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Investing

Changing My Investing Strategy – Part I

Past Strategies

I’ve had a number of strategies for investing over the years. Initially I was a property investor who planned to do a FIRE (Financial Independence, Retire Early) type approach to saving in order to buy 5 houses to rent, then give up the aggressive FIRE saving to live a normal life for 30 years until those houses were paid off so I could live off the rent.

The property market changed a few years into my plans, which altered my strategy as each year passed, changing from a strategy to buy and sell to retire, to a buy and leverage to buy stocks, eventually becoming too much of a burdon in the effort to do my tax returns and dealing with bad tenants, causing me to part ways with property and focus solely on stocks.

I then discovered Angel Investing, and have made significant gains investing a number of six-figure sums in a handful of companies in this arena, which has altered my retirement timeframes significantly.

With my retirement timeframe brought forward, I now need to change my investment strategy from investing in growth stocks that will eventually pay dividends in 5-10 years time, to a new strategy that will give me an income and security in my retirement, which will be either next year or the year after – though truthfully I haven’t decided if I want to work for a few more years to get more security, socialize while my friends are at work, or become mega rich (the later is possibly less interesting to me, unless it would facilitate some other interest, such as making a business out of some of my inventions – yes, I’m also an inventor!).

How To Make An Investment Strategy

Having a strategy is something often talked about, but not often explained. People new to investing will always say:

“My strategy is just to make a bunch of money.”

“Buy low, sell high!” – words often proclaimed by the least educated of investors.

“I will invest in shares until I have enough money to buy a house.”

New Investors

Actually to be fair, the last one in the list of quotes there is almost a strategy.

To build an investment strategy, you first need a goal. That goal will most likely be to buy a house or save for retirement, though it could be as simple as buying a car or saving for a holiday. In fact, I would suggest that everyone’s goal should be to save for retirement, and holidays, homes and cars are things that you include in your strategy as interruptions along the way.

Once you have a goal for your strategy, you need to do some financial modelling. This will tell you what you need to do in order to meet your goals.

To do a financial model, first work out how much money you’ll need to attain your goal(s). Then work out how much you can save, how much you’ll need to invest each year, and how much your investments need to grow to attain the goal(s) set out. You’ll need to do several of these models to model what happens if things go right, wrong or somewhere in between. You’ll need a strategy for each scenario (or at least a strategy to deal with the near term issues).

Once you’ve got your models sorted out, you should think about whether they are tolerable. Do they prevent you from having the sort of life you want? If so, perhaps you can make another model that has some compromise? Your compromise should not involve making your financial models rely on your situation becoming more fortuitous than you might realistically expect. Alternatively this might be the nudge you need to put in the effort to get that higher paid job.

Once you have your financial model, you should refine your investment strategy around this. There might be a few investment strategies that fit your models. For example, at for the past few years, my strategy was to save like crazy then put my savings into investments that will grow at a rate that does not require me to save any of my salary – which I then used as a giant leisure budget as compensation for my time spend saving. Of course this was balanced by a backup plan which involved my savings being redirected back to investing if things didn’t go to plan.

You should always have at least one backup plan.

In fact, not only should you have backup plans, but you should have multiple plans that phase in and out of existence as situations change, much like my car keys seem to when I’m looking for them.

My Investing Strategy For 2021

My goal remains the same, which is to retire, but my timeframes have changed significantly. Therefore my new goal is to invest in things that will:

  • Give me dividends within the next 1-2 years, every year. This basically means that I need investments that give me dividends now, which have a history of paying dividends, so I can be sure that they will produce dividends in 1-2 years.
  • Gives me security of income for decades to come. This means that I’ll need access to a pot of money that can get me through bad times, with possibly a Plan C in case that goes awry. This also means that I’ll need my dividend producing stocks to grow the dividend return at a rate higher than inflation to be comfortable, or come up with an alternative strategy such as buying growth stocks that may not pay dividends, but can be sold at a later date to cover the failings of my dividend growth stocks – not my preference. I will also need a significant amount of diversification such that the loss of a few stocks from my portfolio will not make my lifestyle untenable, or have a Plan D that makes my lifestyle less expensive while I save / work for enough money to replenish my position.

As I’ve written a lot today, I think I might write up the rest of my Investing Strategy for 2021 another day. In the next article of this subject I will cover my costs, how I plan to diversify and cover my risks, and my investing strategy for the coming year prior to the preparation for my retirement, which will involved divesting my holdings in companies and investing in dividend paying stocks (unless those companies start to pay reliable dividends backed by a policy in the Company Constitution).

