Newbie Lessons - All your questions answered

[Sir Osisofliver]

Hi nev25,

Hope you are getting what you need from the forums.

Ok so as you have already said minimum marketable parcel is $500, but most brokers require a minimum account size which can vary.

How much is enough to start? I've seen a number of threads on the boards with that topic so here is my take.

When starting out and learning it has been my experience that it is the fixed costs which kill the newbies. This is what Burglar was talking about, your brokerage is a fixed cost to your transaction, win, lose or draw. That brokerage (and any other fixed cost such as data cost, software cost, etc) acts like a millstone around your neck. It's the same situation for professional fund managers, except their costs include things like rent, salary, advertising etc. If only roughly 20% of fund managers can out perform the index, can you see the difficulties inherent on the small scale? I read an article recently that a bunch of professional fund managers went up against a group of students, and a cat...the cat won. He chose his stock by playing with a mouse, and where it landed is what was invested.

Someone mentioned the 2% rule (google it it's easy to find) which is a positional sizing method. Positional sizing is literally what we do to give us the greatest chance of succeeding. Even if we choose our stocks at random, (like a cat) if we maintain a stop loss (limit our downside risk), and invest the right amount via a positional sizing method, we are usually much better off.

The problem is that positional sizing methods require a reasonable sum to work effectively when you take the fixed costs into account. A starting point would be 10 to 15 thousand if you want to use this methodology. If you have less than that either save up or go looking for an outlying event, knowing your risk of ruin is high. It's what got me started.

Cheers

Sir O

 

[Sunflower]

First of all, thank you all for all the contribution. I came across this forum in the attempt to improve my financial literacy. Having read the thread from the first post to the last post, I can't help feeling that I have missed out on something in my understanding. Maybe, some wise soul out there might be able to fill in the gaps:

(1) Indicators of the end of a cycle. There were a few posts about some of the indicators to watch out for. I am trying to learn how to discern which part of the economic cycle we are in. Where is the money going to flow?

(2) Devising a system. I really like the initial part of the discussion about strategies, turning an idea into a system. I think I'm still missing the final step of actioning that system that was discussed. Maybe, some insights into how experienced investors do this will be helpful. I don't want nor expect to be given the tools, I just want to see how experienced investors do it so that I can devise my own system.

(3) I'm intrigued by the concept of diversification through different kind of portfolios e.g. Core/Non Core, Real estate (residential/commercial). Something I would like to take with me on my investment journey. Insights into how the experienced investors do it would be great.

Once again, thank you.

Sunflower

 

[Sir Osisofliver]

First of all, thank you all for all the contribution. I came across this forum in the attempt to improve my financial literacy. Having read the thread from the first post to the last post, I can't help feeling that I have missed out on something in my understanding. Maybe, some wise soul out there might be able to fill in the gaps:

I'll see what I can do.

(1) Indicators of the end of a cycle. There were a few posts about some of the indicators to watch out for. I am trying to learn how to discern which part of the economic cycle we are in. Where is the money going to flow?

I could simply tell you the answer to that question, or I can make you work it out. The first option is giving you a fish, the second teaches you to fish, and you know what they say about that. (wives enjoy husband free weekends ) So what you need to look for are what influences the big picture? Some of the things you should be looking at are:

Interest rates. Are they above long term averages or below? If you've not been under a rock...they are very low at present. What do you think this means in terms of the economic cycle? The theory is that the economic cycle (as opposed to the share market cycle) ends with interest rates high, which then have to be cut to stimulate the economy out of recession (like what is happening in the US and Euro zones for a while now).

Unemployment. Do we have a tight labour market? IE low unemployment. This is a condition that exists at the end of the share market cycle, and generally lags a short period behind the share market fall (because of the effect on consumer confidence and demand). At present we do not have a tight labour market, although unemployment has been rising over the last couple of months, we are still below our GFC peak but above long term average levels.

