Where to start when it comes to trading/investing?

[LifeChoices]

Hey nomore4s.

Not derailing your thread. Just questioning buying shares rather than putting money into a bank account.

If you do the maths and apply exactly what you did in buying shares in CBA - to putting the same money into a CBA bank account every year at 7% interest for 15 years you would be slightly better off. If you did it for the past 5 years you would be much better off with the bank account.

 

[luckyforteja]

Hi Sri, welcome to the forum. I will get around to answering your questions but it won't be tonight as I am about to go to indoor cricket.

I just want to clarify this thread is not about my strategies in particular, it is about the processes that go into building solid plans and strategies to suit the goals of each particular investor/trader. But obviously I have used my strategies as examples as they are the ones I'm most versed in.

By having an understanding of what you want to achieve and how you want to achieve it - ie the type of trading and over what timeframe, it is easier to research and then practice and perfect the methods needed to be successful.

Take Lifechoices as an example again, he/she has decided to chase the more speculative end of the market for fast returns after 5 odd years of going nowhere, which is fine and there are plenty that are successful at trading that end of the market, but if that's what you are going to do why not build a plan and strategy around that to give yourself the most chance of being successful and maximizing returns instead of in Lifechoices own words just "gambling".

There is quite a bit more I want to get too but I haven't been able to find the time just yet.

Hi Mate,

Thanks for the prompt reply and its Good to see another Cricket Tragic.....

I am not really after your strategy but I really want to know your thought process in reaching that strategy. From my understanding you are more of a TA guy, I am the opposite I like FA/Value investing. I am in the process of putting a plan/strategy but I am really struggling to get my head around Risk Management.

I see lot of people saying that they sell stock if the value goes down by x%. I really don't want to use a figure decided by someone else. I would rather get an understanding about Risk management and Capital Protection from experienced investor like yourself and your thought process, so that I can work on something that suits me.

Sorry for the rant

Cheers
Sri

 

[luckyforteja]

Hey nomore4s.

Not derailing your thread. Just questioning buying shares rather than putting money into a bank account.

If you do the maths and apply exactly what you did in buying shares in CBA - to putting the same money into a CBA bank account every year at 7% interest for 15 years you would be slightly better off. If you did it for the past 5 years you would be much better off with the bank account.

Hi LifeChoices,

From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
and buy them again in 09 @ $38.

Just by having this simple strategy you would have been roughly $40,000 better off.

It is just my thought. I am a newbie and I have never invested in shares. So I could be completely wrong.

Cheers,
Sri

 

[burglar]

... why not build a plan and strategy around that to give yourself the most chance of being successful and maximizing returns ...

Agree with NewOrder that LifeChoices is not derailing the thread. IMO

The thread is helping newbies get from a bad (his/mine) situation to a better one!
It is also helping newbies to avoid a bad situation from the onset.


In either case, the thread is excellent, keep up the good work!

 

[NewOrder]

Hi LifeChoices,

From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
and buy them again in 09 @ $38.

Just by having this simple strategy you would have been roughly $40,000 better off.

It is just my thought. I am a newbie and I have never invested in shares. So I could be completely wrong.

Cheers,
Sri

That is how I would look at at as well Sri. Brings up another question from me, in my plan for long term div. Reinvestment portfolio, I have written that it will be evaluated every 3 months. Is this a fair time frame or should it be monitored on a more regular basis?

Hope that makes sense, I am on my phone which is a PITA to type on.

 

[LifeChoices]

Hi LifeChoices,

From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
and buy them again in 09 @ $38.

Just by having this simple strategy you would have been roughly $40,000 better off.

It is just my thought. I am a newbie and I have never invested in shares. So I could be completely wrong.

Cheers,
Sri

Hi Sri, I didn't happen to bump into you at the last MENSA barbecue at Koo Wee Rup? Were you the guy with the goatie and ponytail wearing the kilt banging on to me about Egypt? I was the midget, wearing a Daniel Boon style racoon hat.

I thought nomore4s was showing us an example of what he does with portfolio 1 - but yeah, I agree he/she would have been better off selling shares on 14 Dec 2007, putting the money in the bank at 7% interest and buying shares again on 23 Jan 2009.

 

[luckyforteja]

Hi Sri, I didn't happen to bump into you at the last MENSA barbecue at Koo Wee Rup? Were you the guy with the goatie and ponytail wearing the kilt banging on to me about Egypt? I was the midget, wearing a Daniel Boon style racoon hat.

