Investing ONLY in stocks

[RandomInvestor]

Hey guys so lately I have decided to only go for stocks but some books I read said that "you're crazy if you put 100% of your capital into stocks" But Warren Buffett said "Diversification is protection against the ignorance". When he says "Diversification" does He mean investing in companies in different industries, or investing in a wide range of securities such as bonds, etfs?

Now what's my reason for doing this? I want to learn how to do it, pick companies successfully so I can generate more than just a mediocre return. Thanks.

 

[galumay]

Personally I tend to agree with Buffett - diversification is often 'worsification'. But you have to be a good investor to be able to operate with little diversification. You need the right psychology to bear significant drawdowns and you need to have extreme patience and the ability to withstand long periods of boredom and inactivity!

What Buffett talks about is that if you do a really good job with your research and analysis, then you should be buying the few companies at any given time that offer the most potential for above average returns over long periods of time - so why would you want to diversify into businesses with lesser prospects.

Somewhere he talks about treating investing as if you only have 20 'cards', 20 times you can invest in a business in your life, he suggests this will focus you into only becoming a part owner of the very best businesses you can find.

The first investment you should make is in your education, read everything you can about investing, try to work out what type of investing will suit your personality. As an example due to my studies in Mathematics I simply cannot invest or trade using technical analysis - because I believe its counter to the science of maths. Even if I tried to, I wouldn't make any money because I dont believe in it! There are others though who would have the opposite view and would be unable to use fundamental analysis because they dont believe that understanding the financials of a business has much to do with price action!

There are many approaches to investing and to trading or speculating, you can buy and hold, you can be a contrarian investor, you can hunt for "turn around stories", you can play arbitrage opportunities, chase takeovers, chase yield, chase growth, plot charts, make spreadsheets, get tips on HC or from the taxi driver, etc etc. As I said though, you need to spend time teaching yourself about the different methods and trying to understand the personality traits that favour one over another and be honest about your own personality and psychology before trying to match it to a strategy.

One thing most successful investors will tell you is its not easy, you have to put many hours of work in and you need to have a clear strategy and plan and stick to it. Its not simply a matter of buying some shares and getting rich!

 

[RandomInvestor]

Oh yeah I agree 100% about the education part. I would never do something unless I thoroughly understand it same with investments. I have been reading quite a bit for this past year, having some problems remembering information but I think I just need to practice researching companies. It's harder than I thought lol. I knew it would be but wish I had a step by step guide to analyze a company.

I start off by first understanding what the company does then dive into the annual reports then financial statements. What is your take on this strategy?

 

[mcgrath111]

Hey mate,
I agree with what has been said above, and also agree with putting 100% of your capital in stocks is pretty risky.
I get that buffet believes over diversification can have its constraints; yet there needs to be some degree of diversification, particularly if equities take a major dive, would you be able to withstand your capital essentially halving in value?
Also, by 100% of capital, great opportunities could pass, due to lack of cash.

Remember another quote by Buffet is ''Cash is a call option with no expiration date''.

Having not read much of buffet but a bit of Graham & Dodd, Buffets go to guys so to speak; I would guesstimate diversification to buffet would be:
Equities (Local & Foreign)
Bonds & TD's
Cash
Currency exposure


I would be interested to get your idea of a 'mediocre' return & whether you've considered an index - who will take alot of the head aches of investing for you/ for a price of course.

Apologies for my rambled thoughts.

 

[RandomInvestor]

Nah your thoughts fine mate. When I say mediocre returns I am talking about a hold yielding a 5% coupon. I was before going to go for REIT etf's for extra income and that. But does warren buffet only invest in businesses and stocks or does he do bonds to?

 

[RandomInvestor]

Also when you say its risky what part is risky? Do you mean if the market tanks and your stocks have dropped in value by 80%? If it does in a couple years it will most likely return to its original price, and its a perfect opportunity to buy more shares.

 

[mcgrath111]

I couldn't say honestly what he personally does, although Berkshire need to report to the SEC so I would guess you can see some of the portfolio...I would also guess it's majority equities & cash.

Exactly, however if you put in 100k and by the end of the year your portfolio was worth 20k assuming you didn't sell out of any positions; on paper you're worth $20k. You would have some serious balls and conviction to keep buying more shares. Given if they are trading under FV / Book value you could likely justify and it's likely the right decision if they are indeed good companies; however if you bought 100k of ABC learning back in the day and decided not to diversify, you're never seeing your money again.

Diversification also changes depending on the size of your capital base etc.

