Long Term Investing

[ROE]

I don't aim for multi baggers in my purchase of stocks
My theme: buy something that give me a decent yield
And it can be sustained and sell at a price I am willing to lock
In my capital for years....

I don't care if stock price going no where if it
Can give me yield of 6% fully franked a year

Because with consistent return compounding
Will trumped everything else....compounding dont
Works if it is a negative number or with a zero dividend

Multi baggers is a bonus and usually the result of playing
In small to medium cap business...

 

[tech/a]

Relative to these posts.

CRAFT

Basically my big picture of investing is swapping surplus capital for an ongoing income stream.

AND

RandR

I need to create passive income.

I posted this on another thread which may be of interest.

 

[craft]

A question for the investors who have had multibaggers - with hindsight was it easy to see features that led to the growth?

Much like ROE, I don’t specifically look for multi-baggers and I certainly don’t take long shots where something needs to be found or invented etc to give rise to windfall gains.

However time and good businesses gives rise to many multi-baggers.
A company maintaining profitability but growing its equity at 10% should double in 7 years.
A company maintain its equity but growing it’s profitability at 10% should double in 7 years.
If a company can achieve both growth factors above they will quadruple in 7 years.

The rocket fuel is market re-weighting – if the quadrupling of value from the underlying business is rewarded with a doubling of the multiple then that’s 8 times in 7 years. I have had lots of these sorts of increases from boring little businesses.

I look for a competitive advantage, so that the profitability will be there and I look for scope to grow, so that equity can rise and I look for these things before it’s obvious to everybody else.

I let the market take care of recognising the improvement in the business and increasing the multiple in its own good time, [tomorrow; next year; next decade] if it never recognises the improvement the reward will still be there in the distribution stream overtime anyway as all selling really does is commute the income stream – you have no advantage in selling as opposed to holding unless you are taking the opportunity to sell to somebody who is prepared to overpay for the future income stream.


The asymmetrical risk/return profile from the possibility of multi-baggers to long-term investors is very important.

 

[sinner]

There was a recent Warren Buffett article out, which I thoroughly enjoyed, because it broke his returns down into a fairly easily replicable ruleset, which is common with the "academic" definition of value investing plus a few twists. Mainly:

* Value (as measured by P/B)
* Low Beta
* High Quality (as measured by earnings volatility, etc)

http://www.cbsnews.com/8301-505123_162-57524029/how-warren-buffett-beats-the-market/

What I would suggest to synthetically replicat this idea is to run 4 portfolios, each started at a different Q, i.e. P1 starts at Q1, P2 at Q2, P3 at Q3 and P4 at Q4. Then you rebalance each portfolio once a year to the following universe:

* Define the top 25% of value stocks
* Of those value stocks define the top 25% with lowest beta and lowest realised volatility
* Of those value low beta stocks define the top 25% with the highest quality

This is your portfolio for the next year. Apply leverage as desired. You can replicate the Buffett float by shorting corporate bonds if desired.

One important thing to note is there was low/no momentum factor explaining his returns, so stay away from stocks making highs if you want a "Buffett" style portfolio.

Keep in mind, the article points out that Buffetts major difference from other large funds was his reputation, so even in the face of a 44% drawdown, he did not suffer many redemptions and certainly no margin calls. I think that is the most important lesson. Do not invest in passive equities if you can't handle a 40-60% drawdown. You must be a "strong hand" (with a strong stomach) to successfully execute this kind of strategy. This also means your natural leverage limit is probably somewhat less than 2:1 and more like 1.5:1 at absolute max.

Here is another article that addresses the same topic, lots of pretty charts included:
http://gestaltu.blogspot.com.au/2013/01/track-records-are-rubbish-or-why.html

 

[matty77]

Good topic, and I thought I might review my investment strategy and look at it in a % way...

very interesting, my current investment per week of my income is:

12% Investment: Shares Type
23% Investment: Property Type
6% Investment: Kids Saver Account
18% Investment: Offset Savings / To be used for future investment opportunities
59% of income invested weekly

The remaining 40% would be spent on expenses etc.

The amount for Offset Savings goes up and down obviously depending on what expenses are outgoing, thats just the left over amount really.

I have looked at increasing share % but no point since overall investment $ is for shares v houses is about 2/3 shares anyway. Next investment strategy will most likely be either commercial property or a business purchase, possibly next year. - no rush on this one though.

The first 3 above are all LONG TERM investments eg 20 years minimum and the first two are done to generate PASSIVE INCOME eventually. The kids savings accounts will be given to them at a later date in some for or another when they are older..

 

[prawn_86]

59% of income invested weekly

Wow that is a huge amount/percentage! We invest about 20-25% of our after tax income and thought that was good.

