Transcript Basic's of Investing - Simon Brown
Introduction to investing
Presented by: Simon Brown www.SimonBrown.co.za
@SimonPB
What is the aim of today?
• Market • Risk • Strategy • Research • Choosing Companies • Fundamental Analysis • Using the website • Costs 2
The mechanics of the share market
3
The Stock Market
• Works like any other market. • When a buyer and seller agree upon a price a trade occurs.
• A
share
of stock is literally a share in the ownership of a company • When you buy a share of stock, you're entitled to a small fraction of the assets and earnings of that company.
4
What does a share holder get?
• You own a share of the company • Dividends • Share in the growth • AGM • SENS • First right to new share issues (rights issue) 5
Asset classes
Asset class refers to a set of related investments that have similar
risk
and
return
characteristics • Stocks (large, mid, small, AltX) • Property (residential, commercial, listed) • Debt (bonds, preference shares, retail notes) (government, company, etc.) • Commodities (gold, silver, platinum) • International assets (direct, local, ETF ’ s) • Index trackers (Exchange Traded Funds ie: Satrix) • Cash 6
Sectors
A group of securities in the same industry or market. • ALSI – largest 162 listed companies • Top 40 – largest 40 listed companies • RESI20 • FINI15 • INDI25 • Gold • Banking index • AltX 7
Risk vs. Return
8
Many ways to invest
• Stock market • Art • SME • Property (not listed) • Coins • Gold
Each have Different Risks
9
Risk vs. Reward
Can ’ t have one without the other 10
REWARD
Asset class risk Government Bonds Cash in the bank Property (not your home) Shares
11
Risk
•
Investing is all about managing risk.
• Business risk adequate cash flow to meet its operating expenses • Financial risk adequate cash flow to meet financial obligations • Liquidity risk The risk stemming from the lack of marketability of an investment that cannot be bought or sold • Exchange rate risk risk to which investors are exposed because changes in exchange rates may have an effect on investments • Country / Political risk The
risk
that an investment's returns could suffer as a result of
political
changes or instability in a
country
. • Portfolio risk Diversification • Psychological risk tolerance for fluctuations in market value • Neglect 12
How is risk managed
• Diversification • Across assets • Across sectors – Within sector • Move to five shares.
• ETF ’ s
Buy the winning stock in the winning sector
13
Exchange Traded Funds (ETFs)
14
ETF ’s in summary
• Trades like a normal share but benchmarks the market • Can track anything – from an Index to a Commodity • Allows you to get exposure easier and cheaper • Market makers offer you fair value • Dividends or Interest is paid 15
Examples of ETF
’
s and ETN
’
s
– Satrix.co.za (local indices, Rafi, dividend) – DB x-trackers.co.za (international indices and currencies) – ABSA (NewGold, local indices and Shari'ah) – PropTrax (property index) – Investec Z-Shares (bond market) – RMB BIPS (local indices and inflation linked bonds) – Nedbank BettaBeta Equally-Weighted Top40 – Standardbank – (African index, various commodities including gold, platinum) 16
Strategy
17
Develop an investment strategy - Entrance
• Holistic picture of all investments • What stage of life are you at? What risk can you take?
– Young – Married with children – Retirement • What is your investment time frame?
• Knowledge stage • Common Sense • Your risk profile and risk tolerance • Growth vs. income • Active vs Passive 18
Active vs. Passive
• Active (beating the market) – Value investing, speculating, growth, etc.
• Passive (matching the market) – Index trackers (ETF) Considerations: • Costs (brokerage and others) • Performance (inflation and market out perform) • Time to manage 19
JSE investments: Risk vs. Return Derivatives AltX Mid cap Large cap/growth Blue chip shares Cash / Fixed deposits Start here
20
Remember that return is important
• Return must compensate for: – Time value of money during investment period – The expected rate of inflation – Risk in the business – Market return (beat the market or buy ETF) 21
Common Mistakes
• No investment strategy. • No Diversification • Investing in shares instead of in companies.
