Fusing Fundamental and Technical Analysis with lashings of Behavioural Finance

I’ve updated the Fusion Fund spreadsheet with the ANZ purchase.

OK looking picture after three months. The out-performance will slow, but with the power of fusion the gap will widen over time. Past performance is said to be not indicative of future performance. Disclaimer rant, you know the drill.

Do I think we’ll see 4,000? Nope. Do I think we’ll see the equivalent of 4,000 corrected for long-term market growth? I don’t know, but it seems likely that we will eventually see the equivalent of such a low point. John TwinDeltaTandem

Wow…so clear when someone like John lays it out. Kaboom the path is clear. Investing at low points is an easy path to market out-performance. Using margin at low points is the accelerant.

This thread on the BMW Method Board at TMF shows a remarkable dire consensus. I feel compelled to remark that on the few occasions predictions come true they are usually short lived.

I am slightly in cash. Around 10%. The FI portfolio is 79% cash and buying. If you’re finding reasons not to buy in the current market and though bought confidently in the last two years then you are taking a difficult path to investment success.

If we wash dramatically lower from here then I’ll start to use margin. That is the time to use margin safely. Unfortunately most people us margin in bull markets. To some extent they are right, you want to be in margin and looking to pare back that margin during the early phases of a bull market. You just don’t want to get caught on margin any were in sight of a market peak.

If you are in cash now, well down! You’ve done better than me on this ride down, my cash got to around 20%. I did choose cash instead of an index fund when starting the portfolio as that was clearly the best position to be in. All it takes is a few right calls down the years while keeping the mis-steps as small as possible.

Beware the negative consensus.

Buy on Fear.

Tune out the noise, what do you know is right.

I wonder what the rest of the thread offers. I like most of the suggestions thus far:

1. Be a cheap and recoverable lesson that he will never forget. qazulight
2. Most of what Dan said was probably true, but hey smell the roses the entire world stinks of power and greed. The pigs are at the troths.
3. “When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished by how much he’d learned in seven years.” Mark Twain lptj suggestions on the mechanics of how to deal with SS18 was good
4. I like Wendy’s suggestion
   Tell him to put half into an online savings account at Countrywide, which yields 3.35%.
   Tell him to put the other half into BAC, which currently yields 11.8%.

Interesting re-reading the first part the consensus is not so dire after all. Only a couple gloomy posts. Most seem balanced and wise.

The FI Fund is 18.68% up on the ASX200.

Cheers
Dean

Now is one of the times you need to be a net buyer of stocks.

While I don’t have strong conviction that the bottom is in I do see a lot of extremely good value in the market at the moment. I have been focusing on US stocks recently and will continue to do so as I also believe now is a great time for international investors to be buying US assets. From my perspective the Australian dollar is at a 25 year high against the US dollar. While the upward trend is strong and almost everyone is expecting parity, I am happy to be buying US assets now.

I realise I am swimming against two strong currents, the falling US dollar and flailing US stock market, but to catch good waves you sometimes need to get into position early.

I will be continuing to buy over the coming year. With the high level of cash the FI portfolio has I can’t sit around waiting for a mythical bell to ring at the bottom. We may be headed lower. A lot lower is not impossible. However, I am confident enough that in the long run I will be rewarded for buying excellent value in the current market.

Today for something completely different I’m back buying in Australia. Following on from yesterday and buying what you know I am buying my bank, ANZ Banking Group Limited, ANZ. As per above I’m not calling a bottom on ANZ, but I will crawl out on a limb and say we’re closer to a bottom than the top.

Quick Fundamentals

The last decade has been a great time to be an Australian company. Earnings and margins have swelled. While earnings may have peaked and Australia may go into a recession if the US leads the world down, I am very confident that in the long run the four major Australian banks will continue to prosper and will have higher earnings. I’m a patient guy. That is a long way to say I don’t think the past ten years growth rates for ANZ are maintainable and I’m not investing based on the past growth.

