Robusta fundamental, leveraged investments

[robusta]

It's good to have a plan, but a plan needs to be clearly defined so it can be followed. This will avoid the danger of making decisions on the run and in the heat of battle.

Never a wiser word said.

If you do want to use margin loan (even though you didn't plan that at the beginning), you need to really think hard about some clear rules and boundaries.

- How do you determine what the market has done in relation to the three possible outcome? A particular point level? Velocity of movement? If market falls to 4000 tomorrow, is it still ranging or is it crashing?

They tell you on the news, lead story "Today the market crashed"

Jokes aside I think I would be making that decision more on a company specific basis and with a eye on a decent margin of safety

- When will you action? Will you start buying 1 day after the crash? 1 week?

Not so worried about timing but I will be trying to pick the bottom as close as I can get.


-

What does it mean for "obvious value"? Should you allow greater margin of safety before entry?

Obvious value just smack you in the face like a bank at 10% dividend yield or BHP at $25.00, CSL at $18.00

- What is your ability to pay interest? Has that got a bearing on how much margin you use?

Yes definately will be covered for almost any emergency

- With margin you can no longer afford to be long term holder regardless of market price, as someone else will do the selling for you if you won't. Where is that line? Will you institute a price stop? Do you need to review your position size?

No, definately no stop loss. Will just have to build in enough margin that would allow me to cover a further significant fall in market price.

- And last but not least... should you really use margin? Should you wait a bit longer to see how your current positions pan out first? It's easy to buy but trade management is just as important.

True it is difficult to sell but one day the market will offer me prices for companies I hold that will be extremely overvalued.

- Bring out a chart of the great depression or the Japan's lost decade, and accept what is possible (and probable imo). Then check margin loan is still the right idea if that comes to pass.

To be honest I agree with InvestorPaul...Your signature says

If a bargain cannot be obtained today, the market will open again tomorrow offering you a fresh new opportunity and a new price.

You should observe that. And may be a slightly different version will also be helpful

If a bargain on XXX cannot be obtained, the market will offer other bargains like YYY and ZZZ.

There are always bargains on the market, and you should trust your own ability to make money in a steady market, and not needing to rely on big bets in volatile crashing markets to either win big or lose big.

Good luck.

There are always bargains on the market, but if you look at a chart of the last 100 years you would find the best bargains in periods when the market crashes.

 

[robusta]

You must be hurt'n buddy. Are you sure about this margin loan thingo you are rabbiting on about? I know you also have MCE. It's like some stockbroker in China read this post and said to himself "I'm going to stick the boot into Robusta."

No not really hurting, the only thing that will hurt is if I am totally wrong and MCE turns out to be a to be a low margin company with no growth prospects.

FGE today is selling for $4.780 I'm sure it's undervalued, but atm that's all anyone is willing to pay for it. What a difference a couple of months make?

True FGE is a great quality cyclical stock but at times like these you can pick up larger companies with a clear competitive advantage on the cheap.

Do you use stops at all Robusta?

No

 

[LifeChoices]

I'm thinking of getting some of those rose colored tinted glasses you are wearing... can you tell me where you got them from?

 

[robusta]

I'm thinking of getting some of those rose colored tinted glasses you are wearing... can you tell me where you got them from?

What can I say? I am a glass half full kinda guy.

 

[LifeChoices]

No not really hurting, the only thing that will hurt is if I am totally wrong and MCE turns out to be a to be a low margin company with no growth prospects.

What is your definition of "totally wrong". My definition is 20% down on what I paid for it - that's my standard stop rule.

You don't have stop losses - please explain (Pauline Hanson voice)

 

[robusta]

What is your definition of "totally wrong". My definition is 20% down on what I paid for it - that's my standard stop rule.

Well IMO it is the difference between price and value. The market is down about 20% from a few months ago but within it there are stocks that will be worth heaps more in a few years. The market may throw up prices due to company specific issues and/or due to macro issues that have almost nothing to do with the profits a individual company will make in the future.

You don't have stop losses - please explain (Pauline Hanson voice)

In a nutshell if the price falls on a good quality company I hold I would be more inclined to buy more of a "good thing" at a cheaper price rather than sell to avoid a short term paper loss.

This tactic definately makes me look stupid in the short term and as for the long term...?

 

[LifeChoices]

Well IMO it is the difference between price and value. The market is down about 20% from a few months ago but within it there are stocks that will be worth heaps more in a few years. The market may throw up prices due to company specific issues and/or due to macro issues that have almost nothing to do with the profits a individual company will make in the future.

You seem to be very good with terms but you have trouble defining them.

