Buying Low Priced Shares

[Bill.L]

Thought I would start this thread as AMP is resuming trading today(I think).
A couple of months ago a thread was started that was suggesting the purchase of lower priced blue chip shares, AMP was one example given, of quality regarded as cheap. The then price was around $8.00. The price then fell to around $6.00 before rebounding to above $8.50.
If as expected AMP trades at new lows because of the new writedowns, then the TREND is just continuing, and anyone who bought at $8.00 is suffering huge losses in percentage terms.

My question to people who employ this type of trading is; Where do you place your stoploss?? How wrong do you have to be before you get out??

To me, the buying the low, or averaging down is just plain DUMB, and AMP is helping to prove my point.

 

[Bill.L]

AMP at ~$5.50 for a loss of over 30% for anyone who thought they purchased a bargain at $8.00.

How much pain is enough pain?? Think of how you would feel if you had borrowed to purchase at $8.00???

bye

 

[brains]

I just bought 1000 x AMP @ $5.53. I havnt recieved the confirmation email yet but i think i saw the trade executed.

I usually have a stop loss of 10% if im trading but with this one and QAN i have a bit of a longer term view and dont worry about the dips.

Having said that, i'll be out of AMP this arvo if it rebounds enough.
Say to $6.50. Not likely tho.

 

[Bill.L]

Hi Brains

At least you have a stop loss to get you out of trouble.
My preference is for stocks that are going up in price when I purchase not going down. Therefore I wouldn't touch AMP with a barge pole.

bye

 

[brains]

I just received the confirmation. Thats ok, we all have different strategies. Im pretty risk tolerant.

I was disappointed at missing the last dip at $5.84 i think it was and am glad to weigh in this time.

And surprise...surprise...looks like i might have picked the bottom, gotta be a first...its at $5.57 but the rest of the day will tell wether i did or not.

The volume is amazing.....about 80 million shares in the first hour, some big institutional trades by the look of it.
And QAN is up, what a lovely day

Edit: I just checked and it says the bottom was $5.40, i must have missed that. I didnt see any trades at that price and ive had my eye on it all morning, might have been off market.

 

[Alan H]

Bill said:

To me, the buying the low, or averaging down is just plain DUMB, and AMP is helping to prove my point.


Bill,

I guess an argument used by some would be that this depends on the Fundamentals of the company.

I was looking at a demo of a Fundamental Analysis package the other day and AMP looked like it was in trouble WELL before the big price falls and hence in some peoples eyes you wouldn't have been holding it anyway.

I just note this with the AMP example. Not sure about others you may be referring to.........

 

[Bill.L]

Hi Alan

I can think of only one "Fundamental analysis package" worth having, it use to be called the Annual report. In it you have numbers with real meaning, unless they decide to change them for next years annual report.
In AMP's case the share price has been going down since the very first day it traded and yet there are hundreds of thousands of small investors who have owned it since the beginning hoping that the price will rise.

I like positive fundamentals that are accompanied with a rising share price.

bye

 

[Alan H]

Hi Bill.

Couldn't agree more that the Annual Report is the definitive source, however there are packages that put the figures from the reports in some more convenient formats. Same figures....just different viewing format........

From my conservative standpoint I probably wouldn't have invested here either however I don't know that I agree with all you said. The share price may have been going down since it first traded, but was it always going down? Depends when you got in doesn't it. For example, for the Feb 00 to Aug 01 period it was actually rising.

However, for arguments sake, how about we use that post April 2002 stage when the price started tumbling from that +$18 plateau to its present figures. Was there any warning signs before this started to occur?

For the three previous 6 month periods Jun 01, Dec 01 and Jun02 the ROA%'s were Minus 0.09, Minus 0.34, Minus 0.89, ROE% was Minus 0.93, Minus 3.39, Minus 8.51, EPS Growth was Minus 24.32, Minus 40.97, Minus 26.37 and Net Operating Profit($000) was Minus 80,000, Minus 587,000 and Minus 714,000. Franking for this period was also bouncing all over the shop down to 15%.

And during this period, for the pleasure of purchasing a company with these figures you would have been paying in some cases a PE Ratio more than twice the Industry Group Average. So we're not exactly saying it was cheap either are we?

Note: Above figures have been sourced by a Share Newby and should not be relied on. Also, any interpretation I have personally made are my own views only.

Bill, I take your point totally the importance of those Fundamentals however I'm not sure AMP is the best example of why some other people's strategies may or may not work. Quite simply, for some more aggressive strategies, I don't think many would have held this one anyway.

 

[brains]

Fundmamental numbers are only as good as a company releases and therefore can be misleading, as has been shown a few times recently. The true test is the continuing dividends.

AMP made a profit last year of $495 million from an Australian client base of 3.5 million, thats roughly one in six Australians.

I feel the company is safe, but so did the Enron and HIH shareholders, getting back to fundamentals released by companys.

It all comes down to personal risk tolerance i think. You get nowhere without risk, but not too much.

 

[Ruby]

Well I'm sure there will be lots of media reports on AMP in the next few days and weeks.

