how to raise capital for student investors?

[steve fleming]

Hi all, I've been lurking around the forum absorbing great knowledge from people.

I'm a student at Auckland University studying Architecture. But since 6th form (2006) I've been learning about sharemarket and have been investing since 2007 starting with only $1500.

I've learnt a lot of hard lessons over the past few years and made some good profit every now and then and my portfolio is now around $40000 (with $20000 of loan). However, One of my mistakes was in FPA when it was hanging at around $0.80. Including several other long term investments, I have around 65% of my portfolio locked up or I will suffer an 25% loss on the value my total portfolio.

I'm 21 years old, so I have a high risk tolerence. I can/ have seen my portfolio drop 50% without lossing my nerves. Although I have not followed finance related careers, I have educated myself extensively on sharemarket and everything relating to it. I am very much a foundamental trader, but use technical to make entry/ exit choices. I have tried and used all kinds of techniques over the years, and developed and refined my own strategy.

Hi Peter,
As an Auckland uni grad myself, I read your post and was pretty impressed by what you have acheived to date.

Based on what you have done so far, I think your goal of financial freedom in a few years time is definitely not unrealistic with a bit of luck.

I started investing at the same sort of age as you, and now am in my early 30s and have got a mortgage free home and an investment portfolio of a size that i could now stop working if i wanted to, a large part as a result of share investing, so what you are after is definitely do-able.

Regarding your current capital restrictions, there are other ways to leverage your portfolio rather than taking on debt especially given your risk tolerance - i use options and also micro-cap stocks to maximise the bang for my buck.

If i could just say one thing, for me, from an FA perspective, a big part of my understanding has been gathered by reading as many company announcements and learning about as many companies as I possibly can....assuming you follow ASX stocks, there are over 2000 stocks, there are just so many opportunities out there that most people are not aware of that can potentially make you alot of money, but the only way to find out about them is just to read and research and read and research as much as you can.

Good luck!

[petechewy]

Cheers steve, to hear what you have done has given me some confidence. I am however somewhat scared of using options and micro-cap stocks. I've read and understand the basics of options, but there's hardly a market on NZX and I've only just moved into ASX towards the end of last year. micro-cap seems are hard for me because I like FA approach to select stocks, and with limited financial background it is difficult to sort diamond from sand. But I will keep on reading and researching till I find some.

By the sound of it, did you study finance in University? which I guess also brings up the question, how did you (meaning steve and anyone else) got started in stock market in the first place?

[shasta]

Cheers steve, to hear what you have done has given me some confidence. I am however somewhat scared of using options and micro-cap stocks. I've read and understand the basics of options, but there's hardly a market on NZX and I've only just moved into ASX towards the end of last year. micro-cap seems are hard for me because I like FA approach to select stocks, and with limited financial background it is difficult to sort diamond from sand. But I will keep on reading and researching till I find some.

By the sound of it, did you study finance in University? which I guess also brings up the question, how did you (meaning steve and anyone else) got started in stock market in the first place?

Steve understood the risks with options & is a very astute investor, but that isnt for everyone, you wanna stick to what works for you.

I started out at what is now PricewaterhouseCoopers back in 1994, one of the partners encouraged me to get into shares & learn about general business matters.

I was always interested in economics over accounting anyway & decided the sharemarket was a way to make money whilst learning

I started off on the NZX too, but when the AUD was weakening in 2007 i moved from the NZX to the ASX moving most funds over between 90 - 92c.

Now i have refined a system that suits me, & i look for undervalued low EV resource companies, plus stocks trading well below NTA (ASX: DGR for example)

Have a look on the ASX thread - LOW EV Resource Companies & read the comments (ive already filtered thru what i consider to be some of the better stocks), that will give you a starting point for resource companies to look into, these are NOT buy recomendations, i've just shared my research

Navigate your way around the ASX threads & see what sort of companies others follow & post about, then read there last quarterly report & suss out there website etc

[steve fleming]

I'm a bit of an idealist, I want to have enough passive income so that I can get by when I finish with university (when I'm 26). I sat this goal for myself since I was 18. am not a person who needs millions and millions to satisfy, but want to have enough freedom to pursue what I love without financial worries.

Realistically, IMO if you want to become financially independent through investing in a short space of time (by 26) (and you are genuinely committed to this goal) then, realistically, the only real option to turn a $40k portfolio into say a $500k portfolio (sufficient to generate enough passive income to survive) is to massively leverage your equity.

