Robusta fundamental, leveraged investments

[robusta]

I have given bottom buying a lot of thought over the years and have come to a few conclusions.

• Bottom buying is good, the greatest return on capital (both trade & div) can only be done with the cheapest entry.

• Bottom buying can only be done on a down trend and only by accident, as no one knows where the bottom is.

• Bottom buying can only be done deliberately, as in one seeking the bottom.

So its a deliberate act of chance, buying in the hope/belief that it is the bottom, or at least close enough that it doesn't really matter, works really well with an open ended time frame and little or no leverage...its worked out for me that over the last 5 years roughly 1 in 6 of my entry's has been a bottom.

So it would seem that if one consistently seeks bottoms it is bottoms that one will find.

Sorry I could not resist that previous post.

Good point's So_Cynical I like that concept that it is a deliberate act of chance, if you try it enough you will hit a few times and hopefully when you miss you buy cheaply enough that it does not matter. I guess this also leads into when to be confident enough to average down and when to leave well enough alone?

 

[So_Cynical]

I guess this also leads into when to be confident enough to average down and when to leave well enough alone?

Rules, ya gota have em, everyone has to draw a line in the sand somewhere..trend followers follow rules, value investors follow rules and contrarian averagers follow rules.

Personally i allow for 3 average downs of mixed sizes...with a cash invested limit of X that is roughly 9% of my total portfolio value, of the 47 stocks i have held since June 2007 this strategy (to date) has worked in 42 of them...so a 88.6% success rate.

On the subject of portfolio management I am starting to feel a little uncomfortable being almost fully invested at the moment, the recent purchase of Vocus in particular may have been a error.
The first half of one of the most overused quotes, "Be greedy when others are fearful and fearful when others are greedy" has served me OK up until this point but I am starting to see a little greed around. It may be prudent to free up at least 10% of my capital over the next year as selling opportunities present themselves.

Good to see im not the only person having these feelings...this rally has brought the market back to the 2009/10 peak and yet nothing has changed that much, i have 5 positions (open trades) now in the sell zone (profit in double figures) and im thinking this is an opportunity to free up a heap of cash and close out all but 2 of my open trades...and sit back and wait.

 

[robusta]

Rules, ya gota have em, everyone has to draw a line in the sand somewhere..trend followers follow rules, value investors follow rules and contrarian averagers follow rules.

Personally i allow for 3 average downs of mixed sizes...with a cash invested limit of X that is roughly 9% of my total portfolio value, of the 47 stocks i have held since June 2007 this strategy (to date) has worked in 42 of them...so a 88.6% success rate.

My rules depend on the individual business, something with nice stable dividend streams like TGA or NVT I would be happy to average down as much as I can, normally in increments as the price falls around 10% something a bit more cyclical like SWL I would probably only average down once with a smaller parcel. This rule was developed after my experience with MCE.

Good to see im not the only person having these feelings...this rally has brought the market back to the 2009/10 peak and yet nothing has changed that much, i have 5 positions (open trades) now in the sell zone (profit in double figures) and im thinking this is an opportunity to free up a heap of cash and close out all but 2 of my open trades...and sit back and wait.

Everyone seems happy that the US GDP is expected to grow around 2%, growth seems to vary by more than this over the economic cycle and that cycle seems to be speeding up.
If the US, Japan, Europe and the UK were all businesses I would not touch them - too much debt.

 

[robusta]

While I strive not to make the same mistake twice I seem to have a uncanny ability to stumble into new mistakes while occasionally repeating some old ones.

Investment Sold

VOC - Vocus Communications

Sold 838 @ $1.685 for net proceeds of $1372.12 after the broker got a little larger cut than usual. So that is a capital loss of $147.85 or a touch under 10% of the original capital speculated.

Mistake 1
Should never have bought this in the first place. The lure of high growth assets generating capital that is reinvested in more high growth assets blinded me to the fact that I did not understand the balance sheet and had no clear understanding of the cash flows.

Mistake 2
Should have sold a couple of weeks ago as soon as I came to this realization.

Mistake 3
Got greedy. Started thinking maybe that growth is as fantastic as I think, we are in a bull market apparently, why not use a stop loss for the first time in my life, in particular a trailing stop. Sp at the time was $1.81, the trailing stop was set 4.5% below the recent high($1.725) where it was triggered today to be filled at $1.685

 

[Klogg]

If the US, Japan, Europe and the UK were all businesses I would not touch them - too much debt.

