introduction to investing presented by: simon brown @simonpb
TRANSCRIPT
Introduction to investing
Presented by:
Simon Brown
www.SimonBrown.co.za
@SimonPB
2
What is the aim of today?
• Market
• Risk
• Strategy
• Research
• Choosing Companies
• Fundamental Analysis
• Using the website
• Costs
3
The mechanics of the share market
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
5What 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)
6Asset 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
7Sectors
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
8
Risk vs. Return
9Many ways to invest
• Stock market
• Art
• SME
• Property (not listed)
• Coins
• Gold
Each have Different Risks
10
Risk vs. Reward
REWARD
RIS
KCan’t have one without the other
11Asset class risk
GovernmentBonds
Cash in thebank
Property(not your
home)
Shares
Risk
Rew
ard
12Risk
• 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
13How is risk managed
• Diversification
• Across assets
• Across sectors
– Within sector
• Move to five shares.
• ETF’s
Buy the winning stock in the winning sector
14
Exchange Traded Funds
(ETFs)
15ETF’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
16Examples 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)
17
Strategy
18Develop 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
19Active 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
20JSE investments: Risk vs. Return
Derivatives
AltX
Mid cap
Large cap/growth
Blue chip shares
Cash / Fixed deposits
Incr
easi
ng ri
sk o
f los
s of
cap
ital
Incr
easi
ng p
oten
tial f
or c
apita
l app
reci
atio
nIncreasing risk of loss of purchasing pow
er
Increasing safety of capital
Start here
21Remember 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)
22Common 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.
23In 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
24
Research
25Research
• 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
26Research
• Company
• Sector
• Economic
USE
• Fundamentals
• Technical
27Your own research
• NO ONE PIECE OF INFORMATION SHOULD MAKE YOU BUY OR SELL
• It is over whelming evidence that results in a buy or sell
– Risk vs. reward
28What drives returns?
• Changes in revenue and profits
• The economy
• Industry the company operates in
• Inflation and interest rates
• GDP
29What 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)
30
Choosing companies to invest in
31Shares vs. Other investments
JSE Alternate investment
JSE advantage
Ordinary shares Owning a business
Liquidity and costs
Property stocks Owning property Costs and liquidity
ETF’s Unit trust Costs
DB x-trackers Off-shore unit trusts
Foreign allowance and exchange rate
Preference shares and
Retail notes
Fixed deposits Liquidity and better rates
(does not track normal share)
32Business cycle
33Business cycle – investor response
34Methods used to chose companies
• Fundamental analysis
– The Story and Numbers
• Technical analysis
– The Picture
35Fundamental vs. Technical Analysis
Technical Analysis Fundamental Analysis
Charts Financial Statements
Short term long-term
Trading Investing
Focuses on what actually happens in the market
Focuses on what ought to happen in the market
Both have their place, up to the individual how/which to use.
36In Practice
• Use fundamentals to choose
• Technical's for timing
37
Fundamental analysis
• 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
39Courses
• Advanced Fundamentals Presentation
– Five hours Saturday mornings
40The story
41The numbers
42
Ratios
43Dividend Yield
• The return that you receive from dividends can be expressed as % and is referred to as the dividend yield (like interest).
• Dividend Yield =
• Represents annual income from the share
• Income stocks DY 3-8, growth stocks DY 0-3
Dividend per sharePrice per share X 100
44Earnings 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
45The 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
• 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.
46The 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.
47P/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.
48Price 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
49What 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
50What is PEG?
• PEG is a widely employed indicator of a stock's possible true value
PEG = PE / expected EPS growth
• Below 1 indicates “cheap” relative to expected future growth
• Above 1 indicates “expensive” relative to expected future growth
51What 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.
52
Technical analysis
53Courses
• Introduction to technical analysis
– Two half days on a Saturday
54The Picture (e.g. Pick ’n Pay)
From the Standard Online Share Trading Website
55Three core concepts of technical analysis
• The market discounts everything.
• Price moves in trends.
56
Using the Website
57Share Filter
• Helps to narrow your search
58Share Filter
• Research further
59Quote Page
Detailed Forecasts60
61Results Summary
• Final and interim results summarised
62The website (e.g. Pick ’n Pay)
From the Standard Bank Online Share Trading Website
We help you by providing a range of research reports that covers:
• Fundamentals
• Stocks
• Technical's
• Currencies
• Economics
63Price History
Results Summaries64
65Profile Consensus forecast
Watchlist66
67
Buying and selling shares
68Buying and selling shares
Top down approach
• Select strong markets
• Select strong sectors within those markets
• Select strong stocks within that sector
69Remember your Strategy
• Growth strategy
– High PE
– Low dividend
– Low PEG
• Income strategy
– Low PE
– High dividend
– PEG around 1
70Buying and selling shares
• Place an order
– Limit price or market price
– Life of trade
• Establish exit strategy
• Start feeling like an owner.
71How do I place an order?
72
Limit order
http://www.securities.co.za
73
At market order
74
Exit strategy
75Knowing 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
76Possible outcomes in the share market
0
-
+
Small Profit
Small Loss
Break Even
BIG LOSS
BIG PROFIT
Use a Stop Loss to Avoid
Big Losses
Make sure you do not lose money and you are half way there!
77Big loss needs even bigger return
% Loss Gain required
10% 11.1%
20% 25%
30% 43%
40% 66.6%
50% 100%
60% 150%
70% 233%
80% 400%
90% 1,000%
100% GAME OVER
78
Costs
79Impact of costs on your investments
20 Year Returns on a lump sum R100,000 investment
R -
R 200,000
R 400,000
R 600,000
R 800,000
R 1,000,000
R 1,200,000
R 1,400,000
R 1,600,000
R 1,800,000
Time
Valu
e o
f In
vestm
en
t
Investment A: Lump sum R100,000 (Initial brokerageat 0.6% plus taxes, 15% growth pa with R50 monthlyfee) e.g. Online Broker - share investment R 99,053
Investment B: Lump sum R100,000 (15% growth pawith 5% upfront fees and annual management fee of2%) e.g. a managed investment R 95,000
A - R1,559,694
B - R1,271,699
Difference of R288K in returns
80
Projected costs of shares 10,000.00R Securities Transfer Tax @ 0.25% 25.00R
STRATE Fees 10.92R Investor Protection Levy 0.02R
Brokerage 50.00R VAT on Charges 8.53R
Total Trading Costs 94.47R
Costs as a % 0.94%
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.
Worked Example
81Economics 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
• While learning and saving use cheaper options to gain market exposure
82
Be smart
83
• Strategy
• Stop loss
• Education
• Know your risk profile
• Know the companies you are investing in
• Do your home work
84
Research Reports
85
Subscribe to our research reports and
newsletters
• Daily Standard
• Technical Analysis
• Economic reports
• Stock and Sector Reports
• Rand Futures Daily
• Profile Media consensus.
86
Summary
87Summary
• 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
88Disclaimer• 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.
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