1. It is unlikely that God’s plan for the universe includes making you rich. Success in the stockmarket requires effort, discipline and patience. 90% of success is having the discipline to be consistent.
2. "Research" is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment.
Buffetology: Can we understand the business? Does it have a sustainable competitive advantage? Do we like the people? Are we getting it at the right price?3. Trust falling interest rates to begin a new bull market. Bull markets are driven by liquidity. It takes a lot of bad news to reverse a bull market, and a lot of good news to reverse a bear market. Calculate and analyse ‘trend’ very carefully.
4. Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. BUY when others are despondently selling. SELL when others are greedily buying. When too many people are doing the same thing the market will adjust. Bull markets are driven by liquidity.
5. Focus on value and strength. Cut losses, let profits run. Good profits are generally made on new highs. When a market is making a new high it is telling you something. Buy stocks that are coming out of broad bases and are beginning to make new highs. Price going back into a base is bearish.
6. In the long run the stock market indices fluctuate around the upward trend in earnings per share.
The Ecinya investment rules #1 to #6 of 10. Refer to ‘Market Wisdom’ under the ‘THINK’ TAB.
Eighty percent of success is showing up
Woody Allen.
It was a sunny spring afternoon on Balmoral beach in 1913 when stockbroker Phillip Pring asked his beloved Shirley for her hand in marriage. Knowing his reputation as a ladies man she smiled and inscribed her answer in the sand with her parasol: LINWAR. A puzzled Phillip enquiring as to its meaning was informed "Life Is Nothing Without A Risk".
From LINWAR Securities "Introduction to the firm" booklet.
A NOTE FOR JANE
note: names have been changed for purposes of identity protection.
About two weeks ago Jane came to visit our office for an introduction to equities. She was recommended to do so by her husband, Tarzan. Tarzan is a great admirer of his wife’s abilities, enthusiasm and her level of computer competence. Tarzan runs a successful Australian based manufacturing business employing about 30 people. It is profitable and well established. They have their own superannuation fund. Jane helps Tarzan with administrative matters and we suppose she is well remunerated for her inputs. It is reasonable to say that Jane is a little scared of the stock-market and her belief that she knows ‘not a lot about it’.
Jane wants to learn about shares and manage part of her and Tarzan’s superannuation funds.
We explained that investment is all about yield, growth, and risk management. In relation to yield, we introduced Jane to the concepts of the ‘Price Earnings Ratio’ of which the reciprocal is the ‘Earnings Yield.’ A PER of 13 equates to an earnings yield of 7.7%. We talked of the importance of focusing on operating profits and earnings per share rather than ‘reported profits’ which contain potentially non-recurring items, of which the most common in the current environment is the write down of ‘impaired assets’ in context of the "global financial crisis" and new parameters of assessing risk. We also talked about the importance of earnings growth, or earnings sustainability, for it is from growth that balance sheets remain strong, dividends are paid, debt is reduced, new assets are acquired etc.
We also explained that in calculating ‘earnings per share’ analysts make adjustments for shares that will be issued under share employee and executive programmes, but also under re-capitalisation share issues, a lot of which are currently taking place on a large scale as banks seek to get debt repaid.
BUT WHAT WE DIDN’T TALK ABOUT WAS GETTING STARTED
The stock-market is difficult to predict in relation to time, direction and dimension, but as Woody Allen said; "turn up". A simple course of action for a new investor is suggested along the following lines:
- Select some reliable sources of insightful information. We recommend ‘Share Analysis’ from Aegis Equities Research Group, Huntleys ‘Your Money Weekly’, and ECINYA.
- Select 10 stocks and get to know something about each of them. Ring the companies and say you are thinking of becoming an investor, ask them to send you an annual report.
- Open an account with an on-line broker preferably one with a decent technical charting facility. We currently use E*Trade, but Westpac On-Line, and Commsec may be worth looking at.
- Allocate 5 to 10 hours per week to manage your portfolio.
- Every time you buy or sell a stock write down your reasons in a note-book of substance – A4 or foolscap.
- Read a book or two on the share market: We recommend Victor Sperandeo’s "Trader Vic: Methods of a Wall Street master."
- Embrace a group of confidants that you can talk to from time to time.
- Avoid speculation in the early days.
- Occasionally read some macro economic documents from your bank.
- Construct an Excel spread-sheet to measure your progress.
- Read The Australian newspaper regularly, and occasionally the Australian Financial Review, especially the Market Wrap section.
Now 10 stocks to start with: Westpac Bank, Commonwealth Bank, QBE Insurance, CSL limited, Ramsay Healthcare, Primary Healthcare, Computershare, NewsCorp, BHP and Woodside.
At the moment we are waiting for a better entry point than is on offer with most of the above stocks, but a few of them are close to acceptable entry points, and a few of them are on our list of currently recommended buys.
Let us assume that your starting out dollar amount is $40,000, which is about equivalent to $4,000 per stock. Buy some now or soon, preferably at or very near our entry point level (you have to start somewhere), and buy more later. Weak days are better buying days than strong days. If our market retraces banks are likely to lead the whole market down.
Technical analysis
We always look at charts but NOT for forecasting purposes. We just want to know the primary trend, resistance and support levels, what the price is doing in relation to a moving average, momentum. For daily charts we use an 18 day moving average, for weekly charts we use 13 weeks. We use Williams%R to massage an entry point. Charting is something that a little practice will assist greatly. When you print out a chart, attach a note as to what you think it is telling you, so that you can review it later on.
Thinking
Regularly we plot our mood from the following matrix:
- Deep despair
- Very bearish
- Bearish
- Concerned
- Ambivalent
- Comfortable
- Confident
- Bullish
- Very bullish
- Euphoric.
Obviously, entry into the ‘very bullish’ and ‘euphoric stages’ is a signal of danger ahead.
Tactics
Our tactical position is comprised of 5 parts:
- Going with the flow, with conviction.
- Going with the flow, without conviction.
- Going against the flow, with conviction.
- Going against the flow, without conviction.
- Ambivalent, uncertain, relatively clueless.
A combination of our thinking matrix and our tactical stand determines the level of cash and shares held at any one time.