Life In Australia

The Aussie stock market reached a new record high last night, and my paltry 3.3 percent capital gain over the last six-and-a-half months is slightly less paltry now, at 4.9 percent - giving an annualised return of around 9 percent. Much more encouraging than the position on Friday afternoon of 6 percent annualised.

I don’t normally rush to check stock prices each day, but given the market had hit a new high, I thought I’d have a quick peek. So all I need over the next few months is another few percent gain and I’ll have comfortably beaten any return I could have got from an interest-bearing security.

As of the close of the ASX on Monday afternoon, prices were:

• Compass Resources CMR at $5.13 per share
• BHP Billiton BHP at $31.18 per share
• Oxiana OXR at $3.30 per share
• Kagara Zinc KZL at $6.18 per share

I thought it was about time I updated my stock market activity. In May last year I wrote about how I had grown $100,000 to $373,800 in a year by investing in mining stocks.

After that I got cold feet and took my cash out of the market, missing out on more tidy profits. I’d been reading Martin Zweig’s Winning on Wall Street and I was concerned about having a lot of cash in the market while interest rates were rising.

On the other hand, watching prices continue to rise was irritating. Furthermore, the Chinese economy, which in large part is responsible for the mining stocks’ boom was continuing to grow at a ferocious rate. I decided to go back into the market, taking heed of Zweig’s advice not to commit all of my funds because of my uncertainty about the effects of interest rates on the stock market. I decided to do as I had done before and invest $100,000 into the same four ASX stocks - I did this on November 2 last year. I bought:

• Compass Resources CMR at $4.52 per share
• BHP Billiton BHP at $27.31 per share
• Oxiana OXR at $3.22 per share
• Kagara Zinc KZL at $6.90 per share

As of the close of the ASX on Friday afternoon, prices were:

• Compass Resources CMR at $5.00 per share
• BHP Billiton BHP at $30.71 per share
• Oxiana OXR at $3.24 per share
• Kagara Zinc KZL at $6.18 per share

Overall that’s a 3.3% gain, or 6% annualized. I’d have been as well keeping the money in the bank. We’ll see how things pan out over the next few months.

I thought I would revist my stock market exploits. In May I wrote about how well I had done by investing in mining / resource stocks in the previous 12 months, growing $100,000 to $373,800. I sold my shares, looking for other opportunities. I wrote that I hoped it wouldn’t prove to be a case of “a fool and his money are soon parted”.

For the many who can’t be bothered reading my previous post, let me remind you that I initially had $100,000 to invest, which I split it into four $25,000 chunks and bought:

• Compass Resources CMR at $0.54 per share
• BHP Billiton BHP at $16.30 per share
• Oxiana OXR at $0.83 per share
• Kagara Zinc KZL at $1.19 per share

I sold all of my shares in May for:

• Compass Resources CMR at $3.60 per share
• BHP Billiton BHP at $28.65 per share
• Oxiana OXR at $2.95 per share
• Kagara Zinc KZL at $3.54 per share

Today these shares closed at:

• Compass Resources CMR at $4.20 per share
• BHP Billiton BHP at $25.05 per share
• Oxiana OXR at $2.69 per share
• Kagara Zinc KZL at $4.92 per share

If I had held my shares for another 3.5 months, my $100,000 would have grown to $417,249. The shares I sold increased in value by 11.6% in 3.5 months. That’s an annualised gain of about 40 percent.

So although this fool and his money have not been parted - I’ve been too cautious to do anything with the money - this fool would have done better if he had not sold his shares at the first hint of trouble.

As I continue looking for a new home for my investment funds, I’ve been reading Winning On Wall Street, by Martin Zweig.

It’s a good read - I’d recommend it to anyone wanting to learn about taking a profit out of the stock market. It’s particularly appropriate to investors who want to put their money into the U.S. markets but is useful globally. One of Zweig’s main themes is his Super Model which aims to inform investors whether they should be fully invested in the markets or not. Zweig produces his Super Model by combining his Momentum Model and his Monetary Model and uses it to time his entries to and his exits from the stock market.

Zweig uses a monetary model to predict the market’s broad direction. There are three parts to the monetary model - The Prime Rate Indicator, The Fed Rate Indicator and the Installment Debt Indicator.

I’ve been trying to get to grips with the modelling. At the moment, the signals, both monetary and momentum, seem to indicate that the US markets are not exactly a strong buy. More good news will be needed before anyone should invest there.

Zweig’s performance has an investment adviser and tipster is extremely good, so I would judge that it’s worthwhile paying attention to what he has written.

There is a lot of misery in the markets just now. There’s an old saying that when the shoeshine boy starts giving you stock tips, it’s time to sell. It was getting like that in the Australian markets - people thought the gold price was heading towards $1,000 per ounce and were buying mining stocks left right and centre.

I suppose I was the lucky shoeshine boy who (partly from listening to the hype at the time) got into mining stocks a year before they peaked. I was lucky enough to sell my stocks to “bigger fools” before the bubble burst.

An interesting question now is whether the market is heading into a longer term bearish period.

The chart of the ASX All Ordinaries to close of trading yesterday (below) shows that the long-term uptrend is still intact - but increasingly it looks as if the uptrend is going to be tested.

My official position is that I’m going to wait and see whether the uptrend holds and re-establishes itself. If it does, I will look at buying more stocks. If the uptrend breaks, I will need to be very convinced of the merits of aparticular stock before buying it.

Chart Courtesy of Online Software From Big Charts.

Last year I was lucky / skilled enough to turn $100,000 into $373,800 investing in Australian resource stocks and sold out part of the way through the recent falls in world stock markets.

I’d like to reinvest my share market gains in the most profitable way I can.

My concern about stock investing right now is that the world seems to be in an interest rate raising cycle. This is bad news for share market gains, at least until the markets start to believe interest rates in the world’s major economies have stabilised.

I’ve considered selling one or two choice stocks short. Short selling is a riskier affair than buying (you can lose more money going short than long if the market turns against you). So I rejected that.

I’ve also considered shorter term trading. I’ve been reading Trading for A Living by Alexander Elder. It’s been an enjoyable read. Of some concern is Elder’s statement that 90 percent of beginning traders blow their account. Elder gives plenty of advice and strategies to ensure his readers don’t share the same fate. He leaves readers under no illusions that it’s easy to succeed. In fact, he did such a good job of presenting some of the negative features of trading that I don’t think I’ll go down this route without doing more research. If you are interested in trading shares yourself, I would recommend you read Elder’s book.

Elder begins the book saying,

“You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody.

This is the life of the successful trader.

Many aspire to this but few succeed. An amateur looks at a quote screen and sees millions of dollares sparkle in front of his face. He reaches for the money – and loses. He reaches again – and loses more. Traders lose because the game is hard, or out of ignorance, or lack of discipline. If any of these ail you, I wrote this book for you.”

He ends with,

“If you believe that being a trader is worth the effort – as I decided years ago – my best wishes to you. I continue to learn, and like any trader, I reserve the right to be smarter tomorrow than I am today.”