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  1. #1
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    Default What are your Investment Rules?

    As a newish and very green investor, I am slowly - very slowly - trying to work out which strategies work for me, and which don't. Alongside that I'm also trying to develop my own rules, my guiding principles, in an attempt to make sure that having worked out a strategy to follow I then stick to certain rules. Rules like:
    - not investing too much in one company, no matter how much I'm convinced it's the next big thing
    - which shares are my "bottom drawer shares" and which are my "trading shares"
    - resisting the temptaion to meddle too much

    As I read posts across the board, I've seen people refer to the rules they follow. Seems like people vary between:
    - no rules at all
    - follow your gut instincts
    - then all the way up to carefully designed thought-out plans

    So I'm curious to know, what are some of the rules that you follow? Are they hard and fast rules that you NEVER deviate from? Or they more guidelines, to be tweaked constantly?

  2. #2
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    My starter for 10, learned through not following it when I first started is:

    Never sell shares in one company simply to fund the purchase of shares in another company. I’ve done it a few times and regret it. Plus it eats up any profits in brokerage fees.

  3. #3
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    My initial requirement, if it is an individual share (as opposed to a listed trust), it must pay a dividend, and the dividend cover needs to be at least 1.5x. This keeps my mind going when the market tanks!

  4. #4
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    Quote Originally Posted by oldtech View Post
    As I read posts across the board, I've seen people refer to the rules they follow. Seems like people vary between:
    - no rules at all
    - follow your gut instincts
    - then all the way up to carefully designed thought-out plans

    So I'm curious to know, what are some of the rules that you follow? Are they hard and fast rules that you NEVER deviate from? Or they more guidelines, to be tweaked constantly?
    These are some of the rules I follow off the top of my head.

    1/ Make sure any company you invest in makes a net profit after tax (or is imminently projected to do so).
    2/ Try and invest in 'pairs'. Pick the two best companies in any industry you want to invest in and split your investment between both. This should prevent you from thinking you can always pick the one best company to invest in when you are constantly reminded of what the opposition is up to!
    3/ Buy a company that you wouldn't mind holding on to if the share market closed for five years. This guards against post acquisition overtrading.
    4/ Buy something with a personal connection to you or a family member. I mean connection very loosely. It could mean:

    a/ The company engages in a hobby interest of yours,
    b/ The company is involved in some industry you have worked in, in the past.
    c/ The company supplies critical components to another one of your investments.

    All these 'links' mean it won't be chore keeping up with your investments in the future.

    5/ Buy shares in a company, from where you or a family member can imagine being a customer. This helps preserve your own moral investment integrity.

    SNOOPY
    Last edited by Snoopy; 04-05-2019 at 07:32 AM.
    To be free or not to be free. That is the cash-flow question....

  5. #5
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    Snoopy, I like numbers 4 and 5 - a little bit tangential from the usual!

  6. #6
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    Quote Originally Posted by oldtech View Post
    Snoopy, I like numbers 4 and 5 - a little bit tangential from the usual!
    More on 4/ One of the examples that came to mind when I was writing this was my investment in Restaurant Brands. I can't say I have ever been a fast food addict, although I have eaten a modest amount over the years. That means I was familiar to the product and via being a shareholder gradually came to appreciate the metrics in running such a business. Then I saw all those franchise fees going out and thought:

    "Hey where is all 'my' restaurant brands money going?"

    When I figured out it was going offshore - regardless of restaurant profitability - to an outfit called 'Tricon Restaurants' (now renamed 'YUM Brands'), I decided I wanted to be part of that action. YUM of course owns the intellectual property, about which Restaurant Brands is based.

    Later in 2016, YUM split by spitting out its China based division into a separate sharemarket entity 'YUM China'. My first instinct was to sell my interest in 'YUM China' because it was two steps away from the reason I made my original investment in RBD. However, it did satisfy my investment point 2, and it now provides a comparative 'paired' investment to my remaining stake in 'Restaurant Brands'. Furthermore NZ is now very dependent on trade in China. So I find it interesting to own a stake in a 'western concept' business that is trying to establish itself in the Chinese market. I am hoping that will help me better understand future investments I make in New Zealand that are trying to establish themselves in China.

    More on 5/ I think 'imagining the customer experience' is a useful tool for thinking about business risk. And if you have personal experience that is relevant, and that experience is part of a 'positive solution' to a problem that makes any such investment more satisfying. I don't think anyone wants to go to bed at night having an investment in a company they don't believe in.

    SNOOPY
    Last edited by Snoopy; 06-05-2019 at 08:06 AM.
    To be free or not to be free. That is the cash-flow question....

  7. #7
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    Hi OldTech and others, herewith my input FWIW.

    Left Field's Share Market strategies

    1. Take time to write down your own personal investment goals and strategies

    2. Patient Money. The money you invest in the share market must be prepared to wait patiently without pressure of repayment or penalty interest rates. When investing in any company you should be prepared to ‘ride’ that investment for 5 years or more. Thus it is best to avoid borrowing to invest and to avoid ‘margin lending’. Ideally you will have no debt. Your mortgage will be paid and you will have freehold property assets providing you with a spread of investments of real estate and shares.

