Beginning an Investment Journey...

[Vader]

I'm another newbie with delusions of granduer...

I've been inspired by Robusta's thread (great read btw), so in an effort to blunt any bad habits before they develop too far and accelerate my learning, I thought it would be a good idea to start documenting my progress on a public forum. At the very least, it will force me to own up to mistakes, better justify my decisions and hopefully make a positive contribution to this forum by providing a beginner-level, process-based perspective on my investment choices.

I've been lurking for some time now and have read many excellent threads from start to finish, but Robusta's in particular is one that I have been able to relate to a lot. Why's that? Well, 1. value investing makes sense to me, 2. I will also be using a Line of Credit to buy shares, and 3. I actually work for one of the companies Robusta currently has in his portfolio

A little background... I'm in my late 30's, and while I haven't yet made a single trade in the sharemarket, it's been something I've been interested in for a long time... for one reason or another I haven't progressed it to the stage of actually buying shares, but now the time is right and preparations are well under way. Line of Credit will be finalised next week (just waiting on the valuation to see exactly how much they'll let me have, but everything is approved and ready to go). I haven't opened an online trading account just yet - will start that process in the next few days... I've done that on purpose so that I won't be tempted to jump in and start throwing money around the second the LoC money becomes available - kind of a forced cooling off period if you like

...as for my trading plan - more on that in a few days (I'm in the process of sorting a few rules and getting some structure around it at the moment), but generally a focus on fundamentals and portfolio management are high on my ideals list.

Things I am currently doing now:

1. Reading "Bulls, Bears and a Croupier", by Matthew Kidman (and really enjoying it)
2. Putting together an Investment Plan... process is important on my list of priorities - and hopefully it will help me avoid a few mistakes.
3. Cleaning the house/yard getting it ready for valuation
4. Opening an online trading account

...which brings me to a question.

After some examination and deliberation, I'm leaning towards Bell Direct as the place to open a trading account. It's not a decision that I am completely sold on yet... the only platform I've really had any sort of a play with before is ETrade (my father uses them), but even that was a pretty limited look around.

Is there anything (obvious) I may have overlooked that should make me consider a different online broker? Comsec is the other main contender I was looking at - is there any compelling reason why you would recommend Comsec (or another broker) over Bell Direct? If you were starting from scratch today and could choose any online broker - what would you choose?

Anyway, that's long enough for my first post I think - will add some more detail over the coming days.

 

[CanOz]

You have now started the first phase of the beginners cycle. Expect a long painful experience.

Why would you even have a line of credit ready to deploy when you do not even have a trading plan yet? Its bad enough putting your own hard earned dollars at risk, but borrowed money WTF???

I doubt that you will be able to resist having a dip even though you haven't got a plan yet?

Once you have a plan, how do you know that it has a chance to work?

CanOz

 

[McLovin]

After some examination and deliberation, I'm leaning towards Bell Direct as the place to open a trading account. It's not a decision that I am completely sold on yet... the only platform I've really had any sort of a play with before is ETrade (my father uses them), but even that was a pretty limited look around.

Is there anything (obvious) I may have overlooked that should make me consider a different online broker? Comsec is the other main contender I was looking at - is there any compelling reason why you would recommend Comsec (or another broker) over Bell Direct? If you were starting from scratch today and could choose any online broker - what would you choose?

Bell Direct's "cash account" is not a bank account, you are investing in Bell debentures which are used for margin loans to other clients. Just something to keep in mind.

I agree with CanOz, it's a pretty risky strategy to be getting a line of credit when you have never been involved with shares before. Stomaching a 40% paper loss is a lot different when you don't have your house on the line and you've experienced it before.

 

[Julia]

Why would you even have a line of credit ready to deploy when you do not even have a trading plan yet? Its bad enough putting your own hard earned dollars at risk, but borrowed money WTF???

+1. I agree with Canoz and McLovin. To start off with borrowed money is just asking for disaster.

 

[CanOz]

You know I've been swing trading stocks on and off for almost 7 years.

When i recently decided to do this full-time, even with that previous experience and a mountain of capital, i stayed on the sim for nearly 8 months before putting real capital on the line.

I learned allot about myself.

Learn something about yourself first before you do this. You do not know how you will react when real $$$ are on the line.

CanOz

 

[Vader]

Yes, I know I'm about to start the 'beginner phase' and am aware of the implications that it brings... I'm not expecting to double my money in a year or anything crazy like that. My trading plan, which is mostly complete, but will no doubt be strengthened and refined over time, should (hopefully) help me cut back on plenty of the usual beginner mistakes.

