October Investment Update

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Investment Process

Monthly savings

% Amount = 100 – age. This goes into shares/ property funds or ETF. The rest is in risk free assets

Lets use myself as an example. Age 25. So 75% in shares/property funds or ETF. 25% in risk free assets.

You should at least be putting a good portion of your income into a risk free asset fund and a share fund monthly.

This is the foundation of all your investments. Use a debit order

Spare Cash

Any spare cash goes into risk free asset fund (earns higher interest than bank). It is also very quick to withdraw out the fund if I need to (less than one day).

I use the spare cash sitting in risk free assets to buy more of the share fund at my “low risk entry points” once or twice a year. This update aims to find any of these points.

This Update also provides a breakdown of all my strategies in real time.

Summary of this update

Low risk buying opportunities: Non existent: Not interested in investing yet.

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Big companies are outperforming the small guys. The trend is the same the world over. It also suggests that the mining component of the JSE is outperforming the rest. Probably will continue for another year or two or more. Worth considering if you buying shares.

China: the uptrend keeps ticking along. Hong Kong stock market still marching on strongly.

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Fundamentals:

These are my own opinionated outlooks.

Not much good news lined up for the world as far as I can see. Only the supposed declining inflation and oil prices. SA will start seeing inflation kick in properly in a years time or so.

Everyone is shit scared about SA’s currency weakening right now. I’ll guess and say we might see some decent currency strength in the next month or so. What really interests me now, is how much China and India are relying on the US economy to grow their own.. or rather.. are they gathering their own economic momentum. Inevitably, they will. These 2 countries have provided and will continue to deliver a massive price deflation in all goods and services in years to come and this will serve as a stimulus for further world economic growth. Commodity prices will probably rise though as a result. I’ll be looking for panic in commodities to start buying again. There has been some, but I want some more panic.

I still suspect the major bull markets are in the East, Africa and South America. I hope these markets get sold off some time in the next year or two so that I can get a second buying opportunity. Right now, I’m cautious on buying anything as all asset classes are looking a bit risky. The same goes for commodities & mining shares. I’m still very bullish on agriculture. I found some Zambian agriculture companies that I might be looking to buy into. Might even take a bet on Malawi if prices drop a little.

If someone held a gun to my head today and told me to invest in SA, I guess I would be buying some banking, retail and property shares, because they have fairly decent PE’s and Dividend Yields.. and because they have been sold off quite heavily.

US interest rates started rising this week. If they go higher (suggesting inflation concerns) I would expect the market to come down. Managed to trade this one early. A good technical risk reward opportunity with all my indicators lining up.

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Sentiment

Not enough optimistic investors around at the moment. It suggests that prices will probably rise further as investors are still pessimistic about the prospects of the stock market. This is a very good contrarian indicator. Do opposite to most investors.

This is a new one. Bottom indicator shows how many analysts are bullish on stocks. Right now that’s 78%. That’s very high. We probably getting closer to a top and then a decline.

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mmmm. US stock prices will probably have some difficulty advancing higher past this trend channel. It appears that for the short term stocks are overbought. The same probably applies for the rest of the world.

The breadth has risen a little, which is a good sign. Still looks like it is starting to peak. Prices will probably go higher though, even when breadth falls.

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Seasonality

October: historically one of the worst months for shares.. but has provided good buying opportunities, especially towards the end. It is also the end of the bearish months for shares. The seasonal low risk buying point comes towards the end of this month.

My seasonal model will only kick in a weeks time. Right now, it is still out the market and outperforming for the year. I will provide the seasonal buy signal earliest next week, latest, half way through November. I use the daily MACD indicator to get me.

Guru Watch

This is a number of guys I have been watching closely over the years and tend to be very accurate in the short and longer term. Bullish = they think prices will go up. Bearish = prices will go down, flat = prices will remain the same.

1. Tim Ord: Bullish short term, long term bearish
2. Marc Faber: Bullish short term, long term bearish
3. Sy Harding: Bearish
4. Carl Swenlin: Bullish short term, long term bearish
5. Robert Colby Bearish

My final opinion and conclusion

Low risk buying opportunities: Non existent: Not interested in investing yet.

My guess for the next month: Flat (not bullish or bearish)

Next low risk buying time guess: Maybe some time in mid/late November

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Other shares I am looking at.

