A Sensible Approach
to Sensible Investing?


How about a sensible approach to sensible investing?

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The Australian Share Market enjoyed a great bull run from 2003 until late 2007 when the market topped out. 
It then fell significantly resulting in a loss of funds for many people.
Unfortunately for some people this was a severe loss of funds, and in come cases it has postponed retirement.

Some people lost money on their own share investments, or managed funds. Some people lost money from their superannuation fund through no fault of their own. They were trusting their financial advisor, or their superannuation fund manager, or whomever, to look after their funds. (Perhaps it is time to redefine Contrarian Investing?)

This Global Financial Crisis (GFC, or Global Credit Crunch) might have been unforeseen for many people, but it was apparent in the sharemarket price charts - for those who know at least a little about how to read them. These people either lost very little, or actually made money during this time.

Remember that the price charts summarise the
underlying opinions and emotions of the market participants.

Every chart tells a story, and it pays to understand the stories in the price charts.

In hindsight, many people can now see that perhaps we need to change the way we look at investing.

So, how about a Sensible Approach to Sensible Investing?

And how can we describe "sensible investing"?

Consider the following:

Fact#1:

The Sharemarket can fall between 20% and 50% every few years,
and it can take 3 to 5 years or more before it recovers the lost ground.
Not convinced? See the bear markets history.


Fact#2 - A definition for the term "blue chip":

"Larger companies with a long history of profitability and stability."
(Source: www.asx.com.au, June 2011)

"Larger companies that are known for their ability to make profits
in good times or in bad, and with reduced risk of default."

(Source: www.asx.com.au, 2008 )

BUT, this does not guarantee that their share price will rise forever.
Some blue chip stocks are heavily impacted in every bear market,
especially during the recent GFC.

So you are investing,
or you want to invest,
in the sharemarket?

Here is some advice:

Take care

Are you
Share Market Ready?

True or False?

"We should leave our share investments
in the market, even in Blue Chips,
because we are in it for the very, very long term."

Don't forget that blue chip stocks can fall as much as 50% and
remain under recent highs for 3 to 5 years (and more)!


So, does it seem sensible to stay invested?

Can blue chip stocks
really fall that much?

BHP (click for a larger image).
BHP fell 55% in 26 weeks:

See more stocks in this category.

True or False?

If our investment horizon is only 3 to 5 years,
we should leave our money in the share market. 
Even though we might end up with less money than we started with.

Question: Is this sensible?

Is this sensible?

Some investors firmly believe:

"I am very clear about my investment goals.
I hold Blue Chip stocks so that I can earn an income from their dividends.
During times of financial crisis, and bear market periods, their share price might fall significantly.
But that is okay because they might eventually recover, and I earn dividend income in the meantime."

Question: Is this sensible?

How long can blue chip stocks
stay below recent highs?


Amcor
Amcor (AMC) - 16+ years

CSL
CSL - 4 years

See more stocks in this category.

Hint:
Take a look at TSR (Total Shareholder Return).
You might be surprised at how bad the situation really is.

Is this sensible?

Some investors firmly believe:

"I am invested in well-known companies.
So I can ignore all news about company performance and share price. The share price might plummet, or the company might teeter on the verge of liquidation.
There might be earth shattering events that impact the company - events such as litigation due to a failed product, or government policy changes.
But none of this matters. So I will ignore all the news."

Question: Is this sensible?

Can well-known companies really go bust?
Can I really lose all my investment?



Babcock and Brown
BNB
Babcock and Brown
Nylex Corporation
NLX
Nylex Limited
HIH
HIH

Now consider the following:

Fact#1:

As stated abaove, the sharemarket really can fall between 20% and 40% every few years,
and it can take 3 to 5 years (or more) before it recovers the lost ground.

Not convinced? See the bear markets history.


True or False?

When the market is showing signs of a fall of this magnitude, it might be wiser to move our investments away from the share market and into assets like cash or bonds. Then we can preserve our capital, take profits, and limit any losses.

Question: Now is this sensible?

(for clues about just one way to do this, see the Weinstein approach...)


Fact#2:

Blue chip companies are usually major companies that are
known for their ability to make profits in good times or in bad,
and with reduced risk of default.
Even so, some blue chip stocks were heavily impacted during the GFC (2008-2010+).


True / False?

Just because a company is a so-called blue chip does not guarantee that it's share price performance will be continually rising, nor that it is insulated from various risks such as adverse market events, government policy, climate/weather events, and so on. So, we should take an interest in the company and its performance.

Question: Now is this sensible?

So, how can we do this?
How can we invest sensibly?

Fundamental analysis

There is some merit in using Fundamental Analysis when searching for companies in which to invest. This will help us to invest only in "quality" companies that should be able to stay around for the long term, and which should be able to produce acceptable returns on an ongoing basis.

BUT! there is a limit to how much we can rely on fundamental analysis. Many people used nothing but fundamental analysis during the GFC period, and look at the results (some portfolios were severely impacted)! Some of the more successful investors use between 5% and 50%  fundamental analysis for their investing decisions.

Technical analysis (and charting)

Now before you laugh and scoff, this is really worth reading, and it actually has nothing to do with tea leaves.

Remember that the price charts summarise the
underlying opinions and emotions of the market participants.

Every chart tells a story, and it pays to understand the stories in the price charts.

Note that Technical Analysis is the study of price charts in anticipation of future price movements. It is very true that price charts reflect the mood and sentiment of the share market, and they also reflect all known news about a company (well, almost all known news).

Many technical analysts who properly analysed the market and properly followed proven strategies actually made profits during the GFC down turn when others were making losses. So, there is a great degree of merit in Technical Analysis. Some of the more successful investors use between 50% and 95%  technical analysis for their investing decisions (they use it to time their entry into a position, and their exit from the position).

Funda-Technical AnalysisFunda-Technical Analysis

It seems most sensible that a combination of Fundamental Analysis and Technical Analysis could be very beneficial - let's call it Funda-Technical Analysis. This approach utilises a clever blend of fundamental analysis to weed out poor performing and poorly managed companies, and technical analysis to time the entry and exit in order to optimise the capital returns.

Be aware of the state of the market

Robert has already written some material about the Key Lessons from the Global Financial Crisis for the future benefit of investors and traders. It also carries the title "Beware the Share Market Bears". You can see that material here. And more information about this topic and "Anti-decimation - Avoiding the next GFC" in the Slide Presentations that Robert has presented to several public groups.

More information?

See more information about some of these key topics:Brainy's Share Market Toolbox

How about something just a touch radical?

More information about the latest redefinition for
Contrarian Investing...

 

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Copyright 2009-2014, R.B.Brain - Consulting (ABN: 52 791 744 975).
Last revised: 1 October, 2014.