Category: Investing lessons

How to stop your investment portfolio from catching the Coronavirus.

After a great couple of years market conditions have started to turn. While a falling market is never easy, here are a few tips and tricks to ease the pain.

Ok it’s a stupid title but I thought after reading some of the crazy tweets on twitter any investing article at this time deserved to be a little light hearted.

On one side of the ledger we have some pundits screaming buy the dip and exclaiming this to be greatest investing opportunity ever. I assume those who posted comments along this vein have never actually experienced the GFC or have very short memories. While at the other extreme sees “experts” calling for the hoarding of gold and encouraging everyone to rush into the local supermarket to stock up on can goods and toilet paper for the plague to come.

As with all things investing, there is no right or wrong answer with the truth generally laying somewhere in the middle. While no one knows where this will end up, both sides are extremely confident of their positions, not for one moment giving an inch.

First let me start by saying I have no idea how this will play out but like most things in life which includes my investments, I hope for the best but prepare for the worst.

Anyone that knows me, will know I am constantly reminding anyone that will listen, that if you want to play in the investing game you need to have a plan. You need a plan for the good times, you also need a plan for the bad times. A plan gives you a methodology to fall back on when emotions take hold in times of euphoria and in times of despair.

Now I’m sure you’re looking for me to tell you the exact plan you need to follow to avoid any further losses and I’d love to do just that but investing is not so cut and dry. What works for me may not work for you and what works for you may not work for me. Investing is a game of emotions, forget what you’ve been told about valuing a company or buying and selling on a technical signal they mean nothing if your investment plan does not suit your personality.
As an example buy and hold is a genuine investment strategy for some but it doesn’t suit my personality. Buying the dip works for some investors but for others it can bring them undue distress.
Swing trading works for a particular type of investor while others I’ve known have been completely destroyed by the emotional roller coaster that manifests inside their heads.
Plans will also change with your stage in life. If you’re in your twenties and just starting out, the decades you have left to invest will take care of any mistakes you made buying the dip, but if you’re close to retirement and its not actually a dip but a long drawn-out crash, your life and retirement could be put on hold until the market decides to come good.

OK let cut to the chase, here is what I would be doing for the following styles of investing

Value investors

If you call yourself a value investor and you’re not getting excited by the markets sharp pull back then you really need to consider other investing styles. As value investors this is the type of market that can present life changing opportunities for you. You need to be able to stand in front of a wall of sellers convinced that you’re getting real value for money. If you haven’t already build yourself a list of dream stocks and calculated the value of each company then get the hell onto it!!!!… time is running out!
Value investing is not easy, it needs many hours of work to understand the financials and you a need a deep discount to cover any mistakes you’ve made in your valuation. Simply buying the dip is not value investing as I hear too many times.

Tips and Things to look out for:

• Debt. Let me say that again DEBT! As they say debt can stop a train and it can certainly stop even the very best businesses particularly during financial crisis. Often businesses at this time can’t find lenders to refinance debt (everyone starts to panic even banks) and while its assets might look cheap, I can tell they rarely if ever fetch what you’ll find in their books, so don’t think they will be your get out of jail free card if it all goes wrong. In times of market trouble look for strong balance sheets even if you pay a little more. (thank me later)
• Buying, just because you’re a value investor doesn’t mean it’s easy to buy when the market is saying the world is coming to an end. If you don’t have the nerve to face the stampede break your orders up into smaller limit orders starting at your margin of safety price cascading in stages down to your “dream” price then walk away. Let the market panic, you job is to stick to your plan.

Momentum investing

For last few years momentum investors have been the scorn of the market particularly from value investors but don’t let that get to you. Your returns are the real reason value investors are so jealous and now is not the time to give those life changing returns back. If you haven’t already exited the market you obviously do not have an exit plan, fortunately your returns have been so good over the last few years you should be still well ahead but you need to accept much of your good fortune has been just that, good luck. Get a plan to exit or find a way to hedge your gains.

Tips and things to look out for:

• The biggest problem for momentum investors after such a great run is to start to believe your own hype. New to game momentum investors will be rushing in on any bounce and many will be caught out on the possible dead cat variety. Just as value investors need the patience of Job waiting for their turn to buy, it’s now your turn to wait patiently for the market to suit your investing style again. Many will not be able to resist the allure of the market and will squander their gains over the coming 12 months.
• Momentum investors who are sitting on huge capital gains may consider shorting options rather than selling any companies they have held under 12 months to reduce capital gains tax when the market is telling them their time in the sun has come to an end

Chartists

Just like momentum investors the last few years have been some of the most bountiful in living memory. So like momentum investors the biggest issue for chartists is starting to believe they are better than they really are. Everyone looks like a genius when the market winds are directly behind your sails.

