A noob's plan + some questions.

[zb3]

Hi everyone,

I am new to share trading and would really appreciate input from some of the knowledgeable members on here. I have been trying to develop a long term plan on how to grow my capital at the fastest possible rate. I would definitely appreciate critiques/ideas.

A little bit of background about myself: I am 23 years old and in my final year of a law and accounting degree. I have about $34,000 invested in Milford's PIE funds (in the income, global and dynamic funds) but would ideally like to learn how to effectively invest on my own. From the beginning of next year I will have a little over $1,000 a week to invest so really need to think seriously about the best way to go about this.

I have ordered One up on Wall Street and The Intelligent Investor and plan to read them as fast as possible although this will undoubtedly still take me a little while given study and work takes up the majority of my time. Is there any other books people recommend? They don't have to be share related - just anything good on making money generally.

My plan is to purchase an investment property at the end of this year using the equity in my managed funds as the deposit. I have spoken to the bank about this already and they will allow this although it essentially operates like a margin loan. I plan to fix 20 percent of the mortgage on a 3 year term and pay it off in case the value of my shares fluctuate and the bank forces me to sell and realise any losses. My surplus income would be invested into shares. Is this too much of a buffer? Would it be more prudent to set the majority of mortgage to interest only and invest the rest into shares? The alternative is to have a flexible mortgage and withdraw additional capital to invest, although these tend to be slightly higher interest rates.

I plan to continue this cycle indefinitely - i.e. purchasing a new investment property every 3 years, paying off 20 % and investing the rest in shares. Although the property market in NZ is currently overvalued so perhaps I should hold back on property for a little while?

Is it possible to consistently get greater returns investing on your own than using a managed fund given that fund managers are experts and invest full time? I do get the feeling that fund managers may take less risks to avoid 'rocking the boat' so to speak. Managed funds (provided it's a PIE) also provide tax benefits that individual investors don't receive - lower marginal tax rate for high income brackets, capital gains are NEVER taxed etc.

I guess the only real downside to them are the fees which usually have a base of 1% pa + performance bonuses. Ideally in order to beat returns on managed funds it seems you would need at least $50k to invest? If you were to invest $5k in a share brokerage would cost $60 to buy and sell which is already 1.2%. I would not like to invest less than $10,000 in any one share to avoid brokerage cutting into my returns. To be adequately diversified I would need at least 5 different shares (although 8 would be preferable). Is this the approach that many of you take? Or do you invest smaller amounts and still achieve great returns?

I was thinking that I would probably be better off to use managed funds for the next 3 or so years until I build up my knowledge and capital. I think I should probably focus on just the NZX and ASX and leave global investments to managed funds? I have heard that it is best to have around 50% of your capital in global markets. Any advice/personal stories would be greatly appreciated.

Thank you all for your time.

[Longhaul]

Two books that I've really liked are The Dhandho Investor and The Little Book That Beats the Market. The first helps you focus on finding businesses with deep and wide moats and buying them under value, and the second offers a simple way to beat the market and many mutual funds (I haven't tried it myself and may not work in NZ). Oh, and they're both quick reads.

[Fisherking]

I'm not yet experienced enough to give advice regarding shares. I've basically done things the other way round and am now selling down (some) property and purchasing shares. In my opinion both are worth holding but as you will hear, many dont like property because it does nothing for the country. It is important we move away from inward focused investments as a country.

Who knows where the property market will end up? Most who claim its overvalued have been doing so for the last 5+ years. Massive growth over that period. Given I've sold down, I clearly think things are becoming overheated - but its not just the value its the bad rap PI's are receiving and the likelihood that at some stage government will do something (more) to kill it. I don't think they will, but if labour get in, you need to be extremely careful.

I think you're plans ok, but I wouldn't purchase property with anything less than 25% equity under these circumstances and I'd always retain a further buffer of $10 - $20k depending on the number of properties you own. Without this you can't sleep and the bank could call in a portion of the mortgage as you state.

I'd also recommend you start slow with something you can afford easily. Get something with capital gain potential with the max yield you can achieve. I think you need a mix of yield and CG, but its CG that will make you the real money.

In property you can DEFINITELY do better yourself than in funds. It takes time. time in, not timing.

One other piece of advice - you're planning way too far in advance. Good to have goals, but its not realistic to plan this far in advance. Just bank on saving the money, where you put it will vary.

[boring]

Hi zb3,

Your post so reminds me of myself, 25 years ago: focused and determined to be successful, obsessively planning for the future, eager for knowledge and prepared to put in the hard yards to make it all happen. These personal attributes will serve you well.

I'm going to take a slightly different tangent here, and provide some suggestions that I wish I had learnt early in my investing career. I hope you will find it useful.

