Investment Basics – Lesson 1: Asset Allocation

A couple of posts ago I mentioned that I was going to blog about a mechanical system which I use to determine when to buy and sell shares. But due to a number of posts I have received about this topic, I decided to take a step back and start from the beginning. I hope that in doing so my system will become a lot clearer and people can start to put my trades into context.

IN THE BEGINNING

Okay, first up. Before I even look at what shares to buy I always decide how much I want to risk. And I mean that in the broadest possible sense.

1. Working out how much capital I have: This involves looking at total savings and subtracting from that from any expenses I need to survive. Mortgage payments, utility bills, food, etc. All that comes out. I am then left with free capital which would jeopardise my existence if lost. This is what I call my investment capital.

2. Working out how much to ‘invest’: The general rule is to subtract your age from 100 to determine how much you should be invested in shares as opposed to anything else. For me that breaks down to about 70% I should be putting in shares (As you will see from my holdings I have nowhere near this number, but more on that later). This is what I call my ‘equity’
Then I put the rest of my money into safer areas such as currencies, high interest accounts, bonds, that kind of thing. Which brings me nicely onto…

3. Asset Allocation: This is where I decide how much money I am actually going to risk. On the cash side, I will allocate all my money into a high interest account in various currencies. I think that any currency portfolio should have a blend of hard currencies and growth currencies. Fortunately the long term path of currencies is a lot easier to determine than stocks. Currently I have money in GBP, and the good old Ringgit and I will also be looking to get into the Renminbi.

On the equity side I will split things into 2 pots: A fundamental long term portfolio and a short term high risk swing portfolio. Determining what percentages to give to these is a little trickier obviously because that depends on how confident you are with your high risk strategy. For me, I would be happy to have at 50/50. So the breakdown is currently as follows:

Total Investment Capital

100%

Stock

50%

Cash

50%

CASH

High Interest

25%

Growth Currency

25%

EQUITY Long Term 50% High Risk 50%

Now if you are still working and getting an income then you’re in good shape because your Total Investment Amount will keep growing and you will have the ability to keep adding to your cash and equity accounts. This is why fundamental investing requires a very long term outlook as you are constantly adding to your positions.

Okay now that we have gotten that out of the way I can go onto talking about how to determine what blue chips or high risk stocks to buy and sell, which is the interesting part. But from all this please be aware that the posts I make probably affect only 25% of my savings capital (it’s actually a lot less than that because I don’t post up information on my non Malaysian trades, and on each trade or post I probably risk less than 1%) at the moment! I hope that this helps puts things into perspective and will allow your trading life to exist for the long term. Until Lesson 2..

Happy Trading!

Economics: 3 Themes

Today I added a snippet of what some analysts think will happen in Malaysia in 2007. They may be right and they may be wrong.

The important thing to know is that every person will have a view, and that it is possible to make money even though that view is wrong. This is because as traders we will time our entries and exits so that probablilities are in our favour when we trade. Also, we have a mechanical system which cuts out discretion which we apply rigorously. So don’t always just believe what you hear. Do your own analysis, apply your own rules, and trade stock prices, not mere opinions.

 Now back to my vacation..

Happy Deepavali and Hari Raya!!!

I’m taking a break this week to celebrate. See you next week!

Trading: IJM

Here’s another one for the watchlist. This one’s a bit hot right now because clearly the Roadbuilder acquisition was being played by the sharks from a few months ago. This was pumped all the way up in May and then dumped and now it looks like the sharks are having another go. Even though I think that this has great prospects and growth earnings (it’s 1st quarter earnings outgrew by around 52% last years 1st quarter earnings), I would be careful to time my entry because with all the hoo ha those who got in around May are still treading water with this position despite its recent run up. I would rather wait another spike down or bottom before I go in.

Just to keep things balanced, the main criticism of this company is that it is expanding too rapidly as it already has a pretty good orderbook, even though the acquisition makes sense from a diversification perspective. As the report says, it may see integration problems, so it’s not all just good news. So discount the news and focus on its balance sheet!

Update (20-10-06) In the last 2 days large volumes betray the fact that this counter is being dumped. I really hope this gets whacked so I will wait for the sharks to get out before I descend on the carcass (like a vulture…)!

Trading: Genting

Half the stocks on my screen have been in the red in the last 2 months, which tells me that not many at all participated in the profits in the last 2 months. Counters continue to advance on thin volume, and my theme remains the same. This is fundamenally weak market which is being propped up like a table with only 3 legs. When one of those gets taken away, we’ll see price fall back to certain levels when I will be a buyer again.

