Mineral stocks continue to slide

Apr16
on April 16, 2013 at 11:23 am
Posted In: Blog Post

Over the last 48 hours we have seen some big drops in the mineral sector after some lower than expected economic results from China on top of continuing uncertainty and panic coming out of Europe. Cyprus looks like it will have to sell up to 60% of its gold reserves to pay off bad debts in their banking sector and there are real fears Spain, Portugal and some of the other debt ridden Euro countries will need to likely follow suit.

 

This has led to panic in the minerals sector with stocks being hammered both here and overseas in the last 48 hours. Gold, Silver and Mineral miners in particular have all dropped close to 20+ %
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I thought a couple of months back Gold was looking like a good buy with the fear of inflation potentially on the horizon and a continually devalued USD pushing investors to the precious metal. Now it looks like we could see some serious fear selling and potentially push lows we haven’t seen since the GFC.

 

I think a great buying opportunity exists in the future here. I would really like to see Gold get some support and start to challenge its 30 day EMA before locking in a buy, we don’t want to try buy into it as it continues to drop this rapidly. Silver is the same, having fallen 30% since April. Also being hammered are mineral miners such as Australia’s big miner Newcrest Mining (NCM).

NCM

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I thought NCM was undervalued recently when I was looking at it at about $22 , as of today it has dropped below $16.50. As with Gold we would like to see this stock get some support (which it hasn’t had for some time now!) At its current price though NCM has hit levels it hasn’t seen since post GFC and as far back as 2006. This for a stock that was trading at $40+ at various times in 2010-2011.

 

I am waiting and watching very closely at the moment, minerals may continue to get hammered short term and by no means am I saying to buy now. I am however strongly advising you continue to monitor the news, the US markets and the price of Gold. Watch for support and a push back towards the 30 day EMA (or your preferred intermediate MA) and get ready for a potential buying opportunity in the near future.

 

Also we need to be wary, this could be the start of a more serious market downturn. The AORD have sputtered the last few weeks and we may have seen the end of the bull run we have had since September last year. Watch, wait and analyse. Be ready. The decision to pull the trigger will ultimately be yours and timing will be everything.

 

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Australian Interest Rates on hold

Apr02
on April 2, 2013 at 3:51 pm
Posted In: Blog Post

The Reserve bank decided today to leave Australian Interest Rates on hold for a second consecutive term, leaving Australia’s cash rate at a record low 3% There are mixed reports whether a further cut will come this year or whether rates will continue to hold at our current level.

 

So the question for all of us is ‘what do I do with my home loan?’

 

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I think its pretty safe to say that rates probably wont come up anytime in the short term. Maybe we should be mirroring the RBA and taking a wait and see approach? I dont think its a terrible strategy, I also think locking your rate in now would also be a smart move. With the cash rate so low you might miss out on a couple more 0.25 drops but with the housing market showing slight signs of recovery and the markets still showing some strength (although they have been a little bipolar this last fortnight) I doubt rates can fall too much lower?

 

For me I think I am going to take a wait and see approach, via the SMH website;

 

“The markets were pricing in a 5 per cent chance of a fall in rates, and a 72 per cent chance that a 25 basis points cut could take place this year.

Read more: RBA holds interest rates steady”

 

 

72% is a pretty good bet that we might see that 0.25 drop before the end of the year. I also think it might be worth waiting to see how far they can drop, treat it a bit like momentum trading and try not to pick the bottom, just wait for that first tick back up or have very strong conviction that it is about to tick back up.

 

As it stands right now I don’t think anyone thinks Australian Interest Rates will be heading north anytime this year and that a further fall will be likely. I will be holding the trigger on moving to a fixed rate until I am pretty confident we have seen the last of the cuts.

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Book Review 4 Hour Work Week

Mar19
on March 19, 2013 at 6:54 pm
Posted In: Blog Post

4hour

 

The 4 hour work week Escape 9-5, Live Anywhere and join the New Rich by  Timothy Ferriss was an excellent book which I believe I read at exactly the right time for me. I have read quite a few negative or scathing reviews on this book from ‘it gives no useful examples’ to ‘what a load of garbage’ but to be honest I not only loved the format and general gist of the book but I also thought it offered some great examples for entrepenuers looking for some case studies for automated online fast start ups.

