shares for gearing

[voltage]

I wish to increase returns long term by investing in shares with borrowed money at 6% for 5 years. The same principle applies to buying a rental unit. One day I will use the dividend as a source of income for my super scheme. Lets say I start off with $100000 and will look at 5 stocks of $20000. I will stick to NZ stocks to reduce risk through currency fluctuation. I am more interested in quality shares that have a history of increasing dividends. Hopefully the dividend will pay most of the interest. Property stocks have a higher dividend but show little or no growth. Any suggestions. I am finding it hard to find value in NZ stocks but one needs to look at a long term horizon. The other way is just to buy shares in Smartshares or buy into a fund.
an initial selection TEL, RYM, POT, MFT, EBO

[percy]

Hi Voltage.
Please excuse this post.As you know I have had a very strong year,so I have decided to take a little "off the top" so am selling a few RYM,POT and EBO.
On charts they look to me to have topped,so I would think this is not the right time to borrow money to buy shares.That said, these three are excellent companies,well run,good balance sheets,good prospects and paying divies.

[voltage]

Thanks for the comments. The point risk return is valid. The trouble a higher risk strategy does not always equate to higher return from experience. Looking at historical data RYM has been outstanding. If it continues with a 15% return per annum consistently this is better than any rental house. So not too sure whether to have a collection of 5 higher riskier stocks or 5 blue chips.

[slimwin]

You don't have to limit yourself to 5 stocks either. You could take 10k of that and put it onto one or two spec stocks. Perhaps research nwe and nse. If one of those turns into a big thing it will dramatically boost your portfolio. Not that I'm recommending it, but I just took a loan of 10% the equity of our fee hold house and pot it in specs. That's about 20% of our share portfolio.
We're comfortable with risk with that. Then again, I buy lotto tickets too so perhaps I'm not a good example.

[modandm]

Thanks for the comments. The point risk return is valid. The trouble a higher risk strategy does not always equate to higher return from experience. Looking at historical data RYM has been outstanding. If it continues with a 15% return per annum consistently this is better than any rental house. So not too sure whether to have a collection of 5 higher riskier stocks or 5 blue chips.

honestly if you don't know what you are doing the you shouldn't be taking out loan to invest - investing is tough for amateurs at the best of times and by gearing into it you are just making it worse.

Generally when gearing though you do want to reduce stock risk so gearing into an index fund or managed fund would make alot more sense than picking 5 stocks you read about on the internet... think about it.

[voltage]

I have geared before with endowment warrants and have been quite successful. You must have a long term horizon with shares when you do this due to volatility. I am not too sure if I like the idea of gearing into specs, that is better done with cash. Index funds like smartshares could be a good idea Are there any other funds to consider?

[Silverlight]

Voltage, three comments I would make, first, implementing this strategy after the market has rallied 15% in past 12 months is probably not the best option, you would probably want to implement the strategy after markets have fallen 15%.

Secondly, gearing to buy shares, is not the same as gearing to buy a house. Gearing to buy shares is saying that you think the company you are buying shares in is under-utilising their own balance sheet for the risk/ return, and you need to personally increase the companies risk by moving your equity portion to debt. If you actually think that, buy shares, go to the AGM and pitch your reasoning to the board about the company borrowing more to increase shareholder returns.

However, I don't believe you have actually taken this view, as your premise of selecting 5 stocks at random means you have not considered the fundamentals of each of the companies balance sheets.

Lastly, you say long term, yet 6% for 5 years is not very long term. The NZX50's returns for the past 5 years has been -2% p.a., the ASX200 was also -2% p.a. Your strategy needs to return 6% per year just to break even, if we have another 5 year return series of -2% per annum, your strategy would have to outperform the market by 8% per year, and then you are only at net zero, not even making money.

If you have a strategy that outperforms the market by 8% per year, start your own fund, and make your millions off of performance fees!

[Pete]

I have geared before with endowment warrants and have been quite successful. You must have a long term horizon with shares when you do this due to volatility. I am not too sure if I like the idea of gearing into specs, that is better done with cash. Index funds like smartshares could be a good idea Are there any other funds to consider?

