Practical Management of a Stock Portfolio
Bill Dodd and Joanne Stuhmcke
Gold Coast July 30, 2012
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Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Practical Management of a Stock Portfolio
Investing is not easy
•They lack information (education)
•They do not have a plan
•They fail to understand risk
•They do not manage their open positions
•They do not understand investor psychology...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Investors often do not perform to expectation because:
Some sources of information
1. Books
Guppy, Daryl (2004), Trend Trading, Wright Books
Hull, Alan (2008), Blue Chip Investing, Wright Books
Montgomery, Roger (2010) Value.able, My 2 Centsworth Publishing
Nicholson, Colin (2006), Psychology of Investing, Wilkinson
Nicholson, Colin (2009), Building Wealth in the Share Market, John Wiley
Roth, Martin (annual), Top Stocks, Wright Books
Weinstein, Stan (1988), Secrets of Profiting in Bull and Bear Markets, Irwin
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
2. Web sites
Incredible charts*
http://www.incrediblecharts.com.au/
Australian Investors’ Association
http://www.accc.gov.au/content/index.phtml/itemId/287387/fromItemId/277639
Alan Hull
http://www.bluechipreport.com.au/sample/
Colin Nicholson
http://www.bwts.com.au/
Darryl Guppy
http://www.guppytraders.com/
Australian Securities Exchange*
http://www.asx.com.au/
Some sources of information
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
AIA investors forum
http://www.investors.asn.au/forum/index.php
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Practical Management of a Stock Portfolio
Some definitions:
• Investors and traders
• Stocks and shares
• The index….
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The Investment Plan
‘... successful investors treat their investing as though they
were running a business.’
(Colin Nicholson, Building Wealth in the Stock Market)
• Your business plan for your investing business
• Guide or reference point for all your decisions
• Should reflect your style, objectives, risk tolerances
• Should be individual to you
• Must be written down!
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
What is in an investment plan?
Unbreakable rules as well as guidelines to
manage the investment process.
Should also include:
• Purpose, goals and objectives
• Investment style
• Investment approach or strategy
• Portfolio management strategies
• Risk management strategies
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Goals and Objectives
Before you start to invest, think about your goals
and objectives:
• Why you are investing – what is your purpose
or ‘mission statement’?
• What are you trying to achieve?
how much return?
how do you want to mitigate risk?
do you want to develop investing skills?
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Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Practical Exercise
• Individually, answer the questions (5 Mins) • Focus on answering Questions 1, 2, 3 &4
(we will review these questions together)
• Consider Questions 5 -9 only if you have time
(reflect further at home when you have more time)
Use what you learn in the workshop throughout the morning to expand on your answers.
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Exercise Review
• How will writing down a purpose for investing keep you focused and motivated? •Why is the importance of an investment style or particular strategy being suitable for you? • How easy or hard was it to write down specific goals? • Have you thought about how you are going to invest i.e. What strategies you are going to use
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Try using the SMART goal setting method to refine your goals when you
have time
Investment Plan Summary
An investment plan should:
• Provide a guide to what to buy and sell
• Indicate how to manage risk
• Protect you during periods of uncertainty
• Start simply but grow and evolve as you
continue to invest
IT SHOULD NOT JUST BE WRITTEN AND PUT
IN THE BOTTOM DRAWER & FORGOTTEN!
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Fundamental Analysis
•What is fundamental analysis
•Pro’s & Con’s
•Overview of fundamental ratios
•Filtering using fundamental data
•Practical Exercise using fundamental data
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Fundamental Analysis
Fundamental analysis attempts to determine the
value of a company by analysing the financial
data from the annual report and other qualitative
data about the company and environment in
which they operate.
