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Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No. 42996 Investment Strategies: Value, Growth &

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Presentation on theme: "Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No. 42996 Investment Strategies: Value, Growth &"— Presentation transcript:

1 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investment Strategies: Value, Growth & Dividends Shaun van den Berg Head of Client Education Monday, 22 nd July h00 until 19h00

2 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Agenda: Investment Strategies Introduction Investment Philosophy Developing a Strategy Conservative Aggressive Value Investing Growth Investing Investing for Dividends Summary & Conclusion

3 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investment Philosophy Developing a sound investment philosophy Know your investment strategy Investment Strategies: Value, Growth & Dividends

4 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction Accumulated knowledge –Basic share market concepts –Fundamental analysis (Macro & Micro) –Sector Analysis (Industrials vs Financials vs Resources) Ongoing financial education –Help you make better, well-informed investment decisions –Develop framework: Decision-making process

5 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investment Philosophy: Good & Bad Personal Characteristics – Personality – Patience – Risk aversion – Individualism – Time – Age Financial Characteristics – Job security, Capital invested, Cash needs & Tax status – Early signs of misfit: Lie awake / Day-to-day movements/ Second guessing choices Reconsider your investment strategy Beliefs about the Market – Different viewpoints - What the market actually is, what it does, or what it means. Is the market random, systematic, or a combination of both?

6 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Developing a sound investment philosophy Coherent way of thinking about markets –Set of beliefs about how an investor should behave & how markets work. –Dictates how you should make decisions. –Successful investors’ performance is linked with their world view Address the question, “Are financial markets & the world stable?” Market instability leads to uncertainty & volatility –Potentially produce the greatest opportunities. No philosophy - Live on tips, hunches, dreams, & other people’s opinions. –Leads to poor long-term results. Good investment philosophy will not help you unless you combine it with discipline & patience (Temperament) –Like a good diet: It only works if it is sensible over the long haul & if you stick with it. –Establish a solid philosophical foundation –Rest is learning, smart work, focus, patience & experience.

7 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Before building your investment portfolio: Your strategy should reflect who you are Why you are investing? Develop a strategy that you can summarise in one page Time Frame - Your investment time frame should be at least 3 – 5 years & longer. Your involvement - How much time will you regularly spend on investing? Risk Tolerance - This should influence the kinds of shares you invest in. Investment method - Do you look for large, established leaders (Top 100) or for up- and-comers (Small caps)? How many shares do you aim to own? Your goals - What kind of average returns are you seeking? What will make you sell a share that you are holding? What will make you change your investment strategy? Have you given your shares a financial check-up recently? Do you still believe in them? Do you know when to sell or rely on a wait-and-see approach? Better approach - Make sure you invested right in the first place. Help keep you from moving money back & forth whenever the share market rises & falls. Find the right strategy for you & stick to it. Know your investment strategy

8 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Forming a macro view of the market Evaluate a business Quality, Price & Value Aggressive Strategy Conservative Strategy Investment Strategies: Value, Growth & Dividends

9 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Forming a macro view of the market (80/20 Rule) International Markets Economic Indicators Currencies Precious Metals Local Markets Specific Sectors Specific Shares Checklists Fundamental Criteria Technical Criteria Portfolio Criteria

10 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Your goal is to get to know the company very well inside & out. Too many people think of their investments merely as shares Pay too much attention to the share price Too little to the underlying business More than intangible price - Goes up & down each day. Small claim for its owner on a small percentage of actual business. PicknPay shareholders – You & Raymond Ackerman’s family. Own a lot more of the company but your share still counts. Important decisions - Approving members of the board of directors - Send you a ballot & solicit your vote. Every time a shopper buys groceries, a set of towels or even a television - Tiny fraction of profit from sale generated is yours. The fate of each share is tied with fortune of underlying business. Successful investors need to get & stay familiar with the companies they own. Evaluate a business

11 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No There are many different measures & research tools that investors use in their share evaluation. P/E ratios, PEG ratios & Price/ NAV Return on equity (ROE), Profit Margins, Debt/ Equity ratio & Interest Cover. Sort them into two categories: Quality & Price Is this a strong & growing high-quality company? Is the company’s share priced attractively right now? “You might end up buying grossly overvalued shares of a wonderful company or you might snap up shares of a hapless, doomed business at what seems like a bargain price.” (Source: Quality, Price & Value

