Investing

[Humodour]

Hey guys. I know there's a few investors on here so I figured I'd fire this off.

 

How does this sound as part of an investment strategy? My aim is 10% growth per year.

 

1) Sell any share that increases by 10% above the price I bought it at (I do not intend to make money off the rises and falls, it's simply the case that once it has grown 10% it has served my purpose and I can pull out my profit right there and buy another share I feel is under-performing).

2) Buy stable high-dividend shares just before they go ex-dividend. Sell them after the dividend payment once/if their share price increases by a certain percent which when combined with dividend growth equals 10% growth on the amount paid for the share.

 

Is this an OK idea or should I just aim to keep stable, high-dividend shares long-term? The benefit of this strategy seems to me that I can repeat this process quite a few times during a year and achieve the 10% growth I want, whereas growth from dividends alone won't meet this goal (although share price might - in this current climate that's no sure bet).

 

Is 10% growth per year too high as an aim? To that end, using the above strategy, is waiting for a stock to increase 10% before selling too high an aim, or would I be more likely to achieve my 10% growth goal by selling stocks once they increase say 5%?

 

*This strategy is, I guess, predicated on my ability to be able to correctly identify undervalued stocks. As a bit of a hedge, I aim to only invest in reasonably stable companies with decent dividend payments just in case the stock isn't as undervalued as I predicted.

 

I have a fee-free cash investment account with growth rate of 5% currently, compounded daily. So once I've sold a stock that has grown by my set amount, the money can lie around for a while, waiting for me to find another good buy, and I don't need to worry too much about losing money. Inflation in Australia stays between 2 and 3%. Brokerage is $20.

 

Thoughts?

[Morgoth]

I invest in beer and snacks.

[Gorth]

This thread sounds awfully familiar

[Walsingham]

Surely a firm whose shares appreciate at 10% is demonstrating unusual growth? I woudl have thought that unless they are about to change tack you should hang on to go higher.

 

Novice at shares, so ready to be wrong.

[Syraxis]

This thread sounds awfully familiar

 

So what does IBM have going for it again?

[Humodour]

This thread sounds awfully familiar

 

Yeah, I've asked about it before. But since I actually own shares now (I decided to avoid overseas stock exchanges for now, so all ASX) and a bit of experience with the market, I've got entirely different questions to when I began (which I hope someone like Guard Dog or other can steer me in the right track on!)

 

Do you see dividends or a growth target mentioned anywhere in that thread, Gorth? So no, not awfully familiar.

 

So what does IBM have going for it again?

 

Oh, IBM is just a pretty wonderful company all round. Very well run, arguably the world's largest customer-driven research and development company, has contracts in pretty much every country out there, and every government, is developing for the Square Kilometre Array, is developing Watson into a medical diagnostics machine.

 

But at the time I posted that, the main two compelling reasons for IBM's long-term growth prospects were their hefty materials science credentials (specifically their work on graphene as a replacement for silicon) and the fact that they are able to constantly innovate for their customers (I would argue innovation is the life-blood of long-term growth and hence success in a capitalist market). They've got their hand in pretty much every tech pie in the best way possible. They're also reasonably far divorced from the current financial woes.

 

In the face of the financial crisis, they've continued to grow and grow, such that they're now the fourth largest company in the world and have overtaken Microsoft once more: http://www.google.com/finance?client=ob&q=NYSE:IBM

 

Interestingly, Apple is now the largest company in the world, having overtaken Exxon-Mobil. Who woulda thunk it.

Edited November 7, 2011 by Krezack

[Humodour]

Surely a firm whose shares appreciate at 10% is demonstrating unusual growth? I woudl have thought that unless they are about to change tack you should hang on to go higher.

 

Novice at shares, so ready to be wrong.

 

Yeah I've thought about it and I think it comes down to the fact that there isn't just one way of succeeding at the share market.

 

I mean the risk is that if they've jumped by 10% (or whatever amount we work with), they're overvalued and then people sell them and they fall again, maybe only ending up making say 5% growth that year, even though at one point they jumped 10%. However if I were to consistently sell whenever a company jumps 10%, then go find another undervalued company instead (maybe the same one if it falls down again), and repeat this process, it seems I should be able to get guaranteed 10% growth more easily. In fact, if I set my sell value at 5% growth above purchase price, and did this process twice in a year, that would be my 10% growth.

 

But I'm sure I'm not the first person to think of this idea, so I was wondering if there are some pitfalls I am missing with this method.

 

I've actually got about 40% of my shares at the moment in a local blue-chip telecommunications company (ASX:TLS) whose share prices is both undervalued, but also pays dividends of 9%. So it's a no-brainer to keep that one, although I'd like to diversify more - all eggs in one basket.

[Guard Dog]

We talked about that in June IIRC it was going for around $170-$180 and today it is at $187 with a lot of up and down since. Mostly down, it peaked somewhere north of $200 very briefly this year and hasn't sniffed it since. Like I said back then, there is not a lot to love about IBM if you are looking for rapid growth. If you're looking for 10-20yr performance it is a fair choice, but you would not have to look hard to find better ones. It really comes down to what your expectations are. I think Krecack bought in somewhere around $10k. If the goal is a safe place to park that money where it will likely pay better than bank interest then a company like IBM is the way to go.

