Risk based investing

[Intrinsic_Value]

For many in the forum, I don't think they 'get' the underlying meaning of the readings of my post.

All of my focus is about
(a) controlling risk
(b) generating returns.

I don't need every 'deal' to work out, and not every deal will work out as expected.

But I try hard to be like a casino, I try to get the probabilities in my favour.
The more probabilities in my favour, and the more risk elimination factors I have created, the greater the change of a satisfactory outcome.

That's the easy part.

The hard part is creating this same approach over multiple asset classes and on an international basis, so that I can keep the velocity of returns running high year after year.


If people do this they will really see what wealth accumulation can be like over long periods of time.

I have been fortunate in that over the last 7 years I have been able to consistently generate returns of 20-30% a year

 

[Intrinsic_Value]

and as always with Somersfot being around for so long, we can even get an idea of the movements of property within Australia.

Just go through different time frames, and look at the posters location.

 

[devank]

I don't think I 'get' the underlying meaning of the readings of THIS post

 

[willair]

That's the easy part.

I have been fortunate in that over the last 7 years I have been able to consistently generate returns of 20-30% a year

Anyone that bought into "ALIBABA" recently now that we are wired to the global economy may do well,,competition always makes things better..

http://online.wsj.com/articles/alibaba-group-plans-ipo-launch-week-of-sept-8-1409377740

 

[D.T.]

IV

In Roger Montgomery's book, I believe he refers to this as RRR - Required Rate of Return. This is the percentage of return you need which is priced into the intrinsic value price calculation. Therefore, risk is already accounted for when buying at or below the IV price, assuming you're buying good quality companies (which is a separate calc / metric again).

 

[Ace in the Hole]

I have been fortunate in that over the last 7 years I have been able to consistently generate returns of 20-30% a year

Great returns, but what % of your capital invested are we talking about?
i.e. Have you always had your entire available capital invested at all times during this period, or only a portion?

If not, could one with a more moderate % return, say 15%, but confident to expose and risk their entire capital base, compounded with high leverage, have earned a higher net figure?

 

[D_One]

IV

In Roger Montgomery's book, I believe he refers to this as RRR - Required Rate of Return. This is the percentage of return you need which is priced into the intrinsic value price calculation. Therefore, risk is already accounted for when buying at or below the IV price, assuming you're buying good quality companies (which is a separate calc / metric again).

I'm a quarter of the way through that book. In it he mentioned one of the criteria is to look at whether the company made profit / loss the precious financial year.

How do people go about finding a list of all the companies that made a profit on the ASX?

 

[D.T.]

I'm a quarter of the way through that book. In it he mentioned one of the criteria is to look at whether the company made profit / loss the precious financial year.

How do people go about finding a list of all the companies that made a profit on the ASX?

Read their results (every company on ASX has to make public all financial documents) by going to the ASX website, looking up the company code, then checking the documents section. The company's website may also have an investor section with similar.

Alternatively go to finance.google.com and look up the company code, in the bottom right there's some stats.

 

[D_One]

Thanks DT, so there is no easy way? I would expect the ASX to hold that sort of information, then a simple filter.

 

[D.T.]

Use the stock screener on the google finance page?

 

[knightm]

I absolutely love your language, I think there is considerable truth in it and i would like to sit down over a beverage one day to discuss this further.

For many in the forum, I don't think they 'get' the underlying meaning of the readings of my post.

All of my focus is about
(a) controlling risk
(b) generating returns.

I don't need every 'deal' to work out, and not every deal will work out as expected.

But I try hard to be like a casino, I try to get the probabilities in my favour.
The more probabilities in my favour, and the more risk elimination factors I have created, the greater the change of a satisfactory outcome.

That's the easy part.

The hard part is creating this same approach over multiple asset classes and on an international basis, so that I can keep the velocity of returns running high year after year.


If people do this they will really see what wealth accumulation can be like over long periods of time.

I have been fortunate in that over the last 7 years I have been able to consistently generate returns of 20-30% a year

 

[Intrinsic_Value]

I don't think I 'get' the underlying meaning of the readings of THIS post

What is 'risk'?

Is it just short term movement of market pricing against ones position, or is it the risk of a permanent capital erosion from an investment decision?

Is it volatility? No volatility is the definition of risk in modern capital finance, but its not risk, if the underlying income stream generate a return.

Once one understands the true nature of risk, one can then develop strategies to minimise it. But one must understand what risk is first.

To give a very simple example for a property forum?
What is risk for property?
Is that risk influenced by the yield?

To bring this back to my casino analogy, its the same as the casino. They skim on the probabilities. Each individual hand might not play out as expected, but allow multiple hands to be played and the house wins.



To my way of thinking, the higher the yield (so long as sustainable), the lower the risk, because I get the capital back through the yield.

Just a very simple example.