12 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Price Quality Is it debt-free, or up to its ears in interest payments? Debt is not necessary a bad thing, but a lot of it can sometimes spell trouble. Interest cover - Is the debt manageable? Below three times cover - Alarm bells. Is the company generating a lot of cash & spending that money efficiently? Are sales & earnings growing at admirable rate? Are gross, operating, & net profit margins growing as well? Is the management smart & executing well? Is the company generating a lot of value for shareholders? Is the company well positioned to beat competitors? When evaluating a company’s share price, take a number of measures & relate them back to the company’s earnings. Price-to-earnings (P/E) ratio compares the share price to earnings per share (EPS). PEG ratio compares the P/E ratio to the company’s expected earnings growth rate. Value Better understanding of the company’s quality & its share price Make a judgement - Offers good value. Focus on undervalued & quality shares Foolish to focus on rapidly growing shares Technical analysis - Charts Quality, Price & Value

13 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Aggressive (Small-cap) Investment Strategy Small caps (Outside Top 100) & penny stocks (Shares below 100c) Some companies succeed by breaking all the rules. Most dynamically high returns achievable on the share market. Only for more experienced, aggressive, brash & daring investors. Consciously taking on lots of risk - High risk will lead to high rewards. Investors should be prepared to lose the money Should make up only a small part of any portfolio

14 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Conservative (Top 100) investment strategy Buy companies that are stalwarts (i.e. financially strong & well-managed) Generally big large-cap companies. Not all big companies will meet the criteria Many non-blue chip companies will be worthy of your consideration. Investment strategy relies only on: Simple numeric calculations Common-sense logic Patience. Investment strategy offers above-average performance.

15 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Identifying outperforming Top 100 companies  Look for the number one brand name in an industry  Look for repeat mass-market purchases  Most people do not buy many motor vehicles or washing machines each year  E.G. Consolidated Motor Holdings (CMH) & Amalgamated Appliances (AMAPS).  Think instead of things you routinely use - Because you like to or you have to.  When crunching financial numbers, you can check several measures  Turnover is growing faster than 10% per year.  Look for high gross profit margins (gross profits divided by turnover) – Efficiency  Net profit margins (net income divided by turnover) topping 10%  Cash is king with these types of companies - Want to see plenty of it  Little debt as possible on the balance sheet  Manage cash flow by demanding payment quickly & paying their obligations slowly.  How company fares on the above measures is the direction it is moving in.  You want to see rising margins  Company buying back its own shares  This company should be clearly ahead of its industry peers

16 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Father of Value Investing Introduction to Value Investing Margin of Safety Common Mistakes Value View / Quality View Company Analysis Technical Analysis Value Investing Principles Investment Strategies: Value Investing

17 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No  Value investing is investment model derived from ideas on investment  Two professors at Columbia Business School  Benjamin Graham & David Dodd  Began teaching in 1928  Subsequently developed in their 1934 text “Security Analysis.” Benjamin Graham regarded as the “father” of value investing From 1936 – Remarkable record as a stock picker Over 20-years - Mutual fund had a compound average return of at least 14.7%, compared to 12% for the overall market $ invested would have earned roughly $ more than the average. “Value investment the only real form of investment - Anything else was speculation.” - Benjamin Graham Father of Value Investing

18 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Value Investing  Value investing - Buying companies whose shares appear under priced by some form of fundamental analysis.  Shares trading at:  Discount to Net Asset Value (NAV)  Discount Tangible Net Asset Value (TNAV)  High dividend yields (DY)  Low Price-to-Earning (P/E) multiples  Low Price-to-NAV (P/NAV) ratios.  Defensive investment in shares trading below TNAV  Safeguard against adverse future developments  Margin of Safety

19 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No A true value investor buys companies that the rest of the market think are lousy. Net current asset value (NCAV) approach Look for stocks trading below their calculated value Instead of buying NAV (Assets – Liabilities) What the company would be worth if liquidated tomorrow Only include current assets (cash, stock & debtors) Ignore long term assets (e.g. buildings) Subtract long & short term liabilities Buy companies trading at two-thirds or less of their NCAV (P/NCAV < 0.40) Ben Graham insisted on a heavy discount “A price so low that you can make money even if some part of your analysis turns out to be wrong” - Benjamin Graham Margin of Safety

20 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Common Mistakes  Perception is that value investing merely means:  Investing on the basis of a discount to NAV / Low PE ratio  Do not consider the quality of the business or growth in earnings.  Growth investing is perceived as:  Investing in good quality companies with high growth rates  Ignore Price/NAV & P/E ratios.  Value Investing - Selecting shares trading for less than their intrinsic values.  Seek shares of companies that they believe the market has undervalued.  Believe the market overreacts to good & bad news  Stock price movements do not correspond with company's long-term fundamentals.  Opportunity to profit by buying when the price is deflated Definition of not qualifying Shares seem cheap relative to others Prices in an upward trend - Many investors focus on trend & outlook

