< Alan’s A1 investment plan for his SMSF
“ShareAnalysis is an extremely valuable tool that allows me to implement my investment strategy and manage my SMSF with ease”
One of the most important things to do when starting your investment journey is to come up with a well thought-out set of rules to guide your decisions.
Sticking to a regimented set of rules will not only make investing decisions easier, but over the long run will help you reach your financial goals.
Alan, one of the very first investors to become a member of ShareAnalysis in 2011, follows a disciplined set of rules that must truly be commended.
Here are Alan’s rules for investing:
- Only invest in Australian public companies whose shares are listed on the ASX.
- If the Australian “Risk Free Rate” (10 year Australian Government Bonds) is 6 per cent over the long term and assuming a premium for investing in shares is 6 per cent then only invest in companies where the forecast appreciation in capital value plus the forecast dividend is 12 per cent or greater.
- Only invest in Australian companies with the significant majority of their income from Australia and the significant majority of their management based in Australia. It is hard enough to manage a company in Australia let alone one that is diversified around the world. This is despite improvements in communications. Another attraction is the tax imputation treatment of income earned in Australia.
- Mainly invest in Australian companies where the majority of Directors are Professional Engineers or other related professionals. Professional Engineers consistently rate amongst the highest in the annual Roy Morgan Survey of Trusted Professionals. Contrast this rating with lawyers, accountants and company directors generally. As a minor shareholder it is preferable that the investment is guided by directors with a high ethical and moral compass.
- Do not invest in Australian Biotech Companies. These are capital intensive to progress through the proving trials, then probably taken out by large overseas interests before significant investment gains can be made.
- Do not invest if it flies, floats or grows. These are too capital intensive. Can be adversely affected by many factors outside the companies’ control.
- Do not invest in Australian Manufacturing Companies. These lack economies of scale. There is often little protection from patent infringement in Third World Countries. Someone should invest in Australian manufacturing just not small SMSfs.
- Do not invest in Australian Media Companies. Too many overinflated egos to be stable investment grade opportunities.
- Do not invest in Australian Health Industry Companies. Too much dependence on Government funding. Subject to relatively sudden changes in Government regulation.
- Do not invest in Australian IT or Software Companies. Low barriers to entry. Market share easily eroded.
- Do not invest in Insurance Companies. They mainly make their money by investing the premiums. Why not direct invest?
- Do not invest in Fund Managers, they invest in other companies. Why not direct invest?
- Do not invest in Commodities Companies. Relatively sudden swings in supply and demand which tend to overcompensate in both directions. Hard to pick the timing.
- Do not invest in Internet Companies. Low barriers to entry. Market share easily eroded.
While you may or may not agree with Alan on all of these points, it is clear to see how a solid strategy can assist with creating and maintaining your portfolio.
Setting up a rigid framework as to what types of companies to buy and avoid, and also a set of rules as to when you should buy or sell, will help keep you focused when emotions run high.
How Alan uses ShareAnalysis to manage his SMSF share portfolio
“I access ShareAnalysis once a day to keep up with news and changes. I find the combination of ShareAnalysis and my own spread sheet is invaluable and helps me keep on the straight and narrow when the market “noise” increases”, Alan said.
Alan’s spread sheet tracks a range of metrics from ShareAnalysis, plus a few more that are critical to his investment process. These include year on year changes in valuations, future safety margins and future earnings per share growth.
Alan has been running his spreadsheet since August 2010, and alongside ShareAnalysis since November 2011.
“The spread sheet and ShareAnalysis, while giving me no absolute guarantees, certainly gives me a great deal of comfort going forward”, Alan said.
“Forecast earnings per share growth is one of the sets of figures I look most closely at. If a company is not forecast to significantly grow its earnings per share then it should not be in my portfolio”, Alan explained.
Alan also calculates what he calls IV Av + DPS Av.
“This is one of the most useful ratios I use. It shows the forecast in ShareAnalysis of the average per year Intrinsic Value change added to the average per year Dividends’ change. In other words, forecast per year Capital plus Income change.
“Hopefully these are significantly positive figures otherwise the particular share does not belong in my portfolio”, Alan told us.
Another useful calculation Alan does on a weekly basis is future safety margins.
“It shows how the current share price relates to the forecast Intrinsic Value in three years. These figures move around all the time depending mainly on the share price. If the figure drops to 100 per cent in three years time this could present a buying opportunity at the current share price”, Alan said.
Assuming you had $500,000 to invest, if you followed Alan’s strategy you’d own 13 stocks. The largest holding would represent around 12 per cent and the smallest just under 1 per cent. On average, Alan invests around 7 per cent in each stock. The reminder is held in cash. With regards to sector investing, Alan says “I do not set out to diversify across groups but select shares from the “bottom up”. Nevertheless it is interesting to keep an eye on the mixture of groups in the portfolio.”
“It has taken me eighteen months, as very much a part time investor, to reach the current selection and weighting of shares. As I was in a relative hurry due to my advancing years I have not always been able to sell at the highest or buy at the lowest.
“I am comfortable now, however, with the selections and will see how the next couple of years play out. This does not mean I won’t watch the portfolio like a hawk and act if need be”, Alan added.
Alan’s sole purpose of investing is to fund his retirement. “The forecast figures in ShareAnalysis tell me that my portfolio is predicted to grow by approximately 70 per cent per annum (capital plus income growth) over the next three years.
“I didn't set out with the figure of 70 per cent as a target. I was looking for sustainable growth and it just happened that way.
“I am 77 and my wife is 76 this year. We are no longer able to contribute to super (maximum age 75). We must also draw down at increasing percentages. This is 6 per cent at our current ages.
“70 per cent minus 6 per cent is still a healthy growth rate. Even if it is only half that we will still have an independent retirement”, Alan said.
It just goes to show that one is never too old to learn something new every day, nor is one too old to plan for their retirement.