Shares as part of your overall investment strategy...
- Thread starter sfulop
- Start date
Currently reading 'Margin of Safety' by Seth Klarman.
Great reading for anyone interested, even better another poster talked about the value of a car.
Well this book sold for around $25 dollars when it was published in 1991, second hand copies are now selling on ebay for around $700
. Hows that for capital appreciation.
Anyway i digress, Seth Klarman comes up with an excellent view of the difference between trading and investing.
I paraphrase from pages 3&4:
To investors stocks represent fractional ownership of underlying businesses. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk. Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying business. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow generated by the unerlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and the underlying business value.
Speculators, by contract, buy and sell securities based on whether they believe those securities will next rise or fall in price. Their judgement regarding future price movements is based, not on fundamentals, but on a prediction of the behaviour of others. They buy securities because they 'act' well and sell when they dont.
Look at the mentality of the two statements. There is no rule that investors have to buy and hold. Investors are 'trading' if you like around the intrinsic value of the business, speculators are trading around the security market price.
But that does not mean that investors are 'traders', this is the key. Traders are speculators.
Now there is nothing wrong with being a speculator. There is money to be made in this game as well, but there are VERY DIFFERENT RULES AND MINDSETS that need to be applied.
Great reading for anyone interested, even better another poster talked about the value of a car.
Well this book sold for around $25 dollars when it was published in 1991, second hand copies are now selling on ebay for around $700
. Hows that for capital appreciation.Anyway i digress, Seth Klarman comes up with an excellent view of the difference between trading and investing.
I paraphrase from pages 3&4:
To investors stocks represent fractional ownership of underlying businesses. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk. Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying business. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow generated by the unerlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and the underlying business value.
Speculators, by contract, buy and sell securities based on whether they believe those securities will next rise or fall in price. Their judgement regarding future price movements is based, not on fundamentals, but on a prediction of the behaviour of others. They buy securities because they 'act' well and sell when they dont.
Look at the mentality of the two statements. There is no rule that investors have to buy and hold. Investors are 'trading' if you like around the intrinsic value of the business, speculators are trading around the security market price.
But that does not mean that investors are 'traders', this is the key. Traders are speculators.
Now there is nothing wrong with being a speculator. There is money to be made in this game as well, but there are VERY DIFFERENT RULES AND MINDSETS that need to be applied.
You and your common sense....
haha its funny and its not.
Thats why i used the words 'intelligent'.
Investing is not difficult. There are three primary requisites:
(a) you are not swayed by the mentality of crowds
(b) you dont assume that the immediate past will be reflected into the immediate future
(c) you put your intelligent hat on and think, does this make sense from a risk/return point of view.
However investing is not speculating. If you are speculating, then you must know that you are speculating, and apply a different set of rules.
By the way this applies just as much to shares as it does to property. I have a bad feeling that a some people on this forum are actually property speculators rather than investors. Its just that because property has done well for a number of years that they have confused speculating with investing.
I tried to use the word intelligent in my post too, but it didn't seem to work as well as you did it.
I'm the first to admit, I don't know much at all and what I do know is simply the some common sense things, a bit of this and that in more detail than the whole thing.
So I've not dared to lend money to get into shares, the amount I have put in is pitifully low but I feel safe and invested enough at the same time.
Haven't done much lately, put in a TLS and QBE bid too late, but no rush/bother.
I'm the first to admit, I don't know much at all and what I do know is simply the some common sense things, a bit of this and that in more detail than the whole thing.
So I've not dared to lend money to get into shares, the amount I have put in is pitifully low but I feel safe and invested enough at the same time.
Haven't done much lately, put in a TLS and QBE bid too late, but no rush/bother.
Sent you a private msg intrigued
Regards,
RH
Regards,
RH
Working with fundamentals is way too much work. It requires lots of reading and deseminating information. (unless you outsource your knowledge or just concentrate on data mining, ignoring global news) And that does not take into account unforseen global and extenuating factors.