Edited November 7, 2011 by Guard Dog

[Hurlshort]

I imagine that is the issue with investing in any well established company. Of course Apple was well established 10 years ago, and then it turned into a behemoth because of a small music player. So who knows?

[Humodour]

Scrap that, it looks like Italy is about to default. No ****ing way I'm confident in my ability to predict the market in those circumstances

[Guard Dog]

There is never a bad time to invest in securities if you are careful. You need to understand why a stock rises and falls, and what makes a company profitable. I think in the last thread I went into some detail about EBITA and the types of debt that a company can carry. The reason why we have the iPod, iPhone, etc today is because that in the late 1980s Apple had a strong earning percentage with a low debt service. This means they had the capital for long term R&D projects like that. You just will not see that kind of explosive growth from a company like IBM for a number of reasons, the biggest of which is they do not have the capital to do that without a serious reorganization. Thry sub most of that anyway.

 

I know Krezack is looking at loading his portfolio with dividend paying stocks. Unless you are putting in a LOT of money that is a fine long term choice but it will not get you the 10% near term goal you are looking for. The best way to hit 10-20% near term growth is small cap stocks where small variations in trading volume can swing the price. Dividends are just pennies on the share most of the time so unless you have a hell of a lot of stock we're not talking about a lot of money. Also dividend paying stocks are usually have a huge volume of shares and are not very actively traded because the folks who own hundreds of thousands of share are counting on those dividends so they are only actively bought and sold by speculators (people like us) so the price stays fairly stable. They will not grow in value at any great rate over the years.

 

I have five rules for stock investing. They are:

 

1) Know your exit before you enter. Never buy a stock without know exactly what you want to sell it at and you are reasonably sure it will hit your mark based on your research.

2) Never adjust your stop loss once you've decided what it is.

3) Diversify

4) Diversify

5) Diversify.

[lord of flies]

Is 10% growth per year too high as an aim? To that end, using the above strategy, is waiting for a stock to increase 10% before selling too high an aim, or would I be more likely to achieve my 10% growth goal by selling stocks once they increase say 5%?

10% is really, really high, actually. Like, you might get it in 2011/2012 (assuming we recover from the slump that has been Q1/Q2 2011 right now, rather than nosediving into a second recession), but overall? No. From like, 1920, large cap stocks have made about an 8% increase per year average. Small cap are a little higher, ~10%, but much more volatile.

2) Buy stable high-dividend shares just before they go ex-dividend. Sell them after the dividend payment once/if their share price increases by a certain percent which when combined with dividend growth equals 10% growth on the amount paid for the share.

This isn't how buying shares works, FYI. The present value of the dividend is always going to be calculated into the dirty price, so you'll be paying like $19.98 on a $20 dividend.

 

Further, what's your plan if a stock significantly declines in value? (Go for trailing stops)

I've actually got about 40% of my shares at the moment in a local blue-chip telecommunications company (ASX:TLS) whose share prices is both undervalued, but also pays dividends of 9%. So it's a no-brainer to keep that one, although I'd like to diversify more - all eggs in one basket.

AAAAAAH!!! 40% in one company? Holy ****, what the hell are you doing?? Jesus, sell! Sell! I don't care if the stock is in The Meek, Inc and Jesus Christ came back to Earth! Don't invest so much money like this! Are you comfortable losing 40% of your investment because it turns out ASX:TLS is cooking the books? No? Then get the **** out of there. Jesus. Edited November 10, 2011 by lord of flies

[Guard Dog]

I don't care if the stock is in The Meek, Inc and Jesus Christ came back to Earth! Don't invest so much money like this!

 

 

I've GOT to remember that line! Too funny!

[Walsingham]

In general I'd agree. BUt judging by Krez' manic enthusiasm for tech I'm going to put on my deerstalker and suggest he either works for ASX:TLS or knows them really well. Surely that would enable him to know about things like forthcoming patents and so on?

[Humodour]

Thanks guys (specifically LoF and Guard Dog) - I looked into dividend hunting a bit more and read many similar things to what LoF pointed out. (i.e. dividends are priced into the share price, and thus it's very difficult to make money by buying into a stock for the dividend then selling it afterwards) I'm reading about P/E ratios and whatnot Guard Dog but it'll take a bit to make sense of those I guess. None of the companies I've invested in have P/E ratios above 12 if that's relevant?

 

Just a question, though, on your statement that dividend paying stocks don't really grow in value over the years: how accurate is that, though? Prior to 2008, it was true for Telstra. But not QBE and CBA, which regularly had between 10% and 70% growth each year starting from the early 2000's. Although they are financial companies so maybe they're exceptions?

 

In general I'd agree. BUt judging by Krez' manic enthusiasm for tech I'm going to put on my deerstalker and suggest he either works for ASX:TLS or knows them really well. Surely that would enable him to know about things like forthcoming patents and so on?

