Is this stock overvalued?

When looking at an investment opportunity the most common question asked is “Will I be paying too much for this investment?  Is this share over valued?” There are no shortage of books or information on how to determine the answer to this question with fancy technical mathematics. However, it does pose an interest question when you think about this concept….. If a stock is over valued then technically it should never rise any further in value at least not for the next 10 years? The problem with some of these calls over time is we find that although an analyst may be saying that a share is overvalued now, it still could continue to rise. Lets look at the example of Ramsey Health Care, an Australia share in the hospital sector.  Now this company has gone from around $10.90 in 2009 to $51.96 today.  This is an increase of around 376% over this time. Or in dollar terms if we had a $10,000 investment in this company in 2009, it would be worth around $37,600 in just over 5 years time. The question which I think goes unasked with this example is “At any time was this company overvalued?”  In other words, was the company’s share price traded at a price which no longer justified the companies fundamental financials? You only have to look over this short time frame and you would have witnessed that a number of investment analysts thought at various points in time considered that this company was over valued.  However, if this was the case then why did the company share price continue to rise in value? The answer I think to some degree might have to do with the vision of an investor.  Most investment analysts are essentially trying to forecast what the future might hold and extrapolate the earnings, expenses, profit etc of the company into the future.  The reality is however, that these estimates largely are unlikely to account for variables such as profit acquisitions, introductions of new profitable product lines, or services which can often change a companies growth or earnings projection. In other words, it comes back to understanding the company’s management style and the intangible elements of this organisation. Whilst history is littered with examples of companies where people have payed way too much and received very little in the way of an investment return, next time your read in the newspaper that a company is overvalued you might think differently, You might delve further into the history of the company, review the culture of this organisation, and find to your surprise that the future may bring a higher share price? So, if you need help constructing a quality investment portfolio make sure to contact AJ Financial Planning for a free no obligation initial meeting either over the phone or at our office.  We currently have clients from around Australia and always happy to chat to see if we can help you achieve your financial goals and future retirement aspirations.

Do you have to be a “propellor head” to be a successful investor?

When it comes to investing, throughout my career I have been particularly interested in the equation of whether an

Increase in IQ  = An increase in wealth?

When I have spoken to people within the industry about it, I have found that most of them may initially state a resounding “YES”.   When I think about this equation however, I normally place one exclusion on the data set whereby if the wealth was created primarily from entrepreneurial activities, such as your own business, then this person or data would be excluded.   An example of this would be Elon Musk the founder of Tesla.  He is clearly a genius from an IQ perspective and what I would classify as a “propeller head”.  However in terms of the above equation, I would probably not include him in the assessment, as most of the wealth was generated from from his business activities as opposed to his genius investing activities.   As a side note, you may already be aware of research which confirms that as you increase your education levels there is generally an increase in income.  These are broad assessments and broad statements, because we all know the world is full of high school drop-outs who have created multi-million and billion dollar businesses.  However, if you are wanting to play the the safe option with the odds stacked in your favour, then increasing your education is something to keep in mind.   This data set however does cap out, and the basic level of education that we receive in Australia is often taken for granted from a global scale.   Getting back to the above equation however, I was particularly interested to see if when it comes to investing if you have a higher IQ does this result in better investment decisions?   The data set I believe is inconclusive and the we can only look at incidental examples such as the ones below:   Warren Buffett, a famous investor, was once quoted stating “that if an investor had an IQ of 150 points they they should sell 30 points to someone else, as anything above 120 is unnecessary.”  Interestingly Warren scored only C for English and Maths in his high school report card.   The founders of Long Term Capital Management, were hedge fund managers and winners of the Noble Peace Prize in Economic Science for their company to only later fail in 1997 and require financial intervention of the US Federal Reserve whereby the company then went into liquidation.   Today this question still goes unanswered in my mind, but I think the short coming in the equation is that it misses one key element of common sense – something that should be applied to every decision making process.   The realities are, when it comes to investing, regardless to whether or not you are a propellor head, you can leverage from the expertise of experienced professionals.   Here at AJ Financial Planning, we have over a decade of experience in Financial Planning and believe we balance our IQ with a common sense approach to investing. So why not chat to us about your ideas and dreams, and together we can work to achieve them?  

Go…. no stop… no go, no I mean let me get out!

There has been a saying when it comes to investing, a lot of people expect to do exceptionally well when they first start investing.  The reality with most early newbies can often be a mixed experience and a mixed result, if proper preparation or guidance is not provided.