 

[Intrinsic_Value]

IV

In Roger Montgomery's book, I believe he refers to this as RRR - Required Rate of Return. This is the percentage of return you need which is priced into the intrinsic value price calculation. Therefore, risk is already accounted for when buying at or below the IV price, assuming you're buying good quality companies (which is a separate calc / metric again).

Montgomery's book is very good for beginners. I learnt allot from it (mainly through the easy link into other great investors such as Buffett and Seth Klarman (margin of safety, whos original book sells for more than a $1k now)

However it can be deceptive.
RRR is just a mathematical calculation.
If the world was so simple, don't you think all the hedge funds would just be using it. After all its just mathematical algorithms.

The real skill is to link it back into sustainable ROE or better yet to ROCE, adjust for business cyclicality, adjust for ability of management, adjust for ethical management etc etc (lots of black boxes being opened here).

In regards to good quality companies, the truth is that there are few 'good' companies. The best time to acquire is when the market is very scared, such as during the GFC. For the rest of the times, the market is not stupid, and will price good quality companies accordingly, hence limited opportunities to really make good money from them.

So one needs to move between good quality companies (during market routs) and average companies (that are cyclically unfavourable) in my opinion.

The market never prices unfavourable industries efficiently. (however for some the price can go lower for longer and sometimes for good reasons, which only become apparent after the facts)

 

[Intrinsic_Value]

I'm a quarter of the way through that book. In it he mentioned one of the criteria is to look at whether the company made profit / loss the precious financial year.

How do people go about finding a list of all the companies that made a profit on the ASX?

so if a company made a profit for 9 years and then made it loss in year 10, it has no value???????

be careful of simple stock screeners.

(although I use them all the time, but I am not so na?ve as to just use the stock screener in isolation).

In answer to other questions on this thread.
Open a commsec account.
Can provide quick overviews of a company. I use it all the time (even though my investments are not held in commsec)

 

[Intrinsic_Value]

Great returns, but what % of your capital invested are we talking about?
i.e. Have you always had your entire available capital invested at all times during this period, or only a portion?

If not, could one with a more moderate % return, say 15%, but confident to expose and risk their entire capital base, compounded with high leverage, have earned a higher net figure?

back of the envelope total returns on capital.

and yes most of the time either hold
(a) untapped leverage
(b) cash earning crap (eg I hold some US$ and HK dollars earning nothing, and some AU$ earning small $, but they are my back up)

In regards to your second point,
High leverage should only be used when one is very very confident of the underlying return and can hedge most of the risk away. High leverage is NOT used to achieve the total return.

Right now in a world of low returns, leverage is not the answer. (Too many are doing this)

 

[Intrinsic_Value]

Great returns, but what % of your capital invested are we talking about?
i.e. Have you always had your entire available capital invested at all times during this period, or only a portion?

If not, could one with a more moderate % return, say 15%, but confident to expose and risk their entire capital base, compounded with high leverage, have earned a higher net figure?

i should also point out here in the interests of transparency that 2014 might be the first year out of the last 7 that I don't hit this target.

Its been a difficult year, was generated negative returns from march-June.
The suddenly went bang in July and August, only to be coming back now.

Property is roughly roughly30%
Shares is roughly roughly 30%
Business assets roughly roughly 15%
World wide cash holdings roughly 15%

coupled the an overall loan of around 40% of asset pricing (much less if include business assets)

Holding some mining services and enginerring shares that are doing my head in (at what point do they represent value, trying to piece the fog of future earnings).

Holding Tesco and J. Sainsbury in the UK. Both showing large losses (but not much capital diverted to them).

Lol good probability that 2014 will be the first year I don't hit those kind of returns mentioned preiviously

Total overall portfolio has net assets of around $3m and generated a net income stream of around $350k (would be much higher if didn't have the property portfolio, the property portfolio is generating only around $15k even though it accounts for 30% of total assets) (These figures are only income based, no capital gains considered)

 

[LeoT]

the property portfolio is generating only around $15k even though it accounts for 30% of total assets)

Does the property portfolio account for 30% net assets? If so, I don't understand why its only returning 15k?

 

[D_One]

From my calculations, that will be about a 7% yield on gross assets?

Of all the literatures available, what do you think is a good source for a beginner?

You allude to an efficient market for quality stocks, that is in direct contrast with Roger Montgomery's view. If the market is efficient, then, there is no value in a company as the value has already been factored into the price?

 

[D.T.]

Does the property portfolio account for 30% net assets? If so, I don't understand why its only returning 15k?

Probably net of tax, interest and all related costs. If we said that the net yield was 1%, that'd represent 1.5mil of equity. Depending on leverage, that could mean 1.5m to 4.5m worth of properties.

 

[spanna]

What is 'risk'?


To my way of thinking, the higher the yield (so long as sustainable), the lower the risk, because I get the capital back through the yield.

Just a very simple example.

So would you also assume the longer you hold the stock the lower the risk? As an increased % of your capital has been returned to you via yield?

How do you control this? take money off the table and look for other deals?