Given your accounting background, and your current choice of books to read, I'm guessing you'll probably gravitate towards some form of fundamental investing. Just make sure your choice of investment style resonates with your personality and is one that you can really feel passionate about, because investing is a marathon, not a sprint. I've been an investor for 25 years now, and I'm still learning to be better at this art.

In my experience, there is no one single best investment style that outperforms in all market conditions. Growth investing, value investing, dividend investing and even short-term trading can all work well, and each technique will have their moments of out-performance and under-performance. People from all different backgrounds using all different investing styles can make excellent money in the market. Ignore those who say their technique is the "one and only superior technique" and that all other techniques are inferior, you'll usually find these people lack investor maturity.

You will find plenty of books and get plenty of advice on all the different ways of stock investing (or trading). Most material will focus on technique, technique and more technique. This will seem fine when you are thirsty for knowledge. However, the methods and mechanics of stock investing is only half the story.

The biggest trap is to focus too much on technique. It’s equally important to work on the emotional and behavioural aspect of investing. Controlling your emotions, thinking clearly and learning a framework that helps you make better decisions will really serve you well in your investment journey (as well as your life journey).

So I recomment you start with the following excellent books to help you make better decisions in life, and also become aware of your natural cognitive biases. I can’t stress enough how important this material is, so read it once, and then re-read throughout your investing journey. You will gain something different every time you read it, because with increasing personal experiences, you’ll relate to the concepts differently.

1st Book: Decisive: How to Make Better Choices in Life and Work - Chip & Dan Heath
This is a superb book that brings together all the latest research on decision psychology.
The authors provide an excellent framework for making better, more informed decisions.
This book alone replaced several older books that I had on the subject.

2nd Book: The Art Of Thinking Clearly - Rolf Dobelli
A great introduction to the cognitive biases and judgemental heuristics that affect our decision making.
The author covers a lot of work from other thought leaders and researches on this subject.

These books will hopefully lead you to other material on cognitive biases and decision making. Nassim Taleb, Edward De Bono and James Montier are other authors you may like to consider.

The best thing you can do is to make a commitment to your ongoing investment education and personal development. The two really go hand-in-hand.

[Buffett Jr]

Hi,

Why are you in such a big hurry? Why does everything have to be done "as fast as possible?"

[zb3]

Two books that I've really liked are The Dhandho Investor and The Little Book That Beats the Market. The first helps you focus on finding businesses with deep and wide moats and buying them under value, and the second offers a simple way to beat the market and many mutual funds (I haven't tried it myself and may not work in NZ). Oh, and they're both quick reads.

Thanks Longhaul I will put those down on my list of books to read.

[zb3]

Hi zb3,

Your post so reminds me of myself, 25 years ago: focused and determined to be successful, obsessively planning for the future, eager for knowledge and prepared to put in the hard yards to make it all happen. These personal attributes will serve you well.

I'm going to take a slightly different tangent here, and provide some suggestions that I wish I had learnt early in my investing career. I hope you will find it useful.

Given your accounting background, and your current choice of books to read, I'm guessing you'll probably gravitate towards some form of fundamental investing. Just make sure your choice of investment style resonates with your personality and is one that you can really feel passionate about, because investing is a marathon, not a sprint. I've been an investor for 25 years now, and I'm still learning to be better at this art.

In my experience, there is no one single best investment style that outperforms in all market conditions. Growth investing, value investing, dividend investing and even short-term trading can all work well, and each technique will have their moments of out-performance and under-performance. People from all different backgrounds using all different investing styles can make excellent money in the market. Ignore those who say their technique is the "one and only superior technique" and that all other techniques are inferior, you'll usually find these people lack investor maturity.

You will find plenty of books and get plenty of advice on all the different ways of stock investing (or trading). Most material will focus on technique, technique and more technique. This will seem fine when you are thirsty for knowledge. However, the methods and mechanics of stock investing is only half the story.

The biggest trap is to focus too much on technique. It’s equally important to work on the emotional and behavioural aspect of investing. Controlling your emotions, thinking clearly and learning a framework that helps you make better decisions will really serve you well in your investment journey (as well as your life journey).

So I recomment you start with the following excellent books to help you make better decisions in life, and also become aware of your natural cognitive biases. I can’t stress enough how important this material is, so read it once, and then re-read throughout your investing journey. You will gain something different every time you read it, because with increasing personal experiences, you’ll relate to the concepts differently.

1st Book: Decisive: How to Make Better Choices in Life and Work - Chip & Dan Heath
This is a superb book that brings together all the latest research on decision psychology.
The authors provide an excellent framework for making better, more informed decisions.
This book alone replaced several older books that I had on the subject.