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Fundamental Information
• Company information
• Financials
• Research & analysis
• Dividend history
• Directors & dealings
• News & announcements
• Shareholder Information
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Fundamental Pro’s & Con’s
In support of fundamental analysis:
• Objectivity
• Long Term focus
• Value
• Increased understanding
• Sleep at night factor
The problems with fundamental analysis:
• Time consuming
• Market sentiment
• Timing
• Based on assumptions
In summary, it provides key information on which stocks have the best value and
should be profitable but it may not be the best tool to use to determine when to
buy a particular stock.
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Fundamental Ratios
• Price Earnings Ratio (P/E)
• Price Earnings Growth Ratio (PEG)
• Dividend Yield (DY)
• Return on Equity (ROE)
• Market Capitalisation (Market Cap)
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Price Earnings Ratio (P/E)
Measures the time it would take for an
investor to recoup their initial outlay in the
form of return
• Low PE is better than a high PE
• Growth companies will often have higher
PE’s
• Enables comparison between companies
• Some drawbacks including dependence
upon price
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Price Earnings Ratio (PE
PE Ratio = Share Price
Earnings Per Share
e.g. $1.00 share price = PE 10
10 cents earning per share
$1.00 share price = PE 5
20 cents earning per share
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Price Earnings Growth Ratio (PEG)
Useful as a check on whether a P/E is
justified or not
• PEG of 1 is seen to be fair value
• PEG of greater than 1 indicates a more
expensive stock
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Price Earnings Growth Ratio (PEG)
PEG Ratio = P/E Ratio
Growth Rate in %
e.g. PE 10 = PEG 1
10% Growth
PE 20 = PEG 2
10% Growth
PE 10 = PEG 0.5
20% Growth
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Dividend Yield
Measures the return an investor gets from
a share
• Fluctuates with share price
• Can be compared with returns from other
investments
• Can be grossed up by adding back the
franking credits
• Need to be careful of artificially high
yields
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Dividend Yield
Div Yield = Dividend per share x 100
Share Price
e.g. 5 cents per share = DY 5%
$1.00 per share
$1.00 share price = DY 2%
$50.00 per share
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Return on Equity (ROE)
Measures the return a company achieves with
shareholders' funds
• Higher ROE over reasonable period
• High ROE good D/Y & growth
• Good indicator for overall performance
• Can be compared with returns from other
investments
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Return on Equity (ROE)
ROE = Net Profit x 100
Shareholders Equity
A ROE of 10% to 20% indicates healthy
growth
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Market Capitalisation
Measures the value that the market puts on
the company
• Generally, higher market capitalisation, the
more liquidity
Market Cap = Number of shares outstanding x
Share Price
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Fundamental Filter
Fundamental filter parameters:
• PE less than 16
• PEG less than 1.1
• DY greater than 4%
• ROE greater than 12%
• Market Cap greater than $50,000,000
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Creating a Fundamental Search
Fundamental
filtering
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Fundamental Search
On-line live demonstration
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Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
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Other Options
Stock Doctor www.lincolnindicators.com.au
MyClime www.clime.com.au
Team Invest www.teaminvest.com.au
Skaffold www.skaffold.com
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Other Useful Criteria
• Is the PE at the high or low end of the average PE
range?(from the Company Wrap)
• Is the PE above or below the market P/E?
•Does the company have high debt to
equity?
• Is the Dividend Yield franked?
•Is the Earnings Per Share forecast to
grow?
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Other Useful Criteria
• How has the share performed in comparison to the sector
or the All Ordinaries (Company Wrap)
• In which sector does the
company operate?
• Are dividends stable? (Higher percentage = greater stability)
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Practical Exercise
1. Determine your rules for choosing stocks to buy. Hint: Either use PE, PEG, DY, ROE as is or refine further or add one or two more guidelines from the ‘Other useful criteria’ list on page 6 of your workbook. Remember – keep it simple!
2. Analyse data from a fundamental filter search and cull stocks that don’t meet your rules
3. Choose 5 stocks to add to your ‘notional portfolio. Make sure you refer to the Existing portfolio and Portfolio Guideline notes on Page 5 or your workbook.
