A newbie's journey into Value Investing in the stock market.

Discussion in 'Share Investing Strategies, Theories & Education' started by Sackie, 4th Feb, 2018.

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  1. Sackie

    Sackie Well-Known Member

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    My partner and I are in a position now ( have been for awhile ) where we would like to diversify our assets into the stock market. We have a solid real estate asset base and are comfortable with the niche market and strategy we utilise with RE so that's sorted and we'll continue to be very active with that as our primary method for wealth creation. Our main reason for wanting to invest in the stock market is simply because we are comfortable enough with where we are now and it meets our risk profile to diversify without the possibility of significantly affecting our asset base already created which is of the upmost importance to us. We are not going to compare stock investing to our real estate returns. This is not an attempt to look for greener pastures - we don't think we can out do what we already do. This is simply an attempt to also invest in a different asset class medium to long term.

    Plan: Invest 600k in total over the next 12 months .
    Strategy: Value investing long term . Identify companies which are undervalued , spin offs, mergers buy outs, acquisitions, bankruptcies. The main technical strategy we will use to select companies is:
    1. Profitability (based on Greenblatt’s chosen metric, Return on Capital)
    2. Earnings yield (the inverse of the P/E ratio, defined here by Greenblatt as EBIT / Enterprise Value)
    Learning: Currently have bought a tons of books from authors such as Greenblatt, Buffett, Graham, Heins. Will also read a lot of the value investing threads on PC. We are not interested in trading, just value investing long term. I am more than open to be flexible in my approach and i am sure as i learn more I may probably tweak the strategy above. I am a complete newbie so I will document my journey from scratch starting now and update this thread as I progress with all the good, bad and everything in-between.

    Anyone who invests this way (or has any feedback on this type of investing in general) I would love to hear it, advice, wisdom, book recommendations, cautions, anything you wish to impart to me - I am happy to listen and learn. Of course I will also start to go over the great many threads already posted. Btw this is also the same method we took when we started to learn about real estate. Learn as much as we could and start from the beginning.

    I am reminded of a quote: ” When you drop a pebble in a pond you get ripples, soon that ripple fills the whole pond”. Brue lee.

    The journey has begun.
     
    Last edited: 4th Feb, 2018
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  2. The Y-man

    The Y-man Moderator Staff Member

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    Without fully understanding your methodology, I am a bit worried with this description, given the amount you are talking about.

    It might also pay to look for a fund manager that already does this, and invest in their managed fund? (at least to start - and see how they pick/choose)

    The Y-man
     
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  3. Sackie

    Sackie Well-Known Member

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    Thanks Yman. I probably don't really understand part of what I am saying so as I read more I will gain clarity. I have considered what you have said and its still an idea. Are you a value investor ? Do you have a particular method which works well for valuing companies? Thanks
     
  4. kierank

    kierank Well-Known Member

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    Totally concur with your diversification and will look forward to reading about your progress.
     
  5. Sackie

    Sackie Well-Known Member

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    Thanks. It will be a long and difficult journey I am sure. But I think we are ready (and in a safe place now) to diversify this way. Btw you are one of the people who has inspired me to take on this journey :)
     
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  6. willair

    willair Well-Known Member Premium Member

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    "IF" the 600k is your own money and you are prepared to invest the total amount then there are 2 books to read first by Nassim Nicholas Taleb,and read them several times till it sinks in and you both have a understanding of the priceless information that is inside both those New York Times best sellers list..

    ....Fooled By Randomness..

    ...The Black Swann..

    Then as it will only take less then five minutes to sign up,sign up for Commsec ,everything you need to learn is inside that priceless site..

    Also watch in the morning after 10 on the ASX web page and see what's about to happen in the first few hours ..

    These are some of the Quote from Niassim's Books..

    It seems that it is the most unsuccessful people who give the most advice , particularly for writing and financial matters..

    Rumors are only valuable when they are denied..

    But log into the ASX Web page about 9 in the morning and watch as fear overtake,s greed..good luck..
     
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  7. Sackie

    Sackie Well-Known Member

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    Yes its my own money. I am ordering those books now. Thanks mate.
     
  8. Snowball

    Snowball Well-Known Member

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    Interesting. Thanks for sharing, I hope it goes well.

    I'm not sure it's as easy as it seems, or as simple as the books make it sound. Some companies are cheap for a reason, and some are expensive for a reason. Both can stay stay that way for a very long time for very good reasons. It's hard to decipher what's reasonable and what's not.