I've been paper trading for long enough - I very nearly bought shares in 2009 (had the Comsec application filled in), but our situation wasn't quite as comfortable and I held off... which I kind of regret to be honest, I set up the trades I would have made in portfolios in Google Finance at the time and the majority have done quite well, I've been tracking them on and off since then.

...as for borrowing money.

Dual income, mortgage under control (payments well ahead), only borrowing to 80% of equity, interest paid will be tax deductible... in short, while it would certainly hurt if I lost all the funds, it would in no way be terminal. Would it make more sense to just invest the spare cash I have? Probably... but I would prefer to have a reasonable amount of cash at hand in case of emergencies and the leverage I can gain (whether good or bad) from a Line of Credit appeals to me... I won't be touching margin lending, the LoC will strictly be for investments only, so interest charges will only apply when I deploy the funds into shares and the interest rate is a very reasonable 6.73%.

Sometimes you just have to extend outside of your comfort zone... managing the risk can be a challenge, but I'm comfortable with the level of risk I'm taking on.

 

[Vader]

Bell Direct's "cash account" is not a bank account, you are investing in Bell debentures which are used for margin loans to other clients. Just something to keep in mind.

Thanks - that did concern me when I first read it, but I'm not planning on having cash sitting in their cash account for extended periods of time, I'll be moving it in and out depending on when trades need to be settled etc. (i.e. reducing the LoC instead of sitting in a cash account).

 

[Trembling Hand]

Yes, I know I'm about to start the 'beginner phase' and am aware of the implications that it brings... I'm not expecting to double my money in a year or anything crazy like that. My trading plan, which is mostly complete, but will no doubt be strengthened and refined over time, should (hopefully) help me cut back on plenty of the usual beginner mistakes.

I bet the trading plan wouldn't hold up to 2 minutes of scrutiny if you posted it here.

The "refined" over time is just out right crazy. What you are saying is that you will forward test your plan with borrowed money.

The "should (hopefully) help" is even worst from a reasonable guess you actually have no idea how your plan will perform or when its broken.

...as for borrowing money.

Dual income, mortgage under control (payments well ahead), only borrowing to 80% of equity, interest paid will be tax deductible... in short, while it would certainly hurt if I lost all the funds, it would in no way be terminal. Would it make more sense to just invest the spare cash I have?

It would make more sense to pay it off quicker rather than digging another hole.

 

[CanOz]

only borrowing to 80% of equity, interest paid will be tax deductible... in short, while it would certainly hurt if I lost all the funds, it would in no way be terminal.

Take half of your capital and go to the window on a dark and windy night.....open the window and throw out half of it....watch it fly away in the wind.....think about how that made you feel....

If your ok with it then off you go, knock yourself out.

If not then go back and learn some more about your system until you have it fully validated and tested.



CanOz

 

[Gringotts Bank]

Vader, consider CMC stockbroking. Bank-backed. $10 trades.

I'd say go for it, but not with borrowed money.

Also realize the odds of you making money are low. About 10% of people who trade make money. Roll the dice with some small trades and see how you go. Get a feel for whether you enjoy it, and whether you can make money.

 

[McLovin]

Also realize the odds of you making money are low. About 10% of people who trade make money. Roll the dice with some small trades and see how you go. Get a feel for whether you enjoy it, and whether you can make money.

I don't think Vader wants to trade (hence he posted in this forum). However, I think generally, long term investing (growth/value/whatever) is less suited to leverage than short term trading.

 

[Vader]

Thanks for all the concern

Obviously I don't want to throw the money away, the aim is to increase it.

Would I be content with a 7% ROI in the first 5 years. Yes.
Is a 20% loss, even over that time frame possible. Yes.
Is a 50%+ loss possible. Yes.
Will I be using stop losses. Yes.
Do I think stop losses remove most of the risk. No.

...as for the mortgage - that will still be paid down with additional payments.

Should returns above 7% be realised, they will be used as further additional payments to pay it down even quicker. This is obviously the preferred situation to be in.

If returns are less than that. I can deduct the interest from my salary and carry forward any capital losses... I am aware that many of you would change 'If' to 'When'.

...as for forward testing vs back testing a 'plan', I will be investing for medium to long term in solid companies that I have some confidence in the underlying fundamentals. I'm not going to get into the fundamentals v TA argument that is adequately covered off in Robusta's thread. I will be posting my trading plan / strategy... I fully expect you all to pull it to pieces in 5 minutes... and I'm more than happy to take those comments on board and make it stronger.