• Churning your investments.
• Acting on “tips” and “sound bites”.
• Paying too much in fees and commissions.
• Decision-making by tax avoidance.
• Unrealistic expectations.
• Neglect.
• Not knowing your real tolerance for risk.
• Averaging down.
22
In Summary
• A good strategy can help us stay on track without clouding our judgment with emotion.
• Be confident in your strategy and carry through with your plan • If you're looking for steady income with low risk, you may want to consider investing in income stocks. On the other hand, if you're looking for opportunities that may result in a big payoff and you're not too concerned about the risks involved, you might want to try investing in growth stocks 23
Research
24
Research
• Start with names you know and trust • Would you do business with them • General long term prospects • Do you know a bit about the business • Do they have good Leadership • Financial strength and capital structure.
• Strong companies in strong sectors.
• Buy the company – not the share 25
Research
• Company • Sector • Economic USE • Fundamentals • Technical 26
Your own research
• NO ONE PIECE OF INFORMATION SHOULD MAKE YOU BUY OR SELL 27 • It is over whelming evidence that results in a buy or sell – Risk vs. reward
What drives returns?
• Changes in revenue and profits • The economy • Industry the company operates in • Inflation and interest rates • GDP 28
What to watch?
• Inflation CPI and PPI (monthly) • Interest rates (every two months) • GDP (quarterly) • Manufacturing production (monthly) • Retail sales and PSCE (monthly) • Vehicle sales (monthly) • Exchange rates (live) • International markets (live) 29
Choosing companies to invest in
30
Shares vs. Other investments JSE
Ordinary shares
Alternate investment
Owning a business
JSE advantage
Liquidity and costs Property stocks Owning property Costs and liquidity ETF ’s Unit trust Costs DB x-trackers Preference shares and Retail notes Off-shore unit trusts Fixed deposits Foreign allowance and exchange rate Liquidity and better rates (does not track normal share) 31
Business cycle
32
Business cycle – investor response
33
Methods used to chose companies
• Fundamental analysis – The Story and Numbers • Technical analysis – The Picture 34
Fundamental vs. Technical Analysis Both have their place, up to the individual how/which to use.
Technical Analysis
Charts Short term Trading
Fundamental Analysis
Financial Statements long-term Investing Focuses on what actually happens Focuses on what ought to happen in the market in the market 35
In Practice
• Use fundamentals to choose • Technical's for timing 36
Fundamental analysis
37
•
Fundamental analysis
of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets .
• We need to look at the “numbers” and the “story” 38
Courses
•
Advanced Fundamentals Presentation
– Five hours Saturday mornings 39
The story
40
The numbers
41
Ratios
42
Dividend Yield
• The return that you receive from dividends can be expressed as % and is referred to as the dividend yield (like interest).
• Dividend Yield = Dividend per share Price per share X 100 • Represents annual income from the share • Income stocks DY 3-8, growth stocks DY 0-3 43
Earnings Per Share (EPS)
• Earnings per share serves as an indicator of a company's profitability • Profit per share • The companies total real profits divided by number of shares 44
The Price earnings ratio (P/E)
•
Company A
is worth R1m • Issues 100,000 shares • Each share is worth R10 •
Company B
is worth R1m • Issues 10,000 shares • Each share is worth R100 45 • A 10% rise in Company A = 10% rise in Company B.
• P/E ratio will be used to explain the concept of price vs. value.
The Price earnings ratio (P/E)
• It establishes a direct relationship between the profitability and the share price.
P/E ratio = price of share (EPS)
• It allows you to compare one share to another within
the same sector
.
46
P/E Ratio
• Is this stock expensive?
– MNO & Co has a net profit (EPS) of R2000 for the year – Asking price is R100 000 – P/E = R100 000 R2 000 =
50
• Is this stock cheap?
– ABC & Co has a net profit (EPS) of R2000 for the year – Asking price is R12 000 – P/E = R12 000 R2 000 =
6
• ABC would pay for itself in
6
years • MNO in
50 years
• Income stocks P/E10-15, growth stocks P/E 20-30.
