Is this a viable lifelong strategy? And A New Definition For Risk

Today someone close to me asked if this is a viable lifelong strategy and it has left me feeling a little bit deflated. Not because I don’t believe that I can make it but more so because it feels like your goal/lifelong dream is being questioned.

Now, I am not under any delusion as to how hard it will be to generate a living from the market, nor how long it will take for the companies I invest in to reach their full potential. I also don’t want to lie and say that if one of my stocks goes up ten times I’ll be a multi-millionaire, because that is simply not the case. To turn this goal into a reality I really need one ten bagger from which I can then enter another couple of stocks with three to four times what I put in my first few (OBJ, MHM & KGL). This is the value of compounding and each successive win means I have more capital to put into my next stock.

Right now the risks are the greatest because I already have three stocks and only room for maybe one or two more. From those five companies one or maybe two will fail but the gains from the others should more than offset those losses. If this occurs then I will have a larger capital base and my future portfolio could probably accommodate up to six stocks, with a bit of cash for short term opportunities and a cash buffer to protect against more than 50% of the portfolio crashing to zero (i.e. ensure I have money to come back in the event of a worst case scenario).

Finally I don’t necessarily classify my portfolio as “high risk” because if you have conducted the research and understand the fundamentals of the company then it should be “known risk”. High risk to me sounds like some useful catchphrase from which people can justify poor investment decisions. Why would anyone invest is something that is “high risk” unless they are gambling. It is a non-sense saying made to satisfy the demands of the ignorant. I apologise if I have used the words “high risk” in relation to my stocks in the past, but it was probably to make sure people understood what I was taking about in a general sense. From now on I will use my new phrase (not sure if it’s been used in investment terminology before or along these lines) but I propose the following definition:

“known risk in relation to a stock (or portfolio of stocks) that are anticipated to generate a high rate of return refers to the ability of an investor to understand the fundamental components of the company, the industry in which they operate and other external factors which may affect their future performance. Taking all these factors into consideration the investor calculates a future share price or market capitalisation that is likely to be five to ten times that of the company’s current value.

If the share price then falls by a considerable margin this is not an unpredicted event, but one of the considerations accepted by the investor when making their investment decision. I.e. The Investor chose to invest based on the likely return, but with knowledge that the return was conditional on a set of targets or objectives.

Known risk should not be used when referring to any investment that involves “hit and hope” exploration, companies with poor management or no/limited future of financial performance or security. These should be classed as poor investment decisions. I.e. there is no risk because they will only ever go one way, down”

I didn’t Listen to My Own Advice

This is pretty embarrassing to admit after banging on about the importance of doing your own research and the forming your own opinion, however I have recently fallen into the trap myself.

I have been following a stock, Northern Star Resources (ASX: NST), for a while now and was considering taking a position. In my opinion it is a well-run company, that has managed to turn an unwanted mine into a good little cash cow. That said there are a number of risks that I have to consider including the fact that the mine life of their Paulsens project is unknown and their Ashburton Project is pretty much 100% refractory ore, which makes the recovery of gold harder.

Anyway, as I was saying, I was considering taking a position in the company but my research indicated that future growth could only be achieved through an increase in the gold price, a sustainable mine life at Paulsens or further acquisitions. I discussed my research with another poster and it was only now that I can see that I placed too much emphasis on that discussion. My opinion was swayed and I decided to cease researching the stock. At the time it was trading around 58 – 60 cents (which is where it is currently at), however a couple of weeks back it dropped to the low 40’s which would have been a prime buying opportunity had I kept on top of the game.

Furthermore NST has made some recent announcements which are very significant for their Paulsens project, with the potential to alter my valuation. In my mind as long as Paulsens continues to pump out the gold this company is going to be in a very strong position. So I have admitted my mistake and maybe I have missed the opportunity, but I am going to pull up my notes and do some further research. Who knows it may be part of the portfolio shortly, it may not.

As always please do your own research and consult a licenced financial advisor before making any investment decision.

One Shot, One Opportunity!

All I have is one opportunity. This is a thought that I constantly crosses my mind because it is unlikely that I will be able to add significant capital to my portfolio over the next few months or years. There is one last cash injection to come (which I will discuss in a later post) but after that I have to make this work with what I have already got.