Commodity Prices. What are they doing? Up or down? Since '05 the global commodities market underwent a significant change...China turned from being a net exporter to net importer of many resources. This has drastically affected the long-term averages of the commodity cycle. As a commodities driven economy Australia is in prime position to benefit from this over the longer term.

The average length of the Share Market cycle is 7.8 years, when did the latest cycle start? The above three should give you a fair idea of where we are. Let me know what you think.

(2) Devising a system. I really like the initial part of the discussion about strategies, turning an idea into a system. I think I'm still missing the final step of actioning that system that was discussed. Maybe, some insights into how experienced investors do this will be helpful. I don't want nor expect to be given the tools, I just want to see how experienced investors do it so that I can devise my own system.

Step 1. What are your strengths and weaknesses? Know thyself.... only use what works for you.
Step 2. What resources do you possess? Not just in terms of monetary resources. What time do you have to devote? What information and experiences can you draw upon? Etc
Step 3. What are you attempting to achieve? Have you written down your goals? Are they measurable and achievable? etc
Step 4. Now look at devising a system. Go look at what others have done...work from there. Ensure that you put the ability to evaluate your progress into your system.

(3) I'm intrigued by the concept of diversification through different kind of portfolios e.g. Core/Non Core, Real estate (residential/commercial). Something I would like to take with me on my investment journey. Insights into how the experienced investors do it would be great.

Once again, thank you.

Sunflower

You'll find that there is a good time to buy property....and then there is a bloody fantastic time to buy property...and that there are similar periods that exist across all assets. Each asset class has its time in the sun. You need to recognize when these periods of time exist and how to take advantage of them. If you've been reading these forums...you'll start to get an appreciation of when these time are.

I never seemed to get to non-core portfolio...if I get time (which I know I won't over the next several weeks), I'll write this up.

Cheers

Sir O

 

[burglar]

Yesterday JB Hi Fi rose 17%

 

[Sir Osisofliver]

EOFY

With 30 June approaching I won't have time to devote to the newbie thread (and our latest discussion on system design) until late next week at the earliest. I'm also going to take a few days rest whilst the school holidays are on.

Here's something to ponder however about the system. Talk about it amongst yourselves. I mentioned it previously (back on page 32 I think) about the sorts of things we can scan and look for, and I asked for a ranking. One of them I mentioned was news reports. Both Tech and TH correctly stated the likelyhood that short volume would be unwound within the selling volume. If you've been tracjing the short positions in JBH, you'll notice that this is already occuring. Without a triggering event we are likely to see an extended sideways movement of price whilst the short positions unwind in the selling volume. For a short squeeze set-up - we need something that will effectively dry up the present selling volume, leaving the short holders little choice but to close out positions and drive up the price.

Here's something to think about.
1) We are approaching reporting season
2) Companies publish these reporting dates

Cheers

Sir O

Some would consider a +5 month position for a ~46% return a slow trade. I'm happy to be patient, to enjoy the short squeeze

Of course you could have held it for significantly less time and achieved a 30% return as well.

Cheers

Sir O

 

[Ridgydidge]

Hi Guys,

Just finished reading through this wealth of information. I am in awe of a guy who is willing to share his hard earned information for 5yrs now on this thread. I tip the hat at you in appreciation Sir O

I would also like to thank all the other contributors to the thread… even tho some times over my head your input was interesting. I have just started to look into the share market as an option for investment and honestly did not believe it could get so technical. I am sure I am going to have to read through this again soon to pick up on the things that I missed, but for now I am having my first stab at paper trading on the ASX and will see how I fair… the truth is tho, atm that I can’t trade on the paper trading system the way I would like to trade once I dive in the deep end and have a crack at the real game. But, none the less , I will learn from the experience of sorting out how to pick my marks.

What I would like to do is put a theory I have in my head onto paper and let you guys pick it to pieces if you feel so inclined lol.