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Investing

Reviewing The Year

Since 2021 is just around the corner I thought it might be a good time to look back and review my analysis on this website. The benefit of this would be to ensure that I’m providing quality analysis to others, but most importantly, to myself! Without reviewing yourself, it’s easy to let your ego convince you that everything you do is right, which stops you improving or even ensuring that you’re doing the right thing.

How will I measure the performance of my analysis?

This is a tough question. If I were a trader, I could just look at the “Buy” ratings I gave stocks and see if the share price went up after the article. I could then further quantify the success by weighting my results against how much I could have made on my trades. But I’m not a trader. I am an investor who has a specific strategy to attain my goals. For such an investor, it’s not about buying a stock and seeing if the market pushed the share price up; it’s about buying a stock and seeing if the reasoning was justified.

Good investing (as opposed to trading) is not measured by prescience of the share price, but sound reasoning within a fitting strategy.

Lewis Hurst

Given that, I will now go through the years articles written under the Investing section of my website and see what I can glean…

My Performance

Looking through my articles over the past year, I can draw the following conclusions:

  1. I was almost always right with my analysis when I did thorough research.
  2. I was good at predicting where share prices would go.
  3. I was bad at acting on minute indications that something might be wrong – even if I was able to detect that there was possibly something wrong.
  4. I was terrible at predicting the impact of Coronavirus and the recovery, particularly around retail stocks where there has not been enough information to perform a proper analysis or where directors have not been forthcoming with information.
  5. I have seen people on the internet (Facebook and Sharetrader.co.nz) using logic that was written in some of my articles – both in valuation techniques that I created and in explaining the logic around why stocks are priced the way they are.
  6. I have bought stocks without doing the full research, which caused me to sell them after doing the work that I should have done in the first place. Specifically, my assumptions have been very wrong when I did not do the full research required.
  7. I was bad at predicting where the economy was going.
  8. I was good at predicting the effect of fiscal stimulation.
  9. I managed to publish information about the Chinese producing a COVID19 vaccine before it reached national media.
  10. Finally, there are a LOT of speeling mistakes in my articles. I apologize for this.

Despite a lot of red in the above list, I think I didn’t do too badly. Basically I’m good at pricing stocks, picking opportunities and doing the research, but bad at predicting things when there’s not much information, and I need to make sure I don’t buy without researching things thoroughly.

I think the one thing of concern is that I need to react quicker to the suggestion that there might be bad news, and I need to somehow address my inability to predict the future of the economy.

To do this, I will keep trying to predict the future of the economy until I get good at reading the signs (assuming that such a thing is possible). Until I get good at this, I will re-engineer my investment strategy to account for my inability to mitigate this risk – which is something that I intended to do anyway in light of my changing financial circumstances as I accelerate towards retirement (or perhaps I should say “financial independence”, as I’ve not decided what to do about my work plans), which should be at the end of 2021 or some time in 2022.

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Investing

Legal Matters: Convertible Note Gotcha’s

I’ve never invested with Convertible Notes before, the idea has always had a funny smell that’s put me off. I feel too inexperienced with Convertible Notes, and therefore don’t feel like I know all the risks and things to look out for when buying Convertible Notes.

What Are Convertible Notes?

Convertible Notes are an alternative to buying shares, in order to invest in a company. Essentially Convertible Notes are a legal contract that defines a thing you get, which at some point should convert into actual shares in the company.

Convertible Notes are a great way to invest if it’s hard to place a value on the company. For example, if a company has limited financial history making a valuation difficult, then Convertible Notes can be used to invest, such that the notes convert into shares after a period of time has passed that would enable a valuation. The value that they would convert into would then be based on that future value and an investor would either get a large chunk of a small company, or a small chunk of a big company.

Problems With Convertible Notes (From An Investors Perspective)

Like any legal contract, you have to read and understand the terms so you don’t get caught out. You also need experience in the area to know what gotcha’s need covered off, and what snakes could be hiding in the long grass.

As I am inexperienced when it comes to investing in companies via Convertible Notes, I thought it might be useful to use this article to store information about Convertible Note gotcha’s that I come across or can think of. I expect this list to grow organically as I discover new information or am forced to investigate this more thoroughly due to investment opportunities popping up with Convertible Notes. If you are aware of things that should be added to the list, please leave a comment below.

