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Australian Stock Market Investing Tips

August 7th, 2012 · Greg Atkinson · 21 Comments

I thought it might be a good time to run over my stock market & investing tips again plus allow others to share their tips as well. My list of stock market investment tips of course doesn’t cover everything & I am not suggesting it’s all anyone needs to read before they invest in shares. But I hope it’s of use to those who are looking to invest in shares or are managing their own investment portfolio.

Do not put everything you own or even most of what you own into any one investment.

This excludes the family home which technically is not an investment. You will of course kick yourself when company XYZ goes up 300% overnight and you were going to invest everything you own in that company, however this pain is far less than losing everything because you put all your eggs into one basket and that basket falls off a rather high cliff. I know this sounds like a pretty basic rule, but it is amazing how many people end up putting most of their savings into a single investment scheme that ends up falling apart.

Write down all the bad things about any investment before you invest.

If you cannot think of any bad aspects about an investment you are contemplating of investing in then get some advice, because all investments have risks and potential problems. After you complete the list ask yourself if the expected return you may get is worth the risk, or do you feel more comfortable with having you money in the bank until something else comes along?

Make sure you understand the Product Disclosure Statement (PDS) or documentation related to the investment.

Product Disclosure Statement’s are not the easiest documents in the world to understand. I often wonder if the people writing them are paid by the word as they seem to be able to produce dozens of pages of documentation without actually making things clear to the average investor. Take you time reading any investment related material (try and stay awake) and Google any terms you are unsure of. If you still have trouble getting a good understanding of what is in the PDS then either skip the investment or seek good professional advice.

Do you own research!

The internet is a great place to do research. In particular you can check the ASIC website and search for company information or financial scams. You can also use a site like Investopedia to read up on investment and financial terms. In addition most online brokers these days also provide varying levels of company research and analysts reports.

Also try to read widely and obtain a few different sources of information. Many investment related websites do not necessarily offer independent analysis even though they may claim they do, so look around. If a particular website or advisor is pushing an investment product or asset class strongly then ask yourself why are they doing this? Do they stand to gain from commissions? Are they selling a related product or trying to steer you into a paid newsletter subscription? Is the product or investment they are suggesting really suitable for your risk profile and investment objectives?

Have a disaster plan!

In a perfect world we would make a series of investments and then sit back and watch them grow into a lovely sum that would fund our retirement or allow us to buy that boat we always wanted. However we need to be prepared for trouble and think about what we will do if there is a stock market crash or some of our investments fail. For example ask yourself these questions:

  • At what point would I try and cash in my investments if their value began to fall?
  • At what point would I sell my stocks in a particular company during a stock market rout?
  • What sort of losses can I manage?
  • What will happen I get a margin call? Do I have cash ready for that situation?
  • Can I handle a few years of negative returns?

The key point about having a disaster plan (and you can just do it in your head) is that it makes you think of the risks involved when investing. I suggest you regularly review your disaster plan as you might find it a lot easier to do this when you have time, rather than trying to sort things out in a panic when that margin call arrives.

Look after your health.

Being healthy is far more important than trying to be the next Warren Buffett. If you find yourself unable to sleep at night because you are worried about stock prices then I would suggest you look at putting your money in the bank. Managing investments is not for everyone, and for many people it is probably better for them to seek assistance from a good financial or investment professional rather than try to do everything for themselves.

Get expert or professional advice.

Even if you are an expert investor you will at times be out of your depth and may need some advice to help you make a decision. This advice can be obtained sometimes by reading a variety of analysts reports, by contacting your broker or by speaking to your financial adviser. As a starting point have a look at the Financial Planning Association of Australia website: http://www.fpa.asn.au

Expect to have losses and bad days.

It would be just lovely if none of our stocks or investments ever declined in value. However no investment is 100% safe and as the saying goes, the higher the expected return – the higher the risk. So mentally prepare yourself for having the odd failure. If the thought of having an investment failing makes you nervous then that is probably a good thing and you will avoid putting too much money into any one investment type. It is better to miss some gain and preserve your money, than to lose everything.

Try and keep a good sense of humour.