As you said, as a student, borrowing is going to be tough, so, the other key leverage alternatives apart from borrowing are CFD’s or options. I would also include micro-cap ($10m market cap or less) investing as a form of investment that offers larger upside than downside and therefore a similar sort of leverage. As Shasta has said, his low EV resource list has some really quality micro-caps that offer some substantial upside.

Realistically, i can't see Pete turning $40k into $500k in a few years by investing in the likes of FPA.

You really need some big multi-baggers to pump up that portfolio size. Eg, a $5k investment that turns into $50k or a $10k investment that turns into $100k can quickly do wonders for your portfolio.....You can then re-invest that $100k into 10 further lots of leveraged $10k investments which in effect generates compounding/multiplying returns....I adopted this strategy as, given the riskiness, I knew not all the leveraged plays would come off, so needed to maintain a very large diverse portfolio with many different exposures....Because the investments are leveraged, a $10k leveraged exposure equates to a significantly higher risk/upside exposure than had the investment been in a bluechip.

I am not recommending this strategy at all, but am saying IMO it is probably the most REALISTIC way to quickly (say within 5 years) turn increase your portfolio size by many times. (Although, I note that I am coming from a FA point of view and take a medium term investment horizon , some of the TA experts may have other short term trading strategies to multi-bag your portfolio ).

This strategy can work, I have done it myself using options and micro-caps to significantly increase my portfolio size, and i know others who have done similar over time. For me, it required a lot of research, understanding of the market, a lot of bottom feeding, patience, confidence and conviction buying when nobody else was. You have to have some luck and make some calls along the way that no one else is willing to make.

Again, I am NOT recommending this leverage strategy, and in many cases will fail, but if you want high returns as Peter requires to meet his aim of sufficient passive income by the time he is 26, then realistically you need to take risks (though there are strategies to minimise the risks – diversification; buying in early; buying in at/under asset backing).

The alternative is building your portfolio more slowly using a more orthodox strategy.

And Pete- yes i did study a bit of finance at Auckland University – i used to spend a lot of time at the old access brokerage stock boards in Finance Plaza on the way to and from uni watching all the live stock quotes – good times!

[petechewy]

Cheers guys.

It seems that if I want to get to where I want to be in that time frame, the best chance is with micro-caps and options where the risk is far higher in the hope of better leaverage and maybe return. Maybe I should reposition myself to move at least half of my portfolio out of NZX50 and ASX200 to look for some of the more riskier investments? Obviously taking into accounts of a lot more study and research into companies.

[POSSUM THE CAT]

Petechewy If you really want leverage try CFDs through CMC markets but remember they are Basically Bookmakers

[petechewy]

Okay, i spent most of the weekend on this forum. Thanks to Steve, shasta and possum. I've began to see the merits in all sides. Fact, I don't have a huge capital (quite the opposite) and I have exhausted most of my avenues of cheap loans (overdraft and student loan). It has also become clear that at my age, to take on additional loans is not going to be easy and has more chance to do damage to me than help me. Therefore, if I want to seek what I want, I must reposition myself and take on more risk as a form of leverage.

I think the best thing for me to do is restructure my portfolio (please tell me if I'm wrong). Think I'll divide it equally into three parts: a third in NZX50 market focusing on medium term growth/ opportunities (I don't know enough about business yet to be confident with IPO and micro-chip stocks on NZX seems to have no liquidity); A second third in Micro-cap/ options in ASX focusing on short term trading (thanks to steve and shasta's advice and threads on low EV healthcare and mining. Very high risk, but it will help to give the leverage that I need to propel myself and i have already and will learn a lot from); the last third in ASX200 and NZX50 as I already have shares in AIA, RYM, MHI, HLG, FBU and it will be focussed on long term growth/ income (something to fall back on if others should fail).

Like steve said, FPA is most likely not going to get me anywhere in short term, medium or long term. So I will just learn the lesson and offload those when opportunities arises, basically treating it as cash sitting on the side. CFD, don't know enough and don't really want to go with bookmakers thanks to your advice possum

[shasta]

Okay, i spent most of the weekend on this forum. Thanks to Steve, shasta and possum. I've began to see the merits in all sides. Fact, I don't have a huge capital (quite the opposite) and I have exhausted most of my avenues of cheap loans (overdraft and student loan). It has also become clear that at my age, to take on additional loans is not going to be easy and has more chance to do damage to me than help me. Therefore, if I want to seek what I want, I must reposition myself and take on more risk as a form of leverage.