 

Yeah, my long-term aim is about 8 or 10 different companies with no more than 20% in any one. But for now, Telstra is a fairly unique buy because of a few local factors:

1) They were privatised about a decade ago - ex-government business

2) They're the biggest ISP, phone, mobile and general telecommunications company in Australia

3) They've just had their copper line monopoly forcibly purchased off them by the Australian government to ensure they don't try and compete with the government's new universal 1 Gbps fibre optic network, the NBN. The government paid them $11 billion dollars for this. It was a HUGE payout, and from memory 99.8% of Telstra shareholders voted for it.

4) Because of point 3, they no longer have to maintain an ailing business model that was starting to cost them dearly (copper line), as the government owns it now.

5) The company has stated they will maintain their dividend payments at 14 cents per share twice a year for the next 4 payments (i.e. till the end of 2013), and that there might be some special cash extra dividend payments.

6) That dividend yield per year at their current share price is 9%. As far as I can tell, that's huge, no? They've paid that kind of dividend level for a long time, but it only became a 9% yield when the share price crashed due to government intervention earlier in the year in response to their monopolistic practices (which led to structural separation of their wholesale and retail arms) and the government's NBN rollout. That is: the dividend yield is high because of outside reasons, not internal desperation to attract investors or whatnot.

7) Everything bad that could happen to the company in the way of government intervention (which, I would like to point out was entirely warranted) has happened (these events only resolved about a month ago). A lot of people are still highly suspicious of buying Telstra stocks (hence the still somewhat undervalued share price) because of their recent history with government history and some political uncertainty about the NBN (which Telstra will be participating in as an ISP), but this uncertainty is due to irrationality and threats from the opposition party to axe the NBN (which is legally, economically, and politically pretty impossible).

 

So... yeah, almost on the fact that they now have $11 billion in cash alone, they're a stable company to hold at least for the next 2 years (which, coincidentally, is the remaining duration of this current government's term). The fact that there is certainty about their next 4 dividend payments helps, too. Another bonus with Telstra is that they are not exposed to international volatility, being an Australian comms company. So the only way something like Greece or Italy defaulting will hit them is if it hits the wider Australian economy first.

 

I'm moving more cash savings into shares soon and I don't think I'll bother with what I mentioned earlier in this thread. So I'll have 3 blue chip companies for now (CBA, QBE, TLS), each one with an undervalued share price and with dividend yields between 6% and 9%. Hard to tell with QBE's because they're not franked. It should end up being a roughly 33%/33%/33% split. So not terribly diversified but I'm confident in the fundamentals of these companies and I'll diversify more as I save more for investing.

 

Thanks again guys. Keep pulling me up if I say something naive or misinformed!

 

EDIT: Bah, I'm seriously struggling to find information on EBITA and D/E ratio. Do they have other names, or is there an easy way to calculate them from other stats I might have? I have quite an array of stuff provided by Morningstar via my broker.

Edited November 11, 2011 by Krezack

[Humodour]

We talked about that in June IIRC it was going for around $170-$180 and today it is at $187 with a lot of up and down since. Mostly down, it peaked somewhere north of $200 very briefly this year and hasn't sniffed it since. Like I said back then, there is not a lot to love about IBM if you are looking for rapid growth. If you're looking for 10-20yr performance it is a fair choice, but you would not have to look hard to find better ones. It really comes down to what your expectations are. I think Krecack bought in somewhere around $10k. If the goal is a safe place to park that money where it will likely pay better than bank interest then a company like IBM is the way to go.

 

Warren Buffett buys $10 billion worth of shares in IBM.

[Nightshape]

No sane man would invest in you Krezack.

[Guard Dog]

Just a question, though, on your statement that dividend paying stocks don't really grow in value over the years: how accurate is that, though? Prior to 2008, it was true for Telstra. But not QBE and CBA, which regularly had between 10% and 70% growth each year starting from the early 2000's. Although they are financial companies so maybe they're exceptions?

 

That is bsed solely on my own observations. I put 0 research into that statement. So take that (and everythng else I tell you) with a grain of salt. Except for what is in my 401k & IRA I've gotten out of stocks all together for the time being anyway. Like you I got started about 8 years ago when I found myself with some cash I did not know what to do with and like you I am self-educated about the process. I read everything I could get my hands on and for a time I was constantly trying to "game" the market by timing the rise and fall of stock prices. It's a ton of work and it just boils down to a crapshoot. Since then I've followed a different strategy, chasing small cap stocks for short term growth and I've enjoyed a little success. It's a strategy called "Bottom Feeding". The idea is for each transaction to net a small return but you do a lot of transactions. Before long pennies become dollars, etc. A few years back I bought into a company called Conserve when their shares were at $0.40 or there abouts. I had a standing order to buy at $0.40 and sell at $0.70 (or close to it). That stock was jumping up and down back then and I'd buy and sell 1000 shares several times a week. Sometimes several times a day. Not a lot of money each time it happens but this went on for weeks before it levelled off around $0.50 or so. You get the idea.

 

Since I got out I've gotten into commodities as we've discussed but I'm backing off that now and looking into real estate. In the US that has hit rock bottom and even if it takes years to recover the time to buy will never be better.