  • Convertible Notes must have a condition that ensures that they convert into shares, and it must be impossible for that condition not to not come true, otherwise the Convertible Notes will never be worth anything.
    An example of a Convertible Note that never matures would be one that is converted to shares based on the market value ascribed at the next capital raising. Existing shareholders / directors could then ensure that they never raise any more capital, causing the Convertible Notes never to convert to shares.
  • You don’t have the same rights as a shareholder, which means the terms of your investment could change if the existing shareholders vote to change the Company Constitution.
  • In the case of investing in very early stage companies, the (typically 20%) discount to the next capital raise that you get in buying the Convertible Notes is probably not enough to represent the level of risk of investing in a less mature company – so the risk premium is not fairly reflected in the price of the Convertible Notes.
  • What happens if the company is bought out? Is this covered by the conditions of the note?
  • What happens if the subsequent fund raise which dictates the value of your Convertible Notes is not at arms length from the existing shareholders? They could manipulate the share price higher, so you don’t get fair value for your investment.
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Investing

My Alternative To FIRE

I thought it might be nice on a long weekend to take a little time to write about part of my financial path, and share part of the story of how I came to be in the position after less than a decade of saving, to be on the precipice of retirement at just 38 (in other words, I’m capable of retiring now, but I’d be poor). More specifically, I want to share the alternative approach to FIRE that I came up with.

What Is FIRE?

You’ve probably heard of FIRE, which stands for Financial Independence, Retire Early. It’s a relatively new movement, the idea behind which is that you live minimally in order to save like crazy and retire early.

I think living minimally and saving like crazy is a great way to get a fast start to your financial goals. In other words: you have to invest; and in order to invest, you need a pile of cash; in order to get a pile of cash, you have to save; in order to save, you probably have to live minimally.

The bigger the pile of cash you have saved, the more significant the compounded interest will be on your investments, and the faster you will be accelerated towards your end goal.

The trouble with FIRE is that people sacrifice their lives to get to their goal, which I believe is counter intuitive if your goal is freedom rather than safety. It’s counter intuitive because when you safe hard, you’re probably not living. This means that you’re sacrificing your time now, to get more time later. Any older person will tell you that time is worth more when you’re young.

Every time you choose something, you miss out on something else.

Lewis Hurst

The trouble is, for every decision you make, you miss out on something else. You choose the chocolate cake, you don’t get the raspberry cake; you choose to lose weight, you don’t get the food; if you choose to save, you don’t get to buy things and experiences; and if you choose to buy things and experiences, you don’t get to save.

My Alternative To FIRE

I believe that there are a few ways to get rich, and if you’re investing, you first need to save. The trick is, once you have saved and are investing, you might not need to save.

Using financial modelling you can find balance between saving and living, in exchange for a slightly extended timeframe of your financial independence. With my alternative to FIRE, you can even live frivolously after a stint of saving, but before retirement.

My approach has been to aggressively save (I didn’t need to do a spending budget, but budgets works for some), then calculate my rate of saving (which I wouldn’t have needed to do if I’d budgeted) per month / year. Then I started investing my saved money, at which point I calculated my Return On Investment (ROI) per annum. I then used financial modelling to work out how long I’d need to save for at my current ROI to get to my retirement goals.

In doing my financial modelling, I ran various models to see what happened if I adjusted the amount I saved each year. I noticed that the more money I had, the less my saving affected my retirement goals, to the point where (in later years) saving had no effect whatsoever.

I realised that I was able to save enough to get the benefits of compound interest from my investing activities, which meant that I could use the salary from my job 100% for my own enjoyment – which leaves a big entertainment budget and still gets my to my retirement goals earlier than I otherwise would.

Modelling at which point in time (age) I started to rely solely on ROI from my investments enabled me to make decisions about how early I could stop saving and start living my life the way I wanted to. Rather than sacrifice all my years saving before retirement, I could decide what was an acceptable amount of my youth to sacrifice in order to have freedom at an older age.

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Investing

A Useful Source Of Data For Investors In Retail Related Stocks

Today I stumbled upon a useful data source for people who invest in retail related stocks, such as KMD, HLG or affected REITs.

While it’s not useful to me (as I don’t fit into the above category of investors) the Google Mobility data (which is collected from people’s GPS enabled Android phones) could be useful in predicting the performance of aforementioned stocks.

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Investing

The Psychology Of Investing – Part I

Today I’ve been thinking about an article I read a few years ago, in which the author talked about how, as the value of his investments grew, the value of his portfolio fluctuated more. It got to the stage where the daily fluctuations in the value of his portfolio would fluctuate by the equivalent of a days salary. Then as he saved more money, his portfolio would fluctuate by a weeks’ salary and then a months’ salary. As he approached retirement, his portfolio might fluctuate by a range equal to a years’ worth of salary.