Throughout my life I have learnt that I like working for myself. This even stretches back to when I was sixteen I owned a retail business for a couple of years. After this I moved into the property industry, and if I am honest I didn’t enjoy my life. I hated waking up to go work for other people and found my work life to be somewhat stagnant. This probably wasn’t helped by the fact that the private company I worked for was undergoing a transformation with the father passing the business onto his son who had absolutely no idea how to manage people or projects, let alone run the numbers over potential developments (but that’s a story for another day).

Anyway it had always been a passion of mine to work in the stock market and to be honest I don’t know why I didn’t follow that path sooner. Towards the end of my property career I tried applying for a number of graduate roles, however I had in part studied the wrong degree. It was basically an economics degree which applied the theories and modules to property, however when recruiters saw that I studied a Bachelor of Property, they didn’t seen the economic side of things that dream was eventually shattered.

In the end it probably was a positive thing because I don’t know if I could have gone on to work 80 hours plus a week in the city, which would leave little time for my family and other activities I enjoy (soccer and going to the gym). Anyway I continued to muddle along and switched to working in residential sales, it didn’t last long and I reached another cross road in my life. Basically I was forced to go work for someone else or grow some balls and risk it all again to work for myself.

That is when I expanded an online business that I had previously only run for some additional income on the side. I increased the businesses advertising tenfold and with it came a corresponding increase in revenue and profitability. I was not rich, but I had the enough money to pay an average wage, keep the wife happy and press on with my dream of working for myself and eventing into the stock market once more. If you read my original welcome post you would know that I feel at home in the market and this was kind of like returning to my roots, even though I am only 22.

As a result I am writing this piece today. I have this one opportunity and need to make it work. I am not under any illusions of how hard this is going to be and realise that to do this full time I need to get a number of “10 baggers” within the next 3 to 5 years. To ensure I can make enough to realise this dream I have to throw everything I have against it. I have to be willing to take on more risk than ever before and back my own research. This is not about being reckless or throwing good money after bad, it is about taking the steps that could result in a life changing outcome. As I mentioned at the start I have a limited amount of capital with which to work with and being married does limit my access to future funds (as we are also saving for our own home one day, as a result I have one shot at making this work and to change the course of my life.

An Insight into My Research – Background Analysis

I thought it would be an ideal time to discuss some of my researching methodology and analysis techniques so that you all can get a better idea of how I chose my investments. I will break my investment approach down into a number of separate posts which will be published over the next few weeks. For today I am focusing on the very first step which is the background research I conduct into the company.

Once I have found a company that I am interested in or has what I believe to be good future potential I undertake a significant amount of research into the background of the company. This normally involves reading past ASX announcements, broker reports, news articles and investor presentations. Luckily for me most of the stocks I research have been listed for around 4 to 8 years so it only takes a couple of days to wade through all this information. For both of my current investments (OBJ and MHM) I have read and taken notes on every announcement released since their listing.

I know this may seem extreme, however, it helps me understand where the company has been, where it is now and where it plans on going in the future. For companies that have been listed on the market for a long time or have undergone a significant restructure I normally only read from this point forward. An example is Northern Star Resources (ASX: NST) who acquired Paulsens Gold Mine in 2010. Prior to this the company did nothing of note (in my opinion) so I only spent a small amount of time reading over these earlier announcements. That said if I believe information and a further understanding of the company’s past is required then I commit the time to read it all.

After reading about the company I have normally developed a list of questions and concerns that can affect my investment decision. In particular, my research can help highlight poor management, a failure to meet deadlines or targets or a general chopping and changing of the company’s activities on a regular basis. I will also be better able to understand the company’s future potential from these announcements and what their “vision” is. For example it may highlight that the share price has been depressed for many years due to poor management. However a new senior management team could have been installed six months ago and acquired a project that is moving towards production. This can provide an opportunity as the market may be pricing them at a discount due to the previous management and their old projects.

After I understand the company it is important to do further research into the industry and associated partners. This is particularly evident in the bio-tech space where there is a steep learning curve in regards to understanding the link between large pharmaceutical companies, their smaller partners, the approval processes and timeframe to development. For example with my stock OBJ Limited case we are dealing with three partners, two of which are unknown (due to confidentiality agreements) and as a result links need to be drawn between potential partners to get a clearer picture.

For stocks in the resource sector this analysis can involve looking at nearby mining operations, other similar companies listed on the ASX and other exchanges and considering the future demand of the commodity. This allows for additional analysis and comparisons to be made between companies when I finally proceed to the calculations and forward projections part of my research.