Like I said, I learned a lot from this thread and currently hunting for the resources referred to so often through the banter that has made this read an enjoyable one. My idea is very simplistic (maybe too much so?) and totally hypothetical for now, but here we go…

Say I had a $100K investment portfolio (is it still a portfolio before you buy stocks?) and I would look through the given stockmarket that I was hoping to invest in (most likely would be an overseas exchange until I proved myself sustainable) for the “good news stories” of the day and trade $20K per stock found, looking for a gain of 2% or more before selling out (same day preferably). I would do this 5 times per day (that’s providing there were 5 good news stocks). Ahhh… I was taking notes, lol, I haven’t forgotten about the 2% Rule, so lets say that the $100K is just the portion of the Cool Mil I have that I am willing to risk on the market. The rest I have diversified into rentals, commercial building ect. That would get me in compliance with the 2%er right?

I am a realist ( A Million, yeah right!!! Lol), so I would like to make a reserved call and say that I would only earn 5% a week on my $100K… That’s still 5 Grand , good earning in my ledger. My assumption (if that’s not what I’ve already done so far) is that I would be able to make $130K profit in 6 months (AWSOME!!!) (26 trading weeks X 5G) and that’s without compounding.

OK.. I know, I will have to pay for my transactions (Brokerage) and support the Swan Fund but it all still seems very worthwhile to me… that’s assuming that my idea works. So here’s your chance to pick my theory to pieces .. looking forward to your insight

Ridgydidge all the way

 

[Assasin]

Sounds fantastic,

Start as soon as you can, the market could do with an extra 100k to absorb into thin air.

Please, read , read and learn and when you think you are ready to begin, start the reading and learning process again.:1zhelp::1zhelp:

 

[theinvestorguru]

Hi nev25,

Hope you are getting what you need from the forums.

Ok so as you have already said minimum marketable parcel is $500, but most brokers require a minimum account size which can vary.

How much is enough to start? I've seen a number of threads on the boards with that topic so here is my take.

When starting out and learning it has been my experience that it is the fixed costs which kill the newbies. This is what Burglar was talking about, your brokerage is a fixed cost to your transaction, win, lose or draw. That brokerage (and any other fixed cost such as data cost, software cost, etc) acts like a millstone around your neck. It's the same situation for professional fund managers, except their costs include things like rent, salary, advertising etc. If only roughly 20% of fund managers can out perform the index, can you see the difficulties inherent on the small scale? I read an article recently that a bunch of professional fund managers went up against a group of students, and a cat...the cat won. He chose his stock by playing with a mouse, and where it landed is what was invested.

Someone mentioned the 2% rule (google it it's easy to find) which is a positional sizing method. Positional sizing is literally what we do to give us the greatest chance of succeeding. Even if we choose our stocks at random, (like a cat) if we maintain a stop loss (limit our downside risk), and invest the right amount via a positional sizing method, we are usually much better off.

The problem is that positional sizing methods require a reasonable sum to work effectively when you take the fixed costs into account. A starting point would be 10 to 15 thousand if you want to use this methodology. If you have less than that either save up or go looking for an outlying event, knowing your risk of ruin is high. It's what got me started.

Cheers

Sir O

Hi Sir,

well written and explain your thoughts.

I am wondering, I am newbie, I did couple of books, and doing the stock game ASX200.
what do u think about paper trading vs playing with 2000-4000 that i m not worried to lose

thank you all for replying and joining this lovely forums.

 

[wadesansom]

Risk Management Techniques and Optimisation. (Part 1)

OK Time for another secret:

If your PPR has non tax deductible interest and limitations towards optimisation and gearing; and investment properties do not have these limitations, which is the better first purchase?

A great many people seem to want to follow some kind of script that involves chaining themselves to a large asset with an inefficient gearing and taxation profile. The better first purchase is an investment property (or two) BEFORE you purchase a PPR. For a great many people this little secret comes too late – remember to tell your kids when they are old enough to appreciate it.

