Having a Dad as a stockbroker and a Mum as a self-employed legal consultant, I was exposed to shares, investing, and the importance of being independent from a young age.
I remember when I was 10; my godmother gave me a cheque for my birthday to buy a My Little Pony, which, at the time, was really cool and exactly what I wanted. Dad, seeing the cheque, offered to match the amount and invest the total in shares on my behalf. He explained that I could earn an income (dividends) and increase the amount of my cheque if I invested the money in shares. He also explained that it would allow me to buy more than one My Little Pony, in the future, if that was what I wanted. Being 10 years old and besotted by my father, I gave him my cheque, forgot about the ponies momentarily and went for the shares.
From then on, shares and business fascinated me; I just loved the idea of watching something grow and sharing it with Dad. I was also naturally competitive, which meant that watching markets rise and fall, and seizing opportunities, was something that came naturally to me.
Ever since, I have been a self-confessed investment geek, forever working out ways to better manage my money so that I can ultimately increase the returns from my assets.
In my adult life, my investment scope has expanded to property, managed funds, cash and options. Currently, I am busy investing all my money and resources into two of my own business ventures, The Investment Stylist and LemSec.
In recent years, my investment style with shares has taken a bit of philosophical tone. I like the idea of investing in companies that provide jobs, develop new ways of doing things, expand our community and add to our economy. Naturally, I also enjoy the benefits that come with having more of my own money, not only for the obvious benefits of being independent but for increased security and choice. Very importantly, I like the time and resources I can offer to the community, thanks to my investments.
As ‘do-good-doer-ish’ as that all sounds, I also like the comfort of knowing that I am steadily increasing my wealth so that one day I can buy the house of my dreams, take a year off work to travel around Australia, afford the best schooling for my kids if I am lucky enough to have them and eventually retire comfortably. Shares, along with other investment assets, can provide me with the opportunity to achieve all this.
Like anything in life, investing and better money management takes practice, many adjustments along the way, a bit of discipline, and a strong understanding of the basics.
In order to share my knowledge with you, I thought a good place to start would be to define five steps that I follow when I am looking for a new investment opportunity.
Style your Investment in Five Steps
1. Understand Me – Just as I would when thinking about the right outfit for a party (consider what look I’m going for, how I want people to see me, how comfortable I need to be), when looking for an investment I consider what my husband and I want to achieve. I remind myself of the goals we have set and what our risk level is, and I never lose sight of what stage we are at in life.
I then spend time assessing a number of things including: our current lifestyle, what income we have, where our assets lie, and what we need to do make sure we have a strong foundation. I plan to go in to more detail at a later date but in the meantime you can refer to one of my earlier articles that touched on this: http://www.investmentstylist.com.au/managing-your-finances/start-year-financial-detox
Ensuring you have a strong foundation is the first step to sound money management and investing.
2. The Current Environment – I then look at the economy (this is called a top down approach). I read the papers and make assessments on what is happening in the current economic climate. I consider questions like, Is there growth overseas? Is our economy growing? Where are jobs being offered? What new legislation is in place? The investment choices I make in a slowing economy are quite different to those I would make in boom times. By understanding where the economy is setting I can assess what areas or sectors on the market are worth focusing on.
Over the past three years we have seen a slow down in the world economy and even near country collapses in Europe. We have seen strength in China and other developing countries and a very slow recovery in America. In Australia, we have gone into further sovereign debt, seen the legislation of new taxes and witnessed a shift in the economic focus of our country into mining and new technologies.
I use this information to give me an indication of where investment opportunities may lie.
3. The Markets/Sectors – I then assess the markets. I invest usually for the medium to long term, which is around 3-5 years, so I look for overall market trends over that time. I look for the overall market performance (all ordinaries and ASX top 200), volume on the market (how much money is being traded on the market), market volatility or consistency, and what the investor sentiment is (VIX index). This gives me an indication of whether the market is bullish (raising) or bearish (falling). I then look at what sectors of the market have been performing and whether they match those areas of the economy that are more optimistic.
After reviewing the current economic climate and market conditions and identifying what sectors I should be focusing on, I analyse individual companies and what entry price I would like to buy for and exit price I would like to sell for. As I am continuously looking for new investment opportunities, I don’t review the economy or market every time I’m making an investment; I usually re-assess every quarter.
Now for step 4 and 5, which cover company and technical analysis. A summary at this stage but a topic I will cover in more detail at a later date.
4. Know the Company – When looking at a company, it’s helpful to review its fundamentals and ratios. Fundamental analysis is used by some of the world’s most famous investors including Warren Buffet. It uses real data to evaluate a company’s value, it attempts to review the macro economic and market environment (steps 1 and 2 above), and looks at the company’s financial, qualitative and quantitative factors. It studies everything that can affect the security’s value.
Fundamental analysis assists by eliminating the duds, which prevents you from researching 2000 companies, instead leaving you with 10 companies to look at in-depth, which spark your interest and appear to be good business opportunities.
When assessing a company’s financials I review basic ratios, which include:
- Price to earnings ratio to assess value
- Return on equity ratio to assess performance
- Debt to equity ratio to look at whether it’s good or bad for that company
- Dividends – does it pay dividends and if so for how long has it been paying dividends.
The fundamental analysis assists in identifying the basket of companies I wish to focus on, and the ratio and financial analysis assists in setting a value that I’m happy to buy the sector at. There are so many tools to assist in getting to know a company, which again I will cover at a later date.
5. Entry Point – Getting to know a company gives me an indication of whether I think it will grow or shrink, it also helps me establish a value for the company. My valuation and the price on the stock market are two different things. So I then turn to technical analysis to decide an entry point.
On markets there is a daily struggle between buyers and sellers, technical analysis tools such as Candlesticks assist with identifying who is winning. If buyers are in control then prices go up, if sellers are in control then prices go down. Markets can trend up, down and sideways and the first step to knowing when to buy a stock is to determine what way the market is going to go (step 2). This is where technical analysis really comes into play.
Now that I have laid the foundations, I hope I have captured your interest and given you an insight into how an investor can look at the market, in order to make smart investment decisions.
I would love to hear about your investment strategy.