Monday, December 22, 2008

What I Learned About Investing In 2008 : Lesson 1 - Patience

The Australian Stock Market has had a terrible year based on almost any measure you care to name. The All Ordinaries and major S&P ASX indexes are all down significantly from the beginning of the year and some market pundits are saying we still haven't reached bottom - but I guess we wont know when the bottom is until it has passed. World stock market indexes have fared little better and in some cases even worse.

It's approaching the time of year when I like to reflect upon my investment activities over the past year and consider what the coming year may hold. It's a great opportunity to take a couple of steps back and look at the year's events and my participation in and reaction to them from a safe distance. Time can sometimes give us a better perspective from which to consider our actions.

With that in mind, I thought I'd share some thoughts on what investment lessons I've learned from the tumultuous year that has been 2008. Before I started writing this, it was going to be a single post. But as I started writing, the words just stated to flow to I think I'll spread this over a number of posts.

Value Investing Takes Patience.

I like to consider myself a value investor or even a contrarian investor. However, in recent years (with the exception perhaps of 2008) this has taken more and more patience. Value investing opportunities become very scarce. I was accumulating cash, my trigger finger was becoming itchy but there just weren't any decent targets to take aim at.

Then the sub-prime mortgage came along and suddenly some of the shares on my watchlist were getting cheaper. To put things in perspective, the All Ordinaries had been as high as six and a half thousand in 2007 and fell to around five thousand in the first quarter of 2008 and looked like staging a recovery from that point.

I didn't want to miss the buying opportunity so I started buying. While I didn't spend all of my cash, in retrospect a think I spent too much, too early, leaving less in reserve for the opportunities which would emerge later in the year.

I think I fell for the old "this time it's different" line. You know the one where everyone tells you that there's been some sort of fundamental shift in how sharemarkets work. Think back to the dot-com boom (and bust). It 's happened many times over - the stock market crash of 1929, tulip mania - the list goes on.

Stock market commentators were saying that higher prices were justified. They said there was a great weight of superannuation money driving asset prices and that this was an ongoing and long term trend which would support shares prices. They said that industrialization of China had lead to a resources "super cycle" - everything was different now!

Even though I considered myself a skeptic, I was worried that the market would recover from this hiccup and carry on it's merry way, leaving me behind. I felt I needed to take advantage of the "relative" value in share prices, even though I didn't consider it absolute value.

Investing is a long term game. Even though the last bull market was a long one, history told us that it had to end. It also told us that the longer the bull market and higher it goes, the longer and deeper the bear market that follows it. Benjamin Graham, author of The Intelligent Investor and Security Analysis recommended buying blue chip stocks at no more than two thirds of their most recent highs. This was to protect investors from the market's inevitable manic depressive behavior. He believed there would always be another opportunity - that the market would always over-correct on both the upside and the downside.

Once again, Ben has been proven right. The Australian Stock Market has shown how quickly things can turn ugly. I should have had more patience in waiting for that value to emerge.

Saturday, December 20, 2008

Institutional Transactions - Week Ending 19/12/2008

This week has been a relatively quiet one for institutional investors - at least among the money managers that I keep an eye on. I guess everything is winding down before Christmas. And with the the performance of the Australian stock market (and global financial markets for that matter) this year, I suspect this is a year that some of those in the industry would prefer to forget.

Some Of The More Interesting Substantial Shareholder Notices This Week.

452 Capital Pty Ltd bought some more Consolidated Media Holdings Limited shares (ASX:CMJ) to go to over 7% this week following an announcement at the end October that they held 5%. They joined Perpetual, among others, as substantial shareholders of the company. Consolidated Media Holdings is the old Publishing And Broadcasting, without the gaming assets plus a few other 'minor' tweaks.

Australian Value Investor Maple Brown Abbott Limited has sold down its stake in Metcash Limited (ASX:MTS) again after selling shares in September and October this Year. Maple Brown Abbott join 452 Capital Pty Limited and Lazard Asset Management in heading for the exits in recent months. I don't follow Metcash at all, but I noticed from the share price graph that the stock price has been rising in recent months.

Perpetual has been active in the market again this week. The have been buyers of Consolidated Media Holdings Limited, Billabong (ASX:BBG), Incitec Pivot (ASX:IPL), CVC Ltd and sellers of Skilled Group (ASX:SKE), Crown Ltd (ASX:CWN) and Norfolk Group (NFK).

In other news, Manhattan Software passed 50% ownership of MYOB Limited. This is after the MYOB board capitulated and recommended a revised, conditional offer from Manhattan at a little over $1.15 per share. The offer is conditional on acceptances reaching 90% at which point the rest of the shares can be compulsorily acquired (the details of the offer are a little hard to explain in a concise manner here, so have a look at the announcement on the Australian Stock Exchange website if you want exact details). The directors, who control nearly 30% of MYOB stock have said they will accept the higher offer. After reaching 50% this week and including the board's almost 30%, Manhattan Software must be close to 80% - just 10% away from taking MYOB private.