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Exercise Review
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Technical analysis of stocks
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Technical Analysis see ASX web site http://www.asx.com.au/resources/education/classes/shares/index.htm
Technical analysis is the study of the price and volume
movements of a stock or market.
It is based on the belief that everything that is known about
a stock is reflected in the share price and the volume of
shares traded.
Technical analysis tells investors when to buy or sell by
providing insights into market sentiment and emotion
Covers many techniques we are able to cover only a few …
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
1. Different types of charts
2. Classical methods
3. Problems of randomness of data
4. Pattern recognition
5. Software for technical analysis…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
An Introduction to Technical Analysis
1. Different chart types
Technical analysis uses data based on
price open, low, high, close and volume.
The data are presented as charts. There are many different
types of charts and we consider only three…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Line chart (monthly) of CSL
Bar chart (monthly) of CSL
Open, High, Low & Close
Candlestick chart of CSL (monthly)
Open, High, Low & Close
The last three charts considered O, H, L, C
What about volume?...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Candlestick chart of CSL (monthly) with volume
2. Classical technical methods
(a) Phase analysis
(b)The trend line
(c) Support and resistance…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
2(a) Phase analysis (Dow Theory)
• Proposes that markets are cyclical
•That markets go through bull and bear cycles
• Within each cycle different phases can be recognized
•These different phases represent different risk situations
• Consider the different phases of the S&P500...
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
DOW PHASE ANALYSIS ON THE S&P500 WEEKLY
REVIVING CONFIDENCE
INCREASING EARNINGS
RAMPANT SPECULATION UNCERTAINTY
DECREASING EARNINGS
DISTRESS SELLING
LOSING HOPE
Distribution
Accumulation
2(b) Trend lines
Perhaps the simplest form of technical analysis
Markets are not random they often move in trends…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
All Ords monthly
Trends can continue for long periods.
All Ordinaries weekly
How to draw trend lines
CHART SHOWING UP TREND
COULD USE A DIAGRAM OR ACUTAL CAHRT
INVESTING IN THE SHARE MARKET - 1 9 JULY 2009
LOW
LOW
LOW
HIGH
HIGH
HIGH
HIGH
THE UPTREND
Trends usually include countertrends
2 (c) Support and Resistance
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INVESTING IN THE SHARE MARKET - 1 9 JULY 2009
s
s
s
R
R
LONG TERM S&R
ABS WEEKLY
The trend line as support
3. Problems of randomness of data
• Moving averages
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Randomness, volatility and variation often make
chart interpretation difficult.
Consider the following chart...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
This stock is not trending
How to deal with volatility and randomness ?
We have considered using trend lines to resolve the problem of
random data.
This is often very useful but there is a better way of coping with
variability.
This is the moving average
So what is a moving average? …
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
A 10 period moving average (this is an exponential moving average)
Moving averages are lagging indicators and are the basis of many other indicators
Triple moving average Note the lag effect
• Probalby build up the ma idea here The multiple moving average.
LYC weekly
4. Market patterns
Chart patterns reflect human behaviour in a market.
The following chart patterns offer a high probability of future market movement and can be used to select stocks or to time entries into stocks.
(a) Continuation patterns
•The triangle
•The flag
(b) Reversal patterns
•Double tops
•Head and shoulders...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Patterns can be categorized into:
Continuation patterns
or
Reversal patterns
Consider the following chart…
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Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
A trend continuation pattern
A trend reversal pattern
4(a) The ascending triangle
An example of a Continuation pattern...
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A reliable continuation pattern The ascending triangle
The flag
Another continuation pattern...
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The flag
ASX200
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The pennant
a variation on the flag.