If the consensus 2 year forecast process correct then ANZ is a steal at current prices. I’m not counting on any growth.

Dividend yield quoted at 7.6%

Next Dividend Ex Date 6 Nov 2008

Dividend History Since 1993 (extent of my history) ANZ have never failed to raise their dividend. The last dividends were; interim 62c and final 74c, both 100% fully franked. That represents a 7.9% yield or around 9.1% after tax for the Fund (tax rate 15%).

Credit Ratings of Aa1 and AA from Moody’s and Standard & Poor’s.

For a swathe of fundamental details check out the ANZ Analyst Toolkit This features ten year summary data, historical interactive charts which go back 13 years. For example the 13 year net non performing loan graph below. The site also has financial spreadsheets, presentations and more.

Quick Technical View

• Ugly. Falling Knife. Fall accelerating. Many buyers already exhausted at higher levels.
• Panic setting in.
• But is it time for a bounce? Looking at the shorter term six month chart I think it’s fair chance.

Quick Behavioural View

• The early value hounds who bought in first half of March and second half of April may now be feeling the pinch as the shares are down 15-30%.
• A lot of buyers have already bought. However, thanks to superannuation more money pours into the kitty every month and patient value buyers must be getting interested.
• When a bounce occurs from these depressed levels many buyers will quickly emerge. Although the next bounce may falter it should have enough momentum for a 20% bounce (based on recent history).
• The Fund bought ANZ at $17.16. If a bounce occurs soon I’d be looking for $21 as a first target. If ANZ continues lower then I will be averaging down.
• Funds managers’ TV advertisements currently pushing idea of buy and hold. I don’t even need to look at the fund flows to know they are out.

Summary

This is both an opportunistic buy and a long term buy. If I get a 20% return in a couple months and there is no large fundamental difference to the global economy I will re-evaluate with a eye to taking my profits. As we are close to a fundamental strong buy and long term technical support I see the chances of a bounce as at least 50:50. For the long term I am happy to start buying ANZ at these levels and believe a long term hold will outperform the ASX200.

Even under the worst circumstances of the dividend being cut in the short term, over the long term there is very small risk of losing capital on ANZ and a good probability of market beating returns with a healthy dividend.

Peter Lynch extolled the virtues of looking around you for investing ideas. One Up On Wall St and Beating The Street and rightly investing classics. A new investor could do no better than turn to their pages for direction.

If you’re investing then no doubt you regularly use Nasdaq products.

Nasdaq, NDAQ, is on sale. Just like tonnes of other stocks! It is a fundamental strong buy with excellent risk to return profile.

But look at this chart. Poowee! It’s stinking it up.

Still, a lot of great stocks have lousy charts now. That is what bear markets do. Nasdaq has made it on to my watchlist.

An investigation is warranted due to the fundamental story and excellent value.

I am looking to buy at least one position this week as now is the a good time for me continue deploying cash.

What one stock would you buy this week?

Belief Systems

Why do so many intelligent people not transfer their success to investing success? Think about that for a minute. Got an answer?

Now consider this question. Why has investing research such as the following found that psychologists are more successful investors than some of the smartest people around?

Recently, a research, which was conducted by Bank of England, the universities of Heidelberg and Bonn together with McKinsey, observed the share-buying behavior of about 6,500 persons in an Internet experiment. They found that psychologists, particularly, were good at guessing other players behavior and mistrusted the overvalued stock by others. On average, psychologists were markedly more successful in their speculation than physicists or mathematicians - or even economists.

One answer is that most investors focus on valuation and detailed fundamental research as their belief system tells them a scientific, quantifiable, repeatable approach is the path to success. After investing for twenty years I am almost positive (that’s as sure as a doubter like me gets) that there is no edge to be gained from valuation and detailed fundamental research. Perhaps the absolutely smartest, most experienced and skilled fundamental investor can gain an edge through their research, but is that you? Fundamental analysis is a necessary step, for most investors, but it is not the key to alpha.