Monday, December 15, 2008

Watching What Fund Managers Are Buying And Selling

Buying Australian shares has taken nerves of steel in recent times. All of the major Australian stock market indexes have spent most of the year in a decline that has ranged anywhere from a steady fall to alarming drop depending on the prevailing mood in world financial markets.

Australian investors need all the help they can get. Could keeping an eye on what the professional fund managers are buying provide you with some clues as to how to invest your money? While institutional investors don't always get it right I think watching what shares the managed funds are buying and selling can be a useful exercise.

I tend to use this information in one of two ways.

Identifying Investment Opportunities:

The first way I use this information is as a way of finding new shares to invest in. I should stress at this point that just because a fund manager is buying shares in a particular company, does not mean I would automatically go out and but that stock. Investing money in something just because a leading fund manager is buying is not a good way to make money, in my opinion.

What I tend to do is research the company in more detail and apply my own quality and valuation criteria to it. Look at earnings and dividends. Does it have low debt? Does income cover the interest on borrowings with a sufficient margin? Does it have a good return on invested capital? And so on...

In most cases, I cant make a compelling case to buy shares in the company and I move on to the next opportunity. It doesn't mean the stock wont go up - it just means that I can't find any reason to buy based on fundamentals.

Because of the resources available to most institutional investors, they are more likely to spot opportunities before I do. In this way, a number of situations have come to my attention which I would otherwise have missed. It's normally after a sudden share price drop that a situation like this presents itself.

As Part Of My Investment Research:

The other way I use this information is as a kind of a sanity check when I'm doing my research. When investigating an investment opportunity, I normally have a look to see who the substantial shareholders are and who has been buying or selling lately. While it's not normally a deciding factor, if I see that one of the better Australian fund managers has been buying, it would strengthen the case. Conversely, if I see that some of the best performing managed funds have been selling, it would raise a red flag and cause me to dig a little deeper. But, just because they are selling, doesn't automatically mean the company is a poor investment. You don't know why they are selling.

How To Find The best Fund Managers:

This is a difficult question. If you're going to spend time watching a professional you'll need to make sure it's someone worthwhile. Perhaps the best indicator is the fund managers performance over an extended period of time - preferably through both bull and bear markets. Look for consistent performance as measured against an index like the All Ordinaries or the ASX 100 (or some other appropriate sharemarket index) or against other managers with a similar risk profile.

The other thing to look at - and I think this is just as important as performance, if not more so - is their investment style. Do they buy growth stocks or are they a contrarian investor? My value investing bias leads me to monitor fund managers like Maple Brown Abott or Investors Mutual or one of the other value investors. The important thing is to make sure their style matches your idea of what makes a good investment.

Benefits Of Following Fund Managers:

As I said earlier, these guys have more resources than you do. They're likely to have looked of lots of companies before buying and hopefully they've done their homework. And while this doesn't mean you should automatically follow them, it can give you ideas or add weight to an idea you already have.

Disadvantages Of Following Fund Managers:

I will stress again that you should not mindlessly follow the actions of one or more institutional investors, buying and selling whatever shares they do. You're not privy to the reasons behind a given transaction. Remember the decision was made in the context of an entire share portfolio. Depending on their investment strategy, it may be part of an broader asset allocation policy. Or it could be a high risk purchase of a distressed security in an industry where the manager has special expertise. Or any of more than a dozen other reasons.

The other problem is when they sell. They wont give you a call or send you an email to tell you they're about to sell. And if they're a big investor and they sell a large quantity of stock, the share price could be dragged right down by the selling pressure. You could then be stuck with an unloved company which was bought for reasons which may no longer be apparent.

If you take a long term approach to wealth creation you can afford to be patient. The Australian stock market will continue to throw up bargains so you can afford to be picky. Keeping an eye on the fund managers can be good sport but don't get carried away.

Friday, October 17, 2008

Australian Stock Market News - Week Ending 17/10/2008

Well it was another turbulent week on the Australian stock market. The all ordinaries index was up and down like a yo-yo. The all ordinaries opened the week at 3,966, reached a high of 4,404, a low of 3,937 and finally closed at 3,945. This is a far cry from the high of over 6,800 reached by the all ords mid last year. The chart below shows the movement in the all ordinaries during this week.

Australian Sharemarket Chart

I can't believe how volatile the Australian sharemarket has been over the past month or so. Share prices collapse one day, rally the next only only to slump again. There are probably some very important lessons to be learned about human behavior and market psychology from all of this. As a long term value investor, I can't believe that the underlying value of some of these companies can vary so much from day to day.

