managing a share portfolio 2011.pdf

7/28/2019 Managing a Share Portfolio 2011.pdf

1/12

Managing a Share Portfolio


2/12

This report is about investing directly inAustralian shares for profit, not aboutusing the Share Market as a Casino.

There are any number of books and

systems that purport to show the road toquick and easy riches. Almost invariably,the riches flow only to the promoters.


3/12

1

Investing for Profit in Australian SharesThousands of books and millions of pages have been

written about investing in shares, from popular books

aimed at the general public to academic tomes written by

Doctors of Philosophy.

Statistics have been poked and prodded, ideas espoused

and debunked, all to confirm what is really obvious.

This Report focuses on the five basic principles used

by investors serious about managing and growing their

wealth.

Special Points of Interest Analysis of almost seven decades of Australian share

market performance shows average per annum

performance of around 11%. This confirms the

importance of patience, diversification and time in the

share market; The importance of understanding and applying basic

principles to recognise when shares in good companies

are reasonably priced. And being disciplined to sell when

those shares become expensive; Why planning to be wrong is an important part of being a

seriously successful investor.

The Lessons of Experience and Research

The continuing lesson from examining how the great

names in investment and fund management have

been consistently so successful over decades of often

great industrial, financial and economic change is their

disciplined approach using five basic principals. Dont expect to get rich quickly but dont be surprised if

you do; Buy shares in good, investment grade companies; Try not to pay too much - be happy to wait - and be happy

to sell if the stock becomes expensive; Plan on being wrong sometimes - manage your risk; Work hard and hire good help the less work you want to

do, the better the help you need.

Personal Funds Management for Profit

Your Own Portfolio, Managed Funds or Investing in

the Index.

In the main this report is about investing in your own

portfolio rather than in the market overall or by using

fund managers. Employing any of these approaches

is far better than not investing. Often a combination of

approaches should provide a better quality result.

Investing in the Index

There are investment funds that aim to almost exactly

replicate the performance of the share market index.

There is little or no management involved in this type ofinvestment and the costs are very low.

Investing in the index is a legitimate approach. The

investment is in the broad economy as represented by the

major businesses listed on the share market.

There is no attempt to favour one company or type ofcompany over another, although, by definition, more will

be invested in large companies than small companies

because that is how the index works.

Efficient Market Theory says that the market is always

well informed in setting the price of individual stocks.

Supporters of this theory believe that the market is

almost always right and that it is impossible to do better

and very costly to try. Recently this theory has been

seriously challenged both on a theoretical basis and after

new, long term analysis of share market data from the

United States.

There is also ample evidence in Australia, where themarket is not as large, diverse and well informed as

some international markets, that the market can be

beaten - but it is not easy. Over time, the Australian share

market, as represented by the index has been a very good

investment.

Using Fund Managers

Using fund managers can be a good approach to share

investment but management expenses can be high.

Also, money tends to be managed by people - not

companies - and significant changes in personnel are

rarely reported to investors. Many investors spread their

investment across too many fund managers and can end

up paying dearly for an average return.

For larger investors, perhaps the major problem with

using managed funds is the lack of control over the

level and nature of the income received and the tax

implications of decisions taken by managers.

When buying into a managed fund, investors are

invariably buying into a pre-existing Capital Gains Tax

liability. Sometimes this Capital Gain is crystallised soon

after investment and a portion of the investors capital is

paid back in the form of taxable income.

Investing in Your Own PortfolioBuying shares is different to investing in the market

index by definition. It would be a miracle if the returns

received over short or long periods were the same.

The risk when investing in your own portfolio is higher

than when investing in the index or through most

managed funds. Individual companies can go out of

business and all of the money can be lost. (Ask investors

in HIH or Babcock & Brown).

Investors who dont obey the basic rules or are driven by

greed into speculation can be very badly damaged. Many

who played the market with technology stocks found their

portfolios down by more than 80%. In the late 2000s,

those who were overexposed to property investments also

would have seen their portfolio performance lag. This

is a far worse performance than an investment in the

broad market index could ever return just because of the

increased diversity it provides.