 

[matty77]

comparison to a previous post I did in May 2011

n round about terms (per week):

26% Home loan repayments
11% Invest Shares
36% Weekly expenses (all bills, food, petrol, phone etc)
10% Pay ourselves "fun money"
3% Other investments
14% Invest Houses / Other investments

so its actually about the same still as the home load repayments now are techincally an investment property.

I thought I had worked out previously !! lol

 

[matty77]

Wow that is a huge amount/percentage! We invest about 20-25% of our after tax income and thought that was good.

sorry just wanted to add to your comments; as the kids get older and the family grows I expect this investment amount to reduce, and least for a 20 year period, hence "making hay while the sun shines" at the moment. At least 3 kids maybe more so should be interesting to see how the finances cope! haha or

I would like to take the foot off the accelerator before I am retirement age as well.. early effort now for later reward.

 

[So_Cynical]

To be honest the % of being right is less important that how right you are! If you 'win' 80% of the time but only make an average of 5% profit and on the 20% of losses you lose 80% of your investment - then you are a long way behind!

Again, is a lot easer to make money being right most of the time than it is to be wrong most of the time.....lets face it any idiot can be wrong most of the time.

 

[CanOz]

Again, is a lot easer to make money being right most of the time than it is to be wrong most of the time.....lets face it any idiot can be wrong most of the time.

Depends on your definition of easy...

CanOz

 

[So_Cynical]

Depends on your definition of easy...

CanOz

Oh com on.

Easy = not hard...not rocket science.

If a person makes 10 investment decisions in a day, and over a 10 day time frame most of those decisions are wrong..it stands to reason that its not going to be easy making money...of course money can be made but not easy money.

 

[CanOz]

Oh com on.

Easy = not hard...not rocket science.

If a person makes 10 investment decisions in a day, and over a 10 day time frame most of those decisions are wrong..it stands to reason that its not going to be easy making money...of course money can be made but not easy money.

Some people (most truly successful investors i reckon..) have no issue if they make wrong calls. Just because you are a long term investor doesn't mean you cannot cut the losers short when you know you're wrong SC. Not everyone will just hang on until they come good and they can say, "i knew i was right".

To some people, 'easy' means having the ability to take losses, knowing that its not whether you are right or wrong, but how much you make when you're right and how much you lose when you're wrong....

CanOz

 

[So_Cynical]

Some people (most truly successful investors i reckon..) have no issue if they make wrong calls. Just because you are a long term investor doesn't mean you cannot cut the losers short when you know you're wrong SC. Not everyone will just hang on until they come good and they can say, "i knew i was right".

To some people, 'easy' means having the ability to take losses, knowing that its not whether you are right or wrong, but how much you make when you're right and how much you lose when you're wrong....

CanOz

Some people get so hung up on this wrong and right stuff, for me the beauty of the stock market is that you have time if you want time, one can use time to there advantage, so many short term traders and trendy's think time is evil, something to be managed and limited.

Wrong and right simply doesn't come into it for me except for the fact that im in it for the money, and when im right i make money and when im wrong i don't, and i like making money.

 

[tech/a]

So c

Speaking for me that's not so.
Would love nothing more than sitting in a trade for years as
I did in the early 2000s.
But in the mean time my favorite is the

BREAK EVEN STOP.

You can be wrong as often as the market proves so without
Damage to your account or stress over deminished capital base.

 

[tech/a]

Some people get so hung up on this wrong and right stuff, for me the beauty of the stock market is that you have time if you want time, one can use time to there advantage, so many short term traders and trendy's think time is evil, something to be managed and limited.

Wrong and right simply doesn't come into it for me except for the fact that im in it for the money, and when im right i make money and when I'm wrong i don't, and i like making money.

I think overtime you to will become hung up on being Right or Wrong.

You are absolutely correct in your premise that a very wide Stop will give you a better winning % than a close stop.
I can vouch for that through my own systems testing.
In fact the sweet spot for highest % winners in the data set (7 bourses) I tested my systems-- some 10 yrs ago
suggested that 20-30% was the best.

However Biggest % winners or even better % winners didn't equate to best return for risk and indeed best return---period.

What you get is a vast number of stocks that spend vast lengths of time in that no mans land below your purchase price.
The opportunity cost does become an issue during bullish periods as some are stuck returning to their buy price and many never return. Capital is not being employed with maximum efficiency

Im glad your running your exercise and Robusta his.

Not because they are fundamental and my own approach is technical--but because these fundamentally and important issues will show themselves.

 

[cynic]

Again, is a lot easer to make money being right most of the time than it is to be wrong most of the time.....lets face it any idiot can be wrong most of the time.

When faced with binary outcomes, an idiot would probably only get it wrong ~50% of the time!

...Wrong and right simply doesn't come into it for me except for the fact that im in it for the money, and when im right i make money and when im wrong i don't, and i like making money.

You seem to have equated right with profit and wrong with loss!

Had it not occurred to you that it is also possible to make money whilst getting it wrong?