    3. Embrace risk. Appreciate that without risk there is no gain, but a prudent investor can reduce risk and can make sure that mistakes (when they do happen) are only small mistakes. A prudent investor will see mistakes as learning opportunities.

    4. Do not ignore the small cap’s for opportunities. As Jim Slater points out in his excellent investment book, “The Zulu Principle,” the small investor has significant advantages over the institutional investors (including banks).

    “The institutions prefer leading stocks because their marketability is better…..most leading brokers cannot spare the time and money to research smaller stocks…. you are therefore more likely to find a bargain…. in this relatively under-exploited area.”

    5. Look for;

    a) Sound Coys (Focus on what the company is doing – not what the share price is doing)

    b) Sound management.

    c) Sound financials (not likely to need to raise cash) (eg the P/E ratio is key.

    d) Dividends a help (but not essential if opting for high growth.) Steady growth in EPS etc.

    e) Diversified, eg not soley reliant on the NZ economy. Prefer a concept or product that is sets the ‘world’ as it’s market eg ATM, XRO, FPH, MFT, etc.

    f) Leader in sector or potential to be, or strong, strong growth potential.

    6. I choose to avoid Mining/Petroleum/Gold and unethical investments such as tobacco, guns, gambling etc.

    7. Use TA to time purchases. Look for a positive price trend above either 90 day or 120 day moving av. Buy only on a confirmed uptrend. Use the ‘golden cross’ and ‘death cross’ signals as buy and sell signals.

    8. Stalk a share that you like and over time observe and buy on dips, nibble at a share you have faith in over time. In generally it is not wise to purchase large tranches all at once.

    9. Learn to set rules over feelings and sell if the SP goes below 100 MA or a death cross appears on the TA.

    10. Aim always for Long term trades to take advantage of NZ's tax free capital gains.

    11. Recognise that too much diversification may not be such a great idea, indeed the more diversified you are, the more 'average' your returns will be. If you want to beat 'average' returns, you may be better to concentrate on fewer 'winners.' (Example, since 2014 ATM has been over 60% of my portfolio (by value), and has provided my small portfolio (of only 5 to 8 companies,) outstanding returns, much better than the NZX 50 yardstick.)



    As always DYOR and take responsibility for your own investment decisions. Good luck out there!!
    Last edited by Left field; 07-05-2019 at 10:29 AM. Reason: To add diversification comments

  8. #8
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    Not a rule exactly but I like to have a risk bucket. Shares that will probably tank, but are interesting for various reasons. Like Wellington based, or at least NZ. Innovative. #8 wire. That sort of thing. Including the odd crowdfunding one. I am usually an early adopter. In truth they are mostly dogs or fall over completely, but they are fun.

    If 1 out of 10 is a star, fantastic. If not, still fun.

    Some of my risky ones on the NZX - BLT, CRP, AOR, PIL. And XRO now on the ASX, not so risky now.

  9. #9
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    The best advice I can give is to read Left field's post #7.

  10. #10
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    Some excellent advice there, Left field, thank you. You have articulated some good sound principles that I'm glad to realise I'm (mostly) following already!

  11. #11
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    Rules to investing? I look for only 2:

    1) Tax efficiency and effectiveness: ie. seeking companies on the basis that they pay a dividend is foolish and forgoes any rise in capital gains (the book value vs share value)

    2) Follow great investors: and not your financial adviser. So you pretty much can't go wrong reading about Warren Buffet or John Bogle, especially for the small investor point of view. The 2 open admit going in a low cost index ETF for long term growth is a for sure winner. If you are trying to pick individual stocks, you begin to play the SAME game as manage funds like Kiwi Saver (as those managers are trying to pick individual stocks).

  12. #12
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    Quote Originally Posted by SBQ View Post
    1) Tax efficiency and effectiveness: ie. seeking companies on the basis that they pay a dividend is foolish and forgoes any rise in capital gains (the book value vs share value)
    A company that is earning money has three options when declaring a profit.

    a/ Pay out all the earnings as a dividend to shareholders.
    b/ Keep all the earnings and reinvest those in the business, and in doing so provide extra capital that will enable the business to grow
    c/ Choose a combination of paying out a dividend with some of the profit and retaining the rest to help the business grow.

    Which strategy is used depends on what kind of market the company is in and whether that market is static shrinking or growing. A company should only retain capital if they can reinvest those retained earnings and be sure that any resulting incremental investment earns more than its cost of capital. If they can't do this, then the company should pay out to share holders all of their earnings as dividends, and let shareholders decide where to reinvest that money for themselves. In this situation, it is absolutely the right thing to do to pay out all the company's earnings as dividends. It would actually be foolish not to do so!

    Getting a dividend from a New Zealand company is generally very tax effective. That is because if the company has paid tax on their earnings, you as a shareholder should not as a rule have to pay tax again on that same money.