Yeah, but they can never go broke - unless they do so voluntarily!

 

[odds-on]

I have given bottom buying a lot of thought over the years and have come to a few conclusions.

• Bottom buying is good, the greatest return on capital (both trade & div) can only be done with the cheapest entry.

• Bottom buying can only be done on a down trend and only by accident, as no one knows where the bottom is.

• Bottom buying can only be done deliberately, as in one seeking the bottom.

So its a deliberate act of chance, buying in the hope/belief that it is the bottom, or at least close enough that it doesn't really matter, works really well with an open ended time frame and little or no leverage...its worked out for me that over the last 5 years roughly 1 in 6 of my entry's has been a bottom.

So it would seem that if one consistently seeks bottoms it is bottoms that one will find.

I doubt many rational investors would disagree with the following:

• The ASX300 market is broadly efficient. The majority of the time all businesses will trade within a “fair value range”.
• The inefficiencies are in small cap stocks.
• Profit margins are mean reverting – most listed businesses can be best described as fair. Only in exceptional cases are profit margins not mean reverting.
• A business that has been successfully operating for a few years has the same probability of failure as a business with decades of operating history.

So creating a diverse portfolio of businesses with some operating history and a focus on buying bottoms allows the investor:

• Profit from buying at the lower end of the fair value range of ASX300 listed stocks
• Minimise risk (permanent loss of capital) by holding a diverse portfolio.
• Recycle capital to maximise portfolio expectancy. Once a stock has gone up a reasonable amount, further gains are dependent on the mood of Mr Market or improved earnings, both of which are near impossible to predict with certainty, time is better spent searching for the next bottom.
• Just follow the market and buy bottoms.

The open ended timeframe and no leverage make it work. I really do like your approach to the market. When I have a larger pot of capital and further experience I will look to implement a bottom buying system.

 

[tech/a]

Right now anyone with a brokerage account is making money.
The question is how much are they making relative to money invested.

Personally I think that before this year is out the folly of BOTH of your views will become aparent.

 

[So_Cynical]

I doubt many rational investors would disagree with the following:

• The ASX300 market is broadly efficient. The majority of the time all businesses will trade within a “fair value range”.
• The inefficiencies are in small cap stocks.
• Profit margins are mean reverting – most listed businesses can be best described as fair. Only in exceptional cases are profit margins not mean reverting.
• A business that has been successfully operating for a few years has the same probability of failure as a business with decades of operating history.

So creating a diverse portfolio of businesses with some operating history and a focus on buying bottoms allows the investor:

• Profit from buying at the lower end of the fair value range of ASX300 listed stocks
• Minimise risk (permanent loss of capital) by holding a diverse portfolio.
• Recycle capital to maximise portfolio expectancy. Once a stock has gone up a reasonable amount, further gains are dependent on the mood of Mr Market or improved earnings, both of which are near impossible to predict with certainty, time is better spent searching for the next bottom.
• Just follow the market and buy bottoms.

The open ended timeframe and no leverage make it work. I really do like your approach to the market. When I have a larger pot of capital and further experience I will look to implement a bottom buying system.

I whole heartily agree...however as TH pointed out in another thread, my (above) method may have near perfectly suited the conditions of the last 4 years, and thus may not work as well going forward.

However the results so far in my weekly system testing thread, seem to indicate that there are always stocks that look cheap (a potential bottom) even if they are harder to find in this rising market.

Right now anyone with a brokerage account is making money.
The question is how much are they making relative to money invested.

Personally I think that before this year is out the folly of BOTH of your views will become aparent.

You may not have noticed but i have been doing a lot of selling over the last 2 weeks 14% of my portfolio now in cash.

I'm actually a little surprised at the depth of my contrarianism.

 

[robusta]

Investment Increased

HHL - Hunter Hall International Limited

Bought 717 @ $2.83 = $2049.06 including brokerage.

Actually expected the FUM to fall more at the H/Y report, the investment returns are improving however and while the dividend has been reduced I do not expect this to be a permanent state of affairs.

The share price has fallen further from the recent highs as they have gone ex dividend.

 

[tech/a]

Investment Increased

HHL - Hunter Hall International Limited

Bought 717 @ $2.83 = $2049.06 including brokerage.