Price is easy to understand. It's what you pay for something at a point in time.

I just don't get your definition of value? I think you are talking riddles.

Can you define the value of FGE or MCE to anyone else? What is your end game - what do you want to achieve?

At what price would you sell those shares? Would you ever sell those shares. What is motivating you to post on this forum about these investments/gambles?

 

[skc]

Not so worried about timing but I will be trying to pick the bottom as close as I can get.

What I meant by timing was how soon you deploy your capital. You used up your $30k LOC very quickly and evidently didn't pick the bottom on most of your positions.

With Europe in full blown crisis mode, there is nothing wrong with waiting that to be resolved one way or another. Sure the overall market will bolt up on positive news but there is always time. Jessie Livermore said the first and last 20% of the move are the hardest to catch and the most expensive to try to catch... and that's true for either trading or investing.

Obvious value just smack you in the face like a bank at 10% dividend yield or BHP at $25.00, CSL at $18.00

Bank is at 10% gross yield now...

True it is difficult to sell but one day the market will offer me prices for companies I hold that will be extremely overvalued.

That day may never came for many shares. For example I sold my position in ZGL when it got to ~60c. It wasn't over valued at the time and certainly not extremely overvalued - even with pumping by Montgomery!

Then something changed for the worst and they are now at 30c. Time can be your worst enemy because the longer you hold a position, the more things can change in the future.

There are always bargains on the market, but if you look at a chart of the last 100 years you would find the best bargains in periods when the market crashes.

After. You find bargains AFTER the crash. And you will find that there are plenty of time to find those bargains.

To be honest your portfolio isn't that bad except for MCE. And your portfolio would be close enough to market return if you didn't buy that second parcel of MCE. And you would have outperformed the market if you simply cut MCE at the first opportunity.

Some good lessons there imho. Good luck.

 

[Intrinsic Value]

What I meant by timing was how soon you deploy your capital. You used up your $30k LOC very quickly and evidently didn't pick the bottom on most of your positions.

With Europe in full blown crisis mode, there is nothing wrong with waiting that to be resolved one way or another. Sure the overall market will bolt up on positive news but there is always time. Jessie Livermore said the first and last 20% of the move are the hardest to catch and the most expensive to try to catch... and that's true for either trading or investing.



Bank is at 10% gross yield now...



That day may never came for many shares. For example I sold my position in ZGL when it got to ~60c. It wasn't over valued at the time and certainly not extremely overvalued - even with pumping by Montgomery!

Then something changed for the worst and they are now at 30c. Time can be your worst enemy because the longer you hold a position, the more things can change in the future.



After. You find bargains AFTER the crash. And you will find that there are plenty of time to find those bargains.

To be honest your portfolio isn't that bad except for MCE. And your portfolio would be close enough to market return if you didn't buy that second parcel of MCE. And you would have outperformed the market if you simply cut MCE at the first opportunity.

Some good lessons there imho. Good luck.

MCE is the elephant in the room.

It could prove to be a good long term play but it is pretty speculative at the moment.

I still hold MCE bought at 4 dollars and 5 dollars bought last year and in hindsight I should have sold.

At the time I was worried about paying capital gains tax of 50 percent

 

[craft]

In a nutshell if the price falls on a good quality company I hold I would be more inclined to buy more of a "good thing" at a cheaper price rather than sell to avoid a short term paper loss.

This tactic definately makes me look stupid in the short term and as for the long term...?

Your framework seems to be to exploit market pricing where it differs from your estimation of underlying value. Except for using leverage I agree with the framework.

MCE is either a symptom of a problem in your approach or a validation of it. But which?

Time will eventually give you this answer. But if you want to be proactive you should really be examining exhaustively the mechanism that puts you into conflict with the market – your valuation method.

Exactly how do you value MCE?

 

[Tysonboss1]

Price is easy to understand. It's what you pay for something at a point in time.

I just don't get your definition of value?

Price and Value are two very different things,

No doubt throughout your own life you have looked at the prices people offer various products out in the market place (Cars, food etc ) and come to a decision whether the item is Good Value or not. the same goes with the price of companies on the share market.

Some times the price a company is selling at will seem expensive when compared to what it will produce for the share holder over time, other times it will appear cheap compared to what it will produce.

A value focused investor spends his time trying to assess the earning power of a company and based on the likly profits and how the company allocates these profits comes up with a $ figure of what the company is worth to him, this may be higher or lower than it's current price.

 

[investorpaul]

True - just a lot more opportunities to buy good companies on the cheap when the market crashes.



Thankyou for that opinion investorpaul but some opportunities are too good to pass up, like for example buying any of the big four banks in the middle of the GFC for example.

