Where Do I See My Blog Going In 2012?

I have now been writing my blog for approximately five months and I have found the process very rewarding. Recently I commented on the benefits of writing a blog or journal so it is certainly something that I will keep doing throughout 2012.

Obviously 2012 has been a challenging time in the markets and although none of my stocks have “taken off yet” I think I have invested in a diverse range of companies that offer significant potential in 2012 and the years to come. I will be posting a brief article on what I would like to see from each of my investments shortly, but for the time being this post will focus more on where I see the blog and my portfolio going in a general sense.

As you would know all my investments are purchased based on fundamental research, however, one of the side benefits of this approach is that I gain an in-depth understanding of the company and its expected future news flow. On top of that I monitor each stock every day and at multiple times throughout the day. This has allowed me to gain an appreciation of strong support and resistance levels that I should be able to take advantage off. As a result I am going to allocate a small percentage of the portfolio >20% towards “trading”.

This will be limited to stocks that I already own or have researched in great detail. The benefit of this approach is that I will be able to utilise my knowledge of the company to generate additional gains in the short term and even if the price was to go against me (in the short term) it is something that I am happy to hold as a long term investment any way.

Obviously this is a slight change to my original strategy and is not something I will do every day/week/month. But when I see an opportunity I want some flexibility within the portfolio to take advantage of it. I will not necessarily trade off charts, but more my knowledge of the company and where strong resistance/support is usually found from my observation of the daily price movement.

Something I have not mentioned on my blog before is the fact that I do have some additional long term shares (blue chips) which I have held since I was around the age of 12-18. As I prove to myself that I am able to generate strong returns in the small-micro cap sector I will be selling off some of these older investments and re-distributing the funds into this portfolio.

I have not mentioned this in the past as most of the stocks have smaller capital amounts invested and are not something that I actively research on a daily basis (like I do with MHM, KGL and OBJ).

On top of all that I would really like to grow the readership of my blog a little more and generate some comments on my articles. So please do be shy, talk up and let me know what you are thinking.

Things To Include In Your Trading Journal or Blog

Following on from yesterday’s post I thought I would comment on some things that I feel are very important to include in any trading journal or diary. The obvious ones are the date when you purchased the stock and the price you paid, but some other ones worth considering include:

·         A summary of the reasons why you purchased the stock. For a fundamental investor I would be looking to detail why you think the company will be able to increase their operations (e.g. one a new mine) , why the underlying commodity may increase in price (e.g. increased investment demand gold) or if there is the potential for the stock to re-rate and become more closely aligned with its peers (e.g. P/E ratios or in ground valuation of gold, etc). For traders I would include information on what technical indicators or metrics led to your decision to buy or sell a particular stock.

·         A detailed list of future expectations based on your research. For the fundamental investor this would include things like the company achieving a certain rate of growth or establishment of new mines or operations and what that would mean for the share price. It is important that this information considers the facts and is not just some fantasy dream that you hope will occur. For the trader this will be solely priced based, but it is also important to note the expected timeframe for each of these items. You could also comment on how much volatility you expect while holding the position as this can have an effect on your frame of mind and ability to hold during down days.

·         Your exit rules. This is probably the hardest thing for a fundamental investor as we usually ignore the short term noise associated with a stocks share price. I would however suggest that the failure of the company to meet a certain objective, the poor performance of management over a period of time or deterioration in the underlying commodity price would be some of the reasons which you could include here. For traders the exit rules can either be price bases (i.e. set your stop loss at a certain pre-determined level) or time based (i.e. if the stock does not start moving in line with my expectations by x date then I will reconsider the position and/or sell).

·         Information on managing the position for trades or investments that go in your favour. For example will you exit 100% of the position in one go or will you scale out of the position over time to ensure you do not sell at the highest nor lowest point. For my investments I plan to scale out of each position because it is simply too risky to take all the money off the table in one go (for positions that are going your way) as there is always the potential for another announcement or the strong buying to continue. This will obviously average out your potential gain/loss but I believe it is an important tool well worth considering.

·         Your thoughts on the riskiness of the position. All of mine investments are typically “high risk”, however I think it is important to detail this in writing as it will remind you of the pitfalls associated with each investment and remind you that even if the price is currently green there are still risks associated with each position. I would also be looking at detailing what risks you foresee in the share price and the company’s operations. This can also be linked in to your exit rules.

I am sure there are many others that I cannot think of off the top of my head so please feel free to comment below and share you thoughts.

The Benefits of a Trading Blog or Journal

As the year draws to a close I wanted to comment on the benefits I have received from running this blog over the last couple of months. I have found it an immensely rewarding experience and I am somewhat surprised at how easy it has been to keep coming up with new posts and information to share you with you all.