You can understand why some people see shares as such a risky investment. I wouldn't like to be trying to learn about the stock market right now as I think the fear pervading financial markets would make it very hard on a beginner just starting out.

Surely this will be a great time for value investors. I noticed that renowned value investor Maple-Brown Abbott has been busy in the last week picking up shares in Paperlinx, Boart Longyear and Emeco. Another fund manager I keep my eye on is Lazard. They were buying shares in Specialty Fashion Group this week.

While I'm on the topic of fund managers, I noticed that Platinum Capital has announced a 1 for 4 rights issue. Kerr Neilson is a pretty canny investor so I was initially surprised to see him raising capital with the share price so low. But I guess that he must see lots of opportunities right now and will be able to put the new funds to good use.

The last thing I want to mention today is that it is now October. The significance of this escaped me until today. For those that don't remember, the crash in 1987 occurred in October and since that time October has been a regular period of weakness in the Australian stock market. Even more to learn about market psychology...

Sunday, September 21, 2008

ASIC Bans Short Selling Of Australian Shares

After another week of turmoil on the Australian stock market, the Australian Securities and Investment Commission has announced a temporary ban on 'naked' short selling. This action has been taken in an effort to restore confidence to the market - particularly the shares of those companies operating in the financial sector.

Rumour has it that hedge fund short selling was behind the plunge in the Macquarie Group (MQG) share price during the week. The stock hit a low of $25.98 on Thursday before finishing up the week at $35.90. It's believed short sellers targeted the stock in the wake of more bad news from Wall Street amid the Lehman Brothers collapse and the sale of Merrill Lynch.

Short selling is the practice of selling securities you don't own in the hope of buying them back at lower prices and pocketing the difference. It can be quite lucrative when the share price of a company drops a long way very quickly. The problem is that short selling exerts further downward pressure on the stock price and naturally leads one the ask questions about stock market manipulation.

I have read that Westpac and ANZ Bank have also been subject to pressure from short selling and this is where it can become dangerous. A plummeting share price can cause doubts in the minds of bank customers - not just investors. In the worst case scenario a run on funds could ensue. Deposit holders assuming there is something fundamentally wrong with the bank withdraw their funds en masse leaving the institution with a massive liquidity problem.

Only naked short selling has been disallowed. Covered short selling is still allowed (this is where you need to 'borrow' the shares before you sell it).

Wednesday, September 17, 2008

ABC Learning Shares Still Suspended

The ABC Learning (ABS) saga continues. Regular readers of Australian Stock Market Investing will know I've developed a fascination with this company as evidenced by my posts on their share price crash, the continued stock price slide, the share price recovery and finally the IMF Class Action against ABC Learning. It feels like I've been watching a car crash in slow motion. The shenanigans that have gone on here are worthy of the best (or worst) daytime soap operas.

ABC last traded at 54 cents after an alarming share price drop over the past year. The share price graph below does not paint a pretty picture - especially if you're an ABS shareholder.

ABC Learning Stock ChartABC Learning Share Price Chart

Next I'll bring you up to date with the latest developments.

ABC requested a trading halt on 21 August, which the ASX granted.

On 25 August, ABS shares were suspended from official quotation at the company's request so the company could:
"finalise its full year results and prior period adjustments arising out of a re-assessment of accounting treatments"
The voluntary suspension was meant to last for 4 days (it's now mid-September).

Then on 29 August, ABC Learning announced it was still not in a position to release its annual results and therefore would not be able to comply with ASX Listing Rule 4.3. Listing Rule 4.3 says that a company must provide its Annual Results within 2 months of the close of the accounting period, subject to a number of exceptions. For those purists out there who want this stuff straight from the horses mouth, you can read more about Listing Rule 4.3.

The most recent announcement on 9 September indicates results should be available by the end of September 2008. They also announced the appointment of a new Chief Financial Officer (CFO) - Peter Trimble. Is that a hospital pass or what?

While there's been no official word, apparently sources have told the Sydney Morning Herald that the release of the annual accounts have been delayed over questions of the company's solvency. Ernst & Young have taken over the audit role from Pritcher Partners and the rumor is that KPMG has been called in as arbiter over a dispute about the correct accounting treatment of some items.

I'm sure the last thing Eddie Groves and the ABC Learning board want is for Ernst & Young to issue a qualified audit opinion, especially if the qualification relates the company's status as a going concern.

Having said all of that, provided ABC doesn't become the Australian stock market's latest corporate fatality, it may be an interesting situation. It operates what should be a profitable business. I believe there is a board restructure taking place and if they were able to reduce their debt to more realistic levels and concentrate on the Australian business, who knows - maybe something beautiful can grow...