Take a few minutes to consider what beliefs you may have that are stopping you from become a better investor. Invert every belief you have. Consider your core investing beliefs from every angle.

A life coaches would suggest you make a list of all your disempowering beliefs and ask yourself these three questions:

1. Why do I believe this?
2. What is this belief costing me?
3. What do I have to loose if I let go of this belief?

I hope you found at least one investing belief that limits your possible success. I’d love you to read what it was.

Didn’t come up with a disempowering or limiting belief?

How about these few?

• It is impossible to time the market. (Any belief you have which includes the word impossible should receive double your focus!)
  Invert it.
  It is possible to time the market. Now write down, research, consider how it is possible.
• Technical Analysis is a waste of time.
  Turn that frown upside down.
  Technical Analysis can give me an edge and help me gain an extra percent or two when both buying and selling.
• Options are risky?
  Options are less risky than direct share ownership.

A major disempowering belief that I have held since my early teens is that I could never be a teacher. When I became a dad I realised that was a disempowering belief I had to tackle head. I’m still working on it and hopefully incrementally improving. Part of my problem is another disempowering belief I’ve held since childhood, I must learn that not everyone is a dickhead!

So why do psychologists outperform? They understand behaviour and have learned understanding of psychological biases. Could that become an edge for you?

Cheers
Dean

This is one of the primary reasons I invest in GE, more on that another day.

Today it’s Q2 earnings time.

So it’s time to go to the source.

Press Release

Main Presentation

Supplemental Data

Always go directly to the source. Rather than read a Reuters or some other press release on a company’s earnings, go straight to the source. Go the company’s investor relations page on their website to get the information from the horses mouth. If it’s a company you invest in then sign-up for the investor alerts.

For those too busy to read the releases or listen to the conference call (I’ll wait for the transcript) here is the bottom line: Continue reading →

Quotes to Live By

Too much prosperity makes men greedy and their desires are never controlled sufficiently to stop at the point of attainment. Seneca

The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” Bertrand Russell, philosopher, mathematician, author, Nobel laureate (1872-1970)

They are my two favourite quotes. Both are cornerstones of my life philosophy.

Another recent favourite is an Anthony Robbins quote, or at least a modern maxim attributed to Robbins.

Once you have mastered time, you will understand how true it is that most people overestimate what they can accomplish in a year - and underestimate what they can achieve in a decade!

How do these quotes fit in with investing? If you were wondering that, then maybe you should consider sticking to index funds. Continue reading →

After three months investing in a bearish market the FI Fund has finally succumbed and slipped into the negative territory. I have updated the spreadsheet and PDF file and you can see them on the portfolio page.

The following graph highlights why I’m still feeling good about the performance thus far. The FI fund is kicking the leather off the index ball. Continue reading →

I often see this confusion in fundamental investors, how can you call a bottom? The thing is you can’t. Technical investors know that and never proclaim they can. Fusion investors also know they can’t time market bottoms, but they also know they can increase their chances of getting close to the bottom by combining fundamental and technical analysis in a mixing bowl along with some behavioral finance. Fusion analysts know they don’t have to nail the bottom, to outperform they simply buy at prices lower than 50% of other market participants.

Buying low Continue reading →

I have a full sized position of Suntech (STP) in a personal account. Despite that I was disappointed by the large, 9.7%, rise on Friday. I had been hoping to be able to pick up more STP down around the March lows of $30. I had an alert set at $35 and depending on market conditions would have bought around then. Only time will tell if I’ll get that opportunity now.

As this article highlights Cowen and Co. analyst Rob Stone reiterated his outperform and made the bold call that 2009 earnings could come in as high as $3.35, mainly driven by gross margin expansion. The current consensus is $2.58 with a range of $2.02 - 3.06.

So why is a company that has been growing at over 100% for the last five years and Continue reading →