21 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Determining a share’s intrinsic value No "correct" intrinsic value. Two investors with exact same information / Place different value on a company Estimated price relative to NAV (P/NAV) Low P/E ratio relative to expected growth (PEG) Compared to charting, value investors have tons of financials to read. – It is very labour-intensive. Often subject to management buy-outs / “Going private" Wait for market forces to realise company is undervalued to move it up. – You need loads of patience Problems: Value Investing

22 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Value View

23 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Quality View

24 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Company Analysis

25 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Technical Analysis

26 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Focus on following the progress of individual companies, not the share market - Make sure you know everything there is to know about the company. Regular analysis of business reports is key to making informed investment. Make sure you can clearly picture the future of the company - A long-term earnings outlook is essential to any investment decision. The only reason to invest money in shares is the expected cash flow. Choose shares in the best companies - Only consider companies which have proven that they are excellent in their field of business & have achieved an increase in profits over a number of years. Identify the actual value of a share - According to Benjamin Graham every company has an intrinsic value. This is calculated by taking into account not only the book value (NAV) of a company but also its earning power. Only buy when the price is right - Even when investing in the best companies, you can end up paying too much for shares. The long-term return on invested capital is calculated by looking at the relation between the purchase price & the earnings trend of the company. If the former is too high, the return can be slim. Do not feel the need to cover all your bases- This does not mean abandoning your conservative & safe approach & throwing caution to the wind, but rather that just a few investments in companies with excellent prospects will be your path to success. Hold on to your shares - Selling your shares should only ever be an option when the basic estimation of the earnings trend changes, or if an investment that promises even higher returns presents itself. A higher stock market price should never be a reason for selling. Avoid additional costs - Try & avoid making non-essential transactions as this results in paying extra brokerage commission & often taxes. Ignore the experts - Trust your instincts & not the opinions of others- least of all the stock market. Value Investing Principles

27 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No “Price is what you pay, value is what you get” Warren Buffet

28 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Successful Investor: Peter Lynch Peter Lynch: His Thinking Introduction to Growth Investing (G.A.R.P.) Growth at a reasonable price (GARP) Company Analysis Technical Analysis Guidelines for Growth Investors Investment Strategies: Growth Investing

29 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Managed Fidelity’s Magellan Fund between 1977 – – Posted an average annual return of 29%. – No fund manager has ever run a fund of its size ($14-billion) so successfully for such a long time. Attributes success - Skill of finding investment opportunities in areas you are already familiar with. Looked closely at stocks for which he & his family had “positive personal experiences as consumers” Looked for the simplest of businesses to invest in … – “Go for a business that any idiot can run, because, sooner or later, any idiot probably is going to run it.” - Peter Lynch Successful Investor: Peter Lynch

30 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No His book was published in 1989 has the same relevance today. – Introduced the Holy Grail of investing … the “Ten Bagger” – Make 10-times your money within 5-years Financial fundamentals were secondary thing to look at. – First he liked to understand the company thoroughly. – He visited shopping malls to see how the shops were doing; – Checked which brands were selling; and – At what prices – Then he looked at the Balance Sheet He avoided investing in large, well-established businesses: – Opting for less well-known ones, or – Turnaround (recovery) stories – He was a contrarian investor … seeking out stocks that everyone else was ignoring. Advice: Think of your stocks as you would your children: you have limited time, so you cannot keep an eye on too many of them at once … – Five stocks are enough for most of us to keep track of. Peter Lynch: His Thinking

31 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Peter Lynch pioneered a hybrid of growth & value investing Commonly referred to as a "growth at a reasonable price (GARP)" strategy. Another acronym SWAN – Sleep Well At Night GARP combines value & growth investing Value investors look for relatively cheap shares compared to their earnings & NAV Growth investors look for companies that will grow faster than others GARP investors do not look for companies in trouble or drastically undervalued, nor do they look for high-flying growth stocks Stop short of investigating the companies’ business in great detail More concerned with historical growth & stock price than qualitative factors Seek growth from: The firm itself (Organic Growth) Headline earnings growth (HEPS Growth % > 15) PEG ratio < 100 GARP might sound like the perfect strategy (S.W.A.N.). Being greedy for both growth & value is not easy. If not mastered, you could buy mediocre shares rather than good GARPs. Introduction to Growth Investing (G.A.R.P.)