Tuesday, September 16, 2008

Australian Stock Market Hits 2 Year Low

Shares on the Australian Stock Market hit their lowest level in 2 years today. The All Ordinaries index closed just under 4,800 after falling about 1.5%. And this was after a fall of over 1.6% yesterday. You need to go back to early 2006 to see the All Ords at a level below this. The following graph shows the performance of the Australian Stock Market over the past 2 years.

Australian Stock Market PerformancePerformance of Australian Shares

The sell-off was triggered by news of the collapse of Lehman Brothers over the weekend and the sale of Merril Lynch. Lehman Brothers, a large United States investment bank, filed for bankruptcy protection under the US Bankruptcy Code - from what I've read, it's the largest filing in US financial history.

As you would expect, Aussie financial stocks were down significantly on news out of the US. All of the major Australian banks withe the exception of Westpac were down today. Investment bank Macquarie Group (MQG) was down $4.55 yesterday and another $2.66 today to finish the days trading at $36.80. And poor old Babcock & Brown (BNB) was down a lazy 33.5% today to a closing share price of $1.05 - a long way off its 52 week high of $31.08.

While the recent financial turmoil has claimed it's share of victims on the Australian stock market, I wonder whether the worst is over yet. Investors should be taking a good hard look at their portfolios, particularly shares in companies with excessive debt. And if you're taking advantage the bargains on offer at the moment, discretion as advised.

Sunday, July 27, 2008

Australian Stock Market Floats For August

There is a real theme to the upcoming Australian Stock Market Floats for August 2008. You guessed it - small resources stocks. Although there are only a handful of stocks due to list on the ASX next month, I thought it would still be worth running my eye over them.

Below is the meager list of upcoming Australian Stock Market IPO's.

RVE - Riviera Resources Limited (August 1)
EMG - Emergent Resources Limited (August 7)
IVA - Ivanhoe Australia Limited (August 7)
AGN - Australian Gemstone House Limited (August 14)
OHZ - Opal Horizon Limited (August 15)
MET - Mt Isa Metals Limited (August 22)

Riviera Resources Limited is trying to raise $2,500,000 through the issue of twelve and a half million shares at twenty cents each. The company plans to extend on the exploration work already done on the Three Sisters Project in Queensland with a view to eventually mining any gold or other base metals discovered.

Emergent Resources Limited want to raise $4,000,000 at twenty cents per share. Emergent Resources are looking for iron, copper, lead, zinc, gold, nickel and uranium as part of the Beyondie Iron Project in Western Australia.

Ivanhoe Australia Limited is much more ambitious. It's looking for $125 million at $2.00 per share. Ivanhoe is seeking to explore and develop copper, gold and uranium deposits starting with its "highly prospective" Cloncurry Project.

Here's something a little different. Australian Gemstone House Limited is looking for opals and sapphires. To undertake this task Australian Gemstone House will need $30 million at $1.00 per share.

Not to be outdone, Opal Horizon Limited is also looking for opals. Opal Horizon not only wants to look for opals, it also wants to be involved in the "mining, purchasing, processing, wholesaling and marketing" of opals. To that end, it is raising $6 million at $0.25 per share.

And the last cab of the rank is Mt Isa Metals Limited. They'll be looking for mineral deposits to develop in central and North-West Queensland. For this task, they're seeking $7 million at twenty cents per share.

I haven't looked at any of these companies in detail yet so if you're interested make sure you do your own homework - as you should with any Australian Stock Market float. You should not consider any of the above to be recommendations.

Wednesday, July 23, 2008

ABC Learning To Face Class Action From IMF?

I've written about ABC Learning (ASX Code: ABS) a number of times recently, and it seems there may be more bad news on the way. I read in the Business Section of The Age yesterday that IMF will be funding a class action against the Australian Stock Market's largest childcare provider.

According to the article, the lawsuit hinges upon an alleged lack of disclosure by ABC. In February of this year $73 million of develper fees was disclosed for the first time. This $73 million along with a couple of other one-off items was enough to allow ABC to report a profit, but without these one-off items, there would have been a rather nasty loss. Apparently any litigation would relate to the material nature of these developer fees.

In an announcement to the Australian Stock Exchange a couple of days ago, ABC Learning were at pains to point out that it "has not received any claim or any notice of claim" with regard to the action from IMF. It said that IMF's announcement is simply stating it's intention to fund any possible claim - depending on the level of participation.

IMF is a provider of funding and support in litigation similar to the one mentioned above. It seems to have had some success recently including a settlement with Aristocrat (ALL) for which I'm sure IMF will earn a hefty fee.

ABC Learning Shares closed at 83 cents today, down half of one cent.

Monday, July 21, 2008

Walker Thompson Australian Stock Market Investment Software

*** Important Update ***

Please read the comments at the bottom of this post if you have been approached be Walker Thompson or are considering one of their products. Take particular note of loving mum's experience.

