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[sharechat] LEARNING TO INVEST: Investment styles and selecting stocks (3)

From: "G Stolwyk" <>
Date: Mon, 2 Jul 2001 00:26:26 +1200

Please refer to the Disclaimer at the beginning of my post of June 28, 2001, time 22.24 hours: " LEARNING TO INVEST....(1) ". The second article was written on June 30, 2001, 21.05 hrs.Today's final article will refer to content of these two previous ones.
( A major reason is that the " long term holding strategy " prevents me from placing investments into international markets at a reasonable speed ).
Peter Maiden recommends: " Against the Gods " by Peter L. Bernstein, 394 pages, ISBN 0471295639. Below $ 51.
This book discusses the transformation of primeval superstition into the powerful tools of risk control employed today.
The book mentions that the overall volatility ( risk ) associated with investments in a number of countries can often be lower than that of the participating country with the lowest volatility! 
6. Selection of stocks. Weighting of cash allocation to each stock.
6.1 Selection of stocks.
Please refer to " WORK. AT THE COAL FACE - Investment results (7) of June 22, 21.06 hrs.
Items 1 and 2 refer to NZ and Australian stocks. Diversification was good. Selection of two debt collecting stocks in a large and booming market was in hindsight, marginally justified.
All these stocks had been trading for a number of years with the excepton of CLH and LACO: The first stock was listed @ $ A 1.37 on the first day of trading ( Oct. 2000 ), while LACO opened @ $ A 1.20 on Jan. 2000.
 We bought CLH @ $ 1.73 on Nov. 18, 2000 and it now sells for $ 5.27. We bought LACO for $ 2.38 on Nov. 4, 2000 and it rose to $ 4.60. Due to a less active economy and a cash issue, the price retreated but is now steady @ $ 3.00.
These two stocks were deemed to be some of the strongest in Australia and conformed to the requirements set out in item ( 4 ) of my previous post!
Some of the reasons, these stocks were selected and the outcomes of : 
BCH: Exellent Board and management; high market share and a defensive stock. Priced by the International market: High P/E.
SKC: Excellent Board and management; high market share and a high div. yield coupled with a very low share price. Performer!
WAM: Good Board and management, a good market share and strategic location of land fills. Has expanded into other areas but has since encountered more competition. I think that the closure of competing landfills starting in 2002, will produce benefits.
AIA: Excellent Board and management; strategic and monopolist position, a property company with prospective tenants waiting to be selected. Rising land values and rents! Additional profits from Airport activities. A solid performer!
AFF: Was thought of as a recovery stock and due for a strong rerating. Did not perform and is not recommended.
TAB: Excellent Board and management; a growth stock and a cash cow. The NSW government has since passed adverse legislation and the completion of a large contract being done for this government has been delayed. Sofar, a promising overseas venture has only started but no news since. If it were successful then the shares could rise by 30%. Would now prefer other stocks.
QBE: Top Board and management; at the start of a new insurance cycle, rapid but measured expansion in England, US. I am rating this stock higher than what the price suggests.
CLH: Excellent Board and very experienced management; a very nimble company working in the defensive debt sector. Pricewise, would select this stock rather than BCH. First annual announcement in August.
LACO: An option stock, was heavily underpriced. The company LAC is a duopoly. At present it has about  $A 300 mill. cash waiting on results of rail tenders. The economy has affected activities at the ports but it has a powerfull position. I think that at some stage, Toll Holdings could be interested in this stock as it would give them a seamless operation to the ports.
Summary: I consider a high quality Board and management, their status as an operator and prospects first! Only then, the accounts will be looked into! 
Transparent accounts, good cashftows as well as the number of shares on issue are among items of interest. I tend to select Mid-cap companies but a heavily undervalued large one won't go amiss either! 
6.2 Weighting of cash allocation to each stock.             
Normally, an investor cannot afford to buy these nine stocks in a short time while also having investments in other currencies.
 As the investment grows, more stocks are selected and the spreading of risk intensifies. I would at least have some investments in Australia and overseas in the meantime, and try to initially select only the top three stocks in NZ.( It will be difficult to find more high quality stocks! ).  
Say, I had $ NZ 50,000 and arising from item (), 40%  or $ NZ 20,000 or say $ A 16,000 is allocated to Australia.
I have rated # the above mentioned stocks as follows: TAB * *, QBE* * *, CLH* * *, LACO* * * *. Total *: 12.
TAB gets 2/12 of $ A 16000= $ 2667; QBE: $ 4000; CLH gets $4000; LACO: 5333. The shares will be bought on that basis. An investor may decide to allocate $ 3000 to TAB and reduce the allocation to LACO by that amount.
# Rating stocks is a subjective exercise and requires some skill. One could assign a rating to the more important criteria e.g. a high undervaluation, monopoly status, expected high growth levels and then use these ratings to obtain an overall rating for that particular stock.( No need to assign a rating to a Board and management as only excellent Boards and managements will be invested in ).
Notes: The Focus Investing Group ( FIG ) subjects each stock to certain tests. My subjective weighting of cash allocations is based on the probability of greater ( Growth + Div ) returns, when comparing companies and making these investments within a short time frame.    
Readers know that I recommended LACO from day 1 and therefore had the right to accord * * * * to this stock. I also supported CLH and that deserved * * *. It so happens that in hindsight, CLH should have had * * * *and LACO needed * * * only. But we can't predict the future!
Warning: Allocation of cash based on rating of stocks can be a dangerous exercise and too much cash in any stock will increase the risk. Even experienced investors have lost large sums due to unexpected or sudden events !!!!
7. Other. 
Investors may allocate a certain amount of cash to a stock and, based on excellent honest reports, decide to increase the rating of a stock and hence increase their investment.
Others may use the " START " system as outlined in item ( 3 )- of my June 28 post: if the system allows, more companies or trusts in different countries can be invested in at the same time on an installment basis, and risks may be reduced; the investor should always have such a system costed before proceeding! 

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