Try and keep your sense of humour during both you moments of investment triumph and at the times when your falling asset values and stock prices are causing you grief. Remember if you have followed my tips above you should not have put all you money in any one investment, and so hopefully not all your investments will be down at the same time. As that song goes in the Life of Brian…try to “always look on the bright side of life”. If you find yourself yelling at the dog and pulling the arms off your teddy bear, then perhaps active investing is not for you.

As I said at the beginning, this list of tips doesn’t cover everything so if readers have other tips please leave a comment and let me know what they are.

This article was written by Greg Atkinson who is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


21 responses so far ↓

  • 1 BP // Aug 4, 2012 at 8:42 am

    Pure Gold:

    http://www.moneymorning.com.au/20120803/revealed-government-to-get-hands-on-more-retirement-savings.html

    “We’re from MMA and we’re here to help you…”

  • 2 Greg Atkinson // Aug 8, 2012 at 10:38 am

    Moved your comment/link here BP as this seemed a more appropriate place for it to be.

  • 3 Ben // Oct 26, 2012 at 2:28 pm

    You lost me at “..read the PDS”. This should be titled “Australian Managed Funds Tips”.

  • 4 Greg Atkinson // Oct 26, 2012 at 3:06 pm

    Some Managed Funds can be focused on stocks so I would think it would be wise for those investing in shares via such a fund to read the PDS right?

  • 5 Leigh // Oct 28, 2012 at 10:51 am

    Thanks Greg simple enough but sound advice if only we could think rationally when our socks and stocks have lost their elastic. One thing I would add is to avoid short term if you are not a genius. Was it W.Buffett who said, “if you are not prepared to hold a stock for ten years don’t even think of holding it for ten minutes?” Also I believe in balancing risk with stability, I bought into a bio tech company ten years ago that has gone nowhere but I didn’t put enough into it that I would loose my shirt if it folded. I also bought into CBA and TLS and regardless of the share price the dividends have come close to covering the investment. It is worth taking a risk like it is worth buying a lottery ticket for the dream just so long as you have enough spondoolas in the bottom drawer so if the Mango plantation in Tasmania doesn’t work out you wont have to cut back on the kids tennis coach.

  • 6 Greg Atkinson // Oct 28, 2012 at 1:53 pm

    Leigh I agree with your comments about short term investing. I also will need to update the tips to include something about having a balanced portfolio along the lines you mentioned above.

    The rule of thumb I have regarding stocks is not to have more than 5% of the portfolio value sitting in any one stock. Some say 10%, others less.

    It saddens me when I hear of retirees losing most of their savings because an investment they had failed. Personally I think there should be some checks in place to raise red flags before people can invest so heavily in any one investment, especially for those who will rely on it for their retirement.

  • 7 BP // Oct 28, 2012 at 3:20 pm

    Ah, retirement… .

    Hundreds of thousands of Baby Boomers caught out when the GFC stripped them of (up to) 55% of their share holdings and/or Super… and shares still 33% off their high. Many BBs are still working well beyond their intended retirement date(s).

    Worse to come? Interestingly, this story comes up a blank with most links, after a search in google or yahoo: ‘writing on the wall for super’

    http://www.smh.com.au/money/writing-on-the-wall-for-super-as-surplus-slips-20121027-28ccu.html

    I recall advising I’d left $1K in Super when I retired in March 2011 and paid off our property loans. It’s now worth $911, despite my insistence on and recovering of ‘management’ fees.

    Red flags? Quite a few needed, I think… . 😉

  • 8 Frank // Oct 28, 2012 at 3:46 pm

    Greg it saddens me when I hear of anyone losing money unless it is through their own poor decisions (actual gambling).

    Per another live thread here, some people take great pleasure in the misery of others, I cant understand how they funciton.

    My concern at the moment is that the managers of listed companies, super funds and managed funds are able to be rewarded with increased compensation.

    An example would be CGL (Coventry Group Limited). In 2007 the Chairman sacked the CEO and elected himself Executive Chairman. He has since sold about 60% of the groups revenue, impaired all good will, suffocated investment, shredded shareholder value, sold all assets, and paid himself an average of $900k per annum in the process.