 

I liked Tim’s thrust that the main benefit of the ‘new rich’ is their mobility. The ability to automate your business or job as much as possible and reap the rewards of all your newly freed up time by doing things you actually want to do is simple and empowering.

 

Tim gives plenty of ideas on how to free up your time, from approaching your boss and suggesting a trial 4 day week to limiting and then streamlining your unproductive tasks. He has lots of suggestions on how to approach these time freeing life changes and take back some time for yourself and become more mobile.

 

I understand some of the criticism leveled at the book. Tim all but encourages stubborn and confrontational behaviour at points and also suggests some pretty quirky and odd things you should try, however I didn’t find that ruined the book for me in the slightest. I thought there were so many great ideas and examples within the book that leaving a few of them behind is no loss at all to the quality within the pages.

 

In particular in my current frame of mind which is thinking along the lines of some form of online fast start up or entrepreneurial online endeavour that I found the book great in really helping me channel my thought into actual potential business ideas. I think that if you are in a similar place with your career, where you are thinking it might be good to try something lean and fast yourself then this is a fantastic book to read.

 

Some other awesome points I pulled from Tim’s book;

 

  • Life is here to be enjoyed, not spent in the 9-5 grind
  • Be efficient with your daily tasks, what can you automate or eradicate altogether?
  • Mobility is the new age rich. Even if you don’t want to travel, free up time to spend with your loved ones.
  • Be prepared to fail 99 times and fail twice as fast as you succeed, but you will get there.
  • Take some risks, whats the worst that can happen? on a scale of 1-10? lose your job? get a new one. Sell your house? rent for a while. Compared to the things you could achieve these worst case scenarios are more like 3-4 out of 10 bad than ‘my life is over’

 

I recommend this book to all entrepenuers, all individuals sick of the 9-5 grind and anyone that wants to free up time to do what they really want in life.

 

 

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Stock Trading Diary

Mar17
on March 17, 2013 at 8:43 pm
Posted In: Blog Post

 

Keeping good records is the single most important contribution to your success. – Dr Alexander Elder, Come into my Trading Room

 

I am still reading the great book Come into my Trading Room and just read a fantastic chapter on record keeping. Dr Elder says that discipline is the single most important characteristic of a successful trader and that record keeping helps maintain this discipline as well as to allow us to learn from our success and even more importantly, our failures.

 

He claims the best way to keep these records is a Stock Trading Diary. This diary is then broken down into a number of sections;

 

ENTERING TRADES

 

SPREADSHEET

 

You should have a spreadsheet that you keep to track your purchases. AT the VERY LEAST it should contain;

 

  • Date
  • Long or Short
  • Stock Symbol
  • Position Size
  • Price
  • Commission
  • Total Entry Amount (price x size + commission)

 

CHARTS

 

Copy and paste the chart of the stock you bought into your diary. Make note of the technical indicators that told you to buy the stock. What was the EMA doing? MACD? Volume? whatever indicators you prefer make a note as to why you believe they gave you a buy signal. Paste in your intermediate chart (maybe weekly) and your entry chart (maybe daily) and make comments on the indicators on both charts. This will help us looking back to see clear errors we might have made in our technical reading and also any nice decisions we made we can replicate later on.

 

Stock Trading Diary

 

FUNDAMENTALS

 

Refer back to my post The Most Important Stock Fundamentals for details on fundamental analysis. Before we make a trade we should definitely be aware of the fundamentals of the stock and if we like them and buy then we should record these fundamentals in our trading diary.

 

  • What is the P/E?
  • What is the P/B?
  • What is the Debt/Equity Ratio?
  • Free Cash Flow?
  • PEG Ratio?
  • Return on Equity?
  • Growth? Consecutive positive earnings and sales figures?
  • Upcoming announcements? Check.

 

OTHER VARIABLES

 

You might have other things you like to track in a stock? A key fundamental you have discovered, or a particular announcement or piece of news you have heard which might influence the price or even the entire industry. Maybe there is a new technology that you think will influence your stock or overseas conditions you think will impact it.

 

You might also like to write down where you heard about the stock. Did you dig it up out of charts? Did you read about it on your favourite blog? Was it recommended to you by a friend or colleague? All these things are useful to note down so you can use the power of hindsight to weed out your mistakes and discover your advantages.

 

Feelings. How do you feel after entering the trade? Positive? Negative? Scared? Cautious? Uncertain? Excited? Write them all down. This could help us in retrospect determine whether emotion entered our decision making process and also help us weigh up how positive we were entering this position in the first place.