EDIT: Snipit of Berkshire portfolio http://www.cnbc.com/berkshire-hathaway-portfolio/

 

[Bill M]

Do you mean if the market tanks and your stocks have dropped in value by 80%? If it does in a couple years it will most likely return to its original price,

The All Ordinaries as a market measure hasn't moved in nearly 10 years. Check this thread out.
https://www.aussiestockforums.com/t...nowhere-for-7-years.24058/page-12#post-932342

 

[luutzu]

Oh yeah I agree 100% about the education part. I would never do something unless I thoroughly understand it same with investments. I have been reading quite a bit for this past year, having some problems remembering information but I think I just need to practice researching companies. It's harder than I thought lol. I knew it would be but wish I had a step by step guide to analyze a company.

I start off by first understanding what the company does then dive into the annual reports then financial statements. What is your take on this strategy?

Not one to blow my own horn and bang my own drums, but ...maybe give my awesome web-based value investing software a go. It's free too. www.danginvestor.com

It provides a step-by-step guide to structure your study and charts the financials to help you analyze any company - both private firms as well as any publicly listed ones on any market. Then provide a couple of valuation models based on Graham's books to help with valuing the company.

Pretty much a complete package for business analysis and valuation: quick financial analysis; detailed financial statements/cash flow analysis; management analysis; valuation.

It flows in stages so you wouldn't need to go all the way to valuation or even detailed financial analysis if the quick (1 hour) analysis show it's no good. With experience, you'll be able to tell whether a business is worth looking into from the basic Commsec and Yahoo finance... but this is where you start when you first start; and it'll where you go when you want to further drill into opportunities that look very interesting.

But like all good software, the user have got to apply themselves. i.e. enter your own financial data - it might sounds hard and redundant, but no. Trust me, I've thought long and hard about it. Then you'd have to spend time reading the charts it builts and interpret the notes to guide your interpretation.

Example:

Valuation of MMA Offshore (MRM):




MRM is currently priced by the market at $0.27 per share, or about $100M.

Is this market price justified?

Once you familiarise yourself with MRM operations; read its latest announcements and updates... use the various pricing models DangInvestor automatically charted above to put make sense of history and current market sentiment.

See the share price datasets (in black)? That represents historical market prices.

The blue, red, green and organ range bar charts the reported financials/earnings for various pricing/valuation models.

Compare the market's price to the valuation models and it's obvious that the market priced MRM at about 10 to 12 times its reported earnings. i.e. assume its growth at 3 to 4%p.a. This and the price was always above the Book Value (NTA).. .that is until the oil crash in late 2014.

Then its share price goes to heck... why? Previous sections would have indicate that the financials aren't that bad... maybe it could be the valuation models used by the market - mainly earnings based modelling... so when reported earnings become negative, it's abandon ship we all go.

So the app doesn't take away your own thinking - merely provide a tool to help structure and automate the manual stuff.

-----------

EXAMPLE 2: SIRTEX MEDICAL LIMITED

Note and various tabs at bottom providing structure to analysis.

 

[galumay]

The All Ordinaries as a market measure hasn't moved in nearly 10 years. Check this thread out.
https://www.aussiestockforums.com/t...nowhere-for-7-years.24058/page-12#post-932342

Its a pretty compelling picture actually, had you enterered the market on the specific day that it was at its highest level in 10 years, just prior to a significant market crash, and assuming you could only manage the same return as that benchmark, you would still have your capital unadjusted for inflation - so same as being in cash for the period.

I doubt anyone put all their wealth into the market on that particular day anyway, and its a poor benchmark because it doesnt include dividends including franking, being reinvested.

however if you bought 100k of ABC learning back in the day and decided not to diversify, you're never seeing your money again.

Which is I suspect why Mr Buffett was trying to tell us, its much better to pick the good businesses rather than it is to "worsify"!

 

[mcgrath111]

Which is I suspect why Mr Buffett was trying to tell us, its much better to pick the good businesses rather than it is to "worsify"!

I was going to mention VET which some forum goers believed was a good business, but thought it still might be too soon

 

[RandomInvestor]

Not one to blow my own horn and bang my own drums, but ...maybe give my awesome web-based value investing software a go. It's free too. www.danginvestor.com

It provides a step-by-step guide to structure your study and charts the financials to help you analyze any company - both private firms as well as any publicly listed ones on any market. Then provide a couple of valuation models based on Graham's books to help with valuing the company.

Pretty much a complete package for business analysis and valuation: quick financial analysis; detailed financial statements/cash flow analysis; management analysis; valuation.

It flows in stages so you wouldn't need to go all the way to valuation or even detailed financial analysis if the quick (1 hour) analysis show it's no good. With experience, you'll be able to tell whether a business is worth looking into from the basic Commsec and Yahoo finance... but this is where you start when you first start; and it'll where you go when you want to further drill into opportunities that look very interesting.

But like all good software, the user have got to apply themselves. i.e. enter your own financial data - it might sounds hard and redundant, but no. Trust me, I've thought long and hard about it. Then you'd have to spend time reading the charts it builts and interpret the notes to guide your interpretation.