4/12

2

Managing your own share portfolio also requires moreadministration than using index funds or fund managers.

The rewards are in having more control over investments;

the opportunity to get a better after-tax result by

managing income and capital gains more efficiently; and

the interest there is in the investment process.

These rewards have some costs in time and involvement.

Why Invest in Shares

People with money have two major alternatives:

You can choose to invest in assets like shares and

properties. By being a part-owner, you receive a share

of the earnings and capital growth; or You can choose to lend money to others like banks

and other financial institutions or through mortgages.

By lending your money rather than investing it, you will

receive interest.

Chart 1 shows the returns, from capital growth and

dividends, received by people who invested in Australian

shares over a period of sixty years.

The chart shows all the rates of return they experienced

after one year, two years all the way up to 20 years.

There is a separate line for each quarter over that

period. In other words, the chart includes a line showing

the returns for investments made in September 1936,December 1936, March 1937 and each quarter after that.

This is a very large series of data, including periods

of war, booms and recessions as well as a period

of substantial structural change. During this period

Australia moved from being a rural and colonial economy,

through the growth of protected manufacturing industry

in the 1950s and 1960s, to becoming one of worlds

great mineral exporters, through industrial restructuring

to the present where mining, financial services,

telecommunications, information technology andhealthcare are the significant parts of the economy.

Over this period the average return for long-term

investors has been 11% per year. Had these investors

kept their money in loans to others (eg in the bank) they

would have made less than 7% per year.

And the return from shares is more favourably taxed

with the dividend income mostly in the form of franked

dividends where 30% tax has already been paid and tax is

only paid on only half of capital gains.

Based on todays tax laws the after tax return from shares

would have been around double the return from money in

mortgages or at the bank.

Chart 1 also tells us why people shouldnt put all their

money into the Share Market. The returns can be

negative.

There is, of course, also risk in lending money - the

people you lend it to may not pay it back. In fact, a lot of

money has been lost over the last ten years due to the

failure of mortgage intermediaries through either bad

management or fraud.

But the negative return from the share market goes away

with time and after ten years all index investors in the

past have at least had their money back.

The message is that if you want to spend the money

within the next four years and you want to be 90%

certain that it is going to be there, then dont invest it in

the share market keep it in the bank or in some form

of term deposit.

This area of discussion is called Asset Allocation and

is more fully explored in other reports from Prescott

Securities.

Chart 1 - Rewards from Long Term Investing

Source: Prescott Securities Ltd.


5/12

3

The good news from Chart 1 is that having a bad yearin the first year does not mean that you are destined to

do poorly from investing in shares. And unfortunately, a

great first year does not mean you will always be a top

performing investor.

The blue line in Chart 1 shows the returns experienced

by those who invested at the end of September 1973, just

prior to the oil crisis. This was the worst time to invest in

the last sixty years (worse than September 1987) and the

portfolio would have lost almost 45% of its value over the

next twelve months.

Fortunately, the year from September 1974 was pretty

good and most of the loss was recovered. And by the endof the third year the portfolio was back into profit.

These investors later participated in the strong market

returns of the late 1970s. After seven years they had

experienced compound returns of around 16% per

annum.

The red line shows the return for investors at one of the

great investment dates of the last Century, the end of

June 1967. The economy was running strongly after the

slow down in the early 1960s, inflation and interest rates

were low and the future looked terrific.

After one year the portfolio value was 73% higher than atthe start. Unfortunately, it didnt continue.

Seven years later these investors also hit the oil crisis

that brought their performance back to the pack.

The message is that when investing in the index or

managed funds it is the time in the market that matters,

not the timing of the market.

Why Do Shares Go Up in Value (or When Will theMusic Stop?)

