Newbie Lessons - All your questions answered

[sherlock]

Agreed. good post

 

[glen rosa]

Thank you Sir O and others,
you've been incredibly generous with your time and wisdom.
I have ploughed through all 35 pages! and trawled the site generally. I now have just one question... I need some kind of tool to compare outcomes for an investment portfolio of stock property and cash. I have a small six figure sum, I till work, and the bank interest is dropping. Can anyone recommend a tool that will have all the things in it relevant to options (tax, deductiables, outgoings, income etc) - I am prepared to pay for it if necessary.
Thanks everyone.
GR

 

[Preflight]

I have just joined this forum and have read this entire thread over the last two nights. I'm sure I'll have to read it several more times to distil what is going to be useful to me as I enter the market. And probably several more times as my knowledge grows.

I have a lot of reading to do in other parts of this forum, and I'm sure I will have questions in time, but for now I just want to say THANK YOU!

I hope Sir O, Tech/A and the other generous experts (not to mention fellow newbies) will keep posting. I find the discussion around areas of disagreement as informative as the discussion around areas of agreement. This really has been fascinating.

My hats off to you all!

 

[oowl]

Hi guys

I'm a new investor. I have some long term investments, but I'm looking to get into more short and medium term trades. I'm looking for information about the best resources. I know of a few popular websites, but its more about what specific sections to really concentrate on.. I find myself aimlessly browsing a few sites with no real direction.

What are some daily websites I can check for news, announcements, buy/sell/hold tips, industry spotlights/analysis/predictions, that are easy to follow, understand, and won't take me hours to read?

Is an online subscriber advisory service worth it? Things like Fool, Scott Pape's Barefoot Blueprint, etc.

Where can I find information about new floats, and experts' reviews/opinions on them?

Many thanks.

 

[StevieY]

Hi guys

I'm a new investor. I have some long term investments, but I'm looking to get into more short and medium term trades. I'm looking for information about the best resources. I know of a few popular websites, but its more about what specific sections to really concentrate on.. I find myself aimlessly browsing a few sites with no real direction.

What are some daily websites I can check for news, announcements, buy/sell/hold tips, industry spotlights/analysis/predictions, that are easy to follow, understand, and won't take me hours to read?

Is an online subscriber advisory service worth it? Things like Fool, Scott Pape's Barefoot Blueprint, etc.

Where can I find information about new floats, and experts' reviews/opinions on them?

Many thanks.

Hi All,

Might be in the same boat with oowl.

@oowl: I get some additional info from www.sharecafe.com.au.

Has anyone one else go good websites for us newbies to have a look at?

Thanks
Steve

 

[dave1234]

Just read through all this over the past 24hrs. Brain hurts! Will have to go back over it a few times and keep following, have a lot of learning to do.

 

[Russtafaerian]

Thanks Sir O for the excellent thread - have enjoyed reading over this for quite a few hours this weekend and gleaned quite a lot of new knowledge and insights.

Unfortunately it did more into more advanced territory after about page 30 and I got somewhat lost. Not sure about others, but I am left with a sense that to really do this well, you essentially need to make a career out of it.

Perhaps fundamental analysis is more for me, aiming for longer term investing rather than trading - crossed with the new info I picked up from you about economic cycles, which I think makes sense, I will continue along this route, educating myself as much as possible as I go.

Do hope you will continue with the lessons though, as seems as shame it has trailed off since July this year.

Also thanks to the contributors!

 

[Sir Osisofliver]

Hi All,

Ok yes I have to say I have neglected this poor little thread. Thank-you to everyone who continues to help the newbs with questions, during my extremely busy period.

@ Russ - Got a little lost around page 30...... ahh that's where we started talking about positional sizing methods...which I did feel was a bit advanced for newbies, but it IS important and someone asked for it. We also started to talk about system building stuff.

Technical Analysis and System building is more advanced but is key to providing expectancy and long-term success. I'll try and provide another lesson after Xmas.

What does everyone want?

Sir O

 

[Russtafaerian]

Hi Sir O,

I think as newbies that we could look at more basic systems for picking shares - perhaps longer term, value focused. But that's just what I am thinking of working on at the moment. I think the way you and others worked on the system in this thread was interesting, but over my head unfortunately, hence getting quite lost.

Having said that, I'd never have thought of asking for the economic cycles lesson and that was definitely my favourite lesson thus far!