There’s a few interesting things about this. I think firstly, based on a 5% ROI, if you need a year’s worth of salary as a retirement income (given that it’s normal for stocks to fluctuate by 5-10%) in order to use stocks as a retirment income, one must accept that their portfolio will fluctuate by at least a multiple or two of their annual salary each year.

To use stocks as a retirement income, you have to be OK with watching your portfolio drop in value by the equivalent of a year’s salary or more.

This is quite a mindset to get your head around. Given that other asset types probably fluctuate that much as well (you just don’t see it because you don’t know the exact value of your house or private business on any given day), you have to accept that this is pretty much the same for any retirement portfolio.

I think one take away from this point is that you have to view your retirement portfolio in a way that you don’t lose sleep watching it (this is actually one of the things I like about being a value investor, because regardless of what the current value of a stock is, you feel good that you bought at less than where you see value in the stock).

The other take away is that you need to plan your retirement portfolio in such a way that accommodates these inevitable fluctuations. This might mean having a larger portfolio than you need, in order to cover the risk. This might mean having part of your retirement income guaranteed, or perhaps diversified or hedged.

I think that to achieve the acceptance of these fluctuations, one must change how they see money. Personally I don’t see the money in the same way that I used to (which was a thing that relates to how much I’ve saved or how long it would take me to save that amount of money). I see money as a number that I can manipulate, and as a number that is measured in relation to factors such as ‘inflation’ or ‘how much money I need to fit my financial models’.

This view not only helps me feel nothing when my portfolio drops in value by $10,000, but it also helps me make better decisions that are less influenced by emotion. With that said, I’m still working on this – I don’t feel absolutely nothing if my portfolio drops by thousands of dollars, and I’m not completely emotionless. These things are somewhat linked to how well things are going to plan, but if things are going to plan and my portfolio drops by $10,000, I’m still happy.

How Can Your Portfolio Dropping By $10,000 Be Part Of Your Plan?

I just wanted to pre-empt the titular question, which I’m sure everyone is thinking after reading the last paragraph. In short, I have several plans that are constantly in some sort of flux due to perpetual changing situations (Covid19, etc.).

Basically, I have a Plan A which is to retire with funds from selling my largest private investment. I have a Plan B, which is to retire with funds from selling my second largest private investment and income from my largest investment. I have a Plan C which is to retire on my listed stock portfolio. I also have a Plan D.

There are various versions of Plan A and Plan B that involve a mix of a few things. Which is why it could be perfectly acceptable for my NZX portfolio to drop by $10,000 if Plan A or B is looking good.

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Investing

Useful Sources Of News For Investors

Being across all the news is very useful for investors of all types. It helps us anticipate major events like Covid19, and strategize accordingly; ideally before everyone else. Unfortunately it’s a full time job keeping ahead of everything, so it’s good to have a few good sources that help keep abreast of things.

I thought I’d share some of the sources that I find useful. Here’s my list:

  • NZX / ASX – All company specific developments that meet the respective bourse’s criteria for listed companies have to be publicized here first.
  • ShareTrader – Take this with a large pinch of salt, as it’s community data from often biased sources, but it’s a good place to ensure you don’t miss anything.
  • Share Chat – A nice little summary of the day’s share related events.
  • ASB Morning Brief – This (alongside associated ASB reports) can be emailed to you each day if you subscribe to the service.
  • Stats NZ – This is a great source of data, which is used by Stuff, NZ Herald and other media outlets to write articles (which are essentially second hand data, which may have been misinterpreted or otherwise warped by the journalist). Best to get the information from the source. Many investors don’t watch this too carefully, so it’s a great place to get ahead of other investors.
  • Global News – I’ve mentioned this before, but subscribing to these emails is a great way to get a news wrap up.

All of the above sources have some sort of email subscription facility, which I recommend that you take advantage of.

If this article helped you, perhaps you could share your own sources in the comments below this article.

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Investing

Chinese Coronavirus Vaccine

I can’t find anything in the news media about this yet, but it seems that China may be distributing a vaccine. I take this news with a big pinch of salt, because the information is 4th-hand to me. My source is the colleague of someone I know, whose family living in Wuhan (the Chinese province from which Covid19 is said to have originated) tell him that they have been given a vaccine.

Unfortunately that is all I know – it could be that grandma doesn’t know the difference between a check up and a Covid19 vaccine, or perhaps it’s a wind-up, or perhaps it’s a general (non-Covid19) Coronavirus vaccine for other strains, or something completely different.