Tips and things to look out for:

• Chop! Chop! … Chop is a killer for new TA exponents especially after a good run. Once a market breaks down it will show many false break outs before a new trend is established. Stay true to the signals which has served you so well. New players will stray from their proven plan and give back much of the huge gains before they even know it.
• Patience is now your friend, watch the sector indexes for a new trend to be established then trade only the strongest names. Take this time to understand what other players in the market are doing. And yes even have a conversation with a value investor, you’ll become a better trader for it.

Disclosure and warning

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Trump’s in trouble is it time to sell?

Love or hate Donald Trump, many Australian investors will be asking themselves what the latest events in the US means for their investments

Wow, what is going on over in the US ?

While many predicted Trump would implode in office, it is unlikely they thought it would occur so soon into his presidency. Trump’s unconventional methods have drawn its fair share of supporters along with critics as he brought his own unique style of business to the oval office.

Unfortunately for Trump, it appears he has failed to grasp the true nature of his office and may well have overstepped into an area which is seeing his tenure on the presidency questioned.

Now I am not here to cast judgement on Trump. I do however believe it is important for Australian investors to weigh up the ramifications on the ASX.

Is this the end of the Trump Trade and it is time to sell?

No doubt a great many investors will be asking themselves this exact question today. While there is no simple answer (as no one knows what the market will do) I believe it is important to look at facts and historical events rather than letting emotions make the decisions for us.

History

Last year we were told by the media that two events, if they occurred, would result in financial melt down: Brexit and Trump. As we now know this was not the case and financial markets continued to head higher; in fact, just last night Britain reported its lowest unemployment figures since 1975!

Economics

Over 80% of companies last quarter in the US (Q1/2017) beat earnings forecasts while European companies are growing earnings by around 20%. GDP in Europe, the UK and America continues to grow with the federal reserve able to slow interest rate rises, if Trump’s problems flow onto the economy.

Emotions

I wrote previously on studies that show commentators who project a negative sentiment on the economy are seen as more knowledgeable than those who present a more positive view. No doubt there will be plenty of negative views floating around the markets today and over coming weeks.

What will change if the worst does occur and Trump is removed from office?

The short answer is not much. The US will still have a republican president in Mike Pence and a republican congress.

While life under Pence may not be as exciting as Trump, I believe big businesses would remain happy with such a possible combination.

Conclusion

A favourite investing quote of mine comes from Robert Arnott  “In investing, what is comfortable is rarely profitable.”

While investors will no doubt be feeling uncomfortable on whether Trump survives, they need to weigh up the facts and put aside emotions to decide on whether this is finally “the end” or yet another opportunity just waiting to be taken?

Do you have an opinion on Donald Trump and what ASX investors should be doing?

I would love to hear it!

Please join me on my new forum. Just click here.

Disclosure:


Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Why Warren Buffett is causing many ordinary investors to underperform the market

No one can dispute Warren Buffett’s investing skills but has he actually done more harm than good to ordinary investors?

Yes that’s right, I said it and I am not taking it back! I believe Warren Buffett the world’s greatest investor is responsible for many investors underperforming the market.

Now before you rush to the bottom of the page to leave an unpublishable comment please hear me out.

First let me say Warren Buffett is an absolute investing legend and I am not here to argue that any of his analysis is wrong. On the contrary, his ability to value companies and articulate as such has resulted in a generation of Warren Buffett clones. So this raises the question why are we not seeing millions of investors outperform the market in the very same way Warren has?

My argument is that Warren’s analysis was perfect for his time when companies would survive a generation but with the advent of the internet and ease of disruption, such analysis while still useful has lost its degree of relevance to today’s investors.

I’ll pause a minute as Buffett disciples pick themselves up off the floor.

If you don’t believe me ask yourself why Warren failed to invest in two of the largest companies on the planet Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) ?

(As luck would have it, as I was writing this article Warren Buffett actually addressed this very question here )

While you think about that, let me repeat I am not saying Warren Buffett was wrong. What I’m trying to impart is that many investors have become fixated on particular tools that Warren used, such as the well known Price to Earnings Ratio at the expense of other important considerations.

I’ve lost count of the number of investors who have told me they were buying a company simply because of a low PE without any thought given to the fact that such ratios only measure past performance.

Future is the key

Research on Dow Jones companies by Bain & Co. indicates that two out of three large companies (worth $5 billion or more) will go bankrupt, be acquired or break into pieces in the next 15 years.