When it comes to investing in shares, it is always easy to enter with very few barriers.  You can open a basic share trading account and trade for as little as $1 in brokerage.  When a newbie starts investing they think about the millions they are going to make, but few think about the exit strategy and what that might look like when things don’t go according to plan.  The major obstacles in most cases in the psychology of crystallising a loss or potentially being wrong.

A long time ago before kids, when time was plentiful and in no shortage, I used to play golf.  I often found that the game was a great equaliser.  You might hit a perfect round one week and leave the course believing that you had finally mastered the game.  Then, the very next week, you would turn up expecting to replicate the similar magic, only to have a horror round.  As such, the game quickly brought you back to reality.

Investing, if you are not careful, can have a similar impact, particularly if early on you have a wonderful result in a speculative investment.  Immediately you feel that you have the “midas touch” – the ability to turn everything you touch into gold.  I believe it is at this point in time that you need to be most careful with your mental and psychological approach to the market.

We have often seen people take unnecessary and extreme risks with investments, as they have taken a double or nothing approach.

So when it comes to investing, it is particularly important to look not at only your ‘attack strategy’ -how to capitalise on a particular investment, market or sector, but it is equally as important to think about your ‘defensive strategy’ – how will you behave when things don’t go to plan and what should you do.

Sometimes the best defensive play is to simply just remove the biggest inhabitant to minimising loss.  This might be a little hard to take but in some cases it might just be the you, the investor.  When one loses money the investor’s psychology can run wild.  To date, I have not met anybody who is over the moon with excitement when they have made a loss on their investment.  Crystallising this can sometimes be even harder for some.

The easiest way to sometimes combat this is to simply insert a trailing stop loss each time you invest in the share market.  This does two things from an investing perspective.  The first, and most important, is that it automatically removes decision making around if you should or should not get out.  The second is it provides a reset button on your strategy to review and revisit the approach.

A trailing stop loss simply follows behind a share.  If you imagine a dog walking along, the leash is the share price and the dog racing along in front of you.  The stop loss continues to follow along and enjoy the ride.

If the share price turns and then starts to drop you have the ability to exit the position at a pre-agreed percentage.  The other advantage is that you have protected your profit.

Now like most great ideas there are some elements to consider with this strategy.  For example if you have held a stock forever and sitting on a significant capital gain this could trigger a nasty capital gains tax bill, and you might think twice about this strategy.

Alternatively, if you set your trailing stop loss too tight then you may be bounced out only for the position to turn around and head back up.  It is amazing how many people set their stop loss positions at even number such as $1 or $2.

Like all great investment ideas, if in doubt you, might want to speak with AJ Financial Planning to find out a little more of how to implement such a strategy into your portfolio.

 

 

 

 

 

Warren Buffet’s Biggest Lesson

smoke stake

This week I was driving back from visiting a number of clients who live in country Victoria’s Gippsland area.  On my way back to the office, I passed a large brown coal power plant and I started thinking about this sector…….. and in particular…..  if it is a growing or declining industry?

I realised too that there is a lot of parallels between this industry and Warren Buffet’s textile investment. Let me explain….

Warren Buffet’s company “Berkshire Hathaway” started originally as a US textile mill.  He has been quoted as saying that this was possibly one of his worst investments.  The reason being, is that the textile industry whilst cheap at the time of acquisition, was also in a declining industry in the US. Buffet has also famously said “If you get into a lousy business, get out of it….if you are wanted to be known as a good manager, buy a good business…”

Not surprisingly, Warren Buffet eventually closed the textile mill, however kept the name as a constant reminder of his lesson.

There are a number of lessons one can learn from this experience.  The first might be to act very cautiously around a cheap investment or asset.  It is important that the investment has a future and a prospect for growth in the future – otherwise you may find that although the asset is cheap ,it might also be a “value trap” similar to Warren Buffet’s textile mill.

In many ways, this brown coal power factory I was passing by is in my opinion similar, to the textile industry for Buffett.  At some point the alternative power sources will prove more efficient and more cost effective.  In this industry it is not a matter if it will be replaced, but more a case of when will it occur. In other words it is a declining industry.

It does however raise a larger question about the investments which you might hold.  Are they too in a declining sector?  Most people might quickly respond stating “not mine!”,  however since 1900 in the US there are only 3 companies which remain today.  So I believe it is not a case of if your investments will decline, but more a case of when.  Understanding the date stamp on your investments and the future prospects for growth are very important when managing your investments.