Oh com on.

Easy = not hard...not rocket science.

If a person makes 10 investment decisions in a day, and over a 10 day time frame most of those decisions are wrong..it stands to reason that its not going to be easy making money...

No that doesn't stand to reason at all!

Easy money can be made even with a low % win rate provided the strategy employed features positive expectancy!

Futhermore, negative expectancy can easily coincide with high % win rates!! Reliance upon inappropriately wide stops is one of the more popular methods through which high win rate, negative expectancy is achievable!

 

[craft]

My Big picture approach.

I have developed the LCEAA strategy (Low Cost Entry And Averaging) to build positions in stocks when the price is falling so that a low cost base can be established when the price rises and the more expensive parcels are sold off, thus lowing the average holding price and ensuring a high return on original capital invested via the dividend stream...redeploy freed up capital + surplus cash and repeat.

So C

You seem to have stirred the pot with your big picture. If your stock selection was random then I would tend to agree with most of the comments - however your stock selections are not random and I think that needs to be considered.

Firstly you mention low price – This low price aspect is a major difference over technical entry which takes whatever market price that may prevail following an entry signal. This aspect needs to be considered when thinking about how long you may be underwater. Hopefully your low cost entry calculations would keep you from starting to accumulate Mirabela at $7 or Billabong at $14 etc

Secondly – although you are not explicit about it in the above paragraph I expect from other things you write that you have a quality aspect to the stocks you pick – This aspect should have a big impact into your results as well, ensuring you don’t average into something terminal like ABC Learning or Babcock and Brown etc.

The freeing up of capital to redeploy just because you come into profit is probably the most different aspect to what I do but I can see the logic for it IF you have identified a better business at a lower price to invest in.

I think your system will only work with high quality and low price stocks. How do you ensure you get these two points right? Explain adequately how you manage these two points and you might (should) ease the concerns of constructive critics.

 

[So_Cynical]

When faced with binary outcomes, an idiot would probably only get it wrong ~50% of the time!

I would argue that a true idiot wouldn't get it right 50% of the time, an average idiot perhaps.

You seem to have equated right with profit and wrong with loss!

Had it not occurred to you that it is also possible to make money whilst getting it wrong?

No, please provide examples.

Easy money can be made even with a low % win rate provided the strategy employed features positive expectancy!

Futhermore, negative expectancy can easily coincide with high % win rates!! Reliance upon inappropriately wide stops is one of the more popular methods through which high win rate, negative expectancy is achievable!

Again i would love to see examples of how making wrong choices and bad bets the majority of the time can give you positive expectancy.

------

And what has any of this to do with Long Term Investing?

 

[Smurf1976]

My approach is also very much along the "chickens and eggs, cows and milk" analogy.

I've been there, done that with short term trading both stocks and forex. I made some money but it doesn't fit at all well with my underlying personality which tends to favour the long term approach.

These days, I'm not looking for capital growth as such and yet I find it ends up being relatively easier to achieve than it was when I was actively chasing it. That has a lot to do with the psychological side of trading. Right now, if the market drops then that will trigger some of my buy orders = I'm happy. And if the market goes up then that's a gain right there and now = I'm happy.

I'm simply taking surplus income and investing it into things which are expected to produce an ongoing income stream. Capital gains are just a bonus.

 

[odds-on]

Much like ROE, I don’t specifically look for multi-baggers and I certainly don’t take long shots where something needs to be found or invented etc to give rise to windfall gains.

However time and good businesses gives rise to many multi-baggers.
A company maintaining profitability but growing its equity at 10% should double in 7 years.
A company maintain its equity but growing it’s profitability at 10% should double in 7 years.
If a company can achieve both growth factors above they will quadruple in 7 years.

The rocket fuel is market re-weighting – if the quadrupling of value from the underlying business is rewarded with a doubling of the multiple then that’s 8 times in 7 years. I have had lots of these sorts of increases from boring little businesses.

I look for a competitive advantage, so that the profitability will be there and I look for scope to grow, so that equity can rise and I look for these things before it’s obvious to everybody else.

I let the market take care of recognising the improvement in the business and increasing the multiple in its own good time, [tomorrow; next year; next decade] if it never recognises the improvement the reward will still be there in the distribution stream overtime anyway as all selling really does is commute the income stream – you have no advantage in selling as opposed to holding unless you are taking the opportunity to sell to somebody who is prepared to overpay for the future income stream.


The asymmetrical risk/return profile from the possibility of multi-baggers to long-term investors is very important.

Hi Craft,

Thank you for the response. Food for thought.

-How long should the average equity investor persevere attempting to achieve excess returns before admitting defeat and using an index tracker or a simple value portfolio? Not everybody is going to "beat the market" and in the long term the aim is to achieve the highest returns for the least risk. I think this is a worthy discussion point in a thread about long term investing.

Cheers

Oddson