Finally the last part of background research I undertake is into the senior management team and Board of Directors. With Google and Linkedin it is very easy to gain an understanding of what each person has done in the past, the success they have had and any failures along the way. It is important to look for different sources other than what the company tells you because naturally they will only highlight the positives. Now just because a manager may have failed with a project elsewhere does not mean the company is immediately removed from my list of potential stocks. I am more concerned about repeated failures, illegal dealings and anything that indicates that the manager just jumps from one thing to the next with little considerable for shareholders.

As you can see the above does involve a significant amount of time and after starting with some advice from Warren Buffet I am going to conclude with some of my own. Don’t worry about the thought of wasting hours and hours of research only to find out that the company is a dud. It is better to waste 20, 30 or 40 hours of your time than lose all of your money in a poor investment. Sometimes it feels like you have wasted all that time researching a stock only to conclude it is not a good idea to buy, but you should take this as proof that the research is worth doing. In the long run you will be better for it!

Fundamental Stop Loss

Never heard of it? Well I can’t say I have either. This however does sum up my approach to each investment I make within this portfolio. Now I understand the potential of technical analysis and agree that it can help a trader or investor pick uptrends, downtrends and potential reversals. However I am yet to be convinced on its application to the small/micro cap sector for a long term investment approach.

Why? Well it is probably best to use OBJ or MHM as an example. Now since purchasing both stocks world markets have been a little nervy to say the least. The other week we were seeing 4 or 5% swings on the global indices and both of my stocks have been caught up in the general market decline. Now had I set a percentage or dollar stop loss I would probably not be holding any stocks at this point in time, I quiet simply would have been stopped out. A technical trader would say that I can always re-enter the stock when a new uptrend develops and that a good stop loss forms part of any trade.

Okay, that all makes sense but what if an announcement comes out tomorrow stating that an agreement has been signed which will see the company’s revenues and profitability increase by a substantial margin? For a bio-tech stock with a market capitalisation of approximately $20-25 million an agreement of this nature could see the share price spike by in excess of 100%. In this situation I would have clearly missed the boat and although my analysis many have been correct I would be left holding nothing by a Sell Confirmation Note from a week or two earlier.

This underlines the issue I have with technical analysis at this end of the market. Yes it can be used to help predict future behaviour of the share price based on patterns formed over time (i.e. resistance and support levels, Fibonacci numbers, etc), it cannot however predict the release of an announcement. Why is this important for me? Because I base my analysis on fundamental research and anticipate an increase in the share price based on some future fundamental event.

As a result I do not have a price or percentage based stop loss. I review the company, the market and every announcement in detail. Based on the information available I ascertain the future potential of the company and monitor it over time. If the company makes an announcement regarding the loss of a major partner or the failure to achieve a certain target then I will re-consider my investment in the stock.

My stop loss is therefore essentially $0.00 because any unforeseen event could happen. A company planning to open a new mine may be blocked by a legal hurdle, a major partner could pull of an agreement with a bio-tech stock, all of which would send the share price substantially lower. What this means for my strategy is that I only invest what I am prepared to lose. And by lose I mean lose everything! Now common sense would suggest that even in the event of a bad announcement a company is unlikely to lose all of its value overnight. So although I budget for a total loss of equity I do expect that if such an event was to occur that I would be able to retain 20-50% of the investment depending on the scenario.

This approach is certainly not for everyone and definitely is high risk, although it does come with the potential for high returns as well.

As always do your own research and consult a financial advisor.



My Thoughts on Diversification

A key aspect of my investment strategy is about uncovering fundamental value in the small and micro cap sector of the Australian market. Naturally this involves a great deal of research and analysis across a number of companies and sectors. The traditional approach to investing is to create a diversified portfolio of stocks. Many financial advisors and analysts regularly state that your portfolio should hold between 10 and 25 individual companies.

My approach is different and is based on the following: If I have spent hours of research trying to uncover the best possible investment why would I then also consider investing in those stocks that were on the next rung down in terms of potential and risk. Now this is not to say that I will only invest in one stock in each sector, but highlights that if you are confident in your research and analysis why would you then second guess yourself by placing some of those funds into another company that perhaps did not fit all of your investment criteria.

Ideally I see my portfolio comprising between four and six stocks with a portion held in cash (in case a new opportunity presents itself). By limiting my portfolio to no more than six stocks I will know each one better, perform more detailed analysis and keep up to date with any fundamental changes in value that many alter my decision to buy, hold or sell. These will also be the stocks that I am most confident about and therefore hold the best potential to deliver a return in my opinion.