Sir O

You say that an investment property (or two) is a better first purchase over a PPR... Can you please elaborate? I am aware I am reading this about 4 years down the track!

FYI - I was tossing up between the two, I am 22 and bought an investment property first. So I had a lot of anticipation reading which you thought was better, and as happy as I was to have been on the good end of your advice... There was no explanation why.

Thanks, I hope you are still around to answer me.

 

[KurwaJegoMac]

I can see a couple of reasons why:

1. It is an income producing asset
2. You can claim tax deductions

Those two factors mean you can pay off an IP quicker than a PPOR (or at least make it cash flow positive). You can also then use your IP income to help pay off your PPOR.

Think about it this way; a PPOR and IP should have roughly the same capital gain (assuming similar factors like suburb, property type, etc). The main difference are tax benefits and income on an IP. Why would you want to plough money into a PPOR then since you'll get a lower overall return on your money?

Of course PPORs have intangible benefits (security, permanent roof over your head, etc) so its worth getting one when you can.

 

[Sir Osisofliver]

Sorry all for ignoring the thread for a while.. I've been busy and also taking some time off.

Hi Sir,

well written and explain your thoughts.

I am wondering, I am newbie, I did couple of books, and doing the stock game ASX200.
what do u think about paper trading vs playing with 2000-4000 that i m not worried to lose

thank you all for replying and joining this lovely forums.

Guru - I find it depends on the person. For me, I do learn by paper trading, but you may or may not and I can't answer this because I don't know your brain. When I'm testing a new system, it's an exhaustive process (because I'm the sort of fellow who doesn't gamble - I take calculated risks). I generally data test first (use past market data to evaluate the system). This allows me to do a large number of simulated trades across different market types and confirm positive expectancy of the system.

I'll then paper trade using the current market. I usually want around 50 paper trades, trying to see if the live numbers match the previously created equity curve. Next step is to use a small amount of funds (normally about 20-25k) and run the system for a few months. I usually get a slight degree of slippage at this point, but once again I'm testing for any major differences in expectancy from the previous data sets.

Finally I'll move an appropriate level of funds into the system, depending upon which instrument I'm trading and the level of liquidity. (IE equity trading doesn't have the same level of liquidity and significantly higher risks associated with slippage than say FX).

You say that an investment property (or two) is a better first purchase over a PPR... Can you please elaborate? I am aware I am reading this about 4 years down the track!

FYI - I was tossing up between the two, I am 22 and bought an investment property first. So I had a lot of anticipation reading which you thought was better, and as happy as I was to have been on the good end of your advice... There was no explanation why.

Thanks, I hope you are still around to answer me.

Yup still here - just don't post every day like I used to

I can see a couple of reasons why:

1. It is an income producing asset
2. You can claim tax deductions

Those two factors mean you can pay off an IP quicker than a PPOR (or at least make it cash flow positive). You can also then use your IP income to help pay off your PPOR.

Think about it this way; a PPOR and IP should have roughly the same capital gain (assuming similar factors like suburb, property type, etc). The main difference are tax benefits and income on an IP. Why would you want to plough money into a PPOR then since you'll get a lower overall return on your money?

Of course PPORs have intangible benefits (security, permanent roof over your head, etc) so its worth getting one when you can.

Wade, KurwaJegoMac is entirely correct. I'd only add a couple of things. Property in my view is a long-term investment; that is significantly more orientated towards capital growth than income. But it still provides an income above your employment income. You can trade property... but that holds risks just like share trading and I've never possessed the skills of a "Block" contestant to make it work for me.

For the first property purchase the IP is significantly better because of the taxation profile. Once that property (or two) is positively geared, it provides an income that you can use to support your PPOR purchase, otherwise you are likely to only have your employment income to support the loan for the PPOR. It also provides significant security to use for the loan (always a plus with the banks).

 

[Sir Osisofliver]

Time for an amendment...