Example:

Valuation of MMA Offshore (MRM):

View attachment 69396


MRM is currently priced by the market at $0.27 per share, or about $100M.

Is this market price justified?

Once you familiarise yourself with MRM operations; read its latest announcements and updates... use the various pricing models DangInvestor automatically charted above to put make sense of history and current market sentiment.

See the share price datasets (in black)? That represents historical market prices.

The blue, red, green and organ range bar charts the reported financials/earnings for various pricing/valuation models.

Compare the market's price to the valuation models and it's obvious that the market priced MRM at about 10 to 12 times its reported earnings. i.e. assume its growth at 3 to 4%p.a. This and the price was always above the Book Value (NTA).. .that is until the oil crash in late 2014.

Then its share price goes to heck... why? Previous sections would have indicate that the financials aren't that bad... maybe it could be the valuation models used by the market - mainly earnings based modelling... so when reported earnings become negative, it's abandon ship we all go.

So the app doesn't take away your own thinking - merely provide a tool to help structure and automate the manual stuff.

-----------

EXAMPLE 2: SIRTEX MEDICAL LIMITED

Note and various tabs at bottom providing structure to analysis.

View attachment 69397


View attachment 69398

View attachment 69399

View attachment 69400

Nice luutuzu I was always looking at investing in Sirtex its on my study companies list. Where did you get those graphs? They look cool as motivating to, would make my own for each company I invest in.

 

[galumay]

I was going to mention VET which some forum goers believed was a good business, but thought it still might be too soon

Not sure anyone believed it was a good business!? I took a binary bet on its survival, understanding the catostrophic risk and sizing my position appropriatley. It definitely wasnt part of my investment strategy!

I guess its an example of what I was waffling on about earlier, about the need for clear strategies, a definite plan, an understanding of businesses and understanding your personal psychology.

I knew what I was doing (gambling), i put a very small amount of money at risk based on the clear and obvious catostrophic risk, and I lost - but it didnt 'hurt' much because I had understood from the start the nature of the bet.

 

[luutzu]

Nice luutuzu I was always looking at investing in Sirtex its on my study companies list. Where did you get those graphs? They look cool as motivating to, would make my own for each company I invest in.

The charts are automatically built from my web-based software: www.danginvestor.com

I've just added Sirtex to the Exchange list so you can download your own copy to start analysing.

That copy only contain the basic, top-line financial statement data for past 5 years. You can then go on to do the detailed financials or management if you'd like. But to me, the basics are for Sirtex are enough to know its value. Then combine these historicals with the current development and it's quite an eye-opener.

Once you're familiar with how the software works, it'd only take 1 hour or less to enter all 5 years worth of financials. Sounds like wasted time but it's a whole lot less time than starting your own excel or pen/paper. More accurate and structured too.

That and you get a complete record for each company you've researched and studied - comes in real handy when a good company that was too highly valued become a possible bargain.

But yea, feel free to try and ask me any questions about the app or the company you're looking into.

 

[RandomInvestor]

Nice man! I am actually building a database software to store data of my shares. There is a website that already has all this information called Skaffold.com, though it's a paid service and not sure how accurate the data it, it's quite different to the yahoo finance data though.

 

[luutzu]

Nice man! I am actually building a database software to store data of my shares. There is a website that already has all this information called Skaffold.com, though it's a paid service and not sure how accurate the data it, it's quite different to the yahoo finance data though.

Roger Montgomery had Skaffold built.

I haven't looked at it lately but from a couple of years ago it seem to be your typical financial "app" where they simply buy datafeed from one of the major data providers and have some IT company build some nice charts to present in a certain way that they can then claim it's their own unique insight.

Problems with these kind of stuff is data accuracy, timeliness and ownership. And that's just the beginning.

Take ROE for example. There's a few different ways to get that ROE. And ROE as a ratio alone is not that useful in understanding the business. You have got to know how it came about. And you can't know that when data provider only give you single ROE figure. I mean it's a start, but it shouldn't end there.

So what database are you building? For your own private use or enterprise level app that only you will use (like someone I know )

 

[RandomInvestor]

Yeah he did make it. Tbh imo its a brilliant idea and the execution is great but there is always the worry of data inaccuracy. Just for my self the software is but I can add it on my website, it will just store data for you so that way you don't need to go through everything again.

 

[Aladin]

Talking about stocks, it is good to bear in mind that you could be selling your stock to a market maker who is buying the stock because he has a better handle on demand than you do. This means that he knows the stock price will be going up. By being patient, you could catch the upside momentum and sell at a higher price. Of course, you will have to be very careful about trading with the trend because you do not want to be a buyer when you should be a seller.

 

[galumay]

Talking about stocks,....

Not quite sure what your intent is here, this thread is discussing the pros and cons of various forms of diversification in investing. You appear to be making some point about TA trading, which is rather irrelevant to the thread!