Strategy question: Undervalued Blue Chips as portfolio basis?

Hi all!

Brand spanking new to this site, and I have to say I think I'm going to enjoy being here. It's wonderful to read all the many and varied different takes, systems and so on. And it's wonderful also to see that this is generally quite a nice community. Thanks to you who are more experienced and take time to participate in this newbies forum.

Anyway, I thought I'd briefly outline what my proposed strategy for my first portfolio is and see if anyone wants to comment.

At the moment I have a small seed investment of about $25k that I'm wanting to put into shares. I've been playing away on the market in small dribs and drabs just to have a bit of fun while I've been trying to educate myself. I'm a hopeful investor in my 30s who has no dependants, and decent equity in my house. I'm basically wanting to be a bit smarter, stop letting property do my saving for me, and start putting active regular investment into shares (and it looks like a fun hobby!).

I've been reading a lot about different trading stategies, and what I think would work best for me is to put about $15k of my money into a value investment / fundamentals style approach, basically buy and hold (within reason) over a 5-10 year term. The other $10k I want to be a bit more speculative with. I can afford to lose all this seed money if I make horrid mistakes, but it would hurt and probably put me off the market for good then, writing it off as too hard.

A year or three down the track when I feel like I know what I'm doing, I might look at margin loans and savings gearing, but for now I'm into a gentle intro.

It seems to me that now might be a good time to take the $25k out of cash and put it in the market. If things keep going south for a while - no biggie, really, as I'll try to keep in mind a 5-10 year horizon. I won't talk about opportunity costs, even though cash is doing well at the moment. I'm comfortable putting that money into something that might go backward for a while.

If it does sound feasible - any tips (and I know this is subjective, and I know it's my call in the end, and I know I'm asking a lot etc etc) on some good blue chips that at the moment seem undervalued on fundamentals? Ideally, I'd like stuff that's a good balance between franked dividends and growth. Westpac and Metway seem to me to be good banking stocks to get into at the moment - again with a 5 to 10 year horizon. Any good resources / retail / other sector stocks that I should add to my "to research" list? I want to stay away from aviation and media stocks (the former due to oil, the latter because I think 'new media' is going to hit traditional broadcast/print franchises hard, like it is currently doing to the music industry, but I don't think 'new media' itself is worth buying into until more stable paradigms emerge). The spec stuff I'll punt with on my own later - but for now, here's my $64k question:

What stocks would you advise your kids / friends / whatever to start a $15k value investment / fundamentals portfolio with?

Thanks heaps for helping with this first, unsteady step. Really looking forward to any input.

Hi Paladin. I like the thought you've put into this strategy and I think it could pay off for you over the longterm.

The interesting thing about your strategy is...you may have left things a little too late or you might actually be early.

While plenty of money has been made over the last few years, blue chips are really feeling the pump right now - and confidence in markets is at a precarious level.

The all ords is hovering around 5000 and a breakdown while unfair is possible with the incredible damage to financials that is happening over in the US.

Perhaps, you should keep this money earning interest for a month or two while we are still feeling for the market bottom?

Take care -- its a jungle out there!
-Cali

Although a relative newbee myself (2 years is a blink in share market terms) I am very confident in passing out this piece of advice.

You are now looking at the start of a very serious bear share market. For the inexperienced... Nothing is cheap at the moment...nothing.

In the next couple of years this market will have more ups and downs than a bungee jump as it heads down to a point unknown.

Blue chips will be smashed the most as people flee.

Set up an account and built up a decent cash stake and while you are doing that watch and learn with a portfolio watchlist.
Thats my

Thanks guys. I really appreciate both your replies.

So, to summarise: blue chips are a no-no, given a potential looming crisis. Keep it in cash, eh?

If anyone else agrees with this consensus or has other differing opinions, I'd love to hear them. If staying the heck outta the market is the go at the moment, maybe I should look at another strategy - say, start trading small (just for the heck of it and to learn what kind of strategy suits me best: cost of an education, say)? Start seriously looking at the kind of trend buying that tech/a and others here advocate, but in amounts I'm not scared to see burn and with conservative stop loss strategies in place? Of course, brokerage will burn me if I'm buying in small dribs and drabs, but again, this is something I'd be prepared to burn at least a couple of grand learning to do.

My hesitancy is simply in my own ability (and anyone else's really) to pick the bottom, and the contrarian in me is always an issue

Thanks heaps!

This mite be a good place for u to start.

http://www.asx.com.au/resources/education/games/index.htm

ASX Public Sharemarket Game

• The Game challenge is to increase the value of your share portfolio in a set time frame.
• Simulates real sharemarket conditions as you buy and sell shares online using "real time" share prices.
• $5,000 Westpac Broking account to be won.
• Registrations for Game 2 open July 8 and close August 5.
• Trading commences on August 7, 2008.
• $50.000 dollar account to play with.

hmmm and whats peoples feelings on when we will hit bottom...end of the year? longer? do we need the financial sector to hit bottom first for the rally to start?