The first and most important benefit I have noticed is that having a public blog forces you to read and write about company announcements. Every time news comes out I make sure I read it in depth and consider its implications before I post an article. Yes, I am sure you already read company announcements, but writing about them takes your analysis to a whole different level.

Secondly, I have found the weekly updates to be very satisfying and help quantify my portfolios performance. A week goes so quick and sometimes it is hard to remember where the share price was a couple of days ago let alone 3 or 4 weeks back. By writing down the closing price each week I have become more “in tune” with each stocks performance and quantify what the impact of each announcement, market sentiment, etc has been.

Thirdly, it provides an important review tool. I have copious amounts of notes on all the stocks I have invested in and besides OBJ which I bought before starting this blog a lot of that information is shared on here. Instead of searching my computer it is sometimes easier for me to read through my old posts. Not only does this allow me to review information on each company but it provides an insight into what I was thinking at the time.

Finally, it has allowed me to connect with other traders and investors. I am normally on HotCopper, Aussie Stock Forums and ShareScene a number of times throughout the day, however, the blog has provided a different avenue of discussion. Some of my readers have posted stocks they would like me to check out, interesting links or just there comments. I appreciate all the feedback and it is good to know that people are taking the time to read by posts.

So if you are an investor or trader I would strongly recommend starting a blog. I think the fact that it is private creates a certain level of expectation which will ensure you keep posting and keep up to date on each of the stocks you own. If you start one let me know and I will share the link on my blog.

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”

The Benefits of "Do Your Own Research"

I admit it is hard to block out all the noise that we hear on a daily basis, media commentators, youtube videos, forum posters, blogs, everyone seems to be shouting some message and it always those who are the most controversial (whether bullish or bearish) who get the most air time.

When I was younger I used to get caught up in this, not because I didn’t do my own research but because I was second guessing myself or looking for confirmation from an external source. However, the fact remains that these “talking heads” do not necessarily know more than you do. They do not have a crystal ball. And if you apply yourself and spend the time to research a particular company or industry you too can become an “expert” in that field. When you are confident in your knowledge and ability you will not seek this external validation, your investment decisions will be clearer and you will sleep better at night.

So why am I writing this post today? Well for two reasons. Firstly I read two rubbish articles on the Sydney Morning Herald and News.com.au website today claiming that property prices were going to boom from now until 2013. Both articles referred to a BIS Shrapnel report, a report which I happen to have. Both of these articles correctly stating that BIS are anticipating growth up until 2013, however they then say that growth is expected to slow. This is incorrect. On page iii of the executive summary it says:

“However, the magnitude of price rises will be constrained by the spectre of rising interest rates, which are forecast to eventually peak and bring about a downturn in the market in 2013/2014”

A downturn is completely different to the “slowdown” that the major news sites claim will take place. A downturn implies prices will go down! A slowdown implies price growth will slow! Two completely different things! Any way the reason why I post this is to highlight that you must go to the source of the information to understand the true picture. Don’t just listen to the “talking heads” whether they are on the net or in a paper (and that includes me).

The second incident that led me to write this was some recent comments made by a “well respected poster” on a couple of forums. Now this person is intelligent and certainly understands the industry in question very well. As a result they do appear to hold “sway” over a number of posters who hang onto their every word. This same poster for whatever reason turned bearish and mentioned that they would be dumping shares in a particular company (yet the volume so far suggests otherwise). As a result of these statements a number of other posters suddenly got nervous and I thought I would take this as an opportunity to say that just because someone says something doesn’t mean they will actually do it. For all we know the person may be a net buyer and/or change their mind very quickly. Furthermore if you allowing your investment decisions and frame of mind to be swayed by someone else then it highlights a lack of belief in your own ability and research.

In summary, don’t look for confirmation from others, do your own research and you will be much better off for it.

Where I Am & Where I Want To Go

It can certainly get lonely working from home and trading the markets. Combine this with the fact that markets are currently getting smashed and the desire or will to make purchases is certainly reduced. However, this has provided me with time to reflect on where I am and where I want to go.

Firstly I want to say that I am happy with the stocks that I have incorporated into the portfolio and remain confident about their long term potential. This is not blind confidence, but is based on the research I have conducted into the company, the industry and potential financial return of their activities. I will be the first to admit that their share price performance has been dismal lately; however I must not forget the reason why I am investing in these stocks. I am not looking for 10, 20, 30 or even 50% gains. I am investing in companies which I believe have the potential to deliver 2, 3, 4, 500%+ returns and obviously it takes time to deliver on those goals and aspirations. Nothing has changed fundamentally for any of the companies in my portfolio, hence there is no reason to sell.

Sure I could have held off and purchased more stock at a lower price, but that is like saying I should have had a crystal ball. Everyone knows the global economy is not strong, but that did not stop us rallying off our GFC lows, nor would it stop the likes of OBJ signing an agreement that could potentially deliver millions in revenue.