......... Lol

I thought nomore4s was showing us an example of what he does with portfolio 1 - but yeah, I agree he/she would have been better off selling shares on 14 Dec 2007, putting the money in the bank at 7% interest and buying shares again on 23 Jan 2009.

I would let nomore4s answer this.

That is how I would look at at as well Sri. Brings up another question from me, in my plan for long term div. Reinvestment portfolio, I have written that it will be evaluated every 3 months. Is this a fair time frame or should it be monitored on a more regular basis?

Hope that makes sense, I am on my phone which is a PITA to type on.

It definitely makes sense to me. I think it is very subjective, depends on your trading plan I guess. For me I would probably have a glance at my portfolio every day, adjust my stop loss and do an evaluate every time a major event happens like Japan, major announcement or after their quarterly results. I wouldn't be really comfortable with evaluating after a fixed amount of time. Thats just me being me.

Cheers
Sri

 

[nomore4s]

Hey nomore4s.

Not derailing your thread. Just questioning buying shares rather than putting money into a bank account.

If you do the maths and apply exactly what you did in buying shares in CBA - to putting the same money into a CBA bank account every year at 7% interest for 15 years you would be slightly better off. If you did it for the past 5 years you would be much better off with the bank account.

Yeah except for the capital gains component, the tax benefits of a fully franked d/e over interest(which you need to pay tax on - which has not been taken into account in the attached interest spreadsheet so there is another 20%+ or so straight away) and in the 15th year you would get around $10,000 in interest payments but over $13,000 in the d/e re-investment model.

Have attached my interest calculator spreadsheet with interest calculated and paid monthly with monthly contributions of $420($5040 pa). And while you do end up with close to the same dollar amount from re-invested dividends or interest (about $150,000) the dividend payments are really starting to outperform the interest payments by the 11th year and that is with an extra $400 per year put into the interest model and like already stated with shares you also have the advantage of capital gains.

I know which model I'd prefer after 15 years.

 

[nomore4s]

Hi LifeChoices,

From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
and buy them again in 09 @ $38.

Just by having this simple strategy you would have been roughly $40,000 better off.

It is just my thought. I am a newbie and I have never invested in shares. So I could be completely wrong.

Cheers,
Sri

That is how I would look at at as well Sri. Brings up another question from me, in my plan for long term div. Reinvestment portfolio, I have written that it will be evaluated every 3 months. Is this a fair time frame or should it be monitored on a more regular basis?

Hope that makes sense, I am on my phone which is a PITA to type on.

t.I thought nomore4s was showing us an example of what he does with portfolio 1 - but yeah, I agree he/she would have been better off selling shares on 14 Dec 2007, putting the money in the bank at 7% interest and buying shares again on 23 Jan 2009.

Just be careful here as you are starting to curve fit. While it may sound simple to sell in '07 @ $50 and buy back in '09 @ $38, it raises a few issues.
-First there is the tax that needs to be paid on the capital gains, one of the advantages of this strategy is it lets me grow a passive income without increasing my tax, as remember the dividends are fully franked.

-How do you pick the tops and what triggers the buy back? Here is a list of the major swings with CBA in the last couple of years.
$56.24 on 23.10.09
$50.40 on 2.11.09 - Swing of 10.38%
$55.95 on 10.11.09
$50.30 on 27.11.09 - Swing of 10.09%
$58.65 on 18.01.10
$51.01 on 15.02.10 - Swing of 13.03%
$60.00 on 21.04.10
$48.44 on 21.05.10 - Swing of 19.27% or $47.05 on 02.07.10 - Swing of 21.58%
$54.20 on 03.08.10
$48.07 on 25.08.10 - Swing of 11.31%
$53.96 on 15.09.10
$47.47 on 26.11.10 - Swing of 12.02%
$55.48 on 09.02.11
$49.25 on 17.03.11 - Swing of 11.32%

So in the last 18 months you could have been potentially stopped out of the stock 7 times with declines of over 10%, and now when do you buy back in on each move? It's actually feasible you would still be sitting on the sidelines and now you've paid up to 7 more lots of brokerage, tax for every-time you exit the stock at profit and maybe even missed some dividend payments.
This is fine but it now does not fit in with my original goals and strategies of the portfolio, it is now beginning to fall into Portfolio 2 or even 3.
This is why I'm saying you need to be clear on what exactly you want to achieve before you begin, knowing what your plan is when the stock rockets, falls or trades sideways. Under my exit criteria for this portfolio I would not have had one signal to exit CBA in the whole 15 years, that's not to say I won't have one in the next 15 years.
The above is also why I run other strategies, so I can just let my long-term portfolio grow and do what I've designed it to do without having to chase the markets swings and roundabouts, as I'm trading these swings in my other portfolios.