Nontheless, it’s interesting to hear stories of how people in China are coping with Covid19 via personal contacts as these often differ from what is in the media. For example, the stats from China suggest that they are quite on top of the outbreak, but personal accounts strongly suggest otherwise.

If this is true, this could negatively effect the performance of companies such as Fisher Paykel Healthcare who (as macabre as it sounds) benefit from the Coronavirus outbreak.

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Investing

Thought Of The Day: Investors Don’t Care About Their Buy Price, But Traders Do

It is often said that investors don’t care about the buy price of a share, but traders do. This is an interesting sentence, because of course everyone cares what price they pay for shares. Today I thought I’d have a go at explaining the meaning behind this adage.

Clearly, investors care about their buy price, because if the buy price is too high, the stock isn’t worth buying. The difference comes down behaviour around the small price fluctuations. A trader might try to buy at the bottom of the range of fluctuation, then sell on the higher ends of the current valuation range. For example, if a stock is worth between $1.20 and $1.30, a trader might buy at $1.20, then sell at $1.30. Their profit is small, but they are able to repeat this several times a day to make a large profit.

On the other hand, an investor doesn’t care so much about the small fluctuations. They would prefer to buy at $1.20, but would be willing to buy at $1.30. They may then later sell at $4.00 some years later, so the $0.10 difference in buy price might only equate to a few percent difference in the final value of their stock when they sell.

While this might be thousands of dollars difference for the investor, this is the opportunity cost of being able to invest. I’m sure many investors will have a story where they have missed out on buying a stock due to chasing the price up because they were trying to get in at the lowest price.

Because of this, an investor is more likely to be willing to pay a higher price for stocks than a trader; hence the adage that investors don’t care about their buy price, but traders do.

The take-away from this is that if you are an investor, so long as you buy at a price that you think the stock is worth, it doesn’t matter if the share price drops after your purchase, so long as the company performs as you expected it to. That said, the possible exception to this is if your exit strategy relates to market sentiment, rather than dividends (one of the reasons that I don’t like Multiples of Revenue, and Comparables Market valuations).

The good thing about this type of investing is that (barring black swan events and times of raging bulls where everything’s overpriced for extended periods of time) investors should be able to sleep better at night because no matter what happens to the price, you know that you didn’t pay too much if you bought at a price where you saw value. I think this is an important factor, especially if you are relying on dividend income for your retirement or lifestyle.

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Investing

Investing In A Cure For Covid19

There are a bunch of listed companies with prospective Covid19 vaccines that are quite popular investments at the moment. I just wanted to take the opportunity to warn investors of the risks of such an investment.

Pharmaceutical investment is a curious business. Costs are massively high in this industry and companies often run for many, many years with no results. Once (if) the company successfully researches a cure for something (and it gets past all the necessary hurdles), there’s big money to be made. Especially so if it’s a vaccine for something that everybody in the world needs to buy.

Because of the nature of this industry and the way Capital Raising (CR) works, this can create traps for investors.

As the cost of research is high, pharmaceuticals often need to raise money. In order to entice people to invest, they need to sell the story. This means taking every little positive thing and singing about it as loudly as possible. As the subject is highly technical, investors are usually in the dark about the significance of such announcements and are often led to believe that things are further along than they really are.

For example, a company researching covid19 might announce that they have found a substance that successfully attaches to the virus and not human cells. This might be a significant discovery but not necessarily get the company any closer to a vaccine.

The other problem with such CRs is that they dilute existing shareholders and directors. Therefore a company would want to increase the value of the shares before they announce a CR. They might time CRs after small (but not necessarily significant) technical wins or be deceptive about timelines (without lying) to investors.

For example they might say things like “we are now moving to human testing”. This could mean that they are on the brink of a cure, or it could be part of the normal process of testing multiple candidate drugs as part of normal research, or it could be referring to the testing of the efficacy of a delivery system to be used when they discover a cure.

Of course the above examples are bad, but my point is that they can truthfully and correctly use words that make it seem like they’re on the edge of greatness, but actually miles from success. This typically happens through scientific (or industry) jargon or process that is presented in a way to deliberately mislead potential investors in order to pump up the share price prior to a CR and get investor interest.

Of course I’m not saying that you shouldn’t invest in companies searching for a covid19 vaccine, but just warning that there are pitfalls to consider when investing in, or basing your investment decisions on a covid19 cure.

For this investor, I find this sort of investing too much like gambling. That said, I think that such an investment would be great for a trader or an ethical investor who doesn’t mind a gamble.