces my concern about my ability to develop enough investment wisdom to be able to properly assess a businesses financials and determine its real value.

Every time I think I understand something its like an onion - it just exposes a hundred more layers to understand!

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Keep in mind that this guy did it as a paid professional for 20 years, and has probably been investing for himself for much longer. It's just experience, and doing something for so long that you become an expert at it.

Work hard mate - it's possible. Aim for 12-15% a year and you will have a tidy sum by the time you are 65.

Re: Personal Investment Strategy Help.

galumay said:

Ok, got round to following up on that reference, it raises two points, you were spot on, a great insight and I learnt a very important lesson in one post, secondly this almost reinforces my concern about my ability to develop enough investment wisdom to be able to properly assess a businesses financials and determine its real value.

Every time I think I understand something its like an onion - it just exposes a hundred more layers to understand!

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Don't worry mate. It wouldn't be fun if you knew everything. You can think about it this way: If it was easy your returns would be lower because everyone would be doing it.

TA or FA, you need to put the hours in and then you'll get rewarded.

Re: Personal Investment Strategy Help

I've always had an interest in finance and the way economies tick. Took me over a year of becoming debt free before I found the wherewithal to start investing more within and outside super.

Since you've used the term investment then I'll take it your planning to invest for the long term, though no buy and forget please.

My primary philosophy is the market can't steal a dividend back, but it can with capital gains. Companies paying good dividends have less to blow on expensive take overs or wasteful "investments". Fortunately Australia is blessed with a large number of companies able to pay at 6% plus when you include the prepaid tax.

I focus on:

* Consistency of the dividend payments - much prefer a company that is increasing the dividend each year

* Blend of past and future earnings / dividend yield

* Payout ratio - the lower the better as it makes the dividend much more stable

As an example I had heard about STW Communications. They're in the online media space. They have a history of buying other companies and growing buy acquisition. Very successful track record of absorbing the companies - seems the smaller end of town can achieve takeovers that are value increasing for shareholders. They seem to have now hit a critical mass, where they're able to do a lot of cross selling as the companies they've bought have had the same client across the brands. They service companies like Coca Cola and L'Oreal

The dividend payout ratio was a bit on the high side at 66% of net profit, but still a decent amount of reinvestment into the company. I was able to buy in at a 7.6% fully franked yield and currently sitting on a 14% gain. 2013 full year div is forecast to increase by 6% over 2012. Is good if the div yield can at least keep pace with inflation, even better to be getting a real pay rise.

Re: Personal Investment Strategy Help

sydboy007 said:

The dividend payout ratio was a bit on the high side at 66% of net profit, but still a decent amount of reinvestment into the company. I was able to buy in at a 7.6% fully franked yield and currently sitting on a 14% gain. 2013 full year div is forecast to increase by 6% over 2012. Is good if the div yield can at least keep pace with inflation, even better to be getting a real pay rise.

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Unless they're making acquisitions, there's not really much need to reinvest in the company.

Re: Personal Investment Strategy Help

McLovin said:

Unless they're making acquisitions, there's not really much need to reinvest in the company.

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True. Just nice they have the ability to self fund the acquisitions. Except for the pay off from M2 last year with their cheap 1 for 4 rights issue to fund the Primus purchase, generally I don't like the dilution of current shareholders to fund future growth.

It's my security blanket Sometimes having something to give you the confidence to invest is more important than anything else. I'm willing to accept that I will generally under perform on the capital growth side, generally outperform on the income side, but hopefully with a lower volatility that gives me the sleep at night aspect.

Now that everything is set up I'm enjoying analysing my methodology and seeing how it pans out over the next few years. Hopefully I wont have to learn the expensive way on what needs to be changed

Re: Personal Investment Strategy Help

sydboy007 said:

True. Just nice they have the ability to self fund the acquisitions. Except for the pay off from M2 last year with their cheap 1 for 4 rights issue to fund the Primus purchase, generally I don't like the dilution of current shareholders to fund future growth.

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It's not always dilutionary.

Anyway, you should be happy that you have a business that can grow while still paying almost all of it's earnings. That's a great business.

Re: Personal Investment Strategy Help

I really enjoyed Unholy Grails by Nick Radge.
Though not particuarly eloquent, the details of trading signals and the interviews with some successful investors at the rear of the book were quite fascinating. I recommend you read it.