As I mentioned above this does not necessary limit me to only one stock in a certain sector and is more based on the current status and potential of each individual opportunity. For example if I decide to invest in a gold producer I will attempt to identify the one that offers the best potential, but I could also decide to invest in a gold explorer or a company that is in the process of developing a gold mine (all gold stocks, but all at different stages of their life). By the same token I could invest in the best gold mine I can find in Australia, but also the best one I identify in Asia. This will allow me to diversify within sectors as well as across sectors.

As you will see from my current holdings in OBJ and MHM I am currently exposed to the bio-tech and resource/materials sector and I do see the majority of my funds being placed in these sectors. I am currently in the process of evaluating a number of gold stocks, but am yet to make a purchase given the current market turmoil. I am also anticipating a slight pull back in gold and/or a rally in the AUD that may provide a better short term entry into any gold stock.

Trading is a journey

Hello world and welcome to my blog!

I first began investing in shares at the age of 12, at 16 I bought and ran my own business and at the age of 22 I have left my job and established an online business so that I can work from home and become a full time professional investor. Along the way I have traded options, CFD’s and tried out a variety of short term investment and trading strategies.

After the culmination of many hours, reading, trading and learning about the markets I feel like I am returning to my roots. Originally when I was twelve and bought my first shares in Billabong (ASX: BBG) I always envisaged myself as a long term investor. Although this purchase didn’t exactly turn out the best (I purchased at $7.30 and they went to mid $4.00’s shortly after) it taught me some valuable lessons about researching a stock and understanding it’s fundamental value, future prospects and above all the catalyst that will drive its share price higher.

After my purchase of Billabong I made another rash decision that taught me even more lessons about the stock market and the behaviour of stocks. It’s not that I didn’t care about my money or the investments I made but as a 12 year old who lived by the beach I guess I thought everyone wore Billabong and bought TV’s from Harvey Norman. Any way you can probably gather that neither of these investments really paid off in a financial sense, however from an educational view point it was money well spent.

After my first two forays into the stock market I began reading financial reports and conducting some analysis into the company’s performance. I looked for consistent growth in sales, earnings per share and dividend payments. This formed the basis of my research and I was able to purchase my best two performers to date Leighton Holdings (ASX: LEI) and Origin Energy (ASX: ORG). I had found a style of investing that I liked and enjoyed creating a whole raft of excel spread sheets with formulas and graphs.

After I purchased my business at 16, my investment capital dried up and I just continued to monitor my existing shares without making any major new purchases. This went on for a number of years and I was pretty comfortable with what I had. I also think the business and my HSC took some of my focus away from the stock market during this time.

As I matured I came to realise that the potential for large, life changing returns were not going to be found in just buying and holding blue chip companies (unless I wanted to reap the fruits of my reward when I am 20, 30 or 40 years older). As a result I began investigating different trading methods and Contracts for Difference. I have in the past dabbled with options, however I have not traded them since I was about 15 or so. What would follow was a period of frustration. I can read and understand charts and could tell you how most underlying indicators works, but I never found anything I was overly comfortable with trading or basing my investment decisions off. Even if I did make some profits using various systems and trading methods.

During the Global Financial Crisis I traded the FTSE 100 and individual UK stocks, I made some fast (but relatively minor money) short selling bank stocks intra-day (at the time the intra ranges were he 10, 15, 20%+). I have also traded the ASX 200 index, where I also made some profits. Anyway what I believe was a combination of a small account balance, a lack of time to trade these markets full time and the failure to find a way of trading that I truly enjoyed I stopped.

I then went on another hiatus from the stock market and entered the property industry (something that I used to love, but am somewhat indifferent towards now). I completed a bachelor degree via correspondence and worked for almost 4 years in the industry before finding myself where I am now…… back to where I started, with a passion for the stock market and a realisation that I was in the right place the whole time. I just needed to change what I invested in slightly. I have always had an analytical mind and even during my property career I would run analysis on property developments, investments and retailer trading figures. I am now in a fortunate situation where I can apply this to the stock market in a somewhat full time capacity. At the core of my investment philosophy is the uncovering of stocks with the potential of multi-bagger returns (ideally 5 - 10 x return on investment or more). Now I am not under any false illusions and know this is not an easy area of the market to crack, but I have finally found my niche and I plan on utilising my strengths to exploit it to the best of my ability.

Welcome to my blog and please follow me on my journey! 

P.S. Please read the disclosure statement. This site is provided for entertainment purposes only and no information should be taken as advise or a recommendation to buy, hold or sell are share or particular investment.