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 were quite liquid 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. And with me turning 43 in 2010 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.
I have found a great source of high quality articles on retirement that has been very helpful.
In this week’s article 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.
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 invest without taking the overall economic situation into account.
It is however difficult for me to completely ignore the economic climate when making 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 your strategy is just not working in the current market climate.
Please keep in mind that there will always be 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 as the bubble was inflating and undervalued companies underperformed.
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.
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 in-grained 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 conservative 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 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 put 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 investments 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 thus haven’t done any serious work on it.
I also don’t find the pay-offs of short selling that compelling. Unlimited losses with limited profit.
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