 

EXITING TRADES

Obviously when we exit trades we also want to account for the same information. Make sure you paste in your exit chart (most likely just a daily) and make a note of the key technical indicators you used to come to the decision to sell. Was it overbought? Had you hit your stop loss? Are you taking profits at a predetermined price? Mark down your exit strategy in your diary.

 

Make sure you also fill in the other half of your spreadsheet;

 

  • Exit Date
  • Exit Price
  • Commission
  • Total (Exit price x size – commission)
  • Profit / Loss

 

Feelings. Sum up your feelings on exiting the trade. Happy, disappointed, angry, frustrated – write them down! They could help you determine the frame of mind you were in and potentially something to avoid or be wary of in yourself in the future.

 

 

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Most Important Stock Fundamentals

Mar11
on March 11, 2013 at 1:16 am
Posted In: Blog Post

Hi noobs! I was doing some reading on stock fundamentals today as a counter balance to all the work I have been doing on reading technical analysis in trading. It has always been my long term vision to have a nice balance between solid fundamentals of a company and technical signals to enter and exit my positions.

 

As I will mainly be doing long term investing to start it makes the value of fundamentals probably a lot more important than simple buy and sell signals on the charts. We want solid companies with some nice consecutive growth and great fundamental signals. So I asked myself  ”what are the most important stock fundamentals?”

 

From my research the most important stock fundamentals seem to be;

 

  1. P/E Ratio : The price-to-earnings ratio is one of the most important things to look for when valuing a company. The P/E ratio represents the current share price divided by its earnings per share (EPS) which represents a value that investors are willing to pay for each dollar of the companies earnings. A high P/E indicates that the stock is priced relatively high to its earnings, and companies with higher P/E therefore seem more expensive. However this does not tell the full story as it is only useful when comparing companies of the same sector and it does not take growth into account. Which leads us to the next valuable indicator;
  2. PEG ratio : The price/earnings-to-growth ratio is a modified version of the P/E ratio which also factors in growth. It divides the companies P/E by its 12 month growth rate. This is a key indicator to discover undervalued companies which may be growing. As with the P/E ratio it is wise to use this to compare companies in the same sectors only.  A common rule of thumb is that the growth rate ought to be roughly equal to the P/E ratio and thus the PEG ratio should be around 1. A relatively low PEG ratio indicates an undervalued stock and a PEG ratio much greater than 1 indicates an overvalued stock.
  3. P/B Ratio : The price-to-book ratio represents the current share price divided by its book value (net assets). If the company went bankrupt today then this would be the true value of its worth. A higher P/B ratio than 1 denotes that the share price is higher than what the company’s assets would be sold for. The P/B is a good indicator of what investors are paying for in real-world tangible assets, not the harder-to-value intangibles.
  4. Debt/EquityRatio : This is a measure of the total amount of company liability divided by shareholder equity. This measure is very closely related to leveraging and could also be coined as risk or gearing. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Be cautious of this number being too high, it can be the first sign that a company is getting in over its head.
  5. ROE (Return on Equity) : Thought of by many as the most important of fundamental indicators the Return on Equity measure does not take the share price into account at all but is an indication of how efficient a company is at generating profits. It is a measure of revenue and profits divided by shareholder equity. The reason that this measure is deemed so important is that it contains information on some very important values; leverage, revenue and the returning value to shareholders.
  6. Consecutive sales and earnings growth : Not a ratio or measure so to speak but it is valued extremely highly if the company you are looking at can show consecutive positive years of sales and earnings figures. 5 years of positive growth is a good strong sign the company is going the right way and is not being poorly run.

 

When weighing up whether to invest in a company spending some quality time looking at the fundamentals could save you a lot of heart ache and monetary pain. It does not take long to look up the figures either via your broker or trading software (Commsec has all this data in its company research section as does the ASX). All the figures can be a little daunting I agree but remember it is part of our journey to learn all we can about investing and this takes time.

 

The figures wont make perfect sense overnight, but fundamentals are a valuable measure in determining a stocks true value and are another aid to helping us pick the right investments at the right times by combining them with technical indicators on the charts.

 

As a closing note, I have read that the book Security Analysis by Graham and Dodd  is an outstanding and decisive book on fundamental analysis and it is on my reading list for the future.

 

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