Check out Kingfish Limited (KFL) they have a good portfolio of NZ shares and pay out 2% per quarter of the NAV.

[h2so4]

Hi Voltage.
Please excuse this post.As you know I have had a very strong year,so I have decided to take a little "off the top" so am selling a few RYM,POT and EBO.
On charts they look to me to have topped,so I would think this is not the right time to borrow money to buy shares.That said, these three are excellent companies,well run,good balance sheets,good prospects and paying divies.

I agree percy. With the DOW sitting on three year highs I think now is a good time to protect the downside.

[CJ]

What % of gearing are you planning.

As others have said, the market is high and shares expensive. RYM is a great company but it is selling at a high PE. How long will that last.

I am currently geared about 30% and am considering locking in some gains, reducing the leverage and diversifying further.

[ratkin]

Not something i would be doing , especially as the market looking "toppy"

Problem is mainly psychological , suppose there is a decent correction , if yoer using your own money it not so stressful , you just ride it out until the market improves . But using borrowed money any correction will stress you out and could lead to mking bad decisions , ie selling out at the lows in exasperation.
Most the people that were really hurt during the GFC were those investing on borrowed money, they were basically forced to sell out at the bottom

[modandm]

I would look at devon fund management or milford asset management. Sure fees are higher than smartshares but not that much and I beleive active management adds value especially in a inefficient market like NZ.

[BIRMANBOY]

A wise man...even if you do have a despicable avatar handle.
Not something i would be doing , especially as the market looking "toppy"

Problem is mainly psychological , suppose there is a decent correction , if yoer using your own money it not so stressful , you just ride it out until the market improves . But using borrowed money any correction will stress you out and could lead to mking bad decisions , ie selling out at the lows in exasperation.
Most the people that were really hurt during the GFC were those investing on borrowed money, they were basically forced to sell out at the bottom

[lou]

What % of gearing are you planning.

As others have said, the market is high and shares expensive. RYM is a great company but it is selling at a high PE. How long will that last.

I am currently geared about 30% and am considering locking in some gains, reducing the leverage and diversifying further.

Hey CJ,

How do you calculate your 30%?

Do you have borrowings over your property portfolio as well?

[trackers]

Borrowing $100k then asking for stock tips? Sounds extraordinarily risky to me.

[gonzo56]

My advice: Never ever trade with money that you can't bare to lose.

Investing in the share market is basically a socially acceptable form of gambling. Even if you do all the research you can into a stock and know that it’s seriously undervalued, there is still a possibility for failure. (Acts of God or what not...)

[voltage]

thanks for all the pointers. I am interested that so many are against gearing into shares but in Aussie it so acceptable and there are so many vehicles to do this with like warrants etc. I have done well out of Telstra when my broker said sell I bought. Besides the big dividend annually the share price has risen a lot in the last year. Unfortunately this was only a small holding to start with. I still see gearing into property is really quite similar with rent the dividend and capital gain from property appreciation. Auckland property in good areas is around a 3-4 net % yield many blue chip shares are much higher. Perhaps it is not the right time and may be I wait for a fall in the markets as a way in.

[CJ]

Hey CJ,

How do you calculate your 30%?

Do you have borrowings over your property portfolio as well?The 30% is on shares only (in theory secured against the shares only but all debt with one bank so risk the house of cards could fall). I have a rental at 100% and a PPOR at 40ish %. Other investments not geared.

All up under 50% if that is what you are asking.

I also earn a decent salary with a very stable company so feel confident to take on more risk than if that wasn't the case. If i was to change jobs, I would rethinkt he level of debt.

[modandm]

My advice: Never ever trade with money that you can't bare to lose.

Investing in the share market is basically a socially acceptable form of gambling. Even if you do all the research you can into a stock and know that it’s seriously undervalued, there is still a possibility for failure. (Acts of God or what not...)

investing is not gambling. Buying one or two stocks and hoping they go up is gambling.

[modandm]

borrowing to invest in shares is not that different from borrowing to invest in property so I don't understand why it is a bid deal. Sure shares are more volatile but the leverage is usually lower.