Glad you are considering sparking it up again!

Cheers,

Russ

 

[WilkensOne]

Hi Sir O,

I think as newbies that we could look at more basic systems for picking shares

I would be interested in this too and strategies for finding shares to begin with, how do you begin your search for a share to investigate? (hopefully hasn't been covered earlier and I missed it)

Thanks,
Wilkens

 

[Sir Osisofliver]

Hi Sir O,

I think as newbies that we could look at more basic systems for picking shares - perhaps longer term, value focused. But that's just what I am thinking of working on at the moment. I think the way you and others worked on the system in this thread was interesting, but over my head unfortunately, hence getting quite lost.

Having said that, I'd never have thought of asking for the economic cycles lesson and that was definitely my favourite lesson thus far!

Cheers,

Russ

I would be interested in this too and strategies for finding shares to begin with, how do you begin your search for a share to investigate? (hopefully hasn't been covered earlier and I missed it)

Thanks,
Wilkens

Ok Value Investing is a pretty humongous topic. If you're interested in this kind of stuff go read up on Benjamin Graham, the concepts of Intrinsic Value (and why it's so often wrong), CAPM, Efficient Market Hypothesis. If you simply want to follow Warren Buffett's style there's an ok article on investopedia here. There's simply a tonne of resources on this area - don't get lost. I'd ask around for the best books others have read and read those.

I don't want this to turn into a Fundies Versus Techies thread, but I will say this. There are great technical analysts and great fundamental analysts. Neither method is "better", because ultimately the usability of either method is determined by the individual. What I mean by that is there are two main schools of thought, Investment philosophy if you will. I'm going to quote a philosopher here...points if you can identify who they are.

"Do not deny the classical approach, simply as a reaction, or you will have created another pattern and trapped yourself there"

"Use only that which works, and take it from any place you can find it".

I am predominantly technically orientated, because the technicals suit me better. What's going to suit you better? I have no idea - its your brain. I suggest you get across as many different styles of investing as you can, and use what works for you.

As far a value investing goes...this is what works for me. It's not necessarily going to work for you. I look for the ability to largely set and forget this portfolio. It gets a review in the form of about an hour every three months - otherwise I don't bother looking at it. It's not aligned for meteoric performance - just slow and steady returns with little time involvement.

I usually maintain a long-term portfolio between trough and peak of an economic cycle. As in I purchased shares that would deliver long-term appreciation in share prices and dividends yields across a target 8-9 year period. The last implementation of this strategy occurred between roughly November 2008 and June 2009 and used Leverage in the form of Margin Lending, geared at 50%. No further leverage will occur, and during the economic cycle I use the dividends from the portfolio towards the margin loan. The margin loan in this way is self supporting. I do not need to put funds from outside the portfolio to cover the interest payments. With the changes in margin lending caused by Storm financial and the cowboys; Margin Lending now falls under a different piece of legislation than it did in the past. You will need to prove serviceability just like a home loan (and some will not accept the dividends generated by the portfolio to accomplish this). It pissed me off greatly when in 2009 the margin lender I had been using since 2004 decided that I needed a directors guarantee on the portfolio. Told them to shove off and swapped my loan elsewhere.

From the 2000+ stocks on the market, 34 stocks were purchased, in a manner that weighted them according to the ASX100 index.

I'm coming back to this later - but a bit busy at present.

Cheers

Sir O

 

[stevier95]

I don't want this to turn into a Fundies Versus Techies thread, but I will say this. There are great technical analysts and great fundamental analysts. Neither method is "better", because ultimately the usability of either method is determined by the individual. What I mean by that is there are two main schools of thought, Investment philosophy if you will. I'm going to quote a philosopher here...points if you can identify who they are.

"Do not deny the classical approach, simply as a reaction, or you will have created another pattern and trapped yourself there"

"Use only that which works, and take it from any place you can find it".

Bruce Lee

 

[WilkensOne]

I usually maintain a long-term portfolio between trough and peak of an economic cycle. As in I purchased shares that would deliver long-term appreciation in share prices and dividends yields across a target 8-9 year period.

Do many of the forum goers here maintain both a trading portfolio and long term portfolio alongside each other? I like the idea of having a trading portfolio I can generate income from where a percentage of the profits are transferred to the longterm portfolio.

Would enjoy some more experienced thoughts if available?