47
Price Earnings Ratio: where do you get it?
• Our website makes it easy by giving you the PE ratios.
• You simply need to understand what it means.
Pick ’n Pay @ R45.10
Spar @ R90.00
48
What is Earnings Yield (EY)?
• Inverse of PE as a percentage • Shows the percentage of each Rand invested in the stock that was earned by the company.
• Higher than the risk free government bond rates 49
What is PEG?
• PEG is a widely employed indicator of a stock's possible true value 50 PEG = PE / expected EPS growth • Below 1 indicates “ cheap ” relative to expected future growth • Above 1 indicates “ expensive ” growth relative to expected future
What is PEG?
• The PEG ratio is less appropriate for measuring companies without high growth.
• Large, well-established companies may offer dependable dividend income, but little opportunity for growth .
51
Technical analysis
52
Courses
• Introduction to technical analysis – Two half days on a Saturday 53
The Picture (e.g. Pick ’n Pay)
54
From the Standard Online Share Trading Website
Three core concepts of technical analysis
• The market discounts everything.
55
• Price moves in trends.
Using the Website
56
Share Filter
•
Helps to narrow your search
57
Share Filter
•
Research further
58
Quote Page
59
Detailed Forecasts
60
Results Summary
•
Final and interim results summarised
61
The website (e.g. Pick ’n Pay)
62 We help you by providing a range of research reports that covers: • Fundamentals • Stocks • Technical's • Currencies • Economics
From the Standard Bank Online Share Trading Website
Price History
63
Results Summaries
64
Profile Consensus forecast
65
Watchlist
66
Buying and selling shares
67
Buying and selling shares
Top down approach • Select strong markets • Select strong sectors within those markets • Select strong stocks within that sector 68
Remember your Strategy
• Growth strategy – High PE – Low dividend – Low PEG • Income strategy – Low PE – High dividend – PEG around 1 69
Buying and selling shares
• Place an order – Limit price or market price – Life of trade • Establish exit strategy • Start feeling like an owner.
70
How do I place an order?
71
Limit order
http://www.securities.co.za
72
At market order
73
Exit strategy
74
Knowing when to sell
• Entry strategy defines exit strategy • Growth – focus on price • Income – focus on company/economy (Fundamentals) • Economic and business cycles • Management changes • Business changes • Read Annual report • On going research 75
Possible outcomes in the share market
+ 0 BIG PROFIT Small Profit Break Even Small Loss
Use a Stop Loss to Avoid Big Losses Make sure you do not lose money and you are half way there!
BIG LOSS 76
Big loss needs even bigger return % Loss
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Gain required
11.1% 25% 43% 66.6% 100% 150% 233% 400% 1,000%
GAME OVER
77
Costs
78
Impact of costs on your investments
R 1,800,000 R 1,600,000 R 1,400,000 R 1,200,000
20 Year Returns on a lump sum R100,000 investment
Investment A: Lump sum R100,000 (Initial brokerage at 0.6% plus taxes, 15% growth pa with R50 monthly fee) e.g. Online Broker - share investment R 99,053
A - R1,559,694
Investment B: Lump sum R100,000 (15% growth pa with 5% upfront fees and annual management fee of 2%) e.g. a managed investment R 95,000 R 1,000,000 R 800,000 R 600,000 R 400,000 R 200,000
Difference of R288K in returns B - R1,271,699
R Ye ar 1 Ye ar 2 Ye ar 3 Ye ar 4 Ye ar 5 Ye ar 6 Ye ar 7 Ye ar 8 Ye ar 9 Ye ar 10 Ye ar 11 Ye ar 12 Ye ar 13 Ye ar 14 Ye ar 15 Ye ar 16 Ye ar 17 Ye ar 18 Ye ar 19 Ye ar 20
Time
79
Online Share Trading Costs
• Brokerage is charged at
0.5%
of the trade with a minimum fee of
R50
plus statutory taxes. • Monthly fees of R50.00 (incl VAT). This fee waived if you trade 3 or more times in a month.