Does everyone remember bank secret number 1 all the way back on page 2 in February '09?

Here it is again...

Bank Secret number 1.

Ok this is something that EVERY bank will do and by doing this will save you THOUSANDS. When you get a mortgage, they will ask how frequently you want to make payments. If you say monthly...
they'll say 'No Problems" and continue.

If you say Fortnightly.... they'll say "no problems" and continue.

If you decide to pay fortnightly (AND YOU SHOULD), when you get your mortgage documents, if you are paying attention and haven't gone glassy-eyed from reading all the legalese, you will see that they will amortise your fortnightly payments across the year so that you pay exactly the same as someone paying monthly. You pay exactly the same over the course of a year.

Now ask yourself why would they do that? Go ahead - ask your bank manager (and remember that he'll use sales techniques against you) you probably won't get the REAL answer.... Here it is.

There is 52 weeks a year, 26 fortnights a year...but only 12 months. So by choosing to pay fortnightly (AND NOT AMORTISING THE PAYMENTS) you are in effect making 13 months of payments in a year. You are making EXTRA payments (even though the difference to you is about the cost of a cup of coffee every fortnight).

By not amortising the fortnightly payments, over the course of a 30 year mortgage, you will make an additional 19 payments earlier than you would normally have done so, and save yourself...72 mortgage payments.

Wait 72??? How is that possible I hear you cry? Because when you start paying your mortgage - for the first decade or so when you make a payment, the largest portion of that payment is paying off the interest - not the principle. Extra payments reduce both the principle and interest portion of the loan - and hence you pay it off that much faster. Don't believe me? Go ahead ask your bank manager. I haven't found one yet who'll give me a straight answer - but they will all blush when they realize they have been caught out.

It's time for an amendment....

Interest Rate Cycle

If you've been keeping an eye on interest rate, you'll know that they are very low at the moment. 3% Reserve Bank Cash Rate. When the Reserve Bank dropped interest rates during the GFC down to 3%, it was the lowest interest rate environment in Australia for 49 years. I fixed some of my loans for five years back then and they are coming to the end of their fixing period.

So off I trot to fix my loans for another fives, whilst interest are back down to the same level. It appears that the banks have decided that the half monthly payment every fortnight that I detail above is bad juju for the bank. (Of course it is, my objective is to pay as little interest as possible on the loan - and the bank's objective is that I pay the maximum). So I'm usually pretty cautious about dealing with the banks because of that objective that the have.

So one of the things that the banks (I won't mention which one I was dealing with, but they will all be doing it), has done is to impose a limit on the amount of funds that can be paid over and above the agreed contract amount. A limit of $20,000, over the fixing period. Now this may not impact everyone, (after all you need to be able to afford that $20k extra), but $20k on even an average size loan of say $350k is really a pittance. If you pay more than this, they intend on adjusting the interest rate on the loan (via a bit of sneaky adjustment to do with margins that they give to clients for having the loan. It's taking away a benefit then rather than breaking a contracted rate.

Why are they doing this? To limit the number of additional payments that you make and push the interest paid back towards the amortised rate. Sneaky sneaky sneaky.

To combat this I had to take a fairly firm approach to the bank, and create a cocktail loan, one which has only a portion of the amount fixed rather than the whole amount. The remaining funds sit in a variable rate loan (with an offset account). You want to be putting the majority of the loan into the fixed portion and a smaller proportion into the variable loan. (Be careful here, the bank I was dealing with failed to tell me that where the variable portion is less than $100k, you lose that margin I was talking about above, pushing the interest rate higher). I bitched, moaned and complained about the lack of disclosure and adjusted the loan amounts so that there was $100,001 in the variable portion. The first three times the bank sent me the loan documents, they were wrong and blamed it on bank error.

You want as little as possible in the variable account as the offset account and additional payments will pay this account down faster than the fixed account. (you still want to make additional payments in the fixed loan account - only up to the maximum - the $20,000 limit - and make these payments in the early part of the loan life - the earlier the better).