[CJ]

borrowing to invest in shares is not that different from borrowing to invest in property so I don't understand why it is a bid deal. Sure shares are more volatile but the leverage is usually lower.But also remember that the company will already be geared so that should be factored in. It is effectively a second mortgage with the first being say 50% and the second, in my case, being another 15%ish or the gross asset value.

[ratkin]

thanks for all the pointers. I am interested that so many are against gearing into shares but in Aussie it so acceptable and there are so many vehicles to do this with like warrants etc. I have done well out of Telstra when my broker said sell I bought. Besides the big dividend annually the share price has risen a lot in the last year. Unfortunately this was only a small holding to start with. I still see gearing into property is really quite similar with rent the dividend and capital gain from property appreciation. Auckland property in good areas is around a 3-4 net % yield many blue chip shares are much higher. Perhaps it is not the right time and may be I wait for a fall in the markets as a way in.

Might be best , although its amazing how when shares are cheap , nobody wants them!! In hindsight 2009 was an amazing buying opportunity , but most people too petrified to buy any, let alone buy them on credit

[gv1]

Read as much as you can, try first investing in NZ. Even when some one recommends in this thread about a particular share, do you homework. I have been badly burnt. Being a newbie you tend to cut corners and relay on others advise, NEVER EVER do this. Do lots of research about the company you are going to invest. Look for companies that will survive no matter what economic condition they go through. Like the advise I give my family, if they are buying a house...to determine if the price they are paying is reasonable, I tell them to think if they had to sell tommorrow would they get that price. companies still paying good div on investment e.g hallenstein, Fre( freightways is another co with growth) Gff( doing restructure, into food business. We all need food to survive) hope this helps..

[ENP]

I am more interested in quality shares that have a history of increasing dividends.

So not too sure whether to have a collection of 5 higher riskier stocks or 5 blue chips


You have already answered your first question.


initial selection TEL, RYM, POT, MFT, EBO

Taking a quick look at my brokers website, I can see...

TEL:
- Made roughly the same amount of sales for the last 8 years (i.e. no growth)
- Made half as much profit (i.e. negative growth)
- Made 2/3 of the earnings compared to 8 years ago.
- This is a company going backwards, I would personally never invest in this company

RYM:
- My favourite business on the NZX
- 200-300% growth in revenues, profits, EPS over the 8 year period
- 60% rise in share price in the past year but roughly 15% increase in EPS
- This rise is not sustainable, RYM is trading at one of the highest P/E multiples since listing.
- This is a great company to hold, but only at the right price, which right now I believe is not

POT:
- Another good growing and stable company
- 50% revenue growth over 8 year period
- 100% profit and EPS growth over 8 years
- Trades at a rediculously high P/E multiple for what the business is and the alternatives available
- About a 30% share prices return this year, this is not sustainable

MFT:
- A more unpredictable company
- Quite up and down in its sales and profits, harder to predict the future
- Benefit of expanding worldwide
- Tripled it's profits over the 8 year period, with wild swings 4-5 years ago
- Trading at a reasonable P/E multiple and good value compared to the others above

EBO:
- 400-500% growth in sales, profits, EPS over 8 year period
- Quite steady in it's growth
- Trading at a reasonable P/E multiple for a growth company.
- 1 year 25% share price return, not sustainable

You are braver than me borrowing to invest with these companies above.

I'd keep my options open on the ASX if I was you also, as you have more chance of finding a great business at a reasonable price.

[Stranger_Danger]

My advice: Never ever trade with money that you can't bare to lose.

Investing in the share market is basically a socially acceptable form of gambling. Even if you do all the research you can into a stock and know that it’s seriously undervalued, there is still a possibility for failure. (Acts of God or what not...)

A possibility of failure does NOT mean something is gambling.

The irony is, gambling is the one situation where the possibility of failure is the easiest to understand and, over the long term, calculate in a very precise way.

Investment is not gambling because the base case over the long term is the making of money through ownership of the income stream of a basket of productive enterprises, where the base case with any form of gambling is loss, which is a mathematical certainty overall - that is why its gambling.