That spreadsheet is purely an example of how it can work. Remember in the original spreadsheet I purchased the stock on the same date every year without paying any attention to the price and that is not how I run that portfolio, I only did it that way to show even with a very crude entry method it is possible to get good results.
So now instead of trying to pick market tops & bottoms to improve the return and creating tax events in the process how about we bring in some simple entry rules to try and help maximizing the returns while still keeping within the portfolios original plan.
Possible Entry rules.
- As we are buying once a year why not only buy after a decline or at support levels each year as the opportunities present -eg on current CBA chart buy at support at around $48
- If the market or stock is toppy - eg 2007, don't buy but wait for a decline and purchase 2 years stock at once at a discounted price, while still receiving dividends from current holdings.

Don't fall into the mistake of looking at charts and saying if I brought here or sold there or if only I had held here instead of selling, etc etc as it will do your head in.
You will never nail every move perfectly and you will have plenty of times where you exit a stock and it goes to the moon after you exit or you fail to buy a stock for whatever reason and it takes off.
All you can do is build a strategy/system/method/plan that is robust and profitable and then follow through on it to the best of your abilities.

 

[LifeChoices]

Thanks for constructing the last two posts.

I didn't factor in capital gains tax, but I suppose putting money in the bank is more flexible than buying shares and is preferable if you have less income to invest annually into a buy and hold portfolio.

Your last post also rings true, while gambling on the stock market I did figure that all I was really doing was paying commsec commissions. When I look at all the buying and selling I did, I didn't end up much better off than the all ordinaries index and then there was the added hassle of calculating capital gains tax. My accountant one year questioned whether I needed to set up a business for all the trading I was doing. Apart from that I didn't have a crystal ball and couldn't accurately pick the top and bottom of the market.

I've found in the last couple of days on the forum, that quite a few people here make their living from this stuff. The share market for me has just been something I do just to pass time at work to make a bit of extra money.

 

[nomore4s]

I didn't factor in capital gains tax, but I suppose putting money in the bank is more flexible than buying shares and is preferable if you have less income to invest annually into a buy and hold portfolio.

Of course putting the money in a bank account is safer, but the goal in trading is to gain compensation for the extra risk of having the money in the market.

 

[Ves]

1. Income Portfolio
- Build income stream from dividends
- My version of a buy and hold strategy (there is exit criteria although the goal is to never have to sell)
- This portfolio is about accumulation, a great deal of patience and long term vision is required.
- This is my retirement fund
- My money only - no leverage used

Hello, first post here. I'm relatively new to shares (have read a bit over the years, but never really purchased anything). I only have a minimal batch of TLS shares.

I'm currently 25 and work in accounting. I currently have a neutrally geared rental property. I have set myself an initial goal of earning $5k per year of passive income from shares by the time I have turned 30. I plan to put in $10-12k a year minimum from my savings. I currently have $10k sitting in a mortgage offset account that could be used as start-up capital if required, otherwise I would cumulatively save and buy shares in $1.5-2k parcels.

I would like take a conservative approach. So this would involve a long-term income portfolio earning passive income from dividends. Franking credits are obviously a bonus, and I would effectively pay no additional tax on the income as I am in the 30% tax bracket.

First question - is my goal realistic? What value of shares would be required to achieve a passive income of $5k? I would use the DRP strategy and re-invest any income along the way to reach this goal. Could I do even better? I am estimating that I would need around $80-100k in shares to achieve this, but with compounding I could be wrong.

Bear in mind that I would keep the portfolio after I have reached the goal of $5k income.

Second - can you give me some sort of guideline as to what criteria you would use to select a portfolio of stocks to achieve this goal? My gut feel is that proven dividend and earnings growth is paramount, and companies with strong competitive advantages (Porters Five Forces may be handy here).

Stocks that I am keeping in my for this purpose include: the big four banks, WES, WOW, BHP, FWD, QBE, possibly ORG.

With a smaller capital base would you recommend sticking to a core group of 4-5 stocks to begin with?