NAB daily
4 (b) Reversal patterns
(i) Double tops
(ii) Head and shoulders
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METHODS FOR STOCK SELECTION AIA CONFERENCE 2009
MINIMUM TARGET
ABS WEEKLY
DOUBLE TOP
METHODS FOR STOCK SELECTION AIA CONFERENCE 2009
IPL WEEKLY
Head and shoulders
Neckline
Target
Target 1140
S&P500 daily
July 19, 2011
Also note the Inverse of these Patterns
In the following examples both patterns indicated the bottom
of the bear market in early 2009
• Double bottoms
• Reverse head and shoulders…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
NASDAQ weekly Double bottom
DOW Jones weekly Reverse head and shoulders
Technical analysis and probability
Technical analysis does not provide a forecast, it provides a
probability that a future event may occur.
•Ascending triangle - high probability of trend continuation
•Flag pattern - high probability of trend continuation
•Double top - probability of a trend reversal
•Head and shoulders pattern - very high probability of trend reversal...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Technical analysis and the time frame
Always be aware of the time frame.
•When considering any security, view the longest time frame first.
•Signals in longer time frames are more reliable than signals in
shorter time frames
•So a head and shoulders pattern on a monthly chart is very
significant while this same pattern on a daily chart is significant
only for the shorter term…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Software for technical analysis
Many alternatives (Incredible Charts)
Suitable software can be used for:
•Analysis of any security
•Stocks, indices, foreign exchange, bonds etc
•Understanding market risk
•Managing the open position
•Maintaining a watch list
•Screening the market for specific stocks...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Trading systems
Technical analysis provides the opportunity to develop
trading systems.
The approach of Weinstein is a good example.
He used the 30 period moving average on a weekly chart...
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The Weinstein approach using a 30 week eMA
Risks in investing
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Investing does entail Risk
For the investor, preservation of capital is essential...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Will all of my Investments be Winners?
• when I buy a stock there is no way of knowing if my analysis is correct,
this stock might be a loser or the market may move against me. (use stops.)
• 70% winners is good and 80% is excellent
• because there will be losing investments there must be risk management
strategies
• must calculate the risk of loss on any investment
• must use stops to avoid significant losses
• but what are the different risk factors and how can these risks be handled ?...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Managing the Risks in Investment
Market risk
• if the market falls, most stocks will fall too - know the position of market
Specific risk
• the risk that the stock you buy, falls in price - diversification - the 2% rule
Liquidity risk
• the market for this stock is too thin - avoid this stock
Financial or credit risk
• risk when an investor borrows money - exercise care if borrowing
• risk if that the company (stock) has high debt - watch debt/equity ratio
Sovereign risk or country risk
• the risk of investing in an unstable economy – avoid this stock
Currency risk
• investing overseas poses risk of currency movement – hedge currency...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Should investors avoid risks or manage them?
Most of the risks can be avoided.
But investors cannot avoid market risk and specific risk
So these risks must be managed
Consider specific risk now - market risk later…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Managing specific risk
Specific risk is the risk that the stock you buy, falls in price
The investor can manage specific risk by:
• Diversifying and investing in a number of stocks - how many?
• Applying the 2% rule.
The 2% rule prevents an investor from losing more than 2% of capital on any one investment. It also states how many shares can be bought.
Consider the following example:
applying the 2% rule to manage specific risk…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
CNP weekly chart Shares can be bought at $4.85
The investment plan in this case would stipulate that the investor buy in a breakout during an uptrend.
This should be a profitable investment:
How would we buy shares in Centro Property Trust (CNP)?
We now look to our investment plan…
How many shares can be bought?
• Available capital is $100,000
• Shares of CNP can be bought at $4.85...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
The investment plan states that we cannot risk more than
2% of capital on this investment.
We assume for this exercise that the following stock meets all
of the fundamental criteria in our investment plan.
We first step decide how much we are willing to risk losing on
a single share…
calculating number of shares to buy entry price = $4.85 stop loss = $4.10 max risk/share = $0.75 Available capital = $100,000 max risk to capital = $2000 (2% of $100,000) # shares to buy = 2000 / 0.75 = 2666 shares cost of shares = 2666 x $4.85 = $12,933 ....