I think the best thing for me to do is restructure my portfolio (please tell me if I'm wrong). Think I'll divide it equally into three parts: a third in NZX50 market focusing on medium term growth/ opportunities (I don't know enough about business yet to be confident with IPO and micro-chip stocks on NZX seems to have no liquidity); A second third in Micro-cap/ options in ASX focusing on short term trading (thanks to steve and shasta's advice and threads on low EV healthcare and mining. Very high risk, but it will help to give the leverage that I need to propel myself and i have already and will learn a lot from); the last third in ASX200 and NZX50 as I already have shares in AIA, RYM, MHI, HLG, FBU and it will be focussed on long term growth/ income (something to fall back on if others should fail).

Like steve said, FPA is most likely not going to get me anywhere in short term, medium or long term. So I will just learn the lesson and offload those when opportunities arises, basically treating it as cash sitting on the side. CFD, don't know enough and don't really want to go with bookmakers thanks to your advice possum

Thats too passive to meet your goals, you should aim to have 20% max in conservative growth stocks that pay dividends, like the NZX ones you mentioned, even better if they pay interim/quarterly dividends & have a DRP scheme (lazy way to accumulate by reinvesting dividends), this is your "safety" money.

You need to be trading around 50% of capital in ASX spec stocks, 20% in options, & retain just 10% in cash (for any short term opportuntities)

Why follow this kind of model?

You are young & need to leverage your capital to make the kind of returns you require, but it could all go pear shaped, so you need a plan of some sort.

As the amount you have to invest with grows, you will need to develop some system & learn to stick with it, so i'd write down some "rules"

I'll use an example of how you could operate using the above.

Lets say you have $20k to start with.

1. 20% Conservative - NZX large cap dividend payer, the likes of RYM/IFT/FBU as examples, $4k

2. 50% Speculative/Risky - ASX Small Caps (Metals/Oil & Gas), basically any explorer that is actively drilling & generating newsflow, $10k

3. 20% High Risk - ASX Options/CFD's etc - Largely the same as above, but must be listed perhaps utilising SPP's, Capital Raisings, Bonus options etc, $4k

4. 10% Cash Mgmt -Leave to earn interest & a place for your "tax provision*" money, & only to be used in lieu of selling conservative shares, $2k

Eg, If you were to fund additional $ regularly, you would split as per the above ratio, so you are growing your "conservative assets" & "risks assets" in proportion.

Any dividends from the "conservative stock" should ideally be reinvested (via DRP's) or the added into the 10% "cash on standby", perhaps each quarter you can rebalance the portfilio, as any money you put in regularly would be retained in the "Cash Mgmt a/c" until sufficient enough to buy stocks

* Trading profits should have an amount for tax set aside (add to Cash Mgmt A/c to earn interest til due to pay it) & the rest split as above.

I believe this provides you with enough leverage whilst trying to minimise the downside risks, due to the relatively small amounts involved, i'd only have 1 conservative stock, 1 speculative stock & 1 option, with the conservative stock being a long term hold & not to be sold

The whole idea is as you get older & your total capital builds up, your risk profile will change & you will want to put more into the conservative assets for income

I'm having a rethink of my own "system" & am looking at a similar setup myself

[petechewy]

Lets say you have $20k to start with.

1. 20% Conservative - NZX large cap dividend payer, the likes of RYM/IFT/FBU as examples, $4k

2. 50% Speculative/Risky - ASX Small Caps (Metals/Oil & Gas), basically any explorer that is actively drilling & generating newsflow, $10k

3. 20% High Risk - ASX Options/CFD's etc - Largely the same as above, but must be listed perhaps utilising SPP's, Capital Raisings, Bonus options etc, $4k

Gosh that sounds a little adventurous but it does seem to make sense. By the looks of it, ASX is where I should dump most of my money in right? NZX is not really suited for aggressive approach.

Do you think that 1 share in each category a little too risky? I totally agree with only 1 or 2 in long term as per warren buffett's teaching, if one company is good to buy then you should buy as much as you can. But speculative or options, it's more about research with an element of luck. Wouldn't it be better to have a few more buskets to put your money in?

looks like a revisit to the drawing board.

[Corporate]

In my opinion, you've got to many stocks already. With your limited capital, research and invest in a maxiumu of 4 or 5 companies. Then watch them closely!

At your age, forget the conservative stocks. Get a competitive edge through research, reseach and more research!