Alan Hull Active Investing Book and strategy review Garry Hoover
Historical Research methodology: (main method) • Lincoln Stock doctor. • Star stock • Borderline • Filter. Only buy if Price = undervalued
Other Research methodologies • Morning star • Moat company • Model portfolio • Sometimes LIC. • Top 20 invested stocks.
Sell side strategies ? • Lincoln • Hold forever • Maybe sell if lost Star or borderline or income stock status? • Maybe sell if lost Strong or satisfactory status? • Maybe sell eventually if lost more than 50%. • Selling was painful
I’m a recovering addict. • Addicted to being right • When I researched a stock = I had conviction • Stock was a good stock • Good future • Price was right • If it went down…it was the market that had it wrong…the price would come back…I hoped.
Result • I held onto stocks for waaay too long. • Sometimes I bought on the way down • I lost money.
Case. Woodside Petroleum Value downgrade 39.69 to 38.40 (undervalued) Under the “old method” I’d probably hold on to this Value upgrade to stock until it was knocked out Value $44.07 as a star income stock… downgrade Star Value 44.07 to 39.69 downgrade Income who knows when and at what 38.40 to 35.89 Undervalued stock in price.
Case. SGH Star stock out Star stock in $3.17. $2.77. this is this is probably probably where I’d where I’d get in get out
My new Thesis= I’m probably wrong • I can study public data until the cows come home. • Lincoln data. • Analyst reviews. • Newspapers. • Annual reports and similar. No matter how much I read, • Economic analysis. talk study, I’m going to make mistakes. “Expensive mistakes”
Coin Toss Game Thought Experiment Imagine we play a game of coin tosses. • The bet is $1 • Over the long term the end result would tend to be $nil return for both of us. Alan Hull’s example. • Imagine I can pull out of the game any time and keep my winnings. • Start the game again. • And you’re happy to play this way. Result. • Every time I’m up $3 or $4 I pull out • We start the game again. • We keep playing until I’m up again…then I pull out. Wow…this got my attention…I can win this game.
Thought Experiment ASX coin toss game. This coin toss game grows at 5-10% per annum over time. I can end the game anytime and start again. Game rules Must AVOID ending the game in a loss Try to buy and hold gainers Caveat. Not too stressful or time consuming.
My Key rule. • I must must must must avoid • ending the game in a loss position • Or at least make the loss as small as possible. Selling out of loss making positions is the key to this game
Example. How I use Stock Doctor to sell out of potential loss making positions. Sell if price crosses this stop loss AND if crosses here. BE Disciplined
Daily Portfolio Review • On Screen example.
How to buy stocks. • Rule one. • Do my best to avoid disasters • Buy only stocks • Star stocks • Borderline • Strong or satisfactory strength (with debt to asset ratio < 40% • Market cap (over $500m). • Turnover (over $200m) (min 5x)
How to buy stocks continued. • Automatic upload of Star Stocks and Borderline (income stocks also) • Using the Lincoln Filter tool. • Saving watch lists. • Automatic updates. • How to save interesting charts.
Looking at a chart that says buy Stock closes in the green For the week Price is between red and blue lines Trend is up Nice clear gap in HMMA
Adding HAV ROAR Rate of return is solid. (here over 20%)
Found an interesting chart? Now take a Look at the fu fundamentals. 1. Financial strength 2. Share price (above Lincoln ok…but not too high?) 3. . Annual returns over 20% 4. PE. Not too high and preferably below Industry PE. 5. PEG less than 1. 6. Next save the stock in “interesting buy chart watch list”
A question. What else is worth watching? • ETFs and Diversified Financials? • Daily turnover above $400k • Exposure to. • Overseas markets. • Bond funds • Unlikely to go bust.
Once I’ve found something worth buying • Ideally I should buy every stock that fits my criteria • Provided that I don’t reduce my returns • Remember HAVROAR. • I should sell if it hits the stop loss • This stop loss system gives me confidence. • I’ll probably be able to get out if it drops.
What can go wrong? • Markets can drop overnight. • Rule. If all three US indices close down…don’t open new positions. • Stocks can have disasters. • Rule. Hold 8-10 stocks (max 15) • Max 5% in any one stock • Max 30% exposure to one sector • Watch daily for sells. • Watch the major indices (not for trading…….gain a sense of what mkts are doing) • Watch carefully for overheating. • Go back to most important rule • Take emotions out of it…lose all friction to selling. • My first loss is likely to be my best.
Bull and bear markets • Bull markets run on Greed. • human emotion allows longer runs. • More time to take advantage. • Bear markets run on Fear. • Shorter and can be much sharper. • Harder to take advantage…needs to be watched closer. • For me I’m going to learn how to do this. • I’ll probably keep away.
Caveat. Not too time consuming. • Imagine I play a game where I • win 51% of time and • lose 49% • If I watch this every minute…I’ll die of stress. • Much Less stressful to watch weekly • This game. • Look for sells 1x per day. (10 mins) • Sell in disciplined way. • Look for buys once per week • 30 mins to 1 hour to get the short list. • 5 mins to review daily.
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