What do you know about automated stock picking software? The reason I ask is that I've noticed a number of visitors arriving at my blog having searched for "walker thompson trading software" (or some variation thereof). I've never used any products like this but I'm curious about how they work and how many people use this sort of stock picking software.

So I'd be interested to find out how many people have used this type of software, particularly to invest in the Australian stock market, and what their experience has been. Do these packages use fundamental analysis to pick stocks or do they use some sort of technical analysis (ie. charting/momentum/trends, etc) to spit out the recommendations of what shares to buy?

To be honest, I have my doubts about how well something like this would work over the long term. Any time I buy shares, it is only once I've not only had a close look at all of the important financial ratios but also read a couple of company's annual reports as well as any other important announcements which have been released to the ASX.

Incidentally, I've since tried to find out more about walker thompson sharemarket software but none of my searches have turned up anything interesting.

Friday, July 4, 2008

Australian Stock Market Worst Return In 26 Years

The Australian Stock Market experienced its worst return for 26 years for the 12 months ending June 30. Australia's All Ordinaries Index lost more than 15% for the 2007/2008 year.

The chart below shows the movement of the All Ordinaries Index during the year.

Australian Stock Market Performance for 2007/2008

As you can see, the market tried valiantly to recover from the low point in March and was looking good until mid May when the wheels fell off again. But what does all of this mean for the average Australian investor?

Less Than Super Returns...

Perhaps the broadest impact will be to everybody's superannuation balances. As we all start to receive our superannuation statements in the mail for the past year, there will be a fair amount of disappointment. We aren't used to getting negative returns. Depending on the investment option chosen, you may experience anything from low single digit negative returns right up to double digit percentage losses.

Value Investor's Paradice?

For those investors among us with a value bias, the Australian stockmarket hasn't looked this attractive in years. After a prolonged period of strong sharemarket price growth, the past 6 months has thrown up plenty of bargains. And not just the minn
ows - blue chip stocks as well. The financial sector with banks in particular are presenting some good value but price weakness is not limited to this sector.

The pain has continued since the close of the financial year as well. The following chart shows the performance of the All Ordinaries over the past week.

All Ordinaries This Week

As you can see, after the close of the financial year on Monday, the index continued to fall throughout the week with the exception of today.

Thursday, June 26, 2008

ABC Learning Share Price Recovery

Shares in ABC Learning were one of the better performing issues on the Australian stock market today. After reaching new lows this week, they finished up 30% today still a far cry from the $8.00 plus all time high, but much improved from their low of 65 cents this week. Only yesterday I wrote about this week's share price weakness in ABC Learning Shares Plumb New Lows.

The recovery appears to be in response to an announcement released to ASX today which said that ABS had completed the sale of 60% of its US Business to Morgan Stanley Private Equity. The announcement also stated that ABC Learning has received the cash proceeds of the sale. As far as I can tell, some of the proceeds will be used to reduce debt levels at the company.

The transaction values the US Business at US$700 million. ABS still retains ownership of 40%. One of the interesting parts of this deal is a call option for ABC Learning to buy back the 60% from MSPE in 3 years. It seems they really want to keep pushing into the US.

Today's share price recovery is impressive. While the Australian stock market is up overall today, the ABS gains put it way ahead of the index. The investing public are obviously happy with the deal.

Wednesday, June 25, 2008

ABC Learning Shares Plumb New Lows

ABC Learning (ASX Code ABS) is the largest listed childcare provider on the Australian Stock Market. As I wrote in a previous ABC Learning post, it has traded at over $8.00 at its peak about 18 months ago. Since then, it's share price have been on steady (and at times alarming) decline. It reached a new low of 65 cents yesterday.

Earlier this month, a placement of 71.5 million shares at $1.15 to MSPE and Lazard raised $82 million dollars. This represents 15% of the company's issued shares (the most that can be raised without shareholder approval). Since then general market weakness and some poor ABS publicity has left MPSE and Lazard sitting on a reasonable sized paper loss (although ABC Learning shares have recovered a little to close at 73 cents today.

Some of the cash raised along with some of the proceeds of the sale of its US operations are apparently going to be used to pay down debt. Hopefully more reasonable debt levels will reassure investors as to the long term viability of the company.

Surely the underlying business of ABC Learning is strong and profitable. Government childcare subsidies are on the rise again. And ironically, yesterday with its shares plumbing new lows, ABS had announced that it was raising child care fees by 10%. Although such a fee increase generates a lot of negative publicity, it demonstrates the strength of ABC's business.

While I find this to be a very interesting investment opportunity, there are 3 things which hold me back. First off, I find it hard to get a handle on what's happening inside the company. I read the announcements but they don't seem to contain quite enough information for me to be comfortable with the financial position of the company.

Secondly, I suspect the main risk the company faces (apart from its high debt levels) is weakness in the Australian job market. Predicting such things is well beyond my capability but with rising interest rates and declining consumer confidence, the unemployment rate may well continue to rise.