The more profit a company earns the more valuable it

is. The amount of profit a company earns can be divided

amongst all of the shares to calculate the Earnings Per

Share. If the amount earned per share increases over

time then the value of the share to investors will increase

over time.

What is also important is the amount that investors are

prepared to pay for earnings.

Investors have long used the ratio of Price per Share/

Earnings per Share (the PE Ratio) as an indication of

whether a share is cheap or expensive.

The amount that investors are prepared to pay for shares

seems to be influenced by two key factors: The level of interest rates (ie what they can earn by not

investing in shares); and Sentiment.

When interest rates are high it is more attractive to keep

money in safe loans rather than be subjected to the risks

of investing. The price of shares will be lower than at

times when interest rates are low.

The level of interest rates is largely influenced by the rate

of inflation. Consequently, over quite a long time periodthere has been an inverse relationship between PE Ratios

and the Rate of Inflation, as shown in Chart 2.

This relationship led to a drop in the attractiveness of

shares in the early 1970s as inflation went up to quite

high levels. There was a return to higher levels of pricing

through the 1990s as inflation fell to more normal, long

term levels.

Chart 2 - Share Prices and Inflation

0

2

4

6

8

10

12

14

16

18

20

22

24-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Price/EarningsRatio

Inflation

Year

Inflation (Inverted) (LHS) Price/Earnings Ratio (RHS)

Source: Iress & RBA


6/12

4

The two factors that seem to drive sentiment surroundingan individual share or the market as a whole are price

movements in the recent past and the level of confidence

in the future.

If prices have been increasing then investors will feel

confident about investing in shares. Prices will keep

rising until they reach an unsustainable level. When share

prices are falling, confidence will be lower and prices will

continue to fall until the underlying value becomes so

attractive as to cause a turn in pricing.

Riding the wave of investor sentiment is called

Momentum Investing. This can be a lucrative but

dangerous style of investing and critics often call it theGreater Fool Theory.

The Greater Fool Theory is that it is OK to pay a high

price for a share that is rising in price because there is

always a greater fool who will pay you more.

This is the foundation of most day trading and works

well until the music stops. The experience of traders in

technology stocks during 2000 bears witness to this.

Long Term Investors will do best if they buy shares in

good quality companies when sentiment is poor and hold

the stock until sentiment improves. If a stock becomes

very popular it sometimes makes sense to sell and moveto another investment.

To do this successfully is hard work. You must recognise

the fundamental quality of a company and also have a

way of knowing when the shares are reasonably priced.

Comparing Likely Returns from Different

Share Investments

The theory is that the true value of a share is the

discounted present value of all cash flows that will flow

from that investment in the future. This means that if you

could estimate the dividends you will receive from a share

each year in the future for a very long time and the price

at which you will eventually sell it, you could then reduceall of these amounts to a current value.

To do this, the estimates would need to be discounted

by the current risk free return you might get, say from a

cash management trust, plus a premium for risk.

This way you can determine the true value of a share.

It is then a simple matter of comparing the true value

to the price and then only buying shares when they are

cheap. If your eyes are starting to glaze over at this point,

dont lose heart. In reality, the maths is fairly simple but

like all good theories when it comes to investing, it is not

the answer but the idea that is the key. The theory points

us to what is important.

If you wanted to estimate future cash flows you wouldstart with the Dividend Yield and in order to estimate the

future dividends and the direction of the share price, you

would need to know the level of Earnings Growth.

In order to make some judgement about the future price

of a share you would need to decide whether the current

Price/Earnings Ratio (PE) would be maintained in the

future and you would certainly need to know what it is now.

With the basic components of Dividend Yield, Earnings

Growth and the current PE, you have all the building blocks

that would be necessary to calculate the value of a share

based on the net present value of all future cash flows.

Another approach to using this data is to create a Value

Score for each share based on the equation below which

was used by the famous US investor, Peter Lynch.

Value Score = Dividend Yield + Earnings Growth

Price/Earnings Ratio

What this equation is saying is that shares with a high

dividend yield and/or high earnings growth that are

selling at a low price are more attractive to buy than other

shares. This seems like a reasonable proposition.