My DJ's example was at best not understood so i went back to the charts to view falls in the ASX200 and the reasons given by the media at the time for the falls. These included:
Short selling in the US market
Chinese stockmarket halt due to panic selling
Panic about Dubai's economy
Panic in Europe - Greece, Germany and Spain (PIGGS)
President Obama's touted legislation to proprietary trading
Proposal on mining tax
Metals down
Rumours about US lifting interest rates
Reasons given for it going up:
US reporting season not as bad as expected
If you want to trade, I suggest using a derivative such as Options. Trading shares in the ASX ties up too much of your own money and then it is usually only on the upside that you make money. On top of that you pay brokerage and often the time and effort does not make sense for the small gains involved.
Just know that because of factors such as those listed above that you will be often fall into the definition of gambling.
Again, do I feel more in control? Yes.
My DJ's example was at best not understood so i went back to the charts to view falls in the ASX200 and the reasons given by the media at the time for the falls. These included:
Short selling in the US market
Chinese stockmarket halt due to panic selling
Panic about Dubai's economy
Panic in Europe - Greece, Germany and Spain (PIGGS)
President Obama's touted legislation to proprietary trading
Proposal on mining tax
Metals down
Rumours about US lifting interest rates
Reasons given for it going up:
US reporting season not as bad as expected
If you want to trade, I suggest using a derivative such as Options. Trading shares in the ASX ties up too much of your own money and then it is usually only on the upside that you make money. On top of that you pay brokerage and often the time and effort does not make sense for the small gains involved.
Just know that because of factors such as those listed above that you will be often fall into the definition of gambling.
Again, do I feel more in control? Yes.
Just popping in a slightly on topic/ off topic question:
If I were to redraw 20k off ppor homeloan non deduct debt and then putting this into an index fund, would the interest be deductible?
I find Index Fund's to be an interesting side for an investment strategy, the lack of leveraging however makes the potential for profits (and losses!) slightly less adequate.
If I were to redraw 20k off ppor homeloan non deduct debt and then putting this into an index fund, would the interest be deductible?
I find Index Fund's to be an interesting side for an investment strategy, the lack of leveraging however makes the potential for profits (and losses!) slightly less adequate.
I think you would be better off growing tomatoes in a pot than messing around with a little cash in index funds. Sorry, but that's how I feel.
There is never much gain in index funds and they are normally used as a low cost, defensive strategy or a highly leveraged aggressive play but be warned: Storm Financial used that strategy. The risks of a double dip are so high many competent investors/traders are sitting in cash or a high percentage of.
There is just no good reason for a newby to go there NOW. Look after the garden and wait for better times.
Note: If someone is competent being long/short the market I would not attempt to influence their approach.
To answer your question, yes the interest would be deductible, but it would contaminate your loan and make it a nightmare for you or your accountant to keep track of which portion of interest from the loan is deductible and which isn't.
So in your opinion do you believe that investing in shares right now is an "intelligent" thing to do.
i.e. are shares as an asset class presenting good value at the moment, if not which asset class is?
I can't help you with my great intelligence I can just pass on the opinions of the intelligent people I read.
The general market is a minefield with real downside risk, but there is always a bull market somewhere. Unless YOU are intelligent enough to work out where that is, wait in cash, cash equivalents or precious metals. If you want some leverage (and risk) buy a parcel of miners of uranium, diamonds, gold, silver, rare earth elements, phosphate. If you believe in the China phenomenon add iron and coal.
Some of the DOW components such as Exxon and Catapillar have historically low PEs and international earnings (I think even Microsoft has a low PE ATM) they will outperform during any US crash. The Yanks, like Australia, are likely to impose super taxes on resource companies so stick to the Canadian side of the border for oil companies.
Anyway, that's what the smart guys are saying. Who knows?
The general market is a minefield with real downside risk, but there is always a bull market somewhere. Unless YOU are intelligent enough to work out where that is, wait in cash, cash equivalents or precious metals. If you want some leverage (and risk) buy a parcel of miners of uranium, diamonds, gold, silver, rare earth elements, phosphate. If you believe in the China phenomenon add iron and coal.
Some of the DOW components such as Exxon and Catapillar have historically low PEs and international earnings (I think even Microsoft has a low PE ATM) they will outperform during any US crash. The Yanks, like Australia, are likely to impose super taxes on resource companies so stick to the Canadian side of the border for oil companies.