This isn't a decision I've approached lightly. I am aware of the risks. I am comfortable with the risks. Feel free to call me an idiot now or in several months time if things are looking quite sick... I am an optimist though... I'll let you know in 6 months if I'm still optimistic

 

[herzy]

Interesting thread though, and good on you for opening yourself up to criticism! Very impressed, will follow this thread with interesting. I'm yet to make a trade myself, so no real advice to give (sorry!).

The idea of using a LoC based on your house seems scary though, and something I would definitely try to avoid... I agree with the comment above, that borrowing would be more suited to trading than investing (long term).

 

[Vader]

Interesting thread though, and good on you for opening yourself up to criticism! Very impressed, will follow this thread with interesting. I'm yet to make a trade myself, so no real advice to give (sorry!).

Oh believe me, I fully expected the responses I've got so far... I actually wrote the opening post three days ago and have been debating whether to post it or not

As I said though, Robusta's thread has inspired me and while he's made a few mistakes along the way, he's also received some very good advice... is it a good start that I'm already ignoring the first piece of advice I'm getting? Probably not, we'll see... but in my defence all I can say is that the responses are not unexpected, they are arguments I have given considerable thought to before today, and ones that I have made a conscious decision to proceed against.

I did consider leaving the Line of Credit details out of my post, but ultimately that would have gone against what I wanted this thread to achieve... even if I can't justify my decision to everyone - I want to be comfortable that I can justify those decisions to myself.

 

[lenny]

Vader

Has your system got positive expectancy?

Lenny

 

[CanOz]

Vader

Has your system got positive expectancy?

Lenny

OR even - do you understand what a positive expectancy is?

CanOz

 

[tech/a]

LOC

Youll need to return 10% on your money to B/E of costs.
If you drop 10% then youll be down 20%

You said you were going to pay attention to portfolio management.
Just interested in what it is you would do to manage your portfolio.
How will you position your stop loss--what criteria?
How will you position size?
How many in your eventual portfolio.

Have you considered a catastrophic even like Spain cant pay its debts and the market drop 400 points in a few days.
What if that happened and your were down 50% through ALL your stops.
What would you do?
Its happened more than once to me so it will one day happen to you!
The What would you do---will indicate where your at to many of us here.

 

[Vader]

LOC

Youll need to return 10% on your money to B/E of costs.
If you drop 10% then youll be down 20%

You said you were going to pay attention to portfolio management.
Just interested in what it is you would do to manage your portfolio.
How will you position your stop loss--what criteria?
How will you position size?
How many in your eventual portfolio.

Have you considered a catastrophic even like Spain cant pay its debts and the market drop 400 points in a few days.
What if that happened and your were down 50% through ALL your stops.
What would you do?
Its happened more than once to me so it will one day happen to you!
The What would you do---will indicate where your at to many of us here.

Thanks T/A - Yes those are questions I have considered and over the next couple of days I plan to have them all written down, plastered to my wall and posted here for criticism.

@CanOz, @lenny
As for positive expectation and edges... yes I know what they are, I spent several years working in the gambling industry. In my teen years I spent countless hours trawling through data bases trying to back test horse racing 'systems' (btw, if anyone has a spare office on the Gold Coast, I've got a couple of fully back tested horse racing systems we could sell... they just don't work too well going forward).

Just to get it all out of the way now - I'm not going to be looking at a short term investment strategy that has been back tested and has a defined edge... I'm not sold on the future performance of historically tested metrics. That may change in the future - I love playing with data and databases - and I'm aware that there is sufficient evidence in predicting bevhaviour of a group and that many of you (and many others) make fantastic profits from this type of trading, but there are also plenty of others that aren't successful. I fully realise that trading with that kind of style should not be attempted without a significant amount of trial and error first.

 

[CanOz]

Well Vader, i echo others in their compliments to you doing this on ASF, I tried to do the same things years ago but my intermittent access to overseas sites disabled my attempt.

Godspeed!

CanOz

 

[robusta]

Thankful for the compliments on the thread I started, there have been a lot of quality posts from many investors I have learned a lot from.

Funny thing I do not remember such a hammering when I started maybe that is just a perspective thing. About the only advise I will give you is no matter what you do someone will disagree with you, just be honest with yourself and clear on your strategy. Having said that I have found it a positive experience.

I look forward to seeing your strategy and wish you the quality of criticism, advise, encouragement and discussion I have received.