Getting the Information

In choosing to focus on the Yield, Earnings Growth and

the Price/Earnings Ratio we know we are evaluatingshares based on the basic components of success.

The raw historic information is readily available and

you will always know the current price. The question is

whether the historic data is good enough or whether the

process can be improved by using research?

Historic data will tell you the results a business has

achieved under past management - very valuable

information. Unless something changes this is a pretty

good indication of what will happen in the future.

At Prescott Securities we believe it is possible to improve

on the historic data and the information we use isoutlined below.

The Dividend Yield

The yield for the past twelve months is in the newspaper

everyday and while analyst projections are available from

any broker or research house, the risk involved in using

historic information is quite low. Companies will strive to

at least maintain their dividend payments to shareholders

the management like to keep their jobs.

At Prescott Securities we use an average of the yield for

the past twelve months and the consensus estimates for

the next two years. We also use the pre-tax value of the

dividend by grossing up to allow for the level of Franking(ie the level of tax already paid by the company).


7/12

5

Determining Earnings GrowthWe know that if the level of earnings per share grows the

value of the share should also grow over time.

Earnings growth provides management with the ability

to pay higher dividends. It seems obvious that if you

have two companies that pay 7c per year per share

in dividends, Company A has 2% per year of Earnings

Growth and Company B has 12%, then you would pay

more for the shares in Company B.

Some investors believe that earnings growth is the

most important focus because it is likely that you will

make more from a rapidly increasing share price than

from dividends. The problem is in getting a handle onwhat earnings growth is - the information is not readily

available and is difficult to interpret and define.

Earnings Per Share history is available from some

research houses and commercial information sites. One

approach is to average the earnings growth over the past

two or three years.

Most research houses and broking firms will provide

earnings projections and the average of each future

years earnings growth could easily be calculated. As it

happens this would be a far more sophisticated use of

broker research than taking notice of their Buy or Sell

recommendations.

The problem with looking only at forward estimates is

that on average they are more positive than historical

growth.

There is an argument for considering the long-term

earnings growth of a company as well as projections. If

a company has been averaging 5% earnings growth over

ten years and the projected earnings growth is greatly

different (either higher or lower), you would want to

understand what was going to make the future different.

Long-term earnings growth is not the entire answer

either. Companies can change. A good example isWesfarmers. Its long-term earnings growth will give you

information about a company focussed mainly on coal

mining. The acquisition of Coles in November 2007 was

a company changing acquisition and the core earningsof the business now has a focus on supermarkets,

competing with the likes of Woolworths.

A substantial management shake up can also change the

direction of earnings.

Finally, it is easier to take a position on earnings growth

where the earnings of a company have been consistently

growing than where the earnings have been erratic.

Below are earnings per share charts prepared in October

2010 for two companies; Westpac and Qantas.

These are very different companies in many ways but

there is also a difference in the consistency of theearnings growth. For many investors, consistency of

earnings performance is an important indicator of the

quality of the investment. The majority of the information

on these charts is historical (we are using the earnings

figures before abnormals so that we can focus on the

actual business performance). The last two data points

are consensus forward estimates.

The level of earnings growth will vary based on the

method used for calculation.

Table 1 indicates the differences in average earnings

growth rate for these two companies over various time

frames. Clearly, some level of judgement is required.

Table 1

Average Earnings Growth Westpac Qantas

Past Two Years 10.8% -10.4%

Forward Estimates 5.1% 53.5%

Long Term Trend 11.2% -1.4%

Medium Term Trend 10.2% 11.3%

For Westpac, given the long-term consistency an earnings

growth estimate of 10-12% would seem reasonable.

With Qantas, you may choose to discount both the long

and medium term trend figures as the past inconsistency

reduces the predictive power of these figures. The recentearnings recovery cannot be ignored, but we should take

into account the conservative forward estimates but

acknowledge that they are only analyst projections and

will change from time to time. Perhaps a figure of 6-8%

could be used.