Wilkens

 

[Russtafaerian]

Thanks Sir O,

After reading heavily through these forums and the numerous debates/arguments on TA vs. FA, although I'm a set and forget type investor at the moment, I am tending toward learning about incorporating some basic TA in order to buy at a better price, if nothing else.

No intention of being a day trader or investing anyone else's money - I am now starting to get serious, after relying on my father's stock suggestions for the past 10 years and building a portfolio of about 25K, which should really be worth about double that, had I been more involved in the process, watching and decisions made.

I've relied on other sources for valuations, but will read the items you mentioned to get a better understanding on how to do my own valuations which I think will help progress my investing skills quite a bit.

My plan for next year March onward is to shift over 4K a month from China (where I am working) into AUD and invest this as I go along when I find worthwhile companies - taking a 2-5 year view.

The benefit of being a non-resident is no capital gains tax on share profits, so now is really the time for me to take advantage of the tax situation aggressively, as I plan to be a non-resident for at least the next 10-15-20 years (38 at the moment).

Have been thinking of reading Benjamin Graham for a while, so will get onto that and try to get a firm grasp of the basics and write myself an investment plan, cherry picking what looks like it would fit into my way of thinking from macro down to micro.

My goal is to have a passive income that is enough to live on and a good million or so in investments by the time I am 50.

Thanks again for the advice!

 

[Sir Osisofliver]

Bruce Lee

Steve wins a cookie.

Do many of the forum goers here maintain both a trading portfolio and long term portfolio alongside each other? I like the idea of having a trading portfolio I can generate income from where a percentage of the profits are transferred to the longterm portfolio.

Would enjoy some more experienced thoughts if available?

Wilkens

I certainly do this, but I also don't ignore other asset classes. I use trading profits into Core Portfolio's of shares, non - core portfolio's of shares (I'll explain what I mean later), Residential and Commercial property and fixed interest investments, aligned to economic cycles.

Non- core portfolio are stocks that I purchase with the intention to sell at the end of the economic cycle. They classically fall under the term of "growth" investing, so selecting stocks for capital gains rather than dividend stability. You see with the share market cycle and value chain dynamics in the latter part of the share market cycle (9-12), the focus needs to move away from the "blue Chip" shares towards the medium and small cap space. Whilst this space still has stand-out players at any stage of the cycle, during this window of opportunity that section of the market has a higher expectancy of return.


Ok there is more to come but won't be till this afternoon.

Cheers

Sir O

 

[WilkensOne]

Well from what you are saying I am glad I'm completing an economics unit at university soon to help understand this a bit better! Is a potential downside of moving money out of the trading account that you limit the capital available to generate more? I guess in a way it also forces you to lock in profits and maybe take a less volatile approach.

Either way I'm looking forward to your explanation

Wilkens

 

[Sir Osisofliver]

Well from what you are saying I am glad I'm completing an economics unit at university soon to help understand this a bit better! Is a potential downside of moving money out of the trading account that you limit the capital available to generate more? I guess in a way it also forces you to lock in profits and maybe take a less volatile approach.

Either way I'm looking forward to your explanation

Wilkens

Removing funds from the trading account..where it's an active investment style to core portfolio stocks...where it's a passive investment. Of course I'm decreasing the ability of the trading portfolio to compound gains, but once trading portfolio's start to get large, you start having problems around liquidity and slippage. It's much easier to invest a $50,000 trading portfolio and maintain consistency than a $500,000 trading portfolio. The major gain however is in the time it takes to monitor the non-core portfolio. The hard yards as it were is done on initial investment. Ideally the stock within the core portfolio will never be sold. If I bought BHP at $8.00 (and I did) - why the hell would I ever sell it, even during the worst market correction? I'm better off to protect the holding and preserve that cost base...however BHP fulfills the characteristics I'm looking for in a core portfolio stock.

So what do I look for? From my previous post - From the 2000+ stocks on the market, 34 stocks were purchased, in a manner that weighted them according to the ASX100 index. (This is where protection of the cost bases comes in, by weighting the portfolio to the ASX100 index I can purchase an Index put in a mature market to protect the cost base of the portfolio).

Now that's a pretty severe trimming process, so what's the deal? What's "core". Of course Core has to have some rules, but these are just simple rules to help me refine my analysis criteria. What does the space look like after I've applied some rules? (from memory about 67 stocks). It's my fundamental and technical analysis that trimmed this figure from 67 to 34 stocks.

