Forum Archive Index - June 2001

["G Stolwyk" <stolwyk@wave.co.nz>]

 

Disclaimer.

Readers, please note that these posts discuss investments on a longer term basis, only. The reader is not asked to imitate my investment style or to imitate the basis of selecting or owning any stocks which are discussed in these posts: My investment behaviour may change without notice. Please note that I have no public qualifications to advice on investment. Any resulting action from reading these posts by the reader, will be entirely at the reader's risk.

 

Investors will need a level of education before investing. FIG ( See Message Boards ) and various books are available to facilitate investing. My posts assume that the reader already has referred to these sources and to some of my earlier posts of this series. Any weighting of shares, property, bonds and other securities will not be discussed. 

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1. Investment Styles.

 

Before any selection of stocks can be made, the potential investor will need to decide on the most suitable investment style.

J B Were has classified the following:

 

The Value Investor: Looks to invest in shares when they are below their estimated value. Value is assessed through investigation of a company's financial performance and would include measuring price and profitability relative to other companies that operate in a similar industry.

 

 For example, the investor may use P/E ratios as a simple measure to identify where a company looks cheap compared to its competitors and the market overall. My note: there are other parameters to consider as well.

 

The Growth Investor: Looks to invest in shares with the potential for higher future growth than the market average. The investor is less interested in the current price or dividend stream and more focussed on the E/S growth expectations.

 

The Business Cycle Investor: Follows changes in the economic cycle and looks for movement of shares that will react to those changes either negatively or positively. This investor will trade shares on a shorter time frame to reflect the timing of cycles.

 

 This style of investing can be higher risk as it is often difficult to predict cycles. My note: The status of the international economy and / or that from the major trading partners will be of interest to this NZ domiciled investor.

 

The Index Investor: Looks to invest in shares that are included in a particular index and responds to changes in that index when making buy or sell decisions. 

 

J B Were mentions that sometimes fund managers mix their styles and so are called " neutral" investors Their aim is to assess shares based on a number of criteria from the styles listed above.

 

My note: Some investors may also be more interested in dividends and these can take a dominant place in the ( Growth + Dividends ) returns.

 

 2. Discussion.

 

The investor will need to be comfortable with the style(s) they wish to adopt. A Stock picker will select a number of stocks from one or a number of markets ( countries ). This will require study and some ability to evaluate the various factors which may now or later impact on the value of his/ her investment.

 

The Index Investor uses a " broad brush " and hopes that it will outperform the market: The index can have poorly performing stocks as well. Share indices, eg. the NZ 40 or the 200 AX. indices will regularly have some of these stocks replaced with superior ones. 

 

The investor may decide to buy units in an Investment Trust or Unit Trust and leave the monitoring of several investments, the Trust holds, to the Manager. While I am a stock picker, I would buy into a Trust to cover unfamiliar markets, eg. Europe, the US.

Selection of the right vehicle will be important and the investor will still need to study the pros and cons of a particular trust.

 

Taxation rules on these trusts and their dividends will need to be known. Shareholders will also need to know the IRD rules on holding shares and tax on trading.   

NB: Further items will be mainly of interest to those stock pickers who are longer term holders of shares:

 

3. How many stocks do I select and how much finance do I need?

 

Assume that I put all my cash on a " certainty " and it goes bankrupt, then, I may not be able to " fight another war "!

I have seen that in many ways and at times have been guilty myself by increasing the investment on a " loser."

 

( Sometimes, the investor can be forgiven as the standard of reporting by Directors deteriorate: the investor may think that the fundamentals are still strong while in fact, his Company is standing on shifting sands). 

 

If I select two good companies, then the risk of losing money declines. As I select more companies then the quality must eventually decline; after all, out of say 20 hand picked companies, the first two or three will be the most suitable!

 

Therefore, there is a trade - off between the level of risk and the chances of increased returns! I tend to keep a watching brief on a number of companies and may select say up to 15 to watch. I keep their data in a few folders. 

 

If I happen to lose one of my companies in a takeover or I need to diversify, then I would select the best five first and restudy them in the light of changed conditions. ( At this stage, I may throw a couple of the others in the rubbish bin due to poor performance ). 

 

I will then pick the best two and once again try to get further data to arrive at my final choice. Occasionally, a new one may beat the initially chosen one.

 

I would need at least some $ 10, 000 dollars , I think, to select say a minimum of three companies for a start. Broker's fees will be too high for that lot and I shall need to obtain them on - line. Alternatively, I may select two good trusts which invest in a number of companies.

 

ABN AMRO Craigs may still have that START scheme; this enables buying of smaller parcels over time by installments. That could be an ideal solution! 

 

If I had say $ 30 k - $50 k to invest, I would select 4 to 5 companies. At $ 75 - 150 k, approx. 7 - 8; at $ 200 k - $ 300 k about 9 - 11, and up to two trusts. If I had some $ 500 k, then I would have no more than 13 companies and say 4 trusts in my portfolio.

 

If, from time to time, I may have a few more than the given number, I would tend to reduce these over time. Over this amount, I would increase my holdings in the best performing stocks and invest more in the existing overseas trusts and increase this number somewhat. Investment in the well performing trusts will lighten my responsibility and could reduce risks.

 

Thus, as the money supply grows, the investment in some companies will grow as well! 

Other investors who don't have the time or aptitude for stock picking, may tend to gravitate towards Trusts and Index funds.

 

In reality, there are a large number of combinations of styles and attitudes. The psychological make-up, health and age can decide the investment style( s ).  

 

Gerry 

( To be cont.)