    There's a lot of decisions to be made. Value strategies are often employed and then the positions trimmed or eliminated when the stock is 're-rated' by the market, so it often doesn't suit long term buy & hold. Will you be trimming positions? At what PE or valuation will you trim?

    Ongoing portfolio management would probably be key to success in this approach. Were you planning on spending lots of time on it?

    I don't know a hell of a lot. Well, less than that actually. But I know it's not easy or everyone would do it.

    That said, we have quite a few stocks in our portfolio along with our LICs. Most of the stocks are income plays (they're not banks).

    I like the sound of the value approach, but I think classic value picks tend to be really beaten down stocks that are having serious problems - hence the low valuation. This doesn't fit too well with the primary investment goal we've settled on, which is a growing dividend stream.

    The Buffett approach is pretty heavy on quality, especially these days. And adding quality to the mix makes it harder, because then you must be able to judge management, industry dynamics and a myriad of other things aside from the financial metrics.

    So anyway, I'm not really sure what I'm trying to say, just some random thoughts. But I wish you luck and please be sure to share your findings and how you go with it here :)
     
  9. Hosko

    Hosko Well-Known Member

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    Good luck Leo. Only in hindsight can it be determined if you make the right moves at the present time and over the next 12 months. And sometimes what looks like value today will look like a steal tomorrow or maybe not so much........
    Enjoy the journey.
     
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  10. willair

    willair Well-Known Member Premium Member

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    That's good the way the margin call system works can blow you out of the water that quick it vastly surpasses your imagination from experience..There is one other book by ,Nassim that I also have called "THE BED OF PROCRUSTES" philosophical and practical Aphorisms..

    Quote..
    "It takes a lot of intellect and confidence to accept that what makes sense doesn't make sense"
     
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  11. Sackie

    Sackie Well-Known Member

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    @Snowball

    There's a lot of decisions to be made. Value strategies are often employed and then the positions trimmed or eliminated when the stock is 're-rated' by the market, so it often doesn't suit long term buy & hold. Will you be trimming positions? At what PE or valuation will you trim? We are thinking for at least medium term B&H. With regards to what PE valuation to trim I have no idea yet. Still in the learning process.

    Ongoing portfolio management would probably be key to success in this approach. Were you planning on spending lots of time on it? Well not 'lots of time', maybe a few hours a week tops.

    I don't know a hell of a lot. Well, less than that actually. But I know it's not easy or everyone would do it. I am sure its not easy.

    That said, we have quite a few stocks in our portfolio along with our LICs. Most of the stocks are income plays (they're not banks). I think I am wanting to go for growth and then sell when it reaches a certain point where price meets value of the stock. What this exactly means I will try to learn more about. I am a complete newbie.


    The Buffett approach is pretty heavy on quality, especially these days. And adding quality to the mix makes it harder, because then you must be able to judge management, industry dynamics and a myriad of other things aside from the financial metrics. Agree. I think we will probably go for a mix of quality as well as undervalued.

    So anyway, I'm not really sure what I'm trying to say, just some random thoughts. But I wish you luck and please be sure to share your findings and how you go with it here :)

    Thanks mate. It's gonna be a long journey.
     
    Last edited: 4th Feb, 2018
  12. Sackie

    Sackie Well-Known Member

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    Yes margin scares the hell outta me and I will not be engaging in that.
     
  13. The Y-man

    The Y-man Moderator Staff Member

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    The way I look at buying shares is that it is no different (fundamentally) to you going out an buying a "small" business (in these cases you still buy shares - just 100% of them).

    So in my head the analysis is really the same too.

    There's are ways to value businesses - and it's usually based on (discounted) cash flow, past and future growth, customer base, etc etc.

    The d&d you would do in buying a local cafe business is no different to buying a share is pretty much the same in my own little world.

    The only difference in the *listed* share world is that there's a ton of people doing the d&d at the same time with varying levels of information, and making their mind up about the valuation at any one time.

    In terms of method then, I (used to) look at (current and history of)
    sales (revenue)
    EBIT (or EBITDA. This is looking at their profits)
    D/E (how much loans)
    Income cover (can they pay their interest?)
    General market (macro view)
    ...and a few other stuff I can't remember off the top of my head :p

    I gave up (sort of) though, and have gone into REIT and Banks.