I’m looking for an entry point into some gold shares for the long term. Why? If and when the US $ declines due to cutting of interest rates in US, gold price should rise. I also suspect the SA rand might see weakness in longer term. This would make gold shares at present in SA a right royal bargain. Entry point will come when rand is strong and gold is weak (i.e. rand gold price is low and gold shares are falling). Am waiting patiently for this.

Guru share selection

Using my Follow the Guru strategy, the following SA shares are potential buys.

Sanlam, Didata, Merafe, Gijima Ast, Illovo, Afgri. I own Merafe & Illovo and plan to buy more.

Still holding on to mining shares: profits here are dependent on higher commodity prices and currency weakness. That’s my bet for now and the next year or so.

Composition

Commodity and mining shares 75%

IT shares 5%

Money Market (earns about 7% interest risk free) 20%

Performance since inception in late 2003 (after transactions costs)

Total performance: 405%
JSE benchmark: 138%
Outperformance (JSE as benchmark) 267%

Trades (shorter term)

Buying: Natural Gas

Selling: US 10 year bonds

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Important Investing lessons

Very Important lessons

Without flogging the dead horse too much, I want to briefly explain the importance of being “contrarian” as an investor or a trader. Being “Contrarian” is when you go against the flow, when the flow is at it’s strongest. It is important, because I feel everyone screws this one up. Here is an example we can all relate to.

Last week, I mentioned that the SA rand had weakened ridiculously, and I expected it to strengthen. As it turns out, so far I am right. Rather than embark on a mission of intellectual m_sturbation, I want to explain why I said this. Here is what happened.

The SA rand started weakening heavily about 2 months ago, the reasons were unclear at the time. It went from the good R/$ 6.60 level to about R7.80 very quickly. Some people blamed it on Mr. Zuma blah blah etc. In the last 2 weeks, the news came out about our poor current account deficits and our high imports. Now, you don’t have to know what this means, but basically, it’s very bad news for our currency.

Lesson 1:over this period is this: markets (in this case the rand) anticipated the bad news way before it actually came out.

Now when the news came out, all the economists were climbing on top of each other saying how the rand will continue weakening forever more, calling for R/$9.00 and more. Newspapers churned out the bad news, the public were squeamish and the pro’s were telling everyone to get their money out the country etc etc.

Lesson 2: prices affect sentiment. The rand devaluation resulted in fear.

Then something happened. On the bad news, the rand plummeted for about 2 hours and hit R/$7.95. Then it somehow started to get stronger and ended the day at R/$ 7.89. How so? All the news was terrible, and I mean it. It was really really bad. So here is a lesson I have learnt from trading:

Lesson 3: Once the news comes out & the market anticipated it, all the bad news is in the price.

My technical analysis suggested that the rand was heavily oversold, producing a good risk reward trade to buy the rands. I suggested to my fokes that they convert a stack of their forex back into rands. I had a very hard time trying to convince them too. This in the face of professionals, economists, public etc selling out rands big time. It’s not an easy decision. However, I guessed that the rand had absorbed all the bad news already. My fokes caught the top. The rand today is at R7.48, having come from R7.95

Lesson 4: Being contrarian when the flow is at it’s strongest, is usually a good risk reward opportunity.

Having dabbled a little in all types of markets around the world, I have learnt these lessons. As a trader, you should have sold the rand when no one knew why it was weakening. Once the news comes out, and the market hardly moves, you should close your trade and go the other way.

Final lesson: News itself is worthless to trade on. What is important is how the market anticipated the news and how it absorbed the news once it comes out.

Was it easy going against the flow? Definitely not! Especially when a lot of highly experienced, quality people I know, nail the colours to the mast and say that the rand will weaken. Such is the difficulty of such decisions.

Just out of interest, I have a similar setup for buying gold and selling all world stock markets right now. Will I be right? I don’t know, and it’s not really important. As long as I trade with a tight stop loss, I risk losing little and maximize possible gains.

That’s what good risk reward opportunities are all about.. in both investing and trading.

As Warren Buffet says: the first rule to making money is not to lose any. In the game of investing and trading, the optimal times to participate, usually arise when it makes the least sense to do so. That, my dear friends, is the ultimate challenge.