I hate to keep going on about his counter because people have being accusing me of falling in love. heh heh. But this is the only counter on my screen which is even anywhere near what I think is a suitable accumulation level. When that price hits, I will look for a bottom, and then hit it hard. But until then, I do what I’ve been doing for the past 3 months. Sit and wait.

Trading aside…

I don’t know about you but I want Genting to win the Singapore casino bid soooooo badly. When I was about 6 my mum took me to Universal Studios in LA and I can still remember it now. Of the 3, this is clearly the most attractive consortium. The brand alone will bring in tourism from all over Asia (the only other Universal Studios is in Japan and that’s all in Japanese!) As per my previous post, the only problem is that Genting does not have a track record of being able to operate in a competitive environment and we have no idea what the fee sharing arrangement is. But who cares?? I just wanna go on the Pirates of the Carribean ride, and I suspect so do the majority of traders.. Here’s the link.

Trading: The Magic Number

Argh! Don’t you just hate it when work interferes with your trading and research? Unfortunately that’s been the way for me lately so I have only been able to sit passively and watch the KLSE keep rising. Now the KLSE has risen approximately 5.6% whilst my portfolio has languished at aroung 4.5%. But that’s okay for me because I am only 15% invested so when the market drops (which it undoubtedly will) my portfolio will not fall as much.

Lately I have been thinking about developing a routine system for viewing and analysing stocks which can be done regularly no matter what mood you are in which removes one’s emotions. Therefore, like physical exercise this is something which can be done either daily or weekly. More on that later…

But here’s a thought in the meantime: I have also been reading about how KLSE is set to break above 1000. For the Dow that magic number is 12,000. That number means absolutely nothing to me. As traders, we sell into rising markets and buy into falling markets. Where the market actually is, is of no consequence to us. It’s a bit like surfing or swimming in the ocean. All you care about is where the currents and waves take you, not where the sea level is.

Hang Five!

Company View: Genting

Today, I add a new category to my posts, titled Company View to let you know what I think of a particular company. Under these headings I will focus more on the fundamental aspects of the counter.

But unfortunately I am travelling today so I don’t have access to my charts, but here it is anyway:

Genting is another one of Malaysia’s top companies, IMO and is up there with the likes of Topglov and Digi, but for different reasons. I am not convinced that it is particularly well managed nor does it have a competitive edge over its competitors (which are MGM Mirage, Harrah’s, Sands) . But its biggest advantage is that the industry has extremely high barriers to entry, and globally it is dominated by fewer companies than in most other industries. And Genting is definitely up there. Its revenues are around USD1 billion a year compared to around USD7 billion for the world’s largest operator, MGM. Also the gaming industry is exploding, especially in Asia. Despite the negative publicity surrounding gambling, especially online, this industry will never evolve and will never go away. Genting also runs power plants – another area with high barriers to entry and is a cash cow. This diversified income stream makes it very popular with research analysts, who have contributed to its skyrocketing prices from MYR$8 to MYR$24 in 6 years.

This year alone Genting has been busily acquiring companies like Landmark back home, and more recently Stanley Leisure in the UK (which also has a growing industry due to greater deregulation). It is also one of the few bidders in Singapore’s new integrated resorts. Research analysts love this counter too, which has skyrocketed from MYR$8 to MYR$24 in 6 years (you can see some of their reports and get some background on this company and its competitors here).

Okay but what are its downsides? Here they are:

1. Losses from Star Cruises.
2. Failure to participate in the Macau casino scene
3. Competition (Genting isn’t the only player getting in on the Asian scene. Its stock price reflects fears that it may be vulnerable in the face of competition because it doesn’t have a record in this area. It may also lose out in the Singapore IT bid).

I’ll leave the analysts to tell you whether it is fairly, under or under valued, but this is a counter on my watchlist which I would love to buy on weakness.

Trading: I’m Back!! Ready to pop..

Back just in time to see all the charts looking positive. This is characterised by breakouts in various charts on the watchlist. Starting with the earliest:

This one popped earliest and is still on a roll.

Maybulk

This one has popped and is taking a breather but not retraced by much – a good sign and the best candidate to jump in as those who missed the initial movement will try to get back in:
DiGI

Here is the latest one to blow. Topglov is usually the lagger in my portfolio, so this move is convincing.

But as you know, I have been bearish for the past 3 months so although I like these opportunities, I will probably only jump in lightly into Digi.

VACATION

Tomorrow I fly to Bali to catch surf!! This holiday has been a long time coming and the only waves I intend to watch will be in the ocean on not on my chart, so posting will be slow to non existent until next Monday.

Happy trading!