Source: Prescott Securities Ltd., Iress & Morningstar Source: Prescott Securities Ltd., Iress & Morningstar

0

50

100

150

200

250

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

Earnings/Dividends-cents

Price

Westpac Banking CorporationPrice Momentum Earnings Trend Dividends

0

10

20

30

40

50

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Ear

nings/Dividends-cents

Price

Qantas Airways LimitedPrice Momentum Earnings Trend Dividends


8/12

6

At Prescott Securities, we find that an average of the LongTerm and Medium Term Trends, adjusted for consistency

and the average of the last years growth along with future

projections, generally provides a reasonable basis for

calculation but occasionally judgement has to be used.

This does not diminish the validity of the overall process

but merely indicates the difficulties in reducing everything

to mathematics when it comes to investing.

Current Price The Price/Earnings Ratio (PE)

Just as the yield based on last years dividend is readily

available so is the PE where the current price is divided

by last years reported earnings.

Relying on the PE based on the past years earnings

is reasonably risky as next year the earnings could be

considerably different and knowledgeable investors

will often know when this may be the case. At Prescott

Securities we use the average of the past years earnings

and the consensus projections for the next two years

earnings in arriving at our PE figure for each company.

We also find it useful to consider how an individual share

is trading, compared to its long-term PE. The chart below

for ANZ Bank was prepared in October 2010.

The long-term earnings versus monthly share price lines

are organised such that if the PE of ANZ Bank had beenthe same over time, then the Price line would be on top of

the Earnings line.

There are a number of things that are interesting to

note from this chart. Since the early 1990s, earnings

growth has been extremely consistent and on average the

analysts in August 2010 expected the consistent growth to

continue. By this measure, we can see that ANZ Bank is a

pretty good company.

At the time, the dividend yield was around 5.9%, theearnings growth estimated at around 6% pa and the PE

around 11.3 times. On each of these criteria, the share

compared favourably to the rest of the market.

The market noticed the quality of the stock and there

was a strong price growth from around $18.00 in May

2003 up to around $30.50 in April 2007 where it became

rather expensive.

It would be wrong to rely entirely on this analysis as many

stocks have had well-deserved positive sentiment for a

number of years and are worthy of consideration.

Increasing the attractiveness of the price when a

company is trading below the long term PE and vice versaadds an element of contrarian thinking into the valuation

model and this is attractive for many investors.

Hard Research is Good to Find and Good Research

is Hard to Find

Research is rarely, if ever, about getting information that

the rest of the world doesnt have. It is about calculating

what impact new information will have on a companys

profit and when.

If the new information will not affect profit for many years,

to act upon it would be speculative as a lot can happen in

the meantime. Some investors may be happy to speculate

(gamble) but this is not serious investing.

Share analysts are clever and well-educated. They do

nothing all day but evaluate information and become

experts about the relatively small number of companies

they specialise in. And while some of them are not as

good at it as others, it would be foolish to spend much

time trying to do basic analysis yourself.

While earnings and dividend estimates are available most

private investors opt for soft research options.

ANZ Banking Group

Source: Prescott Securities Ltd., Iress & Morningstar

0

50

100

150

200

250

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00


Price

Price Momentum Earnings Trend Dividends


9/12

7

They expect to gain an advantage by reading the paper,watching investment programmes on television or by

subscribing to share magazines.

Why Does this Approach Rarely Work?

By the time the information is in the paper or magazine,

it is in the market and prices have already changed to

reflect the impact the information is likely to have.

Even if researchers have important new information or

analysis, the last people they will tell will be the general

public or private client advisers. The research is actually

paid for by large institutions and they understandably

insist on there being an embargo period before this

information is made public.