    REIT are a bit more complex in a way as the commercial property ownership is often "stapled" to a share of the management business.
    So when looking at revenues, there's obviously the rent from tenants (and possibly sale of props), but expenses such as management fees and maintenance. The management fees can then partially end up in your pocket as dividends from the management company in addition to your portion of net rental income.

    Banks are a bit more complicated to assess value too - I just basically buy it on the basis of how much they rip people off and how much dividend they pay...

    The Y-man
     
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  14. Sackie

    Sackie Well-Known Member

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    Haha..love.it!

    What do you do when say you've made x amount of profit and the stock price equals value again?
     
  15. Blacky

    Blacky Well-Known Member

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    Hey Leo
    I was in a similar position to you about 12months ago. Looking for diversification using ‘surplus’ funds and surplus future cash flow (though a slightly lower amount than you). My aim was to ‘buy’ future income.

    I studied what I could and had selected the parcel of ETFs which I wanted to buy. Then found out more about LICs and liked them more than ETFs so started again.
    I have little inclination to spend the time required researching ‘000s of companies and trying to figure out which one to buy (or sell). So a solid LIC portfolio which did it for me was my ‘lazy’ solution (not really lazy cod you still need to research which LIC suits you).

    I’ve now set it up to auto operate and from time to time buy when I can. I don’t really look at it till I have some buying to do.

    It’s kind of fun. But kind of boring.

    Best of luck with your strategy.

    Blacky
     
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  16. Sackie

    Sackie Well-Known Member

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    Hey Blacky,

    With LICs, are they more for an income stream or asset growth or both? Do you just hold the LICs indefinitely or do you sell any at some point? How as the last 12 months been?

    Thanks
     
  17. Intrigued_again

    Intrigued_again Well-Known Member

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    You may want to have a look for a book called “Warren Buffett Accounting” it will help with the financial statements.


    Also “The New Buffettology” is worth the read.


    It’s very hard to find like mind people and books that suit what you are looking for, but you really can’t go past “The Intelligent Investor” it helped us many years ago.


    We also have all of Berkshire Hathaway’s letters to shareholders for light reading, in one file.

    These books are about the companies not the market as such.


    When we started in shares we started with one company, so we made sure it was a good one, and I could look in the mirror and know it’s the right choice before spending a cent.


    It took nearly 2 years to stop checking the price every 5 minutes considering we where under water for the first 3 years capital wise, but it was the second dividend that came in 43% higher that helped calm us down.


    It’s funny it’s like Austini says now I only get excited when the prices start to go down.


    Anyway, I hope you have an enjoyable time learning and finding what you and your partner are both happy and comfortable with.


    Remember this, Whenever you find yourself on the side of the majority, it is time to pause and reflect.
    Mark Twain
     
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  18. Graeme

    Graeme Well-Known Member

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    The trouble that I have with active investing is that most professionals fail to beat the index. I can't remember the figures, but I think that it's something like 20% over a year, and 5% over a five year timeframe.

    Given these are highly paid, and well connected individuals, I don't think that an amateur has an awful lot of hope of pulling off a blinder. :)

    In fact, the central thesis of Fooled by Randomness is that chance plays an outsize role in investment returns, and the gurus are simply those who've been consistently lucky.

    I'd be inclined to do the following:
    1. Either buy into an Index tracker, or roll your own. (With $600K, you could put a reasonable approximation together.)
    2. Don't trade. Fees will eat up profits.
    3. Put your other half in charge of the portfolio. The statistics are that women are better at investing than men, largely because they tend to buy and hold.
    As I said, my opinion is that you or I are unlikely to beat the market over the long term, so I'd try to take my ego out of the equation, and make it more of an automatic process.
     
  19. The Y-man

    The Y-man Moderator Staff Member

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    My main aim these days is cash flow - I keep my resi IP for CG, "shares" (inc REITs) for income.

    In terms of "shares" - I have been trialing a new strategy, where by I look at the yield to determine value. So as an example, if the (share price + any distributions) has gone up 3% in a month, but I bought it on the basis of getting 6% pa, then it has had the same impact in one month as holding 6 months (hope that makes sense), and if there is a better place to put my money (may be another share), then I'll sell it.

    The Y-man
     
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  20. Sackie

    Sackie Well-Known Member

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    Yes I understand your explanation. So it exceeded your expectations very quickly and achieved your target so you'll start to look to redeploy the capital. right? Thanks
     
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