Anyway, that's what the smart guys are saying. Who knows?
If i wanted to 'dummify' the process, with the share market at its current level and with regards to the current global environment i would:
(a) invest some in an australian index fund, with set and forget monthly contributions. I would not try to time the additional contributions, from this level i would be happy to let dollar cost averaging do its thing.
(b) invest some in a DOW Jones index fund (so long as AU$ is above 90c) to get international exposure whilst AU$ is high. Harder to do monthly contributions, because i am most interested in this strategy when the AU$ is high. But i would periodically top up when the AU$ was above 90c.
(c) invest some in a term deposit
I would not be alocating any additional resources to residential property at the moment.
Investment horizon is a minimum of 5 years, this is an absolute minimum time horizon.
Expected returns should be reasonable, but not great.
This opion is given on the basis that the person has a 'real life' and is looking for a reasonable investment strategy that doesnt involve constantly sitting at the computer screen.
Part (c) definately forms part of the strategy. Term deposits actually pay a half decent return in the current environment on a risk/reward basis + if (a) & (b) go into a downwards free flow i still have the funds in the term deposit which could be deployed depending on the circumstances.
This strategy is also only appropriate if you are comfortable having fluctations greater than 20% in your total portfolio. Too many people have got used to seeing just 'upside'.
In addition i would be 'staggering' (a) & (b). Excluding the monthly contributions, i would not be allocating the total amount to be invested in (a) & (b) in a single shot. I would stagger it, maybe invest half now half next year (but with the monthly contributions to kick in once the first allocation is made).
The reason for so much 'hedging' in my answer is the push-pull relationship between current asset pricing levels and the global environment. Are current asset prices reflective of the FUTURE global environment. I dont know and neither does anyone else. Only with the bennefit of harry hindsight will the answer be given. All we can go by is estimated probabilities.
Last edited:
IV,
In this example above, what % would you allocate to (a), (b), and (c), as an asset allocation target?
Thanks.
There is not a 'one size fits all' to answer this.
The greater one's disposable savable income the greater the allocation to (a)&(b)
The greater ones job security the greater the allocation to (a)&(b)
The younger the age the greater the greater the allocation to (a)&(b)
The longer the investable time horizon (greater than 5years minimum) where those funds will not be needed the greater the allocation to (a)&(b),
The larger the intial investment pool the greater the allocation to (c) (because of the relationship between the intial investment pool and the savable income).
People look at investing in a single dimension and this can lead them to trouble.
For example in 2007 equity asset prices where much higher and the future 'environment' seemed safe. From a single dimension this is ok, but fast forward into the future and we now see that the 2008 onwards future has been anything but safe.
Now here we are in 2010, equity asset prices (at least in australia, i am nervous of the the european markets) are significantly below their highs. Yet the future environment seems highly uncertain.
Is the multi dimensional equation actually in balance?
Australia also has much higher interest rates than the rest of the world, this is important in my opinion as much of the valuation of shares is based on discounted cash flow with the discount factor being government bonds. The higher the discount rate the 'lower the fair value' for shares. In other parts of the world government bonds are negligable and i wonder the degree to which this is inflating their equity value.
However having said this i am attracted to the US because of the leading edge of many of their large companies. The Australian market doesnt have such representation. Thats why so long as the AU$ is high i am happy to invest a portion overseas.
By the way its this multi dimensional view of looking at things which makes me concerned about residential property.
On a single dimensional view, yes property looks good, the future environment looks good, but to what degree are current property prices reflecting that 'benign future view'. To what degree is 'risk' priced into property. I would say that the market is pricing in very low risk.
Now if the market is pricing in very low risk, and then actual future risk increases, what will be the effect on property prices, especially comming from a low risk price base.
On a single dimensional view, yes property looks good, the future environment looks good, but to what degree are current property prices reflecting that 'benign future view'. To what degree is 'risk' priced into property. I would say that the market is pricing in very low risk.
Now if the market is pricing in very low risk, and then actual future risk increases, what will be the effect on property prices, especially comming from a low risk price base.