People who are serious about investing for profit in the

share market should have a creed they recite whenever

they are thinking about investing: I will never know anything that everyone who can impact

the share price doesnt already know. I am not smarter than everyone else in the world. I am unlikely to buy something at the lowest price it will

ever be. I am unlikely to sell anything at the highest price it will

ever be. I am more likely to make money by being wise than by

being brilliant - and being wise is easier.

Once you know these things are true you are liberated to

become a successful investor in the share market.

You will know that research is important because only

dealing in historic information is dangerous.

You will know that the availability of research defines the

universe of shares you will be interested in if there is

no research you simply wont have this share in your core

portfolio.

You will know the purpose of good research is to add to

your understanding about the earnings outlook for a firm.

And be aware that good research is hard to find.

Individual share broking firms will have their own

agendas, particularly if they have fund-raising or broking

relationships with listed firms. And even when this is not

the case, sometimes their analysts are not up to scratch.

Also, if they are doing work for a firm they are precluded

from providing any information. Multiple sources of

research are required.

At Prescott Securities we subscribe to consensus data to

get the average projections from all analysts. We also draw

qualitative information from various research houses.

Plan to be Wrong - at Least Some of the TimeHave a Portfolio Management Strategy

This may include ensuring that the majority of your

portfolio is considered core. Your core portfolio will

consist of investment quality stocks and will be managed

in a disciplined fashion.

Many people will be happy for all their portfolio to becore. Others will seek to add spice through small

investments in less well-researched stocks or by

allocating some money to specialist fund managers.

Own more than one or a few shares - but not too many

The risk reduction benefit that comes from diversification

is less with each share that you add to your portfolio.

Remember, you are not trying to replicate the index: you

are trying to do better so some level of risk is good.

Usually somewhere between 10-15 stocks is a good

target where the benefits of diversification are not

outweighed by the added complications. Once you have

set a number, dont increase it every time you want to buysomething - force yourself to decide what to sell. Hard

decision making is good for the soul and for the portfolio.

Establish exposure limits

For example, you may want to say that no one share

should be more than twice the average holding and that

no share should be less than 25% of the average.

Where a share does so well that it moves significantly

above the maximum exposure level you are effectively

saying that you have moved outside of your comfort zone.

It will be sensible to sell some of the shares to come back

to the top of your comfort zone.

Where you have a small holding you should either buy

more or sell altogether and make way for something that

you want to own.

Finally, establish a review process and time scale

Formally reviewing your portfolio on a quarterly basis is

sensible. You dont add much value by formally reviewing

more often. In fact, it makes good sense to take a position

and let the world turn for a while without making changes.

Identify Investment Grade Stocks

For your core portfolio it is sensible to identify the

universe of investment grade stocks. Then keep an eye

on them so that you can consider buying them when theprice looks attractive.

This does not mean only investing in Blue Chips, even

if this meant something. The implication is that all big

companies or only big companies are of investment

quality and neither of these statements are true.

All investment grade companies will be researched

and will have one of the following two characteristics

preferably both.

They will have a significant retail franchise so that they

have control over their own destiny and can be price

makers rather than price takers; They have a history of consistently increasing earnings

per share.


10/12

8

Westpac (as shown earlier) fits into both categories.Some of the other companies, such as Woolworths,

Harvey Norman, Coca-Cola and Origin Energy that have

both characteristics are in a group of charts on page 10.

These charts show earnings per share and prices over

time (prepared in October 2010).

There are some companies that have strong retail

franchises but have yet to exhibit consistent earnings

growth. These companies are worthy of consideration

due to the strong brand position they have. The charts

for Flight Centre and Fosters Group as examples (as at

October 2010) are also shown on page 11.

Some companies may not have strong retail franchisesbut have exhibited long term consistent earnings growth.

ANZ Bank (as shown on page 8) fits into this category.

The charts for some other such companies, in this case

Cochlear and Ramsay Health Care at October 2010, are

also shown on page 11.

There are some companies that do not fit this definition of

Investment Grade Stocks, as shown on page 11.