This will only apply if you choose to fix your loan amount. If it's all variable....what I wrote five years ago still applies.

Cheers

Sir O

 

[prawn_86]

Amazing stuff as always Sir Osis

 

[VSntchr]

A timely update as I have been reading through this great thread for the past couple days.

Looking at the economic cycle posts which were now 2 years ago is quite interesting. At the time of posting it was suggested that we were around 730 - 8 on the clock....

Its interesting to observe that interest rates have since fallen dramatically and shares have had their first major leg up from 4300ish to 5000.
Keeping an eye on commodities, unemployment and o'seas reserve levels for further indication/confirmation.


Thanks Sir O for a great read!

 

[Russtafaerian]

Searching for Data TIps

Hi Everyone and thanks Sir O for the great info.

Not sure if the correct place to ask, so please let me know if I'm posting in the wrong place.

I'm wondering if anyone has any tips on where to find company information more easily. I've been working through places like E-Trade and company Annual Reports and find it a very tedious process - I know there are easier ways to do this.

Specifically, wonder if anyone has tips on where I can get this kind of information:

1. PE trends or annual block data for PE over time - aiming for a 10 year period ideally.

2. The same, but for industry/ASX 200 PE averages over time.

3. Other standard ratios over time (the annual reports only show 2 years data most of the time) I'd like to see 10 years of data - similar to what I've seen Morningstar can provide for US stocks. There is a site called 'Old School Value' which gets 10 years of data in table format - they charge for this, but it's sourced from Morningstar. Anywhere to get this for free in Australia? I can't believe the ASX does not collect this data from company reports and provide to investors - or even brokers such as E-Trade. Am I just not looking in the right places?

4. Number of shares outstanding - another number I'd like to see historical movements on if possible.

Any answers to these questions or advice on where others find data more conveniently would be very helpful - if there is another thread covering this somewhere - also appreciate a re-direct.

Thanks kindly to all!

 

[bullhunter]

There is 52 weeks a year, 26 fortnights a year...but only 12 months. So by choosing to pay fortnightly (AND NOT AMORTISING THE PAYMENTS) you are in effect making 13 months of payments in a year. You are making EXTRA payments (even though the difference to you is about the cost of a cup of coffee every fortnight).

I'm not seeing how by paying a loan fortnightly you'll pay 13mths worth in a year. How is this extra months worth of payments achieved?

Forgive for my lack of understanding. But the maths isn't working out for me here. What am I missing here?

I am a realist ( A Million, yeah right!!! Lol), so I would like to make a reserved call and say that I would only earn 5% a week on my $100K… That’s still 5 Grand , good earning in my ledger. My assumption (if that’s not what I’ve already done so far) is that I would be able to make $130K profit in 6 months (AWSOME!!!) (26 trading weeks X 5G) and that’s without compounding.

$130k in 12mths

 

[burglar]

I'm not seeing how by paying a loan fortnightly you'll pay 13mths worth in a year. How is this extra months worth of payments achieved?

Forgive for my lack of understanding. But the maths isn't working out for me here. What am I missing here? ...

There is more than 2 fortnights in every month except February.

 

[Rider]

I'm not seeing how by paying a loan fortnightly you'll pay 13mths worth in a year. How is this extra months worth of payments achieved?

Forgive for my lack of understanding. But the maths isn't working out for me here. What am I missing here?





$130k in 12mths

there are 28 days in a fortnight, how many days in each month? 30 or 31.... times the difference by 11. there is your extra payments

 

[systematic]

I'm not seeing how by paying a loan fortnightly you'll pay 13mths worth in a year. How is this extra months worth of payments achieved?

What people mean here is when you take your monthly payment and divide in half (to pay each fortnight).
If you do that...you will make 26 (fortnightly) payments per year - which works out obviously to 13 monthly payments.

 

[bullhunter]

I see now thanks.