Investing: A Perspective from 50 Years in the Stock Market Outline - - PDF document

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Investing: A Perspective from 50 Years in the Stock Market

Outline

• 1. My investing journey so far
• 2. What I have learned over 50 years
• 3. Where to from here?

My Investing Journey So Far 1960-1964

Left school end of 1960 1961 started work and enrolled in university part-time 1961 – 1965 Batchelor of Economics at The University of Sydney My majors were economics and government I also studied one year of accounting and one year of industrial relations The accounting year did not really assist with investing except that Professor Ray Chambers opened my eyes to a concept I have never forgotten – the true value of an asset is what it can be sold for I began reading The AFR every day and still do today My father was an accountant and also kept charts of stocks

2 I began reading his books on charting:

• Philip Rennie’s book on Point and Figure (charts in pence – had to convert to cents)
• Edwards and Magee Technical Analysis of Stock Trends
• Alexander Wheelan Study Helps in Point and Figure Technique

I began keeping my own point and figure charts of stocks from the AFR course of sales tables

1964-1987

In 1964, I bought my first stock: Myer Emporium As the 1960s unfolded, a share trading club was formed where I worked, which I joined We did quite well in the mining boom, but towards the end most lost interest and I was running it Once the boom was finished I wound up the club I got married in 1966 and my small investments began to grow as we saved for a block of land and built a house on it We had very little money to invest, but I continued keeping my stock charts From the day we married until my wife retired, we always lived off one income and saved the other

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Initially, the savings went to buy the land and build the house, then to pay down the mortgage However, a little went to buying stocks The end of the mining boom was benign for me – I had sold all my stocks and that of the investment club based on the charts 1974 was another thing – again I got out early based on the charts – but watched in horror as the market closed lower for seven consecutive months This was a great preparation for the severe bear markets to come in 1981, 1987, 1990, 1994, 2002 and especially 2008 In the 1970’s we paid off the mortgage and I began to assemble a significant share portfolio

March 1987

Age 43 - I resigned my job with $180,000 plus a house in assets We would live off my wife’s salary and I would build our investments full-time, aiming to have the house plus $1 million in stocks by the time I was 60

1988-1989

I undertook the Graduate Diploma in Applied Finance and Investing full-time

3 I earned a little money as a census supervisor and some fieldwork for the electoral commission and Australia Post while I was studying Financial Statement Analysis led to me teaching fundamental analysis in the graduate diploma before I had graduated

1990-2014

I continued teaching fundamental analysis, but then had the opportunity to write two courses in, and to teach, technical analysis in the Graduate Diploma and that became my focus I gradually moved out of teaching and began writing for Shares magazine and later for Smart Investor, BRW, AFR and others I had written four books on investing I had built a website that is a teaching tool for investors By 2008 I had quit writing for magazines and newspapers My wife had retired Our capital had grown to $2.4 million plus the apartment we live in I have since revised and expanded two of the books I am not retired – I am a full-time investor I write extensively for my website and newsletter I speak to groups around the country on investing – though I plan to cut back This table shows an important aspect of my investing journey The reasoning was:

• It was useful to compare my returns to the super fund managers
• Much of the super was compulsory, preserved and had tax advantages
• A self-managed super fund was not possible anyway
• I took it over once we reached preservation age

My evolution as an investor:

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• I started buying stocks based 90% on charts
• 1964-1985 I declared I was a share trader for tax purposes, which has some tax advantages
• Since dividend imputation and the capital gain tax discount, I have been taxed as an investor
• I had morphed from a trader to an investor
• I now use charting for timing and fundamental analysis for stock selection (value)

My sense is that the split for me now is:

• 25% Charting
• 75% Fundamental analysis

but this is subjective and arguable … Because of where I have come from I still struggle to not let price dominate my focus:

• Price can signal information/analysis the smart money has before news is announced
• Price is important for capital preservation (I invest in small stocks)
• Markets move in cycles and I am a market timer

However, I am now more and more focussed on the way the business is performing and its prospects

• Especially, looking for high return and growth in earnings
• And above all buying at a price that is reasonable compared to value

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What I have Learned over 50 Years What DOES NOT Work What DOES Work

Trying to predict the market

It cannot be done with any

• Consistency or
• Precision

Even expert forecasters get the direction right less than half the time, which is worse than chance

Following a strategy and a process

• Assess the phase of the market
• Implement your strategy
• Follow a disciplined process based on

rules and guidelines

• As the phase of the market changes –

move through the strategy

Buying stocks whose price has risen strongly

• These have been great investments – but

for other investors

• You are investing new money at high

prices

Buying stocks whose price is low relative to value

• Price is what you pay
• Value is what you get

Pay too high a price relative to value and

• Return is likely to be low
• Risk will be higher

Speculation

Buying stocks that

• Do not make a profit
• Do not pay a dividend
• Are searching for minerals or energy
• Looking for a new cure
• Developing a new technology
• Starting a new business

Investing in them is risk capital

Investing

Buying part ownership of a business that

• Makes a profit
• Pays a dividend
• Is conservatively financed (low debt)
• Has a competitive advantage
• Has a rate of return higher than your

cost of capital

• Can be bought at a price that is low

relative to value

Guru Seeking

Beware people who explain the past as a platform to predict the future

• Any competent historian can explain the

past, but

• Prediction is the role of fortune tellers
• Facts provided are often highly selective
• Qualifications are no proof of ability –

ask to see their investment results

• No one book has all the answers
• If you do not understand the guru’s plan

deeply, you will abandon it under pressure in the market Sufi Teaching Story: “O my people! Do you want knowledge without difficulty, truth without falsehood, great attainment without effort, progress without sacrifice?” Very soon a very large crowd gathered, everyone shouting “Yes, Yes!” “Excellent!” said the mullah. “I only wanted to

• know. You may rely on me to tell you about it if I

ever discover any such thing.”