Paladin said:

Thanks guys. I really appreciate both your replies.

So, to summarise: blue chips are a no-no, given a potential looming crisis. Keep it in cash, eh?

If anyone else agrees with this consensus or has other differing opinions, I'd love to hear them. If staying the heck outta the market is the go at the moment, maybe I should look at another strategy - say, start trading small (just for the heck of it and to learn what kind of strategy suits me best: cost of an education, say)? Start seriously looking at the kind of trend buying that tech/a and others here advocate, but in amounts I'm not scared to see burn and with conservative stop loss strategies in place? Of course, brokerage will burn me if I'm buying in small dribs and drabs, but again, this is something I'd be prepared to burn at least a couple of grand learning to do.

My hesitancy is simply in my own ability (and anyone else's really) to pick the bottom, and the contrarian in me is always an issue

Thanks heaps!

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You should be investing in equities! whoever says cash is king is right as far as safety.. but high risk high reward,

buy when people are panic selling! thats how warren buffett made his millions in the 87 crash..

the market will return to all time highs even if it takes years

hi agro - I totally agree that you should be investing in equities. Only problem is that this gentleman is a new kid on the block if you will. Right now the waters are dangerous...but yes there is money to be made for sure.

Thanks, So_Cynical.

I'll do that. I'll also perhaps have a play with small amounts in the real world.

I've very much enjoyed your input in a number of other threads here, by the way.

The strategy I was referring to by tech/a is (and I should have cut and pasted the URL as well as my notes - will do so in future):

"This is my entry in its entirety;

CLOSE>Mov(CLOSE,175,EXPONENTIAL) AND H>Ref(HHV(H,2),-1) AND CLOSE>OPEN

Translated into plain English it has 3 components;
1. Stock is trading above a long term moving average (= long term uptrend)
2. Today's high is the highest in 3 days (= short term uptrend)
3. Today is an up day.

That's all.

I trade the ASX300 on EOD data and use a 6.5 ATR stop.


No rocket science there, and yet the system always ends up with the strongest stocks in the strongest sectors."

Which seems to resonate with a stop loss strategy I read about elsewhere, to whit:

"I've had recently. I'm a member of an investment club, which has been fascinating to be in. One of the things we do apart from really buying shares, is each person is to have a fictional portfolio of $50000 and to keep track of it over a year.
I really stress the importance of having a strategy (most of the group use very random methods of buying shares) and have selected a random group of shares, but with the proviso that if they lose 10% they are "sold" from the fictional portfolio and if they go up 25%, they are added to. Once added to, that new purchase price is where a new 10% loss price is calculated from.
This random entry method but with a strict exit strategy is in front, by about 8% in a few months.Only one other of the 18 portfolios is in front.
I guess what I'm trying to say is that a tight exit strategy and stop loss is VITAL to success, even with random entries."

What do you guys think about that sort of thing in the current market?

Caliente said:

hi agro - I totally agree that you should be investing in equities. Only problem is that this gentleman is a new kid on the block if you will. Right now the waters are dangerous...but yes there is money to be made for sure.

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yeh but it doesn't take much thought to place money in the stockmarket into a solid company like BHP or FMG

i bet my bottom dollar you are likly to get a higher return than leaving it in the bank.. but then again, i spose you need to be involved and watch the price just in case something were to happen to the company you placed your money into (e.g. babcock or allco scenario)

Of course not, but don't you think there is still significant downside risk built into a big cap like FMG?

I can see it dropping to the 8's/7's in this wild market.

Likewise, BHP could fall to mid to low 30's. While less likely than the call on FMG, BHP might touch $35 over the coming weeks.

What I'm suggesting is that right now is still uncertain waters for the first-time investor.

agro said:

You should be investing in equities! whoever says cash is king is right as far as safety.. but high risk high reward,

buy when people are panic selling! thats how warren buffett made his millions in the 87 crash..

the market will return to all time highs even if it takes years

Click to expand...

Hey Agro, all. Yep - that's basically where I'm coming from, in that I'm happy to take a short term bath in the confidence that things will go north eventually. I have enough assets that $25k is a relatively small bump, albeit one I'd hurt from *if* I wiped myself out and it didn't look like long term I'd recoup my investment. Realistically, what are the chances of a total meltdown (I ask that in all honesty - I can't find anyone who really seems to be able to call it). The problem is, of course, the opportunity cost of going backwards while cash is so good versus the opportunity cost of staying in cash while missing out on the possibilities on offer and the triksy nature of picking the lows. I dunno. Cali has me picked right as a newbie entering in weird times (and from his/her other posts, I respect hir opinion very much), so I'm really trying to inform myself as to all different opinions around and see what feels right.