    It is true that capital gains for long term investors carry no tax liability. But it is also true that capital losses for long term investors carry no tax deductibility. So I would challenge the statement that capital gains are more tax effective than dividends for NZ investors in NZ companies.

    One particular problem I have noticed with the NZ market is that good growth companies need about five years of operations under the belt to really prove themselves. But so often, five years is enough to gain near market saturation in New Zealand. This means it is very possible to buy an NZ company with a 'proven growth record' only to have the growth story fall apart in year six.

    Buyer beware!

    SNOOPY
    Last edited by Snoopy; 13-05-2019 at 09:39 PM.
    To be free or not to be free. That is the cash-flow question....

  13. #13
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  14. #14
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    Quote Originally Posted by Snoopy View Post
    A company that is earning money has three options when declaring a profit.

    Which strategy is used depends on what kind of market the company is in and whether that market is static shrinking or growing. A company should only retain capital if they can reinvest those retained earnings and be sure that any resulting incremental investment earns more than its cost of capital. If they can't do this, then the company should pay out to share holders all of their earnings as dividends, and let shareholders decide where to reinvest that money for themselves. In this situation, it is absolutely the right thing to do to pay out all the company's earnings as dividends. It would actually be foolish not to do so!

    Getting a dividend from a New Zealand company is generally very tax effective. That is because if the company has paid tax on their earnings, you as a shareholder should not as a rule have to pay tax again on that same money.

    It is true that capital gains for long term investors carry no tax liability. But it is also true that capital losses for long term investors carry no tax deductibility. So I would challenge the statement that capital gains are more tax effective than dividends for NZ investors in NZ companies.

    One particular problem I have noticed with the NZ market is that good growth companies need about five years of operations under the belt to really prove themselves. But so often, five years is enough to gain near market saturation in New Zealand. This means it is very possible to buy an NZ company with a 'proven growth record' only to have the growth story fall apart in year six.

    Buyer beware!

    SNOOPY
    Lead by example. ie The Warehouse group, which in the past countless years has had a horrible track record for fulfilling a dividend paying policy while at the SAME TIME borrowing more debt and issuing tons and tons and tons of shares. They particularly done so throughout the 2000 during their expansion period.

    Your view on dividends as being tax efficient misses my point. I'm speaking from a book value per share vs market value per share. Drain the profits in the company and so shall you drain the market share price (there's no way around that). If you seek companies that pay consistent dividends, then seek those that are mature companies with NO market growth (ie utilities). But that's not the story we see in NZ because it's well advertised with brokerage firms like Macquarie where investing in NZ equities is "all about the dividends". No one ever questions the shareholder who does NOT want a dividend because that triggers a tax consequence. No one has thought to say if the capital gain of the share keeps growing, then why not sell a portion of the shares when ever they WANT to elect a return on the investment. But what am I to know? NZ financial advisers know nothing about taxation because from ALL of the ones i've spoke to on the phone in NZ, they tell me, "well you'll need to speak to a tax adviser" which is something very wrong. All qualified CFA CPA advisers in N. America must have a full understanding of tax minimsation for their clients because taxation is such an integral part of investing and retirement planning. No fool in NZ should have to be stuck paying 2 sets of fees for financial advice.

    Also it's not about how quick NZ companies can mature in NZ because likewise, they can fade away as quick and why should investors take that kind of risk. You know a small market (that the NZX is), also means small liquidity = the greater risk for the multi-millionaire that can't move in or out quick enough to change their position. It's more like get all the small investors in, and let them watch 95% of the mix of small companies fail.

    Best to stick with buying houses - at least there's a for sure way path of keeping all those gains tax free.

  15. #15
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    Quote Originally Posted by SBQ View Post
    Lead by example. ie The Warehouse group, which in the past countless years has had a horrible track record for fulfilling a dividend paying policy while at the SAME TIME borrowing more debt and issuing tons and tons and tons of shares. They particularly done so throughout the 2000 during their expansion period.
    'The Warehouse' had a long and very successful expansion period that really only came unstuck after they became number one in the discount department score sector in NZ, then tried to take that model to Australia. The 'attack of the yellow sheds' in Oz was a failure. Growth then was refocused on NZ as 'The Warehouse' tried to become a full scale third force in the grocery sector (largely a failure) within the 'Red Shed' brand. After that 'The Warehouse' bought into other retail channels like 'Noel Leeming' and 'Torpedo 7'. Noel Leeming I think has been a largely successful acquisition. But Torpedo 7 has suffered a large write down in goodwill in recent years.

    Your argument about 'The Warehouse' retaining more earnings and paying out a smaller or no dividend presupposes that 'The Warehouse' would have been able to use that retained capital wisely. With the possible exception of 'Noel Leeming', the historical hindsight tale is that 'The Warehouse' have been poor users of their own capital. Far from proving your point, I would suggest that the Warehouse is a very good example of a company that should not retain their own earnings. Paying those big dividends out of their earnings looks like the right thing to have done.

    SNOOPY
    Last edited by Snoopy; 19-05-2019 at 07:59 AM.
    To be free or not to be free. That is the cash-flow question....

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