2nd Book: The Art Of Thinking Clearly - Rolf Dobelli
A great introduction to the cognitive biases and judgemental heuristics that affect our decision making.
The author covers a lot of work from other thought leaders and researches on this subject.

These books will hopefully lead you to other material on cognitive biases and decision making. Nassim Taleb, Edward De Bono and James Montier are other authors you may like to consider.

The best thing you can do is to make a commitment to your ongoing investment education and personal development. The two really go hand-in-hand.

Thanks for your interesting perspective. Fundamental decision making techniques like you suggested are often overlooked and have application in all facets of life. I shall definitely read the books you have listed. I have looked them up and they have very good reviews so definitely worth a read.

Given your experience it would be interesting to hear how much you invest in one share? Do you still see adequate returns with smaller amounts (5k or less) or do you think that managed funds are better off in those circumstances?

[zb3]

Hi,

Why are you in such a big hurry? Why does everything have to be done "as fast as possible?"

Like anyone I would rather make money quickly than make it slowly. Although I should add that I wish to do it efficiently and not take any unnecessary risks. Whilst I don't mind taking calculated risks, I'm not going to go into a casino and place all my money on black or red just to make money "as fast as possible".

[boring]

I was lucky enough in my early investing career to read a motivational book that gave the advice to "start with the end in mind". So I spent a good amount of time imagining what my "end game" portfolio would look like. I knew I wanted financial freedom, and I knew I wanted to build a stock portfolio of great businesses that would pay me enough dividend income that would exceed the salary of the professional middle-management job that I aspired to have at the time.

And I wanted all this before I was 30. It ended up taking me an extra 15 years before I reached my goal, but better late than never.

Today, when I open up a new stock position in a company, my intention would be for a position no less than $30K (USD or AUD), but preferably $50K. However, I will scale in to a position if I'm not 100% confident that the stock won't fall in price. I'd look to scale in at increments of $10K over a period of 6 months. It's similar to dollar-cost averaging.

You have to realise that's what I do today, and I hold about 30 stock positions which is at very the upper limit of what I can monitor and keep track of.

When I first started, I was living in Europe and I was able to set up a brokerage account in the US of A. that was back in the day when I had to physically ring a broker (I had a Bank of America account) to order shares. I could only keep track of the share price by looking at the Wall Street Journal every morning. I started with USD $5,000 and I opened 2 positions of around $2,500 each in Bristol Myers (BMY) and Worldcom (WCOM). Brokerage was sometime like USD $70 a purchase back then, so I effectively paid 2.8% brokerage on each position.

Yes, you heard it. I owned stock in the infamous Worldcom (I'm wondering whether you are too young to know about this fiasco of a company). At the time I thought, I only have $5,000 and surely I can't go wrong owning a blue-chip Pharmaceutical and Telecom company. I have my first ever monthly brokerage statement (that includes my position in Worldcom) framed and hanging on my home study wall.

I didn't care that brokerage was expensive for the small amount of money I had to invest, it was more important to get some "skin in the game". Learn how it feels to have a fractional ownership in a business, and learn how it feels to experience stock price gyrations and volatility. It was the best decision I made in my life. I was hooked.

I you feel that you would like to own your own portfolio of stocks, get some skin in the game early on. So I think it's absolutely worth spending even less than $5K to buy 1 or 2 positions in some companies you feel that you would like to own directly. Learn how it feels when you have paper losses and learn how it feels when one of your picks becomes a 10 bagger. Don't fret that you are paying a higher percentage of brokerage when you open small positions, what is more important is the fact that you have positions. In 10 or 20 years time, you won't even think about the brokerage that you paid.

I only used managed funds to get exposure to asset classes or regions that I'm not interested in learning or tracking myself. The other reason I owned managed funds was to get commentary from a fund manager who I thought was super-intelligent and I could learn from. Kerr Neilson's Platinum Asset Management was a listed fund that I took an AUD $5,000 position just to get his commentaries. Not only did that position outperform my own portfolio over a period of about 10 years, I learnt a lot about investing to boot.

[Harvey Specter]

First of all, what company pays that much to a Grad. Even if you are living on nothing, $1k per week is over $70k pa before tax. (serious question as things must have changed since my day).

Personally I would not purchase property unless you are really keen to do so. In a few years time, you may decide to go overseas etc so a share portfolio is much easier to manage.

Based on no property, cashing in the managed funds and $1kpw, look to open positions in the $5-$10k range, as you get diversified, start adding to the good positions (sometimes the best company to buy is the one you already own).

You will make mistakes - identify them quickly and learn from them. My biggest mistake is I never sold. I have recently got rid of the losers, and the ones I didn't beleive in. Even selling some were a mistake but I feel it is better to hold only stocks I like, than stocks that I dont on the off chance they do better.