Anything that you may like to add would be great. I am sure I am missing some important factors.

 

[nomore4s]

Just quickly, I haven't forgotten this thread, I've been interstate and extremely busy with work. I'm going to find it difficult to update anything over the next few weeks as I've got a heavy work load and will also be overseas for a few weeks at the end of May. I will eventually get around to adding more and answering some of the questions.

 

[nomore4s]

All right, I'm back on deck so I will try and get this thread going again.

I will start with a bit of a re-cap and then try to go back through the thread and answer some questions that have previously been asked.

Quick re-cap.

- Determine how much time & energy you are willing to devote to trading/investing
- Set goals for your trading/investing
- What time-frame & type of trading/investing you want to engage in, and does this fit in with the amount of time you are will to commit to trading.
- Start researching & testing strategies/ideas that match up with your goals, preferred time-frame, available capital and available time.
- Build a plan that gives you an understanding of how you will react and what you will do if the best happens or if the worst happens. Your plan also needs to cover entry & exits techniques to be used, risk management strategies, money management & trade management strategies.
- Testing of your strategies & plans. Will they hold up under the pressure of real money in the market & are they profitable?

These are the sort of things that should be in place before putting a cent into the market imo, and even then there is no guarantee of success.

 

[nomore4s]

I'm currently 25 and work in accounting. I currently have a neutrally geared rental property. I have set myself an initial goal of earning $5k per year of passive income from shares by the time I have turned 30. I plan to put in $10-12k a year minimum from my savings. I currently have $10k sitting in a mortgage offset account that could be used as start-up capital if required, otherwise I would cumulatively save and buy shares in $1.5-2k parcels.

I would like take a conservative approach. So this would involve a long-term income portfolio earning passive income from dividends. Franking credits are obviously a bonus, and I would effectively pay no additional tax on the income as I am in the 30% tax bracket.

First question - is my goal realistic? What value of shares would be required to achieve a passive income of $5k? I would use the DRP strategy and re-invest any income along the way to reach this goal. Could I do even better? I am estimating that I would need around $80-100k in shares to achieve this, but with compounding I could be wrong.

Your goal is realistic but $5k in the first 5 years will depend a lot on a number of factors, some of which you probably won't have control over.
You will need somewhere around $100k in market value worth of stocks to earn around the $5k in d/e's but how much of that value is your initial outlay and how much is capital gains will depend on the market conditions over the next 5 years. IMO though 5 years is not really enough time to see the true benefits of that sort of investing but you should start to see some sort of return in that time.

Second - can you give me some sort of guideline as to what criteria you would use to select a portfolio of stocks to achieve this goal? My gut feel is that proven dividend and earnings growth is paramount, and companies with strong competitive advantages (Porters Five Forces may be handy here).

Stocks that I am keeping in my for this purpose include: the big four banks, WES, WOW, BHP, FWD, QBE, possibly ORG.

Obviously the criteria you mentioned are good starting bases and I would also have a very good look at the debt levels, companies with low debt levels, solid earnings & d/e growth as well as low dividend payout ratios are very high on my list of potential stocks for portfolios like this. I also take dividend yield into account, for instance BHP's yield is too low for me to justify buying it for my income portfolio.

With a smaller capital base would you recommend sticking to a core group of 4-5 stocks to begin with?

Yes I would stick to a smaller core group until a decent amount has been accumulated but I also wouldn't totally rule out buying/adding another stock if a good opportunity came along.

Anything that you may like to add would be great. I am sure I am missing some important factors.

Just make sure you have solid goals in place with a clear vision of what you want to achieve and then be consistent in implementing them.

 

[nomore4s]

I have a couple of question on your strategy..

1) Can you explain about your exit strategy ? This is one area which confuses me. Would you sell stock at a predefined value, when making profit or loss ?
2) When price is going down how do you limit your loss ? How do you decide to take 1% loss 5% loss or 50% loss ? Can you explain your decision process ?
3) Can you explain about your risk management strategy ?

1) Which portfolio? As they all differ somewhat.

2) This is decided before I take a trade but again it differs somewhat for each portfolio. For my general trading I used a fixed fractional position sizing method and if you search the forum you will find more info on it.

3) Again this varies for each portfolio. But basically I just try to control the amount of money I have at risk for each portfolio at anyone time. I do this by controlling the amount of money in the markets, how many open trades I have, my overall views on the market both macro & micro.