Actually expected the FUM to fall more at the H/Y report, the investment returns are improving however and while the dividend has been reduced I do not expect this to be a permanent state of affairs.

The share price has fallen further from the recent highs as they have gone ex dividend.

So you've watched a 30 % profit all to zero and now your buying more.
I just can't see this as smart/intelligent investing/trading.

You let profits go west and buy a falling knife.
I see self justification for adding to a bad trade.
In my opinion you must lock in profits.
You must minimize loss
Follow the money up---not down.
Take it off the table before it slips through your fingers.
Actively manage your portfolio.

Personal opinion obviously.

 

[So_Cynical]

So you've watched a 30 % profit all to zero and now your buying more.
I just can't see this as smart/intelligent investing/trading.

You let profits go west and buy a falling knife.
I see self justification for adding to a bad trade.
In my opinion you must lock in profits.
You must minimize loss
Follow the money up---not down.
Take it off the table before it slips through your fingers.
Actively manage your portfolio.

Personal opinion obviously.

Your a trendy tech... don't know why you bother with these threads. :dunno: i mean you can stop yourself posting in the political and real estate thread/s.

------------------------------

Trade wise the HHL SP is lagging the other fund managers, reason to believe that at some point HHL will catch up...all things being equal.

 

[brty]

I had to go back a way to find the original thoughts behind HHL.

I am confident the returns will improve

This is very similar to the thoughts on VOC...

I think this sector is set to boom

To me these are not rational concepts to have in a trading strategy that uses "fundamental leveraged" positions.

In the HHL half yearly report, we get the following in the 'outlook' part...

Outflows are likely to continue for some time to come

If total funds under management remain at current levels, ongoing cash profit from Investment Management for the 6 months to June 2013 should roughly match the $4m posted in the December 2012 half year

One of these quotes is what management believes, the other a 'what if' scenario. The market has acted accordingly.

This whole paragraph should set off alarm bells for every investor in the company, from the chairman and chief investment officer...

As a result of better investment performance the rate of fund outflows started to slow from about
September 2012. Outflows are likely to continue for some time to come but we have been able to maintain our funds level at around $1.2 billion for nearly six months. Funds outflows are a lagging
indicator and we hope the operational changes we are making will continue our run of good
performance and eventually allow a return to net inflows.

Rate of outflow slowed from September,and they are likely to continue, is totally inconsistent with "we have been able to maintain our funds for 6 months. Which is it??
If you derive your income from a percentage of FUM, then fund outflows are clearly a leading indicator, not a lagging indicator.
Then the proverbial "we hope", added to "will continue our run of good performance". A 35% decline in ongoing cash profit from the prior corresponding period and a 22% decline in revenue from investment management is regarded as a good performance by the chair.

Robusta, What is your stoploss strategy here?

 

[brty]

Robusta,

You could be right about SHV, I will have to take a closer look.

Did you take a closer look? What were your conclusions?

 

[tech/a]

Your a trendy tech... don't know why you bother with these threads. :dunno: i mean you can stop yourself posting in the political and real estate thread/s.

------------------------------

Trade wise the HHL SP is lagging the other fund managers, reason to believe that at some point HHL will catch up...all things being equal.

Would you be so kind as to show me how you can profit without a movement in the direction of your trade.
Perhaps you could also explain how HHL dropped 30% of it's value recently without " trending" lower.

Every single trader who wants to profit from appreciation of their investment will be looking for a trend.
Long or short.
Value investor
Mean reversion
System
Discretionary
Blah blah.

The whole idea of Robusta's exercise is to profit. Without trends to the upside he won't profit.
Looking forward to you lesson So Cynical.

 

[Ves]

In the HHL half yearly report, we get the following in the 'outlook' part...




One of these quotes is what management believes, the other a 'what if' scenario. The market has acted accordingly.

This whole paragraph should set off alarm bells for every investor in the company, from the chairman and chief investment officer...



Rate of outflow slowed from September,and they are likely to continue, is totally inconsistent with "we have been able to maintain our funds for 6 months. Which is it??
If you derive your income from a percentage of FUM, then fund outflows are clearly a leading indicator, not a lagging indicator.
Then the proverbial "we hope", added to "will continue our run of good performance". A 35% decline in ongoing cash profit from the prior corresponding period and a 22% decline in revenue from investment management is regarded as a good performance by the chair.

