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 MARKET REPORTS |
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Resident Trader
SMSF Negative Returns Not Required – part 2
Will Kraa, August 04, 2008
In the previous article about this subject I mentioned I would write more about how this applies to the individual stocks held at the time the market turns, why not all my money is in cash at the moment, and what will induce me to buy again. Also I will show you the performance of another investment in Riversdale Mining (RIV) in my SMSF as one of the stocks I held while most of my funds was in cash.
In the previous article I showed how the Multiple Moving Averages (MMA) on a weekly chart showed clearly that the market had reversed in a way not seen since 2002/2003. This was certainly a very big warning to do something about SMSF investments. It did not mean I had to sell everything at once but certainly to sell anything that was not performing as expected. Some stocks were sold immediately, others somewhat later.
At that time I was subscribing to a couple of investment newsletters which gave buy and sell recommendations, one on mining stocks and one on general stocks. The idea was for them to do the research and find good stocks to invest in for my Fund and seeing they also professed to use technical analysis I felt that would save me a lot of work for my Fund investments. While the market was going up they did well and it was my strategy to follow their recommendations. The trouble was that when the market turned they cancelled the technical stops or did not give any and I held on for too long with some of these investments. Once I could see these things were headed for disaster I got out regardless but some damage was done. I have since cancelled the subscriptions.
On the other hand there were a few stocks that hardly dropped at all during the market nosedive so there was no reason to sell and that is one of the reasons not all my money is in cash. There were also a few stocks that quickly recovered and remained in an uptrend and these were of particular interest to me. I regularly do a scan which shows up stocks that are trading with good liquidity and in an uptrend. Currently there are about 40 such stocks in my watchlist that meet these crtiteria. It is hardly surprising that most of them are in resource stocks – certainly they are not banks or property trusts. I invest in them when a valid buy signal comes along.
One of these is Riversdale Mining which has enjoyed a stellar run up for the last few years. This has slowed somewhat lately but by late April it was still in a strong uptrend, trading above a rising 150 day MA when the chart gave a buy signal on 23/04/08. The first criterion, that it must be trading above the rising long term MA, was satisfied and so the next thing to look for is a touch or dip below the 30 line on the RSI(7) which happened about 14/04/08 and then the buy signal is the candle turning blue on 23 April. I could see this on my intraday scan and so was able to buy the same day near the close at $8.42.
The initial stop is the last low and in this case that was at $7.45. The ideal is to have the stop less than 10% from the entry price and in this case it was a little more at 97 cents below the entry or 11.5%. With the risk appropriate to this account being about $4000 and the risk per share at $0.97 the number of shares is just over 4000. The account is my SMSF share account and in it I take very much less than the usual 2% risk per investment. I therefore decided to buy 4000 shares with the total investment being $33,633 including commission.
Seeing these are real shares, not CFDs, there is no interest charge but nevertheless it must be realized that the money invested will not get the bank interest it would otherwise earn. This is therefore still a cost of the investment for the time the stock is held.
For the first few days after the shares were bought the price rose before falling to near the stop. It was starting to look like this was going to be stopped out at a loss but then the expected rise in price eventuated and for the next few weeks the uptrend continued. Unfortunately in the current volatile market conditions there was a sudden drop in price in June resulting in two successive closes below the blue 2ATR(10) profit protection line and I had to sell on 11 June. Again this was done after an intraday snapshot data update and the stock was sold at $9.26. The proceeds of the sale were $37,007 after commission for a profit of $3374. This is better than bank interest but even so not a very worthwhile investment since the profit was actually less than the initial risk. It illustrates that the current market is not a particularly good place in which to have your money, in spite of the urging of the buy and hold people.
As you can see, the price recovered after I sold and it would have been possible to get out at a much better price later, but in such a volatile market it was a risk that was not worth taking. At the time of exit it appeared that the trend had reversed and especially in the present market this the sign to get away from the risk of giving back the profit.
It is clear now that the price drop was temporary and those who advocate ‘buy and hold’ may use this as evidence that using stops is not a good idea. I argue having no stops is taking unnecessary risk since it is always possible to get back into the investment as prices recover. I have not done that in this case since the long term MA has now turned down and I am not interested in investing in stocks that are not in an uptrend. Even mining and resource stocks are not immune to the vagaries of the current market so risk management, always essential, is now even more important.
In spite of the fact that this is my SMSF I use stops as it is the only way possible to manage risk. Usually in investing, stops are not used but stocks are selected on the basis that they are undervalued and will be held till the market realises the true value. I have learned (a very expensive lesson) that it is no use thinking that I know something the market is yet to realise. There are stocks which are supposed to be “cheap” which still continue down for a long time and some never recover. There are even unexpected market collapses at times! So even when engaging in “value” investing stops are essential to ensure risk is managed and to see that you take heed of the message the market is sending.
Currently I do have a slightly larger portion of my Fund in the market since there are some stocks which have continued to rise. Once I see more definite signs of recovery (and they may be a fair while coming) I will be interested in putting more into the market. Till then bank interest is likely to be safer than the banks themselves. In the meantime, patience is the name of the game for me.
Next article I think it may be good to have a look at the pros and cons of keeping your money in the market compared to, as they say, ‘timing the market’. I notice it is getting to be a big issue the way some people are writing about it and there are even advertisements on TV about this sort of thing.
More articles from this edition of CompareShares:
Stocks: The next hot spot for resources and stocks set to thrive
Share tips: Broker Stock Recommendations 4 August – 6 to BUY, 6 to SELL and 6 to HOLD
Resident trader: SMSF Negative Returns Not Required – part 2
Stock picks: Stock of the week – National Australia Bank
Stocks: Top Ten CFD stocks for the week
Takeover: Just Group may recommend Premier offer
Credit crunch: Self employed face loan troubles
Turnover: Lend Lease expects a profit fall of 47%
Stocks: Short-selling sends Fortescue stock plummeting
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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