I have a pretty loose investment plan that I want to tighten up. I felt this was a good place to lay down my thoughts in a concise manner and get some feedback at the same time. Hopefully it can give food for thought for green and experienced investors alike.
So briefly to give you my starting position. I am actually pretty skint. I was a full time IT uni student (though just changed to part time for next semester to give more time to work on business). My realistic earnings right now are about $750 a week before tax. I am a solo musician so income varies depending on the number and type of gigs I do. I am looking to increase this by the end of the year to a comfortable $1000/week and hopefully higher.
I currently have $2000 invested in GWA which I bought on 13th April for $1.94. Right now they are $2.02 a share so I am happy that they are bucking the trend.
I am not paying rent right as I have been house sitting. This is about to end though and the thought of going back to live with the folks isn't hugely appealing so that free ride is likely to finish pretty soon.
Firstly, I will invest as much of my income as possible in the share market, and as soon as I have another $2000 saved up I will buy another lot of different shares. I came to the conclusion that anything less than $2000 meant that the $39.90 (2 x $19.95 for buy and sell) transaction fee with CommSec was too big a loss to start with.
This means I am not diversified right now, but that is just too bad. My plan is to continue buying in $2000 lots until I have at least 10 different shares in my portfolio without any of them making up an inappropriately large portion of my entire portfolio due to crazy gains. I need to clarify how many eggs I am going to allow in one basket, though I am so far from this stage that right now it isn't all that important. I know I am prone to a hard hit due to lack of diversification.
I am a big fan of the book Contrarian Investing. I do my own version of the low PE/ high yield approach. Basically I filter out smaller stocks by only investing in shares that Comsec allows 50% portfolio leverage (or higher) margin loan on. This filters my list of shares down to about 60 shares and I feel this is a reasonable protection from speculator stocks.
I then list all the shares from that list that have a PE below market or div yield higher than market.
Then I use a formula, which is pretty straight forward.
(Market PE / Share PE) = PE Rating
PE Rating is just a variable name I have given to the answer. The higher that rating the higher it is on my "to buy" list.
(Share Yield / Market Yield) = Yield Rating
Again, the higher the Yield Rating the higher the share is on my "to buy" list.
Then with these results I go like this...
(PE rating x Yield Rating) x (PE Rating + Yield Rating) = Buy Rating
The stocks with the highest buy rating are the ones that I buy. I calculate with the above formula as I think the data is more reliable if the PE and Div Yields compared to market have a low deviation from each other. By multiplying PE rating and Yield Rating together, the outcome is weighted to shares that have PE and Yield Ratings close together. However I did not want this to dominate my formula so I added the right hand side of the formula to smooth things out.
I follow this formula blindly unless a Buy Rating comes out at over 10 (which usually means a crazy low PE ratio), then I have a basic look at fundamentals to see if there is anything suspect.
Selling the shares
This is the part I need to neaten up. Some things I am considering.
- Minimising Tax - try not to sell shares within one year so as to halve capital gains tax.
- Stop Loss - I don't think I will use one. My reasoning is that if my formula says I should buy it now, then I should keep it now.
- Bailing out - if ComSec stops allowing margin loans on the shares then I will bail out.
- Locking in profits - I need to set a point at which I will sell shares to lock in profits. I am thinking this can be based on some hard figure in my formula. However I need to take in to account the tax benefits of holding for 1 full year.
- Updating the portfolio - Once I have held a stock for 1 year I will sell it and buy a top rated stock according to my formula. However, with transaction fees and tax I am better off holding the stock provided these costs are less than the opportunity cost of being in a share that is top rated according to my formula. I haven't made a rule for this yet.
So that is the plan so far. The philosophy is that I want to limit my emotional involvement in the buying and selling process by having hard and fast rules. When the computer says buy, I buy. When the computer says sell, I sell.
I'm open to feedback