With such sobering statistics I believe it is important investors approach investment from a different perspective.

Rather than looking at a company because it appears cheap, I suggest starting your research in a sector which has fallen out of favour from the market. From there understand where each company fits, (leader, new entrant, or on the way out) then ask which company has the highest profit margin and which company is growing market share.

Once you determine the pick of the litter Warren’s fundamental approach can be used as a guide for valuation and a suitable entry point.

Do you have an opinion on Warren Buffett and whether he has helped or hindered your performance?

I would love to hear it!

Please join me on my new forum. Just click here.

Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Why new investors should keep an investment diary

While an investment diary may sound old fashioned, new investors can benefit from its methodical and repeatable approach.

I’m often asked by new investors about my biggest investing mistake. If you’ve been in the game as long as I have, then the list of mistakes to choose from will be enormous. Having said that, most of my early and stupidly repeated errors can be traced back to a lack of basic record keeping. 

Anyone who has dabbled in technical analysis or charting, will be aware how important it is to keep a trading diary to understand their system’s strengths and weaknesses. While it may not be so obvious fundamental, value and even growth investors can also benefit from the same record keeping procedure.

Misconception

Many investors mistakenly believe a rise in share price is proof that their decision to invest was proven correct. Rather than share price, investors need to judge success on whether the company has performed as they predicted it would via growth in sales and profits when they first decided to buy.

While this is not an exhaustive list I suggest the points below should form the back bone of data collected for each and every investment. Software such as FileMaker Pro would prove very useful for such an exercise and will enable reporting at a later date.

Investment Diary Form
Company Name
Market Cap
Sector
What does the company actually do ?  (15 words or less)
What is the current PE?
Your prediction for PE in 12 and 24 months?
Historical PE (suitable for more mature companies)
Current EPS
Your Forecast EPS (12 month/24 month)
Cashflow positive ? If not ,when do you expect it will be?
Debt level
When will the debt mature?
What is the company’s gross margin on sales?
Does it pay a dividend?
If yes, what is the payout ratio?
How did you find this company?
Percentage away from 52 week high?
Management
What percentage of the company does management own?
Does management have a good record at forecasting future earnings ?
Does management over or under promise ?
Other
Did you consider 2 opinions that disagree with your thesis to buy ?
Did you consider 2 opinions that agree with your decision to buy ?
What is the over riding reason you’re buying? Cheap? Industry tailwinds ? Management?
Frame of Mind
Do you believe the ASX is over or under valued ?
Do you believe the DOW is over or undervalued?
What are your feelings about the market? Calm or volatile ?
How are you feeling about your last investment? Positive or Negative ?
How volatile has the share price been over the last 3 years? % up and down 
Are you prepared to stay the course if it has the same volatility over the coming 3 years?
What is your price target? 
Will you sell or reassess when it hits your target price ?

Conclusion

As I stated above, this list should not be considered the beginning and end of your investment recording keeping. Each investor will look at a particular company in a different way and should tailor their check list to suit. As an example if I was investing in the resource sector, I would include the commodity price along with at what point in the commodity cycle I believed it to be.

As the years pass by on your investment journey, patterns should start to emerge in regard to your strengths and weaknesses.

While keeping investment records will not guarantee success, it is designed to help new investors become more methodical in how they approach each new investment and should help minimize many common and often repeated investing mistakes.

 

Do you have an opinion on what records an investor needs to keep? I would love to hear it!

Please join me on my new forum. Just click here.

Disclosure:

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

2 small caps I recently purchased after their half yearly reports

Small ASX companies have fallen out of favour over the last 6 months. This short term pain has presented some compelling opportunities.

As many of you may know I am not adverse to stealing ideas from famous investors. If it is not broken why fix it, right? With this in mind as I approach any new investment in the small cap space I always remind myself of Peter Lynch’s famous quote “share price will always follow earnings and cash flow“.

For any new small investors reading this article if there is nothing else you learn from the rubbish I write, earnings and cash flow are the most important to keep in mind. While it might seem obvious, many investors get caught up in the “hype” of a company and end up losing money in businesses that are highly unlikely to ever produce any meaningful revenue let alone profits.

As I wrote in my previous article here you can monitor how a company is travelling via their Appendix 4C reports. This way you can project when a company should turn cash flow positive. You may even like to start building a stake just before this occurs because as you can imagine once this happens many investors will soon become interested.

