I tend to read a lot of posts here, but never post myself...mainly because I'm still learning and don't have much to say. I've decided that perhaps the occasional post and especially any feedback might speed that learning up.
I made my first direct stock purchases on Dec 16 2013 so tomorrow is the one year anniversary!
Approach:
I started out with fairly simple approach. I generally used Martin Roth's Top Stocks book and examined selected companies in detail (A GoogleFinance filter will provide a similar list of stocks).
ROE: > 15%
Debt levels: no more than 50-70% Debt/Equity depending on structure of debt
Market Cap > $100m
5 Year ASX history
Good management and prospects given risk
MOS > 15% preference for > 20%
I modified this a little since Dec 16 2013.
ROE: > 12% for consideration with a preference for > 15% and increasing or stable ROE, especially if ROE is <20%
Little or no debt - unchanged.
Market Cap > $100m unchanged
5 year ASX history or 5 years of available fundamental data if off market
Good management and prospects given risk (follow more tightly)
MOS unchanged
Positive Cashflow
Preference for rising ROE or EPS growth
Investing only in areas I can value/understand reasonably well (retail, consumer discretionary, financials etc I can understand fairly easily).
Hard stop loss of 8% (varies in bull/bear markets).
Don't buy a falling stock.
I'm currently holding 100% cash - not because of conditions but because at the moment, I don't have the required time/stress reserves (I'm doing a PhD and it's crunch time).
All commentary is out of date 6 months as are estimated valuations. I haven't updated these since exiting positions in June (October for CDM). Of course none of it is advice.
CCP for -4.43% return I think CCP is a great company with a bright outlook, and I sold at a small loss only because I was exiting the market. Nothing too fundamentally concerning here.
CCV another I really like, although I'm not sure how their branch out into Carboodle will pan out, so far it looks worthwhile. Bad press in the UK with consumer loans, but that is on it's way to sorted. I bought at $0.78 with an estimated value of $1.15 in two years and sold at $1.13. Return was 44.95%
MMS I remember MMS diving due to the short lived regulation changes in mid 2013, I was on the train to work. If I had the cash I would have bought then and there, but bought instead when I had funds, with only a limited MOS to future estimated value. This was a mistake. I got off the train to work and on the train of "I'm going to miss out on the MMS story" in my head and bought when I should have kept evaluating. I estimated its value at ~$11 so don't ask me why I bought at $11.49. I averaged down at $9.68 and sold at $9.18 for a -13.3% return. Lessons in my own psychology, need for patience and more thorough evaluations before buying. At least the education was for a fairly small $ cost. Overall I think it's a very decent company in potentially a bad regulatory environment particularly given a lot of their customers are NGO's and there are risks they will not retain them.
RKN - Another lesson. I bought at $2.13 after valuing it at an estimate of $2.20-2.30 based on guidance and factoring in royalty payments to Intuit ending. I placed too little weight on Xero taking market share, products being slow to launch. It's still a company I keep an eye on, but they are struggling to grow earnings and there is no obvious competitive advantage over MYOB/Xero. They have the opportunity to be a niche operator but I'm not sure that will happen either. Too many unknowns and I shouldn't have invested I also payed too much attention to one commentators rather ambiguous view. In hindsight, following this kind of 'advice' is very dangerous. Sold at $2.14 for 1.49% gain inc dividends. Lucky to get my money back.
SEK - More lessons. I bought at $12.38 with an estimated present value of ~$10-13 and a estimate on future value of $13.50-16. So I bought this without a good MOS to current value. Although the price rose and I sold at $16.49 for a 32.54% gain, I strayed from my plan. SEK is also a company I see growing but I don't understand it well. Online companies I'm keen to learn more about as many in Aus have done well.
TRS - Here I had probably the best lesson I could get in regard to averaging down. I bought at $10.84 and again at $9.11 before selling at $8.11. I valued it at the time at around $10 with future values of ~$16. I based this off stores maintaining profits of around $70,000. If ~350? stores returned to higher levels (in the last 5 years stores returned up to $120,000 NPAT each) I thought it was worth $16-18. I ignored problems like diminishing margins, falling AUD (although TRS hedges against this to an extent) and the impact of K-mart/Target. (Unseasonably cold summers I think had little to do with poor results). Given that they're slowing expansion (they expense store opening costs in the year the store is opened rather than over it's life which reduces reported NPAT) they may have higher NPAT in the next few years, but I'm not sureif there is long term value. I just don't know so it's one turn around story I might miss out on. From this experience though I realised that for me, averaging down isn't sound. Had I cut my losses I would have preserved a lot more capital than I did and the chance to reinvest later if the company shows real signs of being on track might have been wiser. I read somewhere that the second half of the phrase (I'm paraphrasing as I can't recall it exactly) "buy when blood is in the streets...but wait until the clean up has taken place" is the most important and most often committed. It was true in this case and in many others. Loss of 19.87%
FGE - Both my best performer and smallest investment $-wise was FGE. I bought at $0.52 and sold at $1.45 (+164%) based on fast moving fundamental changes and future estimated value and risk. At its initial 'bad news' I valued FGE at $0.70-$0.77 and thought the probability of total wipe out was ~30%. I put a lot of faith in the that Rineheart would find $7bln in backers for Roy Hill which would justify that kind of value based on $700-800mln for FGE in revenue from that project alone and considering other losses - estimated the probability Rineheart could do this at 70%. Longer term if they got things together I thought it might be worth $1.10-1.40 and so sold at $1.45 given I thought it already reached it's estimated future value 2 years down the road and had significant risk still. There was some luck in that as information released changed the outlook quite quickly and therefore the value and risk proposition. It was a very small $ investment but at the time made up 25% of my portfolio, and grew to much more.
Finally after exiting all positions I bought into an LIC - CDM at $1.49 and $1.40 - this was essentially a low work required option and I held it through one dividend payment and sold at $1.48. I bought it for more than it's NTA which some would consider a mistake or at least a missed opportunity. Gain on this was 4.24%. I like Cadence and management's approach, even learning from their own methodology. I won't any more buy a falling stock which many value investors would say is daft. (maybe it is). The idea of buying at a lower price because it represents better value only holds true if estimated future value remains the same or higher and the probability of this occurring is high and unchanged. The problem with this is that a) I could be wrong and b) if people disagree with you the price may drop significantly - while some value investors would happily buy more I'd rather sit that out and re-evaluate. I'm not good enough to be so certain in my estimations of a falling stock (there's usually a fundamental reason for it, digested or not).
Overall the portfolio returned 14.9% inc dividends and minus expenses. Including large cash holdings (for some months) the return was 11.81%.