That said, I *do* want to be in equities soon, all the risks considered, and understanding that the timing itself might not be. . . ahem. . . muy caliente. Given that blue chips might not be a 'safe' basis at the moment, I'm interested in hearing how other people would gently enter the market at the moment with the sort of amounts I'm talking. I get it that now isn't the time to think 'gentle' - so maybe the best way is to say I'm happy to lose some while learning, but not all. In fact, I kinda expect that to happen. I'm also happy to wait a couple of months if there is a chance of things going really south. I'd like to be in a good position skills wise (if not portfolio wise) when things curve out (and I'm talking about the market here like it's some kind of homogenous lump, which it clearly isn't - surely there are *some* ways an idiot like me can dip a toe in at the moment?) - so any advice, again, on what you'd advise a mate to do would be appreciated. I'll make my own decision at the end of the day, of course, but the hive mind here seems a good 'un so I'd be silly not to pick it, eh?

Caliente said:

Of course not, but don't you think there is still significant downside risk built into a big cap like FMG?

I can see it dropping to the 8's/7's in this wild market.

Likewise, BHP could fall to mid to low 30's. While less likely than the call on FMG, BHP might touch $35 over the coming weeks.

What I'm suggesting is that right now is still uncertain waters for the first-time investor.

Click to expand...

See - thanks. That's great to overhear. So would BHP be good to chuck on a watch list at the moment, with a buy at $38 and a stop loss at $34? As an example. I notice that consensus broker estimates seem to have it as a buy at the moment. That would beautifully fit my criteria of a presently undervalued 'blue chip' that might suit in a 5 year window, short term volatility notwithstanding.

Sorry if I'm being at all pushy. Really trying to learn. Feel free to tell me to rack off if it needs to be said. This is as fun as sitting with the smart kids after class, though

Paladin said:

I'm happy to take a short term bath in the confidence that things will go north eventually.

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Just hard to know why you'd want to do this? Why not sit safely on the sidelines, accept that you might miss out on a small amount of profit when a reversal eventually occurs, and await a return of an uptrend before buying anything?

If you can't resist the urge to jump in now, then I'd suggest you pick a sector which is doing OK, rather than buy the traditional blue chips like the big banks.

Julia said:

Just hard to know why you'd want to do this? Why not sit safely on the sidelines, accept that you might miss out on a small amount of profit when a reversal eventually occurs, and await a return of an uptrend before buying anything?

If you can't resist the urge to jump in now, then I'd suggest you pick a sector which is doing OK, rather than buy the traditional blue chips like the big banks.

Click to expand...

Thanks Julia. I guess my answer is twofold:

(1) One of my priorities is learning. If I get in during a muddy market, then I may lose some, but I imagine I'll not only be recouping (if stocks are chosen well) that when the market turns, but also be learning a lot more than getting in when everything is a surefire winner. And, if I want to do this long-term, then that will stand me in good stead when the cycle comes around again when (presumably) I'd have more exposure.

(2) I'm not confident in my ability, or in many other people's, to predict when a reversal has happened. I imagine that by the time it's fully in swing and is being talked about all over the place that a lot of potential gains have been missed. Missing a small amount of profit would still rely on being able to accurately predict the bottom, no?

And to make this useful - what sectors do you personally like at the moment? Food? Energy? I'd really appreciate your input.

Sorry Julia - just re-read my last post. I didn't mean "and to make this useful" as being a dig. What I'm getting at is that I'd value your take on what sectors you feel are presently the best bets.

Also, of course, the reality is that I can put half in now, and half in when the market looks better. Small amounts only, but it gets me learning.

Paladin said:

What I'm getting at is that I'd value your take on what sectors you feel are presently the best bets.

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I personally wouldn't be buying anything at the moment. There may be a bit of a rally soon, but I think the market has further to fall yet. I'd be looking at short-selling, not buying.

I think we are pretty much hitting the bottom now,..

I think he understands that the longterm growth is more important than short term ups and downs, So even if he bought in today and the market did drop a bit further it wouldn't really matter,

However if he waits to long into the up swing he is going to miss some good opportunities,

My suggestion- Spread your money accross 10 companies that are under valued and sit back everytime you have saved another $2000.00 add to your investments,

keep away from the speculation rubbish for now,... continue to build your foundation on solid assets.

Gee whiz, Tyson. That's a brave call. I'm more with Alter Ego at this stage.

Paladin, re sectors have a look at the charts for the XEJ (Energy Index)
and XXJ (Financials). That will give you an idea of what I mean.

Tip: don't try to pick bottoms.. you'll get smelly fingers

Very few traders will enter the market at the very lowest possible entry... if you do, i'll say you just got lucky!

Maybe rather than go all in with your 25K now.. why not dribble it in slowly?

I've heard rumours that fund managers have plenty of cash sitting on the sidelines waiting to buy up blue chip financial stocks, but are just waiting around a little bit more... perhaps after the reporting season finishes?