2% Rule
$4.85
$4.10
Managing specific risk
The investor now buys 2666 shares of CNP at $4.85
• we consider later how this investment should have been
managed
• but we should look at the outcome of this investment...
INVESTING IN THE SHARE MARKET - 1 9 JULY 2009
CNP WEEKLY
BOUGHT AT $4.85
STOP AT $4.10
The investor has 2666 shares bought at $4.85
Stock selection
Stock selection is an important part of the investment process
How do investors select stocks?
It must be seen in the context of the investment plan.
The advantages of stock selection are lost if there is no plan:
• to manage risk
• to manage the trade...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Stock selection procedure
There are many different ways to select stocks.
• We going to use the following approach:
• Firstly stocks are selected using a fundamental filter.
Here using the E*trade software.
• We then subject those stocks to further analysis by
using a technical filter. Here we are using the
Incredible Charts software…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
The selection criteria
On fundamentals, each stock must:
•have a debt to equity ratio of less than 25%
•pay a dividend
•be fully franked
•have a ROE greater than 15%
•trade a minimum daily volume (liquidity)....
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Using the E*trade fundamental filter
We can progressively filter stocks
The approximately 2100 stocks currently available on the
ASX can be reduced to about 10-20 stocks of special
interest as follows…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
NO FILTER (TOTAL STOCKS AVAILABLE) 2060
DEBT TO EQUITY RATIO OF <25% 1290
DIVIDEND IS GREATER THAN 5% 84
ONLY FULLY FRANKED STOCKS 68
RETURN ON EQUITY (ROE) > 15% 32
MARKET CAPITALISATION >$150 MILLION 15
FILTER NUMBER OF STOCKS
USING THE ETRADE FUNDAMENTAL FILTER
These are the 15 stocks from our fundamental filter
Applying the technical filter.
We now apply technical analysis to these 15 stocks.
The software used here is Incredible Charts and we place
our 15 stocks into a watch list on Incredible Charts…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Applying the technical filter
From the investment plan we are only able to buy a stock
which has a closing price higher than the 30w eMA.
Using Incredible Charts we use the 30w eMA as a simple
filter over these 15 stocks.
The filter we apply will leave us with all stocks on our watch
list which have had a closing price above the 30 eMA
over the last 15 days…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
The technical filter reduces the 15 stocks to 10
Consideration of the charts eliminates four stocks
Results of the dual selection process
At the time of running this stock selection scan, (early July 2012),
There were six stocks which satisfied both fundamental and technical selection criteria.
At that time these stocks were:
• Data three
• Wotif
• Cash converters
• Fleetwood
• Thorn
• Mortgage choice
Disclaimer: Note that this is an educational exercise carried out using a specific investment plan. This is not a recommendation and these stocks may not be appropriate for investors who have very different investing profiles…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Stock selection exercise
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Using a combination of the Exercise 5 Stock
Selection Handout and the charts for the
listed stocks found on pages 29 to 33 of
your workbook:
1.Record the relevant data on the worksheet
(handout)
2.Analyse the information and determine which
5 stocks to add to your portfolio
Buying stocks
Things to consider when buying stocks:
1. Market risk
2. Liquidity
3. Market depth
4. Practical aspects of using a broker…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
1. Market risk
It is important to buy when the market is at an appropriate
phase. This information is only available from
technical analysis.
Consider the following charts…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
S&P500 weekly
MARKUP
MARKDOWN
These are the very low risk areas in which to buy stocks
This is a very high risk area
ASX200 weekly
ASX200 weekly
Market risk summary
Market risk can be significant. An investor can significantly
improve results by using technical analysis to assess
market risk.
This allows the investor to be aware of stages in the market
which offer an opportunity or pose a risk to capital…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
2. Liquidity
An investor who owns shares of a stock which does not
trade very often will have difficultly obtaining a good
price when the shares are sold.
Take the example of CNA…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
METHODS FOR STOCK SELECTION AIA CONFERENCE 2009
CNA WEEKLY
METHODS FOR STOCK SELECTION AIA CONFERENCE 2009
CNA DAILY
Liquidity summary
The example using CNA shows the problem of investing in
stocks which are not liquid.