And last, but certainly not least, the Australian Stock Market currently presents a number of other lower risk investment opportunities. The current share price weakness sees many blue chip companies trading at the most reasonable valuations in years. Every time I look at ABC Learning, I can't help thinking about what better opportunities there may be.

Tuesday, June 24, 2008

Australian Stock Market Weakness A Buying Opportunity?

The Australian Stock Market is approaching a three month low this week. After a brief rally it's all doom and gloom once more - just in time for the end of the financial year. So does this mean it's a good time to buy Australian shares?

I guess it depends on your time frame and your outlook. If you're a long-term investor or a fan of value investing, then these sorts of conditions are right up your alley. But if you're a speculator looking to make a quick buck, it might be a little risky.

I suspect that one of the reasons for the recent share price weakness, apart from the obvious ongoing turmoil in the debt markets, is the fast approaching end of the financial (tax) year. At this time of year some investor like to look back on the profits they've taken during the year then look at their portfolio to find any losses they might be sitting on. By selling out of any losing positions, they can crystallize their loss for tax purposes and offset this loss against other gains.

If you're thinking of engaging in the above strategy you'll need to be careful. There are situations where the Australian Taxation Office take a dim view of this sort of activity. I think the problem arises when you sell the buy back in straight away and the only purpose of the transaction is to generate a tax loss. Make sure you talk to a tax professional if you're considering doing this.

Apparently one of the other reasons for volatility at this time of year is because the fund managers are re-balancing or 'window dressing' their portfolios. I dare say the the Superannuation Funds are very busy right now trying to salvage some sort respectable result.

Another way of looking at the current state of the markets is as a second chance. For those of us who hadn't bought everything we wanted to before the recent recovery, it means we get another bite at the cherry. I certainly thought that prices were recovering and that I'd missed the low point. Now we all get a second chance to top up our portfolios with good quality Australian stocks.

Thursday, June 12, 2008

Australian Stock Market Investing

Investing vs Speculating on the Australian Stock Market.

What is the difference between investment and speculation? Unfortunately many people tend to confuse the terms and even use the two interchangeably. In this post I'd like to put forward my views on what the difference is and how it applies to the Australian Stock Market.

In his book, Security Analysis, Benjamin Graham discusses the difference between investing and speculating at length. Graham describes the difference between the two succinctly using the following words:
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

I think this sums it up nicely. If you approach each stock market investment with Graham's words in mind, you cannot help but do well over the long term.

The concern I have with speculation is that there is not normally any fundamental basis for entering a particular investment. A stock is bought because there is an expectation that the price will rise (normally over the short term) and it can then be sold at a profit. The problem lies in the fact that the expectation of a rise in price is based on observations of whether the price is rising or falling, or on what the price has done in the past. It seems to be solely about identifying patterns in price and volume.

The issue I have with this approach is that price does not necessarily reflect the value in the company. Over the course of weeks or even days a company's share price can fluctuate wildly without any news from the company in question. Is it possible that the fundamentals of the company have changed so dramatically over such a short period of time? In most cases it's unlikely. Sure - there are cases where a major change in the company's fortunes becomes known to the stock market leading to a change in valuation of the company's shares. But in most cases it's just investor sentiment driving prices.

So the next time you consider the purchase of a company's shares you should bear Graham's words in mind. Do you understand the company well enough to be confident of it's fortunes into the future? Is there sufficient value present to justify the price being asked? If you can't answer yes to both of these questions, should you really be investing? Remember that you can afford to pick and choose. The Australian stock market continues the throw up opportunities for patient investors.

Thursday, June 5, 2008

Australian Stock Market Basics

The Australian Stock Market has had a rough ride in recent times. The major market indices have come off the boil over the past year or so after a run of stellar gains over the preceding years. This recent market turmoil has seen many beginner investors sitting on the sidelines waiting to see what happens next. For those considering buying into shares, this post will discuss some of the basics of investing in the Australian Stock Market.

Let's start with the Australian Stock Exchange also known as the ASX. This is the organization responsible for maintaining the main share market in Australia. While there are other exchanges in Australia (the Newcastle Stock Exchange or NSX comes to mind) the bulk of equities are traded on the ASX. If you want to buy shares, you'll need to do it through the ASX. But you can't buy directly from the ASX - you'll need a broker, but I'll come to that later.

Before going any further, perhaps we should go back and look at what a share is since this is what's changing hands on the ASX. A share represents ownership of a small portion of a publicly listed company. Each share entitles the owner to a proportion of the company's profits which are distributed as dividends. It also gives the owner a say in how the business is run by allowing them to vote at the company's annual general meeting as well as any special meetings which are called throughout the year. This concept of ownership is an important one to grasp. When you buy a share you're buying part of a real business, not just a symbol for which prices are quoted daily in the newspapers.