An approach I will sometimes take is to start with a 20% holding of what my final position maybe in anticipation of the company turning cash flow positive. Once it occurs I will reassess the business and add the remaining stake if I am satisfied everything remains on track. ( example: If I wanted to invest $20K total in company X my first order would be for $4K or 20%)

I should add here that I will only enter a pre cash flow positive position (tongue twister) when I am extremely confident in the company. Most times I prefer to wait for confirmation via a half yearly financial report.

I know what you are thinking, enough of the lecture just get onto the 2 companies you pushed in the headline.

EML PAYMENTS LTD (ASX:EML)
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EML Payments Limited is a financial services company, specialising in prepaid stored value products.

EML offers prepaid debit card programs for commercial entities, corporations and government departments. Presently EML manages over 850 programs in 13 countries including Austria, Australia, Belgium, France, Germany, Italy, Ireland, Netherlands, Portugal, Spain, United Kingdom, Canada and the United States of America.

What I like
EML’s recent report is the strongest so far delivered, driven by  growth in Australia, Europe and North America. This report is also the first one with a full contribution from its North American acquisition.
Importantly all key operating metrics, including Total Value of Dollar Loads,  Active Accounts and Stored Balances have grown strongly. In simple terms EML generates its  revenue from transaction fees, processing fees, load fees, interchange and breakage on non-reloadable cards. (EML retains any unused value non-reloadable cards). Another source of income is interest on stored balances, so as interest rates around the world return to more normal levels EML is set to benefit.
 .
RXP Services Ltd (ASX:RXP)
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RXP Services Limited is an ICT and digital professional services company, providing consulting and professional services to a number of S&P/ASX 200 corporations and government bodies in Australia and in Asia.

What I like

After losing its way a few years ago RXP appears to have regained it mojo along with the formula to not only grow client numbers but also to retain them.

RXP’s report in my opinion was extremely encouraging. Despite the negative response from the market  I was happy to start a position in a company which is trading at an undemanding valuation when compared to its larger more well known rivals.

What was extremely pleasing to see (and should help to restore market trust) was the fact RXP reconfirmed guidance at the upper end of previously announced, along with the company being financially capable of pursuing future acquisitions.

 

Do you have an opinion on either or both stocks? I would love to hear it!

Please join me on my new forum. Just click here.

 

Disclosure:

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Here’s where I start my search for the next big small cap

Investors are always on the outlook for the next big thing. This is where I start my search.

Every minute of every day, investors dream of finding the next big thing. A small cap company which will grow rapidly over coming years resulting in the company’s share price doubling many times over.

If you are like me you will have listened enviously as other investors recount stories of buying Westfield Corp Ltd (ASX:WFD) or Commonwealth Bank of Australia (ASX:CBA) at some ridiculous price when they first hit the market.

While some investors like to buy in at the initial public offering, in the belief that the prospectus is a true reflection of the company’s future. I prefer to see runs on the board before investing.

Appendix 4C

 
To this end I eagerly await the mandatory quarterly reporting period for small companies. These reports known as Appendix 4C can be found on the ASX website at the end of each quarter.

In summary the report indicates the sales made in the quarter the costs incurred along with the remaining cash balance.

New investors will most likely be overwhelmed by the number of 4C reports released at the end of each quarter. To separate the wheat from the chaff at this stage I suggest only looking at companies which are actually producing revenue.

You will find this in the very top corner of the report. This will exclude most of the small cap exploration companies making the task much easier.

Next only consider companies which have grown revenue over the previous quarter. I recently learned that legendary investor Peter Lynch excluded companies whose revenue had grown by over 25% but I prefer to keep these companies under watch.

Once these companies have been found I suggest looking at the their quarterly activities report which is usually released with the 4C. While the 4C has a standard format, activity reports come in all shapes and sizes.

It is important for new investors to realize the activity report can be very much a marketing exercise but investors can quickly learn from this report the business conducted by the company. From here they can start to decide if they are able to understand what the company does and in turn possible risks etc.

Now that I have a list of growing companies running a business I can understand, I start to review past 4C reports.

Here I am looking to understand if revenue has been growing steadily or the recent report was a one off. Here I can also quickly learn if costs are continuing to rise or are they starting to level off which should see a growing cash balance. (positive cash flow)

From the 4C, remaining cash balance (found at the very bottom) will also alert you to how soon the company may need to raise capital from the market.

Conclusion

While there are never any sure things, I have been able to locate many profitable companies by this process including most recently Paragon Care Ltd. (ASX:PGC) and Nanosonics Ltd. (ASX:NAN) .

I suggest to new investors that this should be only the beginning of your research on a particularly company. From here you may check out the companies website. read annual reports and start looking for any broker coverage to help your understanding of what makes the company tick.

Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.