You only know the bank were a "opportunity too good to pass up" due to hindsight.

If you were investing during the GFC how would you have known when the low was in or when it was the right time to buy into this "opportunity".

I stand by the fact that opportunities exist in every market (except if you only want a top 20 stock)

 

[sinner]

There is another way..
You could also let most of your cash sit around earning 5.5% and write some cheap
ass options and if **** fall down you end up owning the stock pretty cheap else collect nice premium

On reading this thread, that was my immediate thought as well. Move into an equity space (NYSE? TSX? Euronext?) with more options liquidty and sell options are the price you would be willing to buy at. Seems much more rational to me.

 

[robusta]

You seem to be very good with terms but you have trouble defining them.

Price is easy to understand. It's what you pay for something at a point in time.

I just don't get your definition of value? I think you are talking riddles.

Despite the bad press I use the formula in Montgomerys book - along with a large grain of salt.

Can you define the value of FGE or MCE to anyone else?

FGE ~ $6.8 - $8.50, MCE ~ $6.00-$8.50

What is your end game - what do you want to achieve?

Well investing is a nice hobby and keeps me out of the pub but in the end I would like to make money.

At what price would you sell those shares? Would you ever sell those shares.

Yes I would sell shares but only if I consider them to be; 1) overvalued, 2)The fundamentals change or 3) a much better oportunity comes along.

What is motivating you to post on this forum about these investments/gambles?

Stops me from speculating - hopefully

 

[robusta]

What I meant by timing was how soon you deploy your capital. You used up your $30k LOC very quickly and evidently didn't pick the bottom on most of your positions.

I still have ~10% left (just over $3000.00). I did not pick the bottom but still got some good prices.

With Europe in full blown crisis mode, there is nothing wrong with waiting that to be resolved one way or another. Sure the overall market will bolt up on positive news but there is always time. Jessie Livermore said the first and last 20% of the move are the hardest to catch and the most expensive to try to catch... and that's true for either trading or investing. .

True, I just want the capital available when/if more opportunities present themselves.

Bank is at 10% gross yield now....

I would love to buy CBA and ANZ, just looking to get in a fair bit cheaper.

That day may never came for many shares. For example I sold my position in ZGL when it got to ~60c. It wasn't over valued at the time and certainly not extremely overvalued - even with pumping by Montgomery!

Then something changed for the worst and they are now at 30c. Time can be your worst enemy because the longer you hold a position, the more things can change in the future.

Good point and the lesson I am learning is to look for more definate competitive advantage not just good metrics

After. You find bargains AFTER the crash. And you will find that there are plenty of time to find those bargains.

Are we in a crash or correction?

To be honest your portfolio isn't that bad except for MCE. And your portfolio would be close enough to market return if you didn't buy that second parcel of MCE. And you would have outperformed the market if you simply cut MCE at the first opportunity.

Some good lessons there imho. Good luck.

Bought a third parcel of MCE as well, it should be a really interesting next 6 months.

 

[robusta]

MCE is the elephant in the room.

It could prove to be a good long term play but it is pretty speculative at the moment.

I still hold MCE bought at 4 dollars and 5 dollars bought last year and in hindsight I should have sold.

At the time I was worried about paying capital gains tax of 50 percent

Same with me im my SMSF except the capital gains tax would have only been 15%

Your framework seems to be to exploit market pricing where it differs from your estimation of underlying value. Except for using leverage I agree with the framework.

MCE is either a symptom of a problem in your approach or a validation of it. But which?

Time will eventually give you this answer. But if you want to be proactive you should really be examining exhaustively the mechanism that puts you into conflict with the market – your valuation method.

Exactly how do you value MCE?

Time will tell, the method outlined in Montgomerys book seems logical to me, about the only thing I disagree with is looking into the future using analyst forecasts.

You only know the bank were a "opportunity too good to pass up" due to hindsight.

If you were investing during the GFC how would you have known when the low was in or when it was the right time to buy into this "opportunity".

I stand by the fact that opportunities exist in every market (except if you only want a top 20 stock)

We are never going to find the perfect time to buy but sometimes like in the GFC "the baby gets thrown out with the bathwater" and you can pick up excellent businesses on the cheap. For example I dont care what is happening in Europe if ANZ falls below $20.00 I would have to buy, these guys will be around in 20 years and making heaps more money.

On reading this thread, that was my immediate thought as well. Move into an equity space (NYSE? TSX? Euronext?) with more options liquidty and sell options are the price you would be willing to buy at. Seems much more rational to me.