Develop your own investment plan

This involves:

• Formal investment education to a

postgraduate level

• Wide reading and study – Read a book

every month about

• Investing
• Biographies of investors or
• History of markets

Develop a written investment plan

• Requires years of experience, thought

and testing

• Writing it down will expose the gaps and

logical inconsistencies

• It is complete if, in any situation you

encounter, you can find the relevant rule

• r guideline in the plan

If it is not written down, stop fooling yourself that you have a complete plan and know what you are doing (Craig Foreman)

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What DOES NOT Work What DOES Work

Seeking high returns

It is near impossible for most investors to match, let alone beat the market consistently

• The higher the return you seek over the

market return, the greater the risk you have to take

• You can’t make the market give you

money

• To get more money from the market,

you need more capital to invest and

• More time to allow your capital to

compound

Defensive investing

The first commandment is preservation of capital

• Manage risk so that losses are always

small

• Allow returns to compound

Risks to be managed:

• Market risk
• Specific risk
• Financial risk
• Liquidity risk

Specific risk is managed by:

• Investment grade stocks

Diversification

• Rising or high and stable Return
• Purchase at a reasonable price
• Stop-loss and position size

Unstructured investing Usually takes the form of jumping from idea to idea

• Maybe acting on tips or articles
• No understanding of what you are

doing i.e. no investment plan

• Using price alone to try to avoid

difficult and time-consuming analysis

• No clear and consistent guidelines for

stock selection

• No rules and guidelines for managing

investments

• Little or no measurement of progress

through each year Continuous improvement Good records are the mark of a good investor:

• Keep a journal that documents all

decisions

• Track returns year to date against the

target return or the market return at least weekly

• Assess all completed investments

against the process in your investment plan

• Make an annual review of all losing

investments seeking to identify ways to improve your investing

• Make an annual review of all winning

investments seeking to identify the sources of success and build them into your plan

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Where to from here?

I find investing to be endlessly fascinating. Something I wrote years ago: Investing attracts people who are perfectionists, unravel mysteries, solve puzzles, have great patience in collecting, analysing and synthesizing information; all in the pursuit of excellence

• I read The Australian Financial Review every day (I started in the early 1960s)
• I read the Economist magazine as often as I can – on all subjects
• I have read over 400 books about investing, investors and markets
• I never have enough time to get to the bottom of the pile of books I

have to read – my latest read is Luke Wiley The 52-Week Low Formula

• I follow up footnotes and references – one thing leads to another and

deepens knowledge Charlie Munger:

• In my whole life, I have known no wise people (over a broad subject matter area) who

didn't read all the time - none, zero.

• Develop into a lifelong self-learner through voracious reading; cultivate curiosity and

strive to become a little wiser every day.

• Intense interest in any subject is indispensable if you're really going to excel in it.

I will continue to teach investing:

• It is my way of passing on what I have learned, and because
• I have found that teaching is the best way to deepen and broaden my knowledge and skills

I may write more books – I will certainly improve and revise Building Wealth in the Stock Market at some point I will continue to invest in stocks for as long as I am mentally and physically able

• If I can’t continue, I will switch into the major Listed Investment Companies – held passively
• This is also the plan for my wife if I predecease her
• It is what I recommend for 95% of investors (what I learned from Benjamin Graham, John

Bogle and Warren Buffett) In the end we have to ask ourselves what it is the purpose of what we are doing in life. Charlie Munger suggests: If all you succeed in doing in life is getting rich by buying little pieces of paper, it's a failed life. My two passions are: Investing I devote a great deal of my time to teaching it to anyone who wants to learn. Investing is a pathway to whatever we want to achieve in life and its study teaches us much about life in general.

8 Grand opera My investing allows me to travel and enjoy the best there is and I give some of what I have earned back to support opera in Australia. As with investing, great opera is about ongoing learning and practice in the pursuit of excellence over a lifetime. Anyone can learn to sing, but only a few reach the heights necessary to produce an unamplified voice and total performance in an opera house.

Summing Up

My most important general insight is that investing is not a science, it is an art:

• There are no simple answers to the complex questions involved.
• In essence, investing is about striking a balance between risk and reward, between price and

value.

• Investing is an intellectual pilgrimage of understanding – a lifetime of learning and deep

contemplation of the problems

• While progress is proportional to effort, there is no end to the investment pilgrim’s journey

The greatest danger lies in seeking to find someone who can tell us all the answers. The answers only come from within us as a result of making the journey