That leads me nicely to my next point. In my opinion, most of your stock market investments should be long-term. You should be looking at 5 years or more. This means buying quality companies and holding onto them as their profits and dividend payouts rise. This will help you to ride out short term market fluctuations and hopefully allow you to profit handsomely over time. The other advantage of being a long term investor is that you will lower your costs. Your stock broker makes money each time you buy and sell, and the Australian Government takes their share as well in the form of capital gains tax.

And speaking of stock brokers, make sure you get a good one. There are discount brokers around (the most well known of those is probably ComSec) and while they normally provide free company information and research, they don't normally offer individual advice. A discount broker may be fine if you know what you're doing but if you're still coming to terms with the basics, a full service broker might be the way to go. A list of brokers is available through the Australian Stock Exchange.

One final thing to keep in mind is that with compulsory superannuation, most of us already have exposure to the Australian stock market through our super funds (this has probably become quite apparent looking at the recent returns from our super funds). The percentage invested will typically depend on what option you have chosen. The more aggressive options tend to have greater exposure to equities. So when we're considering investing in shares we need to remember that most of us already have some if not a significant exposure through our superannuation.

That's all I have time for today. While this post really only scratches the surface, the main points I wanted to get across are that when you buy shares, you're actually investing in a business and you should definitely think of it that way. And as such you should be taking a long term view. You wouldn't buy your local mixed business one week just to sell it the next would you? I'll discuss more Australian stock market basics in my next post.

Sunday, June 1, 2008

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Wednesday, February 27, 2008

ABC Learning (ABS) Price Crash - Is It A Buying Opportunity?

ABC Learning (ASX Code ABS) shares plummeted yesterday. ABC Learning shares - listed on the Australian stock market - reached an intra-day low of $1.15 before closing the day at $2.14. Shares are now in a trading halt. The current price is a far cry from the peak of over $8.50 reached early last year.

ABC Learning's drop in share price was apparently triggered by a lower profit result and investor concerns over high debt levels. To be honest, I haven't followed this company terribly closely over the last couple years as I thought it was way too expensive. But the market appears to have been concerned that the company's lending covenants contained provisions related to shire price or market capitalization. The company has since released a statement that this is not the case and that it's not in breach of it's lending covenants.

I just heard on ABC News that 1 director of ABC Learning sold shares just before the share price plunged. And 19 million shares were sold yesterday by CEO Eddie Groves and his wife. From what I understand, a large portion of the stock owned by Groves was exposed to margin loans and that's what triggered his selling. That was after Groves had told the Australian Financial Review that he would be safe from any margin calls. On top of that, it seems that while Groves was telling the market that the fundamentals of the company remained strong, his lenders were dumping his shares to meet margin calls. While nobody knows for sure there was a margin call, at would seem to be the case given the large number of shares the Groves' sold.

Insider trading laws will be put to the test with one director selling shares just before the share price drop. From what I understand, the sale was due to a margin call. But the director would not normally have been allowed to trade shares immediately before the profit was announced. While I don't know the insider trading laws very well, this does seem to be an anomaly.

And just to complicate things further, as part of the request for a trading halt this morning ABC Learning also indicated that there was a potential buyer for parts of it's business. What does this mean? Is the company under pressure due to its high debt levels - so much so that it may need to sell off part of the business to pay down it's debt levels.

I haven't been able to confirm it, but everyone is saying that this was triggered by the sub-prime mortgage melt down in the US. I presume that as ABC Learning has refinanced its debt, it's had to pay more as lending have become a lot more cautious about risk.

While I haven't been through the figures yet, I think anecdotal evidence suggests that I should be staying away from the company for now. But I will certainly have a closer look at recent ABC Learning financial statements because these situations of doom and gloom can sometimes provide great stock market investing opportunities.

I Have since written more about ABC Learning.

Thursday, February 7, 2008

MYOB Rejects Private Equity Offer - What's Next?

The MYOB board's rejection of a recent private equity approach is predictable if nothing else. This is how the game is played. Regardless of whether MYOB really is receptive to a private equity deal, the first approach was always going to be denied.

The interesting thing now is the watch how the Australian stock market reacts. The share price jumped today on the news as you would expect but does the market believe that MYOB is up for sale? As I mentioned in MYOB Rejects Private Equity Offer, the company's founder - Craig Winkler - will have the last say in any deal, whether by entering into a partnership or by selling outright.

Taking MYOB private would give the company to pursue more aggressive (read risky) growth strategies than a public structure might allow. Not having the stock market looking over your shoulder gives you more time to concentrate on the task at hand.

I will be following the MYOB private equity approach closely over the next days and weeks.