 

[nomore4s]

Time to dust of this thread I think, as there has been quite a few newbie posts going around during the current downturn that have highlighted a few things to me.

First, it truly amazes me how many people get into trading or investing in shares without truly understand how the market works, what phase the market is in and have absolutely no plan to deal with situations that can occur when trading the stock market.

You wouldn't start a business without a plan and an understanding of the industry you are gettimg into but we constantly see people throw money at the markets with little or no understanding of the market.

It is not to hard to get a decent education on the stock market now, with sites like this one and plenty of info freely available but it seems most are not willing to put the hard work in.

You really need to have a basic understanding of what you want to achieve out of the market and then a detailed plan of how you are going to achieve that.
Is it a retirement fund?
Is it extra income?
Is it to make a living?
Is it passive income & compounding?

How are you going achieve this?
Trading? Swing trading? Trend trading? Timeframe?
Long term investing for dividend stream?
Long term investing for capital gains only?

Do you have an understanding of the different phases of the market?
Can you differentiate between these phases?
Do you know the effect these phases will have on your trading or investing style?

 

[nomore4s]

Now you have an idea of what you want to achieve from the market and a basic outline of how you want to do it.

As an example.

Trade for extra income.
Want to trade various patterns similar to Curtis Arnolds PPS system - so continuation and reversal patterns. With hold times from 2 weeks to 3 months.

Now this is where the actual work starts.
- Need to develop and practice the skills required to trade this way.
- Need to obtain the tools required to be able to trade this way.

- Quality charting software with a built scanning software to scan for patterns​

- Quality data​

- Portfolio tracking software or spreadsheet​

- Low cost broker that you can preferably go long and short with​

- Need to test your ideas and strategies to make sure they will actually be profitable
- Need to understand what market conditions work best for these strategies
- Need to know how to identify these conditions and the conditions that don't suit your strategies (some times being out of the market is a good thing)
- Need to be consistent in your application of your analysis and the application of the required skills.
- Need to understand your risks that are involved with each trade and with your whole portfolio and what sort of risk model you will use to determine position size etc etc.
- Need to understand you entry and exit signals
- Need to have some sort of review process so you can identify when your system/method isn't working as soon as possible and how you can rectify that even if it means not trading.
- Need to develop the skill set to bring all this together and be consistent with it.

As you can see it is really no different to starting and running a business, and that is the way you need to look at it. It requires hard work, good planning, good execution and a consistent approach to everything you do.

 

[Ves]

Thanks for your earlier post. I have done a lot of research on this dividend reinvestment method and on particular shares that may fit its critera. Learning a lot thus far.

Another question on the income & compounding portfolio, though.

This one obviously has a "never sell" philosophy (unless the income stream suffers serious decline or dries up completely.

So the recent market pullbacks / crash / other fancy word would not phase you within this portfolio.

But do you see this as a time to top-up? At 3800 some of the yields for companies that consistently see dividend growth are very enticing. Or do you have an overall "Technical view" of the market and even use it within this portfolio?

 

[tech/a]

Now you have an idea of what you want to achieve from the market and a basic outline of how you want to do it.

As an example.

Trade for extra income.
Want to trade various patterns similar to Curtis Arnolds PPS system - so continuation and reversal patterns. With hold times from 2 weeks to 3 months.

Now this is where the actual work starts.
- Need to develop and practice the skills required to trade this way.
- Need to obtain the tools required to be able to trade this way.

- Quality charting software with a built scanning software to scan for patterns​

- Quality data​

- Portfolio tracking software or spreadsheet​

- Low cost broker that you can preferably go long and short with​

- Need to test your ideas and strategies to make sure they will actually be profitable
- Need to understand what market conditions work best for these strategies
- Need to know how to identify these conditions and the conditions that don't suit your strategies (some times being out of the market is a good thing)
- Need to be consistent in your application of your analysis and the application of the required skills.
- Need to understand your risks that are involved with each trade and with your whole portfolio and what sort of risk model you will use to determine position size etc etc.
- Need to understand you entry and exit signals
- Need to have some sort of review process so you can identify when your system/method isn't working as soon as possible and how you can rectify that even if it means not trading.
- Need to develop the skill set to bring all this together and be consistent with it.

As you can see it is really no different to starting and running a business, and that is the way you need to look at it. It requires hard work, good planning, good execution and a consistent approach to everything you do.

A capital base that is workable.