The Core Rules

1) Classified as Large Cap (which means I'm really only looking within the ASX100 index to start with). Anything outside of that isn't going to be a stock that will benefit from Value Chain Dynamics after a major correction. It's the movement created from this that tends to see the stock not be value destroying after a major correction in the wishy washy chaos that follows for a while.

2) Minimum 10 year history. Basically this rule means I don't buy cowboys. I did own Babcock and Brown (got some in the float) but sold it at ~$25 (500% gain) - it was a non-core holding. This simple rule means that I don't tend to buy stocks that blow up because the company has already been through a correction event and knows what they have to do to survive.

3) Dividend stability measure. Because this is a geared strategy (albeit a positively geared one) the security of the dividend stream is very important. A core portfolio stock will be one in which the stock has a long history (10 years IE over an economic correction) of providing increasing dividends during this time. I'm not so much concerned with the yield of the stock at this time. The portfolio needs to have a yield that returns a positive number after gearing...that is all. The nature of these companies means that the increasing dividends over the economic cycle mean that there is significant passive income by the end of the cycle.

That's the end of the rules.....and where the analysis starts.

Fundamental analysis - at this stage I tend to concentrate on debt and liquidity ratio's. Finance at this stage is tight, and likely to remain so for quite some time, so companies that are over extended will be in for some rough times ahead. They will also lack the ability to be predatory in this environment, and the correction is an ideal time to purchase high quality assets at rock-bottom prices.

liquidity ratio
Debt Ratio

I basically want to ensure that the the cash flows are relatively stable over the longer term. Not so concerned about shorter term fluctuations, but security of cash flow is important. EG something like CBA - very solid cash flows - big four bank etc.

Once this process has trimmed down the list further I will then do Technical Analysis...here's an example...



This is CBA - which meets the above rules and had excellent fundamental ratio's. The stock was well below my calculated instrinsic value...basically it was sentiment that drove the stock price so low... The horizontal blue line is my entry point. Note the Fib retracement of 100% of the range from '02, and the range into and out of the flag formation.



Here it is now... Note that the stock returned to Pre-GFC levels much faster than the index...the effect of value chain dynamics...and the wishy washy chaos whilst the dividend is still increasing. Core portfolio stock characteristics.

Ok That's enough for today...I'll do non-core characteristics another time.

Cheers

Sir O

 

[WilkensOne]

Thanks Sir O,

I am finding this really informative, especially now that I am getting a better understanding of the more specific criteria that are used for stock selection. Can I ask, do you opt for a dividend payment or reinvest them back into the company, or does it come down to a case by case basis?

Earlier you were saying that you use multiple vehicles for investing, do you keep them completely separate or do you attempt to find ways which dividend payments cover the interest of on a loan or mortgage?

Cheers

 

[Sir Osisofliver]

Thanks Sir O,

I am finding this really informative, especially now that I am getting a better understanding of the more specific criteria that are used for stock selection. Can I ask, do you opt for a dividend payment or reinvest them back into the company, or does it come down to a case by case basis?

No DRP the dividends are used to cover the margin lending interest and pay down the loan amount... Because what's coming? The end of the cycle correction will mean that if the portfolio is too heavily geared I will suffer the risk of a margin call. My target is for a sub 25% LVR on the loan in a mature market. With a hedge in place I don't have to worry about a margin call on the portfolio with the LVR so low.

Think of it like a business. The dividends are my incoming revenue and the margin loan interest are my outgoings. I want to ensure that I have a robust cash flow in the business and to do so I will pay down debt.

Earlier you were saying that you use multiple vehicles for investing, do you keep them completely separate or do you attempt to find ways which dividend payments cover the interest of on a loan or mortgage?

Cheers

They are separated by entities but I have the flexibility to manage the increasing equity between assets if I need to. That is significant borrowing capacity in the property and share portfolios.

Cheers
Sir O

 

[WilkensOne]

Think of it like a business.

As an investor looking to start out in investing and trading is it necessary to plan and create, for example a company to trade under when starting with a limited capital base? I know this isn't a blanket answer for everyone but in your opinion is it worthwhile creating the correct entity from the beginning?

Is the method that you use for picking long term shares similar for your short term trading shares. As my capital is limited at the moment I would like to start by learning a good trading foundation that can feed my investments as you described. Is there anything you could suggest to be mindful of when starting or some good techniques?

Thanks,
Wilkens