32 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Growth at a reasonable price (GARP)

33 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Company Analysis

34 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Technical Analysis

35 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Strong historical earnings growth? Based on annual revenue, has earnings been growing in the past. Rate of EPS growth depends on company’s size - Indicates their growth investing potential. Companies should display EPS growth in at least the last five years / 10-year period of this growth is even more attractive. If a company has displayed good growth over the last five- or 10-year period It is likely to continue doing so in the next 5 to 10 years. 2.Strong forward earnings growth? Projected five-year growth rate of at least 10-12%, although 15% or more is ideal. These projections are made by analysts, the company or other credible sources. The big problem with forward estimates is that they are estimates. This requires knowledge of the typical growth rates for different company sizes. For example: An established large cap will not be able to grow as quickly as a younger small-cap tech company. When evaluating consensus estimates, learn about the company's industry What its prospects are What stage of growth it is at Guidelines for Growth Investors Source:

36 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Is management controlling costs & revenues? This guideline focuses specifically on pre-tax profit margins. Great growth in sales but less than outstanding gains in earnings. High annual revenue growth is good, but if EPS has not increased proportionately Decrease in profit margin. By comparing a company's present profit margins to its past margins & its competition's profit margins - Growth investor is able to gauge whether or not management is controlling costs & revenues Maintaining margins. Good rule of thumb- If company exceeds its previous five-year average of pre-tax profit margins, as well as those of its industry - Company may be a good growth candidate. 4.Can management operate the business efficiently? Efficiency can be quantified by using return on equity (ROE). Efficient use of assets should be reflected in a stable or increasing ROE. Analysis of this metric should be relative: a company's present ROE is best compared to the five-year average ROE of the company & the industry. 5.Can the share price double in five years? If a share cannot realistically double in five years - Probably not a growth stock (General consensus) May seem like an overly high, unrealistic standard Rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years. Guidelines for Growth Investors (continued) Source:

37 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Growth Investment 90-Times

38 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investing for Dividends Risks: Investing for Dividends Strategy Investing for Dividends (Dividend Yield) Investing for Dividends (Pay-out Ratio) Company Analysis Technical Analysis Investment Strategies: Investing for Dividends

39 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Most straightforward share selection strategy Pick investments that provide a steady stream of income every month, quarter or year Combination of ordinary shares, bonds or preference shares Pay regular & substantial dividends Assess older, more established companies Very predictable earnings stream Shares with strong, resilient yields tend to fall less than the overall market On R1-million investment: R – R in income Do not invest on the basis of dividends alone High dividends do not mean that it is a good company Dividends are paid out of net income Lower retained earnings (Future growth?) Large dividends would be better spent invested in the company Investing for Dividends Strategy

40 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Value of original investment can drop. Dividend distribution & level of payouts are not guaranteed with shares as with bonds. Should the company experience financial hardship or a great investment opportunity comes along that requires significant cash outlay. Investigate company fundamentals & not do not just look at dividend yield. Income investing is not perfect. Maintain a well-diversified portfolio. Risks: Investing for Dividends Strategy

41 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investing for Dividends (Dividend Yield)

42 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investing for Dividends (Pay-out Ratio)

43 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Company Analysis

44 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Technical Analysis

45 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No If you want to build a portfolio of the highest dividend shares but also want some protection against the downside: 1.Make sure the dividend pay-out ratio does not exceed 60% to 70%. The company retains at least 30% to 40% of its earnings for expansion. 2.Your dividend shares should be in companies that have pricing power. They can increase prices to offset a high inflation rate Can still pay dividends. 3.Look for stocks that have a debt to equity ratio of less than 50%. That means a company has R1 of net worth for every R1 in debt. 4.Look for shares with a PE ratio of 15 or less. Offers some additional downside protection should dividends be cut. Guidelines for a High Dividend Portfolio Source:

46 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Investment Strategies Value Investing Objective: Defensive investment in bear market Growth at a Reasonable Price (GARP) Objective: Look for undervalued & high growth potential stocks (Bull Market) Investing for Dividends Objective: Assess older, more established companies for regular & substantial dividends

47 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Develop your own style of investing Fundamentals + Technicals = Rational Analysis Value + Growth + Dividends Bullish + Oversold + Outperforming Match investment strategy to your personality Summary

48 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Open a Trading Account with PSG Online Online Tutorials Equity Trading Simulator Research Tools DataShare p/m Wen Professional Plus Software is FREE! Link to the PowerPoint presentation will be ed soon! Good Luck & Happy Trading! Conclusion

49 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Contact Us Thank You Shaun van den Berg (011)

50 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Disclaimer This publication has been issued by PSG Online. It is confidential and issued for the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This report is provided for informational purposes only. No information contained herein, no opinion expressed and no recommendation made constitutes a representation by us or a solicitation for the purchase of any of the securities mentioned herein and we have no responsibility whatsoever arising here from or in consequence hereof. Securities, financial instruments or strategies mention herein may not be suitable for all investors and investors must make their own investment decisions using their own independent advisers as they believe necessary and based upon their specific financial situations and investment objectives. The employees of PSG Online may from time to time own securities mentioned herein. Analyst Certification The research analyst who prepared this report certifies that the view expressed herein accurately reflect the research analyst’s personal views about the subject security and issuer and that no part of his compensation was, is or will be directly or indirectly related to specific recommendations or views contained in this report.


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