Brty, fund outflows were offset by appreciation in the market value of fund investment assets. Therefore FUM remains the same as quoted by management. That's the tricky thing about these businesses - at the top and bottom of the market cycle fund in or outflows can be playing tug of war with the increase or decline of investment assets.

There is an arguable investment thesis for HHL at the moment - it's mostly macroeconomic, but backed up by the powerful operating leverage that is latently sitting in this business at or near the bottom of the cycle. If you're interested read through the last few annual reports, AGM addresses, presos and model some of your own assumptions. Mind you, it won't be everyone's style. I still hold some of my previous reservations.

Disclosure: not holding.

 

[kermit345]

Tech/a isn't everyone here familiar with how SC goes about his investing by now?

"Looking forward to you lesson So Cynical." - It's like your baiting him in for another flame war over his style

I haven't followed HHL at all but it looks like brty's post has summed up pretty well whats going on, although as Ves pointed out their FUM is treading water at the moment thanks to market returns offsetting the outflows. If outflows continue but the market appreciation takes a breather or corrects a little bit then FUM will drop.

Probably the best FM opportunity's in the last year or two has been PTM or Magellan. Both are high quality fund managers with long track records (PTM) who were at lows thanks to recent performance. It was highly probable that they'd eventually turn it around when the market went for a run and look whats happened.

What worries me about HHL is that they are still having outflows after we've gone up in a straight like for 5 months now and the fact they are signalling it wont stop soon makes me think a dealer group may have taken the fund off of their approved product list and this is fueling the consistent outflows. I know recently in the dealer group I work for we've been constantly reducing the size of our approved product list which means some fund managers lose out on reasonable FUM if the dealer group is big enough.

Will be interesting to see how you go robusta, i'd just be concerned that there are still net outflows after 5 months of market appreciation - I don't think it lags quite that much (I'd guess maybe 1-2 or 3 months TOPS for the lag effect of inflows to start coming in once people see the market shooting up)

 

[McLovin]

What worries me about HHL is that they are still having outflows after we've gone up in a straight like for 5 months now and the fact they are signalling it wont stop soon makes me think a dealer group may have taken the fund off of their approved product list and this is fueling the consistent outflows. I know recently in the dealer group I work for we've been constantly reducing the size of our approved product list which means some fund managers lose out on reasonable FUM if the dealer group is big enough.

This is a very good point, frog. I hadn't considered that they might have lost a dealer group.

PPT, AMP have all had large increases over 1H13 (more due to the market rising than applications. although that probably started to change in the 3Q, IMO) but HHL is still going backwards. If you blend the performance of their funds it comes out at almost dead on the market increase over the 6 months (~14.3% v XAO 14.4%), but even with that sort of increase they still had a 5% decline in FuM. That requires a pretty hefty redemption rate, which the loss of a dealer group would certainly explain.

 

[tech/a]

"Looking forward to you lesson So Cynical." - It's like your baiting him in for another flame war over his style

No I'm actually looking forward to how you can profit without a trend.
Will be something I and everyone here will learn.

If he or anyone else wishes to label my "type" of trading as something different to his or anyone else.
I beg to differ.
Label it what you want
Mean reversion/Value/Fundamental/Technical/Systematic----we all trade/invest trends.
But if you can profit without one I sure as hell am all ears---aren't YOU?

 

[kermit345]

No I'm actually looking forward to how you can profit without a trend.
Will be something I and everyone here will learn.

If he or anyone else wishes to label my "type" of trading as something different to his or anyone else.
I beg to differ.
Label it what you want
Mean reversion/Value/Fundamental/Technical/Systematic----we all trade/invest trends.
But if you can profit without one I sure as hell am all ears---aren't YOU?

Yeh sure i'd be interested, but I don't see how SC has stated anywhere that this is the case. All he said is that HHL is lagging other fund managers and that at some stage it should catch up, and that catch up period would be the trend and the profitable period.

Anyway i'm done replying to you Tech/a, it just seems like your always trying to get under the skin of others, or even if your not trying you certainly achieve it.

McLovin: about to go on a conference call but will reply shortly with some added thoughts.

 

[prawn_86]

Let's try and keep on topic please folks, being 'Robusta fundamental, leveraged investments'

Thanks