That said, I do get your point and most people invest in such a way that would make gamblers proud.

[shasta]

I wish to increase returns long term by investing in shares with borrowed money at 6% for 5 years. The same principle applies to buying a rental unit. One day I will use the dividend as a source of income for my super scheme. Lets say I start off with $100000 and will look at 5 stocks of $20000. I will stick to NZ stocks to reduce risk through currency fluctuation. I am more interested in quality shares that have a history of increasing dividends. Hopefully the dividend will pay most of the interest. Property stocks have a higher dividend but show little or no growth. Any suggestions. I am finding it hard to find value in NZ stocks but one needs to look at a long term horizon. The other way is just to buy shares in Smartshares or buy into a fund.
an initial selection TEL, RYM, POT, MFT, EBO

I'd want some exposure to energy, any room for IFT in there?

[skid]

Keep in mind that shares have motored ahead in the last year ,but the basic fundamentals of the market have remained the same,which is lousy[aside from Qe3]
Many feel shares are overvalued for this reason.
In this kind of market it is best to reduce or eliminate debt,not create it.
If youve made up your mind,then all the best ,but be careful out there and keep your ear to the ground,not only in terms of your personal shares,but also in terms of the general market conditions.
I personally would do nothing until after the US elections.

[gonzo56]

...That said, I do get your point and most people invest in such a way that would make gamblers proud.

Yeah, i'm talking about virtually guaranteed income from a term deposit vs. putting money in something in the hope of "winning"

[modandm]

You have already answered your first question.



Taking a quick look at my brokers website, I can see...

TEL:
- Made roughly the same amount of sales for the last 8 years (i.e. no growth)
- Made half as much profit (i.e. negative growth)
- Made 2/3 of the earnings compared to 8 years ago.
- This is a company going backwards, I would personally never invest in this company

RYM:
- My favourite business on the NZX
- 200-300% growth in revenues, profits, EPS over the 8 year period
- 60% rise in share price in the past year but roughly 15% increase in EPS
- This rise is not sustainable, RYM is trading at one of the highest P/E multiples since listing.
- This is a great company to hold, but only at the right price, which right now I believe is not

POT:
- Another good growing and stable company
- 50% revenue growth over 8 year period
- 100% profit and EPS growth over 8 years
- Trades at a rediculously high P/E multiple for what the business is and the alternatives available
- About a 30% share prices return this year, this is not sustainable

MFT:
- A more unpredictable company
- Quite up and down in its sales and profits, harder to predict the future
- Benefit of expanding worldwide
- Tripled it's profits over the 8 year period, with wild swings 4-5 years ago
- Trading at a reasonable P/E multiple and good value compared to the others above

EBO:
- 400-500% growth in sales, profits, EPS over 8 year period
- Quite steady in it's growth
- Trading at a reasonable P/E multiple for a growth company.
- 1 year 25% share price return, not sustainable

You are braver than me borrowing to invest with these companies above.

I'd keep my options open on the ASX if I was you also, as you have more chance of finding a great business at a reasonable price.

Great post couldn't agree more. NZX is such as small pool. There are 6200 stocks in the world with a market cap over 1bn USD, restricting yourself to NZ companies is a bad idea.

And def true that the winners over the last 5-10 years AIA, EBO, RYM POT etc are very very expensive on PE multiples relative to the rest of the world.

Look at Henry Schien - just like EBO 15% growth year on year through global aquisition and leveraging scale.
Look at Apple - massive growth and trades on just 13x or much less than that factoring in the billions of cash it has

Then look at NZ - pay 20x for AIA with sub 10% growth... you must be joking. Sadly it seems many NZ shares are priced largely on:

1. History of success (as opposed to prospect of future)
2. Dividend yield (higher must be better right?)
3. Household names

Anyway I am agree valuations are stretched on the NZX - especially when you look at international peers.