    Stock price has fallen from $4.57 the day that he took over to as low as $0.55 and now sits $3.00

    In the real world roger would have been sacked 4 years ago for incompetance, but he remains a live suck on the funds of all shareholders

  • 9 Leigh // Oct 28, 2012 at 5:39 pm

    I also feel sorry for people who put all their eggs in a basket and balance it on a knife’s edge, but it is often because they get sold a high return story and they are naive or greedy enough to belief it. It is still a poor decision because every investment has a risk and it is incumbent on the buyer to beware.

    BP: Some shares have recovered quite well, CBA is 9% off its high,WBC down 17%, WOW down 15%, however MQG is still 70% off its heady days of close to $100. Don’t sell if you don’t have to and you haven’t lost anything, or sell and buy back at the same time to retain your numbers and right off the loss against other profits.
    I do agree with you on Superannuation primarily on the fact that you don’t get it until you don’t need it.
    Frank; I always take the time to vote at the annual share holder meetings and if the share price is down from the previous twelve months I suggest the Board take haircuts instead of bonuses. In fact last week one CEO agree to a ten per cent cut after a shareholder led protest.

  • 10 BP // Oct 28, 2012 at 7:11 pm

    Leigh, both my sons totally agree with you on shares. They’re in it for the very long haul. And, as Noel Whittaker, writing today in Perth’s Sunday Times noted (on the 25th anniversary of the 1987 collapse) had you bought then, you’d have turned $100K into close to a million by now.

    I see on the reverse side of that article, that BFI Boy links the Banksia collapse to ‘bricks & mortar’. Mind you, his closing paragraph also claims that Toyota Corollas are now 25% cheaper. In the same edition of The Sunday Times Motoring Section, West Wheels p.6, you’ll see a report that Corolla prices really _have_ fallen:

    Ascent: $19,990 (down $1000)
    Sport: $20,990 (down $1500)
    Levin SX: $23,990 (down $1100)
    Levin ZR: $28,490 (same price…)

    Thank heavens we have experts to help us choose our own path… .

  • 11 Leigh // Oct 31, 2012 at 2:40 pm

    I am trying to decide if everything is really cheap right now and we just don’t realise it, or if everything was so inflated before the GFC it is going to take ten years to get back to where we were in 2007.
    I aim at shares I think will give a five per cent return and a five per cent capital gain, however I will trade a bit of growth for a better dividend. So I projected a few major Australian stocks from highs of 2007 at 5% per annum to 2012 and came up with ANZ at $42. WBC at $41. NAB at $59.CBA at $83. TLS at $7 BHP at $64 WES at $56 and WOW at $46. I know there are a lot of variables in there but most of those companies are posting the same or better levels of profits than they did in 2007, so if 5% per year growth is not unreasonable, is it reasonable to think that things are relatively cheap right now?

  • 12 BP // Oct 31, 2012 at 4:24 pm

    Why not plot in nine percent, Leigh?

    Marcus Padley has an amusing take on this. You may have already read it in ‘The West’ a month ago:

    http://www.businessday.com.au/business/statistics-do-lie–a-glitch-with-time-doesnt-save-nine-20120921-26c92.html

  • 13 Greg Atkinson // Nov 1, 2012 at 6:27 am

    Leigh to help try and answer that question you would need to look into each stock and look at things such as the price to book ratio, return on equity, how much debt to company has and how their sales/revenues figures have been tracking amongst other things.

    Remember there were plenty of ‘cheap’ stocks around in 2007 and many of them are no longer around…i.e the company failed – so it can be a risky business looking for stocks set to rebound.

    Personally I would avoid assuming xx% growth unless perhaps I was considering something like an ETF that focused on an Index.
    (By the way have you looked at some ETF’s and LIC’s?)

    I am glad you mentioned dividends as they are often overlooked. There are quality stocks paying dividends of around 4-5% fully franked which helps pass the time as you wait for some capital gains to develop..hopefully.

  • 14 Leigh // Nov 1, 2012 at 10:50 am

    Well gee, Padley averages it at 5.75%, I feel better all ready and just to celebrate I dipped in an bought some NAB. Dividend coming up in December and so far I am holding above purchase price, just. I know it is all a gamble and I know we may have been over heated in 2007 (was it global warming?) but we have to get back to those levels some time don’t we? More confidence, less recklessness I reckon.