Lateline had a segment last night, just thought I would post the transcript for anyone that missed it.

http://www.abc.net.au/lateline/s847630.htm

Ruby

 

[Rickardo]

Hey Bill,
I think where people place there stop losses depends on the individuals risk tolerance. Personally if i'm daytrading i'll usually give the stock a 10 to 15% stop loss. Depends on what stock and the previous volatility trend tho. I was fortunate enough to buy AMP a little while ago at 5.95 and managed to sell at around 8.80, i think it was either 1 or 2 days before last weeks trading halt

 

[Bill.L]

Hi all

My whole point of this thread was to show the fallacy of buying(or holding) shares that are going down in value. In the case of AMP there are hundreds of thousands of shareholders who have held on to their shares from day 1 "because it is a good company".
No-one can argue with the fact that AMP has been in downtrend since the first day of trade. That day it was at it's highest ever price and today(ok yesterday now) it is at it's lowest ever price.

From any trading perspective there is NO reason to buy a share at a new low, there are no technical areas of support for the technicians. For the fundamentalists there has not been a good reason to buy AMP for a long time(based on losses), as portrayed by Alan.

For those who have made money in the short term by trading the dead cat bounces, I say well done. You are obviously keeping a very close eye on the market and are NOT the average. Most investors are buy and hold(including many funds) for the medium to long term. They follow dumb advice like "average down" instead of "average up".

For those who still don't get it, You should aim have more of an asset that is going UP in value, and less of an asset that is going DOWN in value.

There is no reason why a share of even the largest companies cannot go to $0. It has happened before(remember HIH,Enron,Pasminco,Ansett,One-tel etc,etc.) and I'm willing to bet it will happen again.

I have never held any AMP shares, just using them as a current example. Perhaps we could use Telstra or ERG instead, it's just that AMP is topical.

bye

 

[brains]

Hi Bill,

My asset base would still be going up if id bought a parcel of AMP 10 times what i did. Its no biggie.

I *will* make money on AMP in the short or long term. Either from the company profit increasing post demerger or as a takeover target or even as the bottom pickers come in like Monday arvo.

Besides that you need to live a little and have a bit of a spec. gamble/fun sometimes.

 

[Alan H]

Point taken Bill.

Averaging down in a less than superior/safe company without a suitable exit strategy doesn't make sense to me either. Maybe others can make money out of it.......and if they can.......good luck to them.

 

[brains]

People do it all the time. Maybe you are mistaking trading with investing. Traders dont care about a company being "superior/safe" they do care about volatility tho.

As far as investing goes im not a fan of averaging down either, as my use of a stop loss strategy had previously demonstrated.

 

[see_change]

Closed at a new low of 5.16 today ( wed 7/5). Maybe this is the bottom , but maybe not, who knows , I don't.

The reality of shares is that they are more likely to continue in an established trend than change that trend.

Share charting effectively charts our emotional commitment to that share.

It's a simple matter of human emotions . This has more to do with share prices than fundamentals. Once we've made up our mind as to what is going to happen ( ie the share is going to continue in it's current trend ) we take a lot of convicing before we change our minds.

Some people will pick the bottom , but it's safer to wait until the change in trend is established and then jump on. Bit like watching for the signs of change in a suburb. more reno's , properties selling quickly , decreasing stock , REA's driving Beemers

See change

 

[brains]

I agree see_change.

I cant see AMP going anywhere soon and it can only go in one direction in the medium-long term. The same with Qantas.

In fact i might ignore my stop loss and hang on for the ride.

 

[Bill.L]

Brains,

In trading one of the most important aspects is discipline. That is what a stoploss is all about. To change your stoploss because it may be hit is a losing strategy.

As an example of what can happen, a friend of mine purchased pasminco shares about 3 years ago for 96 cents by following the market letter instructions of a well known market guru. The shares were in steep decline at the time and not far above all time lows of a few weeks earlier. The target price was about $1.35 for an almost 50% gain. The price only made it to $1.15 before reversing fairly rapidly to 80 cents. When he originally purchased his stoploss was at 80 cents, but because he had been making a profit that had turned into a loss he held on. He didn't want to be proved wrong.

A couple of weeks later after the price had dipped to 60 cents he doubled his position at 66 cents knowing that the price only had to go to above 80 cents for him to break even. It didn't happen. He bought more at 43 cents in the classic "average down" method.
Every time I told him that he should get out he totally ignored me, because he knew better an his trading over the previous 2 years had always been profitable by not taking losses and waiting for the prices to rebound. He did this by averaging down every time the market went against him. He moved his stoploss down every time he was losing!!

When pasminco hit 20 cents he more than doubled his position again and a price of 40 cents would have given him a healthy profit. It didn't happen.
In the last few weeks of trading when the price was around 7 cents he kept holding the shares as he had lost so much in the stock that his only possible course of action was to hold and hope that they recovered in the next few years. Those shares are effectively worth 0.

This sorry story is 100% true and the initial parcel of shares was around 20,000. He doesn't trade shares anymore and we don't talk about pasminco either. He never did tell me how much he lost on the trade.

So Brains, go ahead and change your stoploss, but WHY did you have one in the first place???

bye

 

[brains]

Thanks for permission to ignore my stop loss

The reason im ignoring my stop loss is that im flexible in my trading (and with everything else).

I think AMP will be a great long term play and therefore im changing my strategy. But like ive said "Nothing is permanent and nothing is temporary"

I have a mate who did exactly as your friend did with One.Tel, if he would have looked at the fundamentals he would have realised it was the dog i was telling him but.......same result.

 

[kierank]

If the AMP share price keeps going in its current direction, I might be able to buy my kids an insurance company as a Xmas present!!!