[modandm]

Keep in mind that shares have motored ahead in the last year ,but the basic fundamentals of the market have remained the same,which is lousy[aside from Qe3]
Many feel shares are overvalued for this reason.
In this kind of market it is best to reduce or eliminate debt,not create it.
If youve made up your mind,then all the best ,but be careful out there and keep your ear to the ground,not only in terms of your personal shares,but also in terms of the general market conditions.
I personally would do nothing until after the US elections.

Another great post. The uncertainty surrounding the US fiscal cliff and election is massive and it is likely we will see risk appetite dry up (shares fall) in the lead-up. Depending on how much the market corrects there may be buying opportunities. If Romney wins - hey we might all go to town

[BIRMANBOY]

I wasnt aware NZ was now the 51st state of the USA? The days of America sneezing and everyone getting a cold is long gone...a slight sniffly nose maybe. The NZ share market has a life of its own now....well sort of.
Another great post. The uncertainty surrounding the US fiscal cliff and election is massive and it is likely we will see risk appetite dry up (shares fall) in the lead-up. Depending on how much the market corrects there may be buying opportunities. If Romney wins - hey we might all go to town

[Hoop]

I've just read this thread and am surprised with the omission of several basic procedures.

When thinking forward you have to think forward not base 6 years down the track using your revision mirror as your guide.
Impossible task thinking 6 years ahead. So select best middle worst contingencies and weight their chances of happening (total 100%)...don't cheat and don't analyse with your rose- tinted glasses on.

Very important rule All market trends must end.... Property is a market and is no exception to the rule (currently in a bubble with an "always rising" consensus attitude).

Look at all factors affecting Equities not just the equities themselves..and apply Best middle worst to each...e.g Property assets are big in NZ any small movement downwards would affect the ecomony...using the best middle worst scenario with property only the best would be favourable. Look forward, property rose because household income rose (one income earner then 2 income earners as women entered the workforce..to keep rising at the same rate you need 3 income earners or a large income increase from elsewhere. Also These income earners are aging so look at the demographics. .........So you need to do a huge amount of Homework not on the shares you buy but the factors surrounding those shares.

Look at (here I go again!!!) secular market trends study the theory behind it (more Homework)...Eg If we are nearing the top end of a NZX secular bear cycle then entering now would be a disaster. I don't know what secular cycle the NZX is in (Winner do you know????) If the NZX is in a secular bull market then yes you will make money..and it's a good idea

And the most important thing of all..........Ratkin you Gem:t_up:..you are the only person it mention it.....

The individual investor psychological profile......Have you got what it takes?????? NO BOOKS IN THE WORLD CAN TEACH YOU HOW TO SUCCESSFULLY INVEST if your grey matter constantly lets you down...example, Golf books :p you can learn to have a perfect grip and swing...but you still play like crap or..often worse than before...why???
It is damn near impossible to change an individuals mental profile, often it's hard-wired in......The people who are very good..are those that lift their performance when the times get tough....they excel (ability to make the correct decisions) under pressure ......do you????

Do you suffer from everyday stress
Do you worry
Do you worry over money
Do you lack patience Do you want to make a lot of money quickly.
Do people say to you that you are old-fashioned, set in your ways.
Do you talk and dwell on the past
Are you quick-tempered
Do you change your mind often.
Have you got a lot of unfinished jobs around the house.
Do you lack tolerance
Do you suffer from anxiety
Do you let pride get in the way
Do you have problems excepting the truth
Do you suffer from denial
Do you suffer from depression
Do you suffer from over ebullience
Are you an informal she'll be right type of person
Do you have personal problems which consume your time
Do you lack me time
Are you a person that lacks or dislikes the "system"
Do you lack self-discipline
Do you get emotionally attached to things
Do you lack ruthlessness.
Do you lack having an open mind and believe anything is possible
Are you a linear thinker instead of an exponential thinker
etc etc etc and list goes on

DONT CHEAT....If you answer yes to these or some of these...then forget leveraged long term share investing as a day job.

Now that's only the mental part.