At Prescott Securities we have identified around 30

companies that we should be happy to have in a core

portfolio at most times and especially when they are

attractively priced. Investment Grade stocks have the

capacity to forgive your errors. If you buy at the wrong

time then the quality of the businesses will usually at

least deliver your money back at some point even though

it may take a little while.

DiversifyAs well as owning a number of shares it is a useful

discipline to have exposure to different parts of the

economy. Popular wisdom would have you try to match

your exposure to different sectors as closely as possible

to their weighting in the index. Traditionally, the market is

split into a large number of sectors most of them very

small and it is difficult to gain exposure without managing

a very large portfolio.

The international categories make more sense, excluding

property trusts and utilities, there are nine categories.

They are listed on page 11 along with their size in the

Australian Market (as at October 2010).Weighting the portfolio in line with the index really makes

little sense. Judging risk based on the level of volatility

of prices is a standard approach within the investment

industry but for longer-term investors it is really

nonsense. The reward for owning volatile assets is a

higher return. Owning volatile assets is similar to a roller

coaster ride - if you dont like the ups and downs you can

cover your eyes (property investors have been doing this

for years).

Intuitively, however, it does make sense to own different

sorts of things. Consumer Discretionary, Information

Technology (a very small sector) and Telecommunicationsseem to have marched to a slightly different drum over the

past decade. This makes these sectors good diversifyers.

Companies with Strong Retail Franchises and Consistent Growth in Earnings Per Share





0

50

100

150

200

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

E

arnings/Dividends-cents

Price

Woolworths Limited


0

5

10

15

20

25

30

35

40

45

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

E

arnings/Dividends-cents

Price

Harvey Norman Holdings LimitedPrice Momentum Earnings Trend Dividends

0

10

20

30

40

50

60

70

80

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00


Price

Coca Cola Amatil Limited


0

1020

30

40

50

60

70

80

90

100

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00


Price

Origin Energy LimitedPrice Momentum Earnings Trend Dividends


11/12

9

Companies with Strong Retail Franchises and Inconsistent Growth in Earnings Per Share

Companies without Strong Retail Franchises and Consistent Growth in Earnings Per Share

Companies without Strong Retail Franchises or Consistent Growth in Earnings Per Share









0

5

10

15

20

25

30

35

40

45

50

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00


Price

Fosters Group LimitedPrice Momentum Earnings Trend Dividends

0

20

40

60

80

100

120

140

160

180

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00


Price

Flight Centre LimitedPrice Momentum Earnings Trend Dividends

0

100

200

300

400

500

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00


Price

Cochlear Limited


0

20

40

60

80

100

120

$0.00

$5.00

$10.00

$15.00

$20.00


Price

Ramsay Health Care LimitedPrice Momentum Earnings Trend Dividends

0

5

10

15

20

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50


Price

Australian Pharmaceutical Industries


0

5

10

15

20

25

30

35

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50


Price

TAP Oil Limited


0

5

10

15

20

25

30

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50


Price

Clarius Group LimitedPrice Momentum Earnings Trend Dividends

0

2

4

6

8

10

12

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00


Price

Beach Energy LimitedPrice Momentum Earnings Trend Dividends


12/12

Prescott Securities Limited I ABN 12 096 919 603 I ASX Market Participant I Australian Financial Services Licence No. 228894

Head Office I 245 Fullarton Road, Eastwood, South Australia 5063 I T +61 8 8372 1300 I F +61 8 8373 1710

[email protected] I www.prescottsecurities.com.au

Melbourne I Level 40, 140 William Street, Melbourne, Victoria 3000 I T +61 3 9607 8571 I F +61 3 9607 8282

Gold Coast I Suite 105, Level 1 Eastside 232 Robina Town Centre Drive, Robina, Queensland 4230 I T +61 7 5503 5600 I F +61 7 5503 5699

Consumer Staples and Financials seem to have lower

volatility, indicating that they may provide a solid

conservative investment base.

Also, you may choose to take a view that the prospects for

some types of businesses are better than others at the

moment and favour investment in those sectors.

