During my 2009 visit to South Africa my dad asked for help with his finances.
What I, at first thought will be easy, turned out to be very difficult.
My
father turned 73 in 2009, is retired and thus lives off his
investments. His investments are quite liquid at the moment and his
questions were mostly about how much money to allocate to what asset
classes i.e. bonds, equities and how much cash to hold.
Personally
I have not given the matter a lot of thought as when I am not invested
in shares I hold cash. But with me turning 43 this year I still have
quite a long working life ahead of me to make up for any substantial
losses.
When thinking about my father's asset allocation my thinking went more in the direction of asking if he should have any equities at all in his portfolio.
However
the biggest risk my father, and all of us face, is inflation as
none of us know how long we will live. It is really quite frustrating
not knowing this because it makes planning so difficult but knowing
that may cause more problems than it solves...
I am still doing research and will let you know what I will recommend to my dad.
I have found a great source of high quality articles that has been very helpful.
Take a look at:
How much money can you prudently take out of your investments in retirement?
Fine tuning your asset allocation
Drawdowns: Losing money is no fun
In this week's newsletter I answer few questions I have received from subscribers. I hope some of the questions you may have is among them.
Do you try to time the market?
All
the really long term studies I have read said that the market cannot be
timed. That hasn't stopped me from trying, but without success.
I now stick to simple steps that have worked for me in the past.
- I look for undervalued companies
- I analyse them
- I buy them
- I wait for the value to be realised
- I sell
I
do not recommend it, but should you want to give market timing a try,
put aside a small percentage of your portfolio, say no more than 5%,
and give it a try.
How do I choose long term investments?
This question pre-supposes that I also trade and this is not the case at all.
All
my investments are for the long-term but I am not averse to selling
shortly after buying, if the value has been realised or if I find a
more attractive opportunity.
In the article How do you select investments I explain my investment process in more detail.
Do you look at the general economic indicators and commentary?
I am not the kind investor that looks at the overall economic situation and then decides where to invest.
I
make all my investments from a company perspective. When I find and
undervalued investment I like and I buy without really taking the
overall economic situation into account.
It is difficult for me to completely ignore the economic climate when making my investment decisions.
For
example in early 2010 I was careful about my position sizing and the
amount of money I have invested in equities as I haven't seen clear signs
that the world economy has turned around and that unemployment is
stabilising or decreasing.
Why do investment strategies fail?
This is a difficult question to answer.
I
think the main reason why most investment strategies fail is that the
strategy was not based on sound research that has proven to be
successful over long periods of time, and with that I mean multiple
market cycles.
When a strategy under-performs you have determine
if the strategy ever had a chance of working (example day trading) or
if the strategy is just not working in the current market climate.
Please
keep in mind that there will always be certain market phases when
all strategies under-perform. Sometimes even for a few years.
Abandoning a sound strategy in a period of under-performance may be
exactly the wrong thing to do.
The best example of this would be
value investors abandoning their value investment strategy just before
the Internet bubble burst because they were completely unsuccessful for
the two or three years that the bubble was inflating.
I am a pure value investor. The strategy makes sense to me, and has over time given me excellent returns.
If
you are new to investing or still have not found an investment strategy
you feel comfortable with I suggest you, read as much as you can find
on the different investment strategies, looking only at strategies with
proven long term track records. Decide which one suits you best and
slowly, with small amounts of money at first, start applying the
strategy.
And forget about not using real money for this.
Nothing focuses the mind and forces you to learn as much as possible
than having your own money in the market.
Make adjustments as you learn and, if you feel comfortable, expand your activities.
With the market having recovered so far already are you changing your strategy?
I will not say that I'm changing my investment strategy but I am becoming more careful.
The
advantage of being a value investor is that as the overall market moves
higher attractive ideas become harder to find or the opportunities you
do find is low quality businesses.
If I cannot find anything compelling to invest in I stay in cash.
What I am finding though is that there are a few industries that have completely been left behind by the market.
Telecommunications for
example, companies in this sector are trading at extremely high
dividend yields. Where for example, can you find companies with yields of
between 7% to 9% with a relatively stable business even in these times?
Everyone
is worried about future growth, but at these yields theses companies
are not priced as if there will ever be any growth again.
Do you use technical analysis?
Even though technical analysis played an important role in my investment learning process I do not use it much any more.
Shortly
after I started investing I read a lot of books on the subject and
thought I have discovered the holy grail of investing.
Shortly thereafter I lost a substantial amount of money investing in gold shares using just technical analysis.
After
that I further studied technical analysis looking for long term
academic studies and the results achieved. I quickly discovered that
there is no real track record of technical analysis to speak of.
Furthermore there is no really successful investor that you can point
to and say that he made his money using technical analysis.
There is no Warren Buffett of technical analysis.
That
does not mean that I don't use technical analysis of all. I may still
look at a graph to see where the price is compared to highs and lows
and also what the trend in the price movement is.
Try as I may
have been unable not to look at charts as it has become such an
ingrained part of my investment approach over the last 20 years.
Do you hold cash and if so how much?
I
don't make any decisions as to the amount of cash I hold. The amount of
cash in my portfolio is always the residual amount after I bought all
the companies I found undervalued and worthy of investment.
That
said, I always try to keep are part of my portfolio, say up to 20%, in
cash so that I have funds available should extraordinary investment
opportunities come along.
How do you size the positions in your portfolio?
I've written about this in an article called How concentrated should you be.
To summarise, I usually try to size my position so that I can have a portfolio of no more than 30 positions.
Because
I know that my investment decisions are not perfect and that company
valuation is an imprecise art I always try to be on the conservative
side and keep the amount of damage a large loss on a position can do to
my portfolio to a minimum.
I hardly ever have more than 30 positions as I have found that it then becomes really hard to keep track of all the positions.
As
large companies are usually made up of multiple businesses I may invest
a larger percentage of my portfolio in them compared to small companies
where they just have one line of business that can easily be severely
impacted.
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Do you hedge at all? And if so with what instruments?
As a general rule I don't hedge.
What
I have done in the past is buy out of the money but options if I felt
that a market correction was imminent. My timing was usually dreadful
and most of the options expired worthless.
For that reason, I invest only a really small part of my portfolio say 0.5% in put options.
I
have thought a lot about short selling but have ever gotten round to do
anything about it. The main reason being that I find it really
difficult to go from a mindset of looking for undervalued companies
that are attractive investment opportunities to a mindset where you are
looking for exactly the opposite.
I'm not averse to short
selling it's just that I have found more opportunities on the long side
and that haven't really seen the need to do any serious work on it.
I also don't find the pay-offs of short selling that compelling. Unlimited losses with limited profit.