Physical part is
how wealthy you are
Are you married and have a family...how do they feel you investing all the money...eh??
Do you rent or have a mortgaged to the hilt family home.
Is your job secure
etc etc etc

All these questions have to be honestly to yourself otherwise you are fooling yourself

I have written another post somewhere on ST about Investor profiling (no time to find it atm)

If you flunked answering the above questions it does not mean that you will make a lousy investor...There are several investor strategies your psychological profile will at least best fit one of those strategies.
e.g conservative worrying type and stress makes you sick type investor... then invest using the MA200 (long term stuff) into a solid household name blue chip that has low volatility and clear easy signs to buy into and sell out of thereby creating low risk low reward...or invest in a constant price utility such as fixed term deposits.

[ratkin]

yeah , doing the right thing can be very hard when the markets turn to custard.
I expect we all learnt much about ourselves during the GFC

I made the decision to sell none of my long term holdings and to buy more.
I was lierally shaking with a couple of my big buys of Acrux, didnt sleep for weeks and was a nightmare to be around. But deep down i knew buying was the right thing to be doing. They went lower , i bought more , but i was a basket case .
Not sure i would have the energy to go through that again
As Mr P said 'I was a brave idiot" probably not far from the truth

Many of those i was buying off wuld of bought at 1.50 ish and were bailing out at .40c , they were no doubt rational people , but the pressure made them act irrationally .

[modandm]

I wasnt aware NZ was now the 51st state of the USA? The days of America sneezing and everyone getting a cold is long gone...a slight sniffly nose maybe. The NZ share market has a life of its own now....well sort of.

are you serious?

If so you are mis-informed. The US sharemarket makes up 47% of all listed shares in the world. The US economy is the largest economy and largest consumer economy in the world. Do you remember the Lehman bros collapse and the affect of that on the world? Sure china is growing but the US is still the lead that others follow.

If you still don't believe go to yahoo finance and put in the NZX vs S&P500 next to each other

[BIRMANBOY]

The original post (if you take the time to re-read it) states that the gearing is to be done on NZX stocks not US stocks. My point is that the US elections and other US economic and financial problems has become somewhat disengaged from what the NZX does. Consequently who is US president etc is all somewhat irrelevant to the issue at hand...gearing of NZ stocks.
are you serious?

If so you are mis-informed. The US sharemarket makes up 47% of all listed shares in the world. The US economy is the largest economy and largest consumer economy in the world. Do you remember the Lehman bros collapse and the affect of that on the world? Sure china is growing but the US is still the lead that others follow.

If you still don't believe go to yahoo finance and put in the NZX vs S&P500 next to each other

[skid]

The original post (if you take the time to re-read it) states that the gearing is to be done on NZX stocks not US stocks. My point is that the US elections and other US economic and financial problems has become somewhat disengaged from what the NZX does. Consequently who is US president etc is all somewhat irrelevant to the issue at hand...gearing of NZ stocks.
BB with all due respect,that kind of talk is bordering on delusional
Your basically saying that the worlds biggest economy had no effect on the GFC and the GFC didnt effect NZ
The NZ economy is tiny-when the US sneezes,you had better run for cover.

[BIRMANBOY]

You say potatoes..I say starchy vegetable tubers...I didnt say that it had no effect on the NZ economy...I am saying (for the third time) that the NZX (not the economy..the NZX) has a life of its own now. NZX is highest its been in years ..everywhere else, ASX, etc are struggling. What does that mean? It means the NZX is somewhat independant of other exchanges. Whether Mitt the twit or Barack the black attain office will have bugger all effect on the NZX. Besides that the NZX doesnt even figure on anyones mind other than a few expats overseas and a few bored AUssies. Ask 100 US stockbrokers where NZ is and you'll see what I mean....we dont even register on the radar..consequently most of the movement on the NZX is actually driven by whats happening in NZ and NZ shareholders. Apart from that getting back to the original subject..terrible idea to gear any share purchases anywhere but if you forced me to do it I might try the NZX (as opposed to another exchange) BUT not at the current level.
BB with all due respect,that kind of talk is bordering on delusional
Your basically saying that the worlds biggest economy had no effect on the GFC and the GFC didnt effect NZ
The NZ economy is tiny-when the US sneezes,you had better run for cover.