Prescott Securities periodically produces reports on the

investment sectors that seem to offer the most medium

term potential.

Doing it Yourself it Certainly is Cheaper (like brain

surgery at home)

Lots of things are cheaper if you do them yourself.

Sometimes the result is not as good but often this doesntmatter.

There is a certain sense of satisfaction that comes from

doing things for yourself. Otherwise, no-one would knit

jumpers, turn a piece of wood in the shed, fix up old cars

or roast their own chicken.

When the consequences of failure are low, why not have a

go - you might even save some money. This can be true of

investing if the outcome doesnt really matter, where the

money involved is relatively small or where it really is just

for fun.

Serious investors know that good advice can add value.Good advisers bring information, experience and, probably

most importantly, detachment to your decision making.

The purpose of this report is to show that investing

professionally is not rocket science. But investing with

purpose is hard work, it takes a lot of time and in the

end costs money. By getting good advice you share this

cost with other people. The bad news is that good advice

usually costs more than bad advice (though not always),

the good news is that there usually isnt that much

difference when all the costs are taken into consideration.

There are a few golden rules.

Dont pay for advice by the transaction

Sometimes the best advice is not to invest and you need

to be prepared to pay for this advice too. If your adviser

only gets paid when you do something dont be surprised

if you are often advised to do something. Pay your adviser

a retainer.

Dont pay for reports - pay for adviceMany firms will provide regular reports showing the value

of your shares - often with beaut graphs showing how

your portfolio compares to the sectors of the market, as

if it really matters, and sometimes you will get some tax

information. This is low value add.

You dont need a description of your portfolio; you need

well-considered advice on what to do next.

Ensure that there is an advice process

Stockbroking firms usually leave the advice to the adviser

and often there is no controlling process.

Good advice eventually flows from having well considered

and proven processes delivered by knowledgeable and

experienced advisers.

Financial Planning firms often have good process when

it comes to structures, asset allocation and the use of

managed funds but generally get their share advice from

stockbrokers where there is no advice process.

Disclaimer: The information contained within this document was compiled by Prescott Securities Limited (PSL) based on materials from other sourcesand PSL provide no warranty regarding the accuracy or completeness of the information. All opinions, conclusions, forecasts or recommendations are

reasonably held at the time of compilation but are subject to change without notice by PSL. PSL assume no obligation to update this document after it hasbeen issued. Except for any liability which by law cannot be excluded, PSL, its Directors, employees and agents disclaim all liability (whether in negligenceor otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or

any other person directly or indirectly through relying upon the information. This publication is intended to provide background information only and doesnot purport to make any recommendation upon which you may reasonably rely without taking further advice. This publication does not take into account any

persons investment objectives, financial situation and particular needs. Should you consider the acquisition of a particular financial product as a result ofthe material contained, you should obtain a copy of and consider the Product Disclosure Statement (where applicable) for that product before making anydecision. PSL may receive a fee for advice and/or the implementation of an investment decision. PSL and their representatives may have financial interests

in some/any of the product(s) included within this report. Prescott Securities Limited (PSL) is the holder of an Australian Financial Services License No:228894. PSL is a WHK Group firm. Prescott Securities Limited December 2010. All rights reserved.

Prescott Securities have several other Reports available. Please visit our website www.prescottsecurities.com.au

Sector Share of Index Volatility CorrelationConsumer Discretionary 4.3% 25.3% 34.5%

Consumer Staples 8.0% 16.1% 91.7%

Energy 7.2% 23.5% 80.9%

Financial Institutions 32.0% 21.1% 91.1%

Healthcare 3.6% 23.3% 80.8%

Industrial Companies 6.6% 25.5% 88.6%

Information Technology 0.8% 38.6% 11.9%

Materials (eg Resources) 25.0% 24.5% 91.3%

Telecommunications 3.4% 16.0% -35.6%

managing a share portfolio 2011.pdf

Documents