MYOB Rejects Private Equity Offer

MYOB appears to be the latest target of a private equity deal - something which has been rampant on the Australian stock market in recent times. MYOB has reportedly rejected the private equity approach. The deal is said to be worth $1.90 per share - a premium to the recent share price but a far cry from the heights attained during the heady days of the dot com boom.

From what I understand, MYOB's founder Craig Winkler owns a significant amount of the company - more than enough to block an unfriendly approach from a private equity player. Could it be that he is either willing to take MYOB private again in conjunction with a private equity partner, or would he sell out of the company completely?

For now, the MYOB board have rejected the offer as inadequate.

Monday, January 21, 2008

ASX Website - A Wealth Of Free Information

The ASX website really is a wealth of free information (please pardon the pun). I am a regular at the ASX website because it's regularly updated with useful Australian stock market investment information - all of it free. For those not familiar with it, the Australian Stock Exchange website is the home of the ASX on the web. In this post, I just wanted to point you in the direction of a few of the useful resources available.

Free Online Sharemarket Investment Courses

The ASX website contains a large number of free online sharemarket investment courses. Topics range from beginner to advanced. Here is a small selection of course titles:
  • Sharemarket Investment Stategies
  • Fundamental Analysis
  • Technical Analysis
And the list goes on. Learning is self paced so you work through the units in your own time. You will need to register as a user of the ASX website to gain access, but registration is free.

Investment Podcasts

Free investment podcasts are made available for a selection of the Investor Hour Seminars. The Investor Hour Seminars are a series of regular presentations at the Australian Stock Exchange on a range of investment related topics. These investment podcasts are made available on the ASX website soon after each presentation has been delivered.

ASX Sharemarket Games

Also on the ASX website you can access the ASX sharemarket game. Participants start with a hypothetical $50,000 to invest. You can test your trading skills against thousands of others. I have tried this game a couple of times but found it was oriented more towards traders due to the short term nature of the game. However, if you are interested in trading the market, the ASX Sharemarket game can be a good way to find out if you are any good.

Listed Company Information

As you would expect on the ASX website, you can view information about all companies listed on the Australian Stock Exchange. Information available includes price data (with a 20 minute delay), listing details, company announcements and dividend history. However, there is no detailed financial data, but you could go to Yahoo Finance or ComSec for that.

I have only scratched the surface or what's available on the ASX website. I recommend you add it to your list of free online investing resources. You can visit the ASX website here.

Update: I know this is not really related, but I've tried to find out more about Walker Thompson Trading Software based on a comment left below.

Sunday, January 20, 2008

How To Invest In Gold

How To Invest In GoldHow To Invest In Gold.

Lots of new investors want to know how to invest in gold, especially with the recent resources boom on the Australian stock market. In this post I will discuss some of the methods available to investors who don't currently have exposure to gold, and who want to learn how to invest in gold.

Before we get started, I just want to make it perfectly clear that this article is about how to invest in gold. I'm not making any recommendations as to whether now is a good time to invest in gold. With gold currently trading at over $1,000 per ounce, it is certainly a long way from it's low point, but who knows how much higher it can go?

Invest In Gold Producing Companies.

There are many gold producing companies listed on the Australian Stock Market, not to mention a plethora of junior explorers if you are looking for a more speculative investment in gold. Buying a gold producer will give you exposure to rising gold prices as well as any upside in the specific company. This may include exploration potential and efficiency gains.

The downside to investing directly in gold producing companies is the company specific risk you will take on. An individual company may underperform the gold price for many reasons. In the worst case scenario, insolvency is not out out of the question. Recall Sons Of Gwalia.

A couple of the larger gold producing companies listed on the ASX include:
  • Newcrest Mining Limited (ASX:NCM)
  • Sino Gold Limited (ASX:SGX)

Invest In An ETF.

Investors can gain direct exposure to the price of gold bullion by investing in a gold exchange traded fund. The only gold ETF I know of listed on the ASX trades under the symbol GOLD. Through this vehicle, investors gain beneficial ownership of 1/10th of an ounce of gold bullion for each GOLD share held. Read more about investing in GOLD shares.

Buying an ETF is like buying any other share. They offer liquidity since they are easily traded on the stock market. And if you want to know how to invest in gold with little money, you can investigate the use of leverage with ETF's. Margin lending among other lending products may let you get started with just a small amount of your own money.

Invest In Gold Bullion or Coins.

You can also invest in gold by buying gold directly from gold dealers in Australia. Gold can be bought in a variety of forms including different sized gold bars and coins. Dealers will normally buy at the spot price then charge a commission plus a delivery fee, but there are a few different variations.

Unless you want to want to actually be able to see and touch the gold, ETF's are probably a better option as they will give you the same exposure to the gold price but you don't need to worry about storage and handling.

If you really want to know how to invest in gold coinage, I would suggest you speak directly to a dealer about your specific needs. They will be able to tell you how to invest in gold coins.