80
Worked Example Projected costs of shares
Securities Transfer Tax @ 0.25% STRATE Fees Investor Protection Levy
Brokerage
VAT on Charges
Total Trading Costs R 10,000.00
R 25.00
R 10.92
R 0.02
R 50.00
R 8.53
R 94.47
Costs as a % 0.94%
Economics of scale
• Make sure your trading costs are ideally not more then 5%. • Alternatives to reduce costs – Auto Share Invest (ASI), part of SB Internet Banking – ETFSA.co.za
81 • While learning and saving use cheaper options to gain market exposure
Be smart
82
• • • • • •
Strategy Stop loss Education Know your risk profile Know the companies you are investing in Do your home work
83
Research Reports
84
Subscribe to our research reports and newsletters
• Daily Standard • Technical Analysis • Economic reports • Stock and Sector Reports • Rand Futures Daily
.
• Profile Media consensus 85
Summary
86
Summary
• Investing in the share market makes sense.
• Develop a Strategy • Know your risk level and intention.
• Research before and after you buy.
• Buying and selling share is easy.
• Move towards 5 stocks.
• Buy the company not the share.
• Education is ongoing 87
Disclaimer
• • • • • • • • • This document together with any associated verbal presentation are provided on the express understanding that the information contained therein would be regarded and treated as proprietary to SBG Securities (Proprietary) Limited ( “
SBGSec
”), registration number 1972/008305/07. This document and associated presentation shall not be reproduced or used, in whole or in part, for any purpose other than for the consideration of the information set out therein, without the prior written consent of
SBGSec
. This document and any associated verbal presentation have been prepared solely for information purposes by
SBGSec
and accordingly do not constitute an offer, a solicitation of an offer, invitation to acquire any security or to enter into any agreement, or any advice or recommendation to conclude any transaction (whether on the indicative terms or otherwise) and must not be deemed as such. Any information, illustrative prices, disclosure materials or analyses provided to you have been prepared on assumptions and parameters that reflect good faith determinations by SBG Sec and do not constitute advice by SBG Sec and it should not be relied upon as such. The information, assumptions and parameters used are not the only ones that might reasonably have been selected and therefore no guarantee is given as to the accuracy, completeness, or reasonableness of any such information, quotations, disclosure or analyses. The past performance of any securities or other products is not an indication of future performance. No representation or warranty is made that any indicative performance or return indicated will be achieved in the future. This document together with any associated verbal presentation are not an official confirmation of terms, do not represent an express or implied offer, nor do they create any liability or obligation on SBG Sec. Any rates, levels and prices quoted herein or verbally presented are indicative only and although reflective of market conditions prevailing at the relevant time do not constitute an offer to transact at such levels and are supplied for illustrative purposes only. Any transaction or agreement to perform certain services that may be concluded pursuant to this document and/or any associated verbal presentation shall be in terms of and confirmed by the signing of appropriate documentation, on terms to be agreed between the relevant parties. The information in the document and any verbal presentation accompanying it are also subject to change without notice. SBG Sec, or an associated company, may have effected or may effect transactions for its own account in any investment outlined in this document or any associated verbal presentation or any investment related to such an investment. Prospective investors should obtain independent advice in respect of any product detailed in this document and/or associated verbal presentation, as SBG Sec provides no opinion or advice including investment, tax or legal advice and makes no representation or warranty about the suitability of a product for a particular client or circumstance. Transactions described in this document and any associated verbal presentation may give rise to substantial risk and are not suitable for all investors. SBG Sec will only provide investment advice if specifically agreed to by SBG Sec in appropriate documentation, signed by SBG Sec. This information is to be used at your own risk, and SBG Sec makes no representation with regards to the correctness of the information herein. By accepting this document, you agree to be bound by the foregoing terms and limitations. SBG Sec is a subsidiary of the Standard Bank Group Limited, an authorised user of the JSE Limited and an authorised Financial Services Provider. 88