Sorry for the terrible pun but I have not considered that option

 

[sinner]

if ANZ falls below $20.00 I would have to buy, these guys will be around in 20 years and making heaps more money.

Sorry for the terrible pun but I have not considered that option

Just wondering now, if you never considered it because you don't like the idea or because you don't understand the options space?

Just as an example:

You would be happy to buy $5000 worth of ANZ at $19, so you write (i.e. sell) the equivalent amount of ANZ Dec 2011 $19 puts into the market. If you reach the option expiry date and the price of ANZ is above your $19 strike, then the options expire worthless to the buyer and you collect the premium. If, on the other hand ANZ falls to $19, you will probably be assigned $5000 worth of ANZ at $19 plus the premium associated with the options you sold.

In my mind, for a trader like yourself who has conviction to step in and buy at specific prices without any qualms, this seems like a far more lucrative strategy. You get to express your view on the market through shorting the puts. Even if the price never goes back there, you can profit from your view. You don't have to sit around waiting for opportunities, you can short the puts all year long collecting premium until you are assigned at the price you actually wanted.

I always ask people who say "if gold ever went back to $700 I'd buy all I could", why aren't you shorting $700 puts then? The answer is because even though they say they would back up the truck, they actually don't have the conviction to be assigned the underlying instrument at their stated price level!

In the ASX there aren't a lot of stocks where you can do such, pretty much restricted to the ASX20. But in other markets, like European, Korean, Hong Kong or American there are plenty of businesses outside the "top 20" which have deep options markets.

Just my thoughts on the matter, certainly not to be considered as advice!

 

[skc]

Are we in a crash or correction?

We haven't crashed yet. We have all the ingredients for a big crash, and I certainly believe that the probability of a crash is higher than a speedy recovery.

I am open to the idea that things might recover, but with some pretty bad macro threats that's good enough reason for me to stay out. Again, it's easier to stay out if you are not afraid of missing the beginning of a rally.

Bought a third parcel of MCE as well, it should be a really interesting next 6 months.

It is 'cheaper' to buy something at $1.2 when there is much more certainty, than buying the same thing at $1 when there are significant uncertainties and risks, imo.

 

[ROE]

robusta: Sinner give a good strategy to buy your stock at a certain price if
you are dead set on getting a stock at a certain price...

but be prepared to have the cash ready to be assigned.
sometimes early if the options is deep in the money for the holder...

as in ANZ exercise at $19 bucks but the stock could trades at $15 bucks or $16
and they most likely to exercise their right early...

it is rare and next to zero chance for early assignment if the options isn't deep in the money because they lose time premium but deep in the money options, time premium isn't an issue for them...

 

[nomore4s]

Hi Robusta,

While I commend you on putting forward your portfolio in a public forum there is imo a few areas you need to look at.

1. Market conditions
Your strategy is best suited to a bull market, the current conditions do not suit this strategy imo. Using a $30k loan to buy long term stocks with a buy & hold strategy during a flat/bear phase in the market is opening yourself to unwarranted risks, especially when starting the portfolio up, without even considering hold costs (interest payments, missed opportunity costs etc etc).

You need to have some way to gauge and evaluate market conditions and the effect those conditions have on you portfolio. Like SKC said sometimes it is more profitable to miss the first part of a move.

There will be a time when true bargains are available and this sort of strategy will bring in a very good return but imo we are nowhere near that stage.

2. Risk
You need to understand and control risk, and again imo this aspect is very lacking in this portfolio. While I don't mind investing long-term in the right conditions without stops I would never do it in the current conditions with leverage and I would never be fully invested under current conditions with leverage and no stops.
When starting a portfolio up like yours it is probably better to drip feed your capital into the market to help counter some serious portfolio heat should we encounter a serious drop in the market and with the current risks surrounding Europe and the US this is not out of the realms of probability.
If the market does tank tomorrow and your portfolio halves you are left carrying a debt or a number of stocks that could take years to get back to breakeven and either way you are left paying interest on your loan till repaid or the market recovers.

3. Return
Investing is all about generating a return and one of the big problems for you with this sort of strategy is you need to return around 8%pa to end up in front, now during a raging bull market this is probably going to be no problem but during current market conditions you will be lucky not to lose 8%pa.
It is going to be very very hard to get in front with the way the markets are atm and paying 7.5%pa in interest makes it harder, especially with a buy & hold type strategy.
IMO you would be well worth having a good look at SKC's fundamental strategy & have some long discussions with SKC about how best to pull returns from the market using a fundamental approach as his method is one of the best I have seen.
IMO you need to be more active to generate returns using leverage the way you are.

Good luck and I hope you continue to look at ways to improve your trading/investing.