Finance > Shares

Overall Investment Strategy

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galumay:
I have documented my investment strategy for the share market in word documents, but it really makes more sense to put them up here and allow others to discuss or challenge if they so desire!

OVERALL STRATEGY

move free cash & dividends to SMSF to take advantage of tax benefits.

In reflecting on my portfolio structure the interesting thing for me is that of the 11 companies I have invested in, 8 of them have shown significant unrealised capital gains well in excess of the benchmark.

Just 3 of them have shown significant unrealised losses, and when I revisit my analysis of these 3 companies I am most comfortable with ITD, i expect the benefits of their growth strategy to start bearing fruit and I am confident that they will continue to provide a healthy yield in the mean time.

CDA was a mistake - with the benefit of hindsight - no one predicted the turnaround in earnings that CDA suffered with the collapse of their metal detector sales. But the saving grace is that they were in a good position to weather the storm, they have other profitable if smaller segments, low debt and management that have reacted quickly to gain control of the situation. It will take them a while to recover and for the results of rebuilding the business to flow through, and the dividends have and will suffer in the mean time. An increase in earnings back to about 9c per share would mean a price similar to my cost at a p/e of 14 which is not to difficult to imagine in the medium term.

NWH is obviously the worst performer of the portfolio, we all know the reasons mining services companies have had their share prices savaged, as I have expressed elsewhere, I hold a contrarian view about the extent of the impact in this sector going forward, nothing I am reading currently would support that view!! It probably comes down to a question of whether NWH can survive the cycle financially, and the concern with that is only the debt. When I first purchased NWH I failed to pay enough attention to the debt, particularly the interest coverage ratio - that was something I didnt even know about when I started and it was only ROE's help that expanded my understanding of the importance of considering this metric.

I expect the share price to drop further before it shows any sign of recovery, there is likely more bad news with the impairment that has been flagged and sentiment is so poor towards this sector that any negative news has a disproportionate effect.

I had a long hard think about averaging down into NWH, but I think the capital can be employed better elsewhere and the risk of them not surviving the cycle, while low, does exist.

I reckon MND would have been a better choice for my contrarian entry into this sector, and with what I have learnt from others about reading and analysing financial reports it would have been apparent to me. Either way its not going to be a quick turn around for the sector and it will require patience and nerves to ride it out.

So funny to read this in hidsight, 5 years later - CDA & NWH turned out to be the two best performers by far!!

galumay:
I have adopted the strategy of paying all dividends from our personal portfolio into the SMSF, this will be the most tax effective way to use the dividends.

Looking at performance of the two portfolios at the end of January the personal portfolio continues to be dragged down by just a couple of companies, NWH is the worst culprit, now down to 30c from $1.14, which is a nearly $9000 drag on the portfolio, despite this we are up 5.45% for the FY - but underperforming the AXJO which has made 6.5% for the FY.

Having missed any opportunity to sell, and with so little skin left in the game with NWH, I will just hold and hope for a turnaround in the mining services sector! I suspect it will be a long wait. The main lesson here is the danger of investing in strongly cyclical sectors!

The SMSF performance is also lagging at the moment, I have adopted a Net Asset Valuation method such as a Fund Manager would use, this allows for the regular injections of capital and income stream rather than a straight indexing comparison. On this basis the SMSF on establishment had a NAV of $2.68 per share, (an arbitary amount defined by dividing the total initial investment by a 'share issue' of 100,000), this NAV is now $2.58 so a  decline of 3.75%. By comparison the AXJO is up by 1.24% for the same period - so an underperformance of 5%!

Once again its the mining services sector that is almost entirely responsible for this underperformance, MND and NWH are down 43 and 63% respectively - and thats after averaging down into NWH! So once again all I can do is wait and hope!

galumay:
Something I have been trying to get my head around is how to understand my phycological reation to a share that has risen strongly in price and whether I should sell some or all to take a profit. My first level of analysis is to check whether it is still trading at a discount to my calculated intrinsic value and whether all the other assumptions and metrics hold true currently.

But I have also becaome aware that there is some anchoring bias present where I am reluctant to sell if its gone up stongly for FOMO (fear of missing out) on potential future gains. I am also always caught on the dilemma of trying to decide if the capital could in fact be better employed elsewhere - and often its easier to see the historical run up in price of the existing share as being an indicator that it will continue to run up, where as the price of a potential new position has no history for me.

So part of the challenge is to remove my emotional responce to the historical share price rise in an existing stock and simply focus on whether it is trading at a discount to value or not and whether the same or new potential for growth in the business (not share price) exists.

galumay:
Interesting article here that outlines a well thought out strategy for avoiding really bad decisions,

CLICK

galumay:
I realised I have never really articulated my strategy here, as a deep value, fundamental investor, my aim is to find businesses that i consider to be trading beneath the range of intrinsic value that i calculate, and where the business is within my circle of competence, I can simply explain what they do, the business has attractive metrics such as low or no debt, history of earnings and dividend growth, high ROE, ROIC, low E/EV,  directors with skin in the game, tightly held to the point of illiquidity, prospects for growth and a high conviction of the investment on my behalf.

I am also trying to develop an ability to assess competitive advantage or moats in businesses I invest in, in simple terms looking for price setters not price takers and then understand what drives that.

My goal is to accumulate more shares in these businesses if the market continues to under price them, or even averaging up if the growth in earnings and general prospects are positive. My intention is to sell if the share price substantially exceeds the range of IV I have calculated for the business and there is no compelling change in the business to explain the price. Otherwise my intention is to hold.

I am prepared to have some positions where earnings are not yet reflected in positive cash flow if I believe the business case is compelling enough.

I have no interest in try to time the market, macro economics, financial predictions etc - I consider all these things violate sticking to my circle of competence.

20% rate of return hurdle.

Keep as much as possible in an offset account against property, in the case of a market crash look to buy quality LIC's at a discount to NTA with this "line of credit"

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