Always evaluate the liquidity from data on traded volumes of
shares or by using charts…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
3. Market depth
What is meant by market depth?
Market depth provides an assessment of buyer and seller
demand. It can be important for the investor and
critical for the trader.
When buying stocks it is important to assess the level of
buyer and seller support for the stock.
Consider some examples:…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Practical aspects of using a broker
This section is devoted to looking at the practical
aspects of buying stocks.
• Understanding and selecting a broker
• Using a broker’s platform
• Placing and following an order…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
When selecting a broker
There is a need to assess:
• what they charge for their services
• what services they can and will provide
• if you have a need for a full service stock broker
Consider the need for a specialist (full service) broker:
• fixed interest
• options
• futures
• CFDs
• foreign exchange (forex) …
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Using an On-line Broker to Buy Shares
This example uses the software of discount broker E*trade
•I want to buy ANZ shares
•My total investment capital is $6,000
•First question is, how many shares can I buy?...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
ANZ WEEKLY
Consolidation
In this example I will buy on breakout from consolidation
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
BUY AT $16.86
STOP LOSS AT $15.67
ANZ daily
I will buy on breakout from consolidation. Assume here that ANZ is breaking out of consolidation and that it can be bought at $16.86.
So how many ANZ shares can I buy?
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
BUY AT $16.86
STOP LOSS AT $15.67
ANZ daily
• my capital is $6000
• the 2% rule says that the maximum loss I can incur on
any one trade (investment) is 2% of $6,000 = $120
• I plan to buy ANZ shares at $16.86
the buy price is $16.86
the stop loss is $15.67
loss per share is $1.19
• therefore I can buy 120 / 1.19 = 100 shares
• the ANZ shares will cost me $1686....
Buying the shares
Now consider the process of placing the order with the
broker and following the execution of the order using
the E*trade internet broker platform…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
100 16.86 ANZ
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
INVESTING IN THE SHARE MARKET - 3 23 JULY 2009
Factors to consider when placing an order
•Closing prices reflect value (set by the professionals)
•Opening prices can be very volatile (amateurs buy on open)
•A good depth of market screen is an asset ...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Exercise on market risk
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Managing an open position
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Trade management
Selling is probably the most difficult area of investing.
The aim of managing the trade (or investment) is to
minimise losses while aiming to get maximum profit.
There will always be some losses but these losses must be
kept small compared to the winning investments...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Trade management
How can the investment be managed?
•Technical methods
•Other methods
All aim to protect capital, minimize loss and maximize profit
So what are some of the approaches that could be used ?…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Management – using stops
There are many different types of stops.
In exercises for this section we will use:
Initial stop loss. The risk depends on loss per share. (must preserve capital.)
Profit stop. Sell the whole position if price rises to give 100% profit
Trailing stops. Adjusted periodically to capture profit and limit losses
• Sell of price falls 20% from a previous high
• Moving average stop – using the 30 week eMA.
Other stops include:
Percent loss stops, sell if price falls a fixed % below entry price
Trend change stops, trend line, support and resistance, MMA etc.
Volatility stops. Most useful as they take volatility into account…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Trade management
We go back to the example of CNP and consider how stops
could have been used to advantage to optimise profits...
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
BUY AT $4.85
STOP AT $4.10
Managing the CNP investment using the work shop trading plan
BUY AT $4.85
STOP AT $4.10
Managing the CNP investment using the work shop trading plan
30 week eMA
20% trailing stop
BUY AT $4.85
STOP AT $4.10
30 week eMA
As a managed investment CNP returned 73% profit.
Using a buy and hold approach, CNP was a very bad investment It is no longer trading !!
Exercises
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
3 Charts - Bar Replay Exercises
Managing an open position
There are many different types of stops.
In exercises for this section we will use:
Initial stop loss. The risk depends on loss per share. (must preserve capital.)