  • 15 Leigh // Nov 1, 2012 at 11:51 am

    Greg, Don’t ETF’s and LIC’s take things out of your hands, do the same thing you can do and charge you for the service? I like a hands on approach because I believe I can do it at least as well.

    I was just suggesting that over time, five per cent growth is not unreasonable and if so, then it is reasonable to assume that stock prices are currently on the down side even though the risk may be on the up side. It is certainly not the only figure I consider. Since 2009, I have averaged 8.5% capital growth and 6.2% return on capital so something is improving somewhere even though its from the 2009 low base.

  • 16 Greg Atkinson // Nov 1, 2012 at 12:50 pm

    Leigh it depends on the ETF..you can for example invest in one that tracks the S&P/ASX 200 Index which is not a bad idea if you don’t want to be messing around with stock picks. Warren Buffet I believe said that is what we should do if we don’t have the time/skill to dig into stocks. I hold shares in an ETF just to diversify the portfolio. The ASX website has some good information on LIC’s and ETF’s.

    As for 5% growth, I am no expert but that seems like a reasonable assumption. Anyway we all have to make assumptions of some type when we invest.

  • 17 BP // Nov 1, 2012 at 3:40 pm

    Leigh: “Well gee, Padley averages it at 5.75%, I feel better all ready…”

    Yes, I thought that might appeal to you, Leigh!~ 😀

    Our eldest, who writes optimisation software for a living (evolutionary algorithms, etc) invests in indexed share funds, but has concentrated on international markets in recent years. He claims that it’s dividends, reinvestment of all profit, and time-in-the-market that will see him secure an early retirement.

    I hope for his sake he’s right, but he has spread his investments across most asset classes, as well as Super. The latter is performing less well than anything else at present… . 😉

  • 18 Leigh // Nov 2, 2012 at 10:33 am

    BP: I need a bit of that optimisation right now, NAB has leapt from the high tower although I bought half way through the second half pike. I feel indexed share funds are a bit like backing every horse in the Cup. It is probably a sensible way to go but it just feels a bit tame to me. I like dividend reinvestment because it just happens, it is without brokerage and it compounds the asset however you often are getting the shares at their high point.
    Sounds like your son has his head firmly fixed; generally it is very difficult to convince people that wealth comes with patience.

  • 19 BP // Nov 2, 2012 at 5:57 pm

    Leigh, it’s likely he has ‘gone indexed’ because he _knows_ HFTs have the edge… a little like trying to beat the casino. Yes, it happens from time-to-time, but the odds are against you.

    I think he must use the same kind of reasoning as you offered in your 5% proposition; that over time, the market will provide a worthwhile return, say 5%… and he’s happy with that. His tendency to ‘spread the risk’ across asset classes probably provides the challenge. I was surprised when he bought gold; and surprised when he sold it.

    Although we’ve enjoyed some major wins in the sharemarket, overall we’ve just made pocket money since the late-70s… and our kids know that… so I’m a little surprised at their high level of participation. They have (at least) twice the possible time-in-the-market we’re allocated, so I guess they can afford to be patient… . 😀

  • 20 Leigh // Nov 3, 2012 at 10:07 am

    Seeing this is a stock market investment tips discussion I thought I would add something that I mentioned briefly earlier that may or may not be common knowledge. It certainly wasn’t to me until my accountant suggested it many years ago. That is the sell and buy strategy to claim losses and hold that same amount of stock. If you look like having a tax bill towards the end of the year, you can select something in your share portfolio that is worth less than you bought it for, sell it at the market price and then buy it back at the same price on the same day. The losses you have made on the sale, plus the costs from the original purchase and the sale are deductible and you still have the same amount of shares you started with. Effectively you have reduced your tax bill and maintained your portfolio.

  • 21 Greg Atkinson // Nov 4, 2012 at 6:54 pm

    Personally Leigh I am not a fan of buying/selling stocks for end of year taxation purposes but I guess it make sense for some people.

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