So without much happening with the markets in the short term I have been given the opportunity to really think about what I am doing and where I want to be. And it is certainly right where I am at the moment; however I have realised the need to really apply myself and further strengthen my skill set. As a result I have been looking at online and short courses in the mining industry.  I basically want to understand everything there is to know about mining, geology and what makes these companies tick. Sure, I have a good general understanding at the moment and can decipher reports and conduct financial analysis into projects and companies. But I want to take it to the next level. I basically want to be able to talk to a Mining Engineer or industry veteran and be able to hold a technical conversation for an extended period of time.

This will obviously take time and money but it is something that I am interested in and if I am able to bolster my industry knowledge and combine that with my financial modelling then I feel that I will be able to research more companies, conduct additional analysis and be even more comfortable with the investment decisions I make.

Since I have started my search for some online courses I have come across a number of great options. But first up I would like to extend my thanks to Jamie from http://www.miningman.com/ who was kind enough to provide some online links and additional information. For anyone who is interested in the mining industry or project management I would recommend that you check Jamie’s site out. Jamie also provided me with a link to the “Smartminer” course which seems like a great option at a reasonable price. Through my own research I also came across infomine which has a section titled EduMine. I need to clarify their total costs but it appears as though you can gain access to over 120 courses covering a whole range of mining topics for as little as $40 per month, plus a small sign up fee. It certainly seems like good value and if you are based in the US or Canada you can pay an additional fee and received certification and continuing professional development points.

Anyway that is just where I am at the moment, committed to the blog, my investments and further education.

Paying For Blue Sky

When I first purchased MHM the market capitalisation was circa $120 million (undiluted). Since then the price has crashed from around $1.20 to as low as $0.52. It is clear that this fall is not only due to the global market selloff, but also the failure to deliver any material progress with MHM’s US operations. As a result that “blue sky” has been eroded over a period of time.

Even with some rough calculations which ignore the “blue sky” potential we could arrive at the following value:

MHM Australian Operations: $8.6m profit p.a. x PE of 5 = $43m *

Cash = $10m

Resource Ops/Exploration Potential = Say $25m**

Total Value = $78 million

* Please note the $8.6m projected profit is yet to be achieved from the Australian plant. I also only used a PE of 5 because no long term contracts are in place and additional feed will need to be sought after the 160,000 tonnes of Alcoa landfill is exhausted (5 years’ time).

** MHM has interests in Silica, Gold and Copper I have attributed a value of $25 million to these projects based on what other explorer’s trade for. If this was the sole focus of the business I expect that they would have a MC in excess of $20m but no higher than $30m.

As you can see from the above I can arrive at a rough valuation of $78m. This is $44m below the market cap at the time I purchased and hence represents the “blue sky” potential that I paid.

In hindsight I certainly should have waited for the gap between the company’s current operations value and the market cap to reduce, however, news on the US expansion was expected around the middle of the year and if it had announced a 200 – 250,000 tonne plant then $1.20 would be history in my opinion.

What this really shows is that as an investor I need to balance the risk/reward of paying for this “blue sky” potential or waiting for the price to drop and ultimately miss out on the bigger picture. I continue to maintain almost 50% of the portfolio in cash and it is my aim to increase my holdings in MHM after US expansion is approved. I anticipate that I will be able to do this under my initial purchase price of $1.20.

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.

Know What You Invest In

I have never read a book about Warren Buffet or his investing approach but one of the most important things I believe he has said is “never invest in a business you don’t understand”.

Just today I have been reading some blogs and posts on a couple of stocks and it amazes me at the amount of “long term investors” (note I am not talking about traders, you are free to buy and sell whatever you want) who say that they hold a stock but clearly don’t understand the business or industry itself. Many of these people may have purchased the stocking “thinking” they know about it, but the majority opening admit that they “just think it has potential but don’t really understand what the company does”

This is probably even more evident in the bio-tech space where every company thinks they are onto the next big thing and it is easy to get caught up in the “hype” generated by the company. However, if you are going to invest in this end of the market please take the time to do the research and understand the company you are about to invest in. It is also important to understand that many of these companies will require significant capital contributions throughout their life and the hype in their technology is required to maintain shareholders belief while they tap them for more money.

I will not sit here and pretend that it is possible to know everything, but at least do the research, understand the company and its potential and run some calculations on its future earnings/profitability. As you will know from reading my blog I only hold two stocks, I have however researched many more than this. Some of these stocks I was originally very positive about and definitely thought I was going to buy. However by taking the time to research the stock, the industry and its potential I cut many by the way side.

If you are one of those investors who do not currently understand the companies you are invested in, stop and take the time to do some research. It is better late than never.