Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

I'd be interested in getting some feedback as to how people translate 
their investment goals into investment strategies.  Probably the best 
way to explain what I am on about is to start with an example.

Goal:  To obtain an income return year in/year out of twice the 90 day 
cash return.  In today's terms this translates to a pre tax return of 
around 10%.

Investment Strategy:   Buy a basket of high yielding shares.  In my 
case I have selected CEN, LPC, WRI, RBD and SKC.

As it stands WRI and RBD meet my investment goal on their own.  
Both are yielding around 11% so I can afford to see the share price 
decline by a few cents this year and still meet my goal.

The other three shares are yielding less, so should I sell them?   Not at 
all.    The reason why the other three are yielding less is because the 
market perceives them as 'less risky' and rightly so in my view.   Less 
risk is quite all right with me!   LPC, CEN and SKC have a hard core of 
very solid earnings, but nevertheless they are buffeted around by the 
vicissitudes of Mr Market anyway.  If you can identify the range over  
which these share prices are being buffeted then you can enhance 
your return by topping up on these shares at or near the bottom of that 
range.    That means over the longer term you can expect a modest 
capital gain to supplement your dividend return.  Notice I said 'modest 
capital gain'.

Income shares tend to be more 'price stable' and wild capital gains are 
less likely than in the wider sharemarket.

If share prices fluctuate about a 'fair value', that means that if you 
value this 'income portfolio' at any time some of the shares are likely to 
be slightly undervalued and others slightly overvalued.    Nevertheless 
for all five shares looked at at once, as a collective, there is a very 
good chance that the slight undervaluations in one share will be 
balanced out by slight overvaluations in another ( Note: I have taken 
some trouble to make sure my five shares are in different industries 
and so are not closely correlated ) .    That means the overall portfolio 
of five shares will track much closer to 'fair value' than the individual 
ingredients that make it up.

If you buy individual shares when the shares are 'slightly undervalued', 
but at any time when you want to value it,  your overall share portfolio 
is 'fairly valued', then it seems obvious to me that you will do better 
than a straight 'buy and hold' income investor.   And, since I have 
adapted this strategy to my 'income portfolio', so it has proved in 
practice.

So, there is my 'income investment' goal and accompanying 
investment strategy laid bare.

Now I'll throw the question over to the wider audience.   How do you 
organize your investment strategies to meet your investment goals?
I am particularly interested to hear from the 'gold bull' guys.    The 
Haggis gave some good advice when he suggested that you should 
always buy when prices are cheap.    But the question I want to know 
is with gold and other raw materials, 'How cheap is cheap?'

SNOOPY



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