Profit stop. Sell the whole position if price rises to give 100% profit
Trailing stops. Adjusted periodically to capture profit and limit losses
• Sell of price falls 20% from a previous high
• Moving average stop – using the 30 week eMA.
Other stops include:
Percent loss stops, sell if price falls a fixed % below entry price
Trend change stops, trend line, support and resistance, MMA etc.
Volatility stops. Most useful as they take volatility into account…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Record Keeping
Why is it important?
Personal – monitor performance, borrow funds, estate
planning
Taxation – tax management, declaration of correct
income and capital gains
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Requirements
Guidelines Simple to use
Easy to understand
Reliable
ATO Requirements Must be kept for five years from date of Notice of Assessment
Purchase details including cost and brokerage
Sales details including proceeds and brokerage
Dividends received (franked, unfranked, credits)
Expenses incurred (interest on loans, subscriptions)
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Skills Development
Investing Diary Record of analysis
Decision making (Buying and selling)
Checklist or process focused approach
Performance Record Wins vs. Losses
Equity Curve
To learn more: Trade Your Way to Financial Freedom (Van Tharp)
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Tools
Portfolio Management software (paid/free)
e.g. Broker websites, msn.money, yahoofinance,
Quicken, ShareManager
Simple Spreadsheet
http://www.investors.asn.au/education/portfolio-
management/record-keeping/
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Portfolio Management Spreadsheet
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
NAME OF INVESTING ENTITY
Current Date 27/06/2012
Code Company Name Purch Date Price Paid # Shrs
Amount
Invested Bkg Total Cost Sell Bkg Stop Comments Div Yield Days Held Curr Price Curr Value $ Return % ROI Asset Sect % Port %P/L of PF
XXX XXX 3/03/11 $0.86 6,000 $5,160.00 $19.95 $5,179.95 $19.95 $0.69 8.14% 482 $0.970 $5,820.00 $620.10 12% A 10 5.57% 0.59%
XXX XXX 17/03/11 $3.26 2,000 $6,520.00 $19.95 $6,539.95 $19.95 $2.99 5.21% 468 $4.200 $8,400.00 $1,840.10 28% A 15 8.04% 1.76%
Total Value of Shareholdings $14,220.00
Trading Account $4,218.50 C 4.04%
Investment Account $86,000.00 C 82.35%
Balance of Trust Holdings This Month $104,438.50 $2,460 100.00%
Total Portfolio Last Month $103,200.00
Increase/Decrease in Value $1,238.50
Percentage Move for the Month 1.20%
Performance Since Inception 1/2/10
Current Balance $104,438.50
Initial Captial $100,000.00
Overall Increase $4,438.50
Return YTD 4.439%
Return YTD with Franking Credits 4.567%
Actual Benchmark Difference
FI Fixed Interest $0.00 0.00% 5.00% -5.00%
C Cash $90,218.50 86.38% 2.00% 84.38%
A Australian Shares $14,220.00 13.62% 73.00% -59.38%
I International Shares $0.00 0.00% 10.00% -10.00%
P Property $0.00 0.00% 10.00% -10.00%
O Other $0.00 0.00% 0.00% 0.00%
$104,438.50 100.00% 100.00%
98000
100000
102000
104000
1 2 3 4 5 6 7 8 9 10
Concluding remarks
We have considered how to manage a stock portfolio.
•With particular reference to:
The investment plan
Risk management
Managing the open position.
We have not considered the problem of investor psychology
which is perhaps the most important area of investing
and trading…
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio
Where do you go from here?
It is our view that to make the most from a portfolio investors need to make use of both fundamental and technical analysis.
This means continuing education in investing.
This would include:
• using an investor forum such as the AIA forum.
• courses on investing eg. AIA investment courses
• accessing Incredible Charts (free) and becoming familiar
with technical analysis
Copyright © Dodd & Stuhmcke 2012 Practical Management of a Stock Portfolio