Getting started

I've decided to start this blog to hopefully bring some discipline to my investing. Over the past twenty years I've had half-hearted attempts to invest in shares, which at best has only resulted in me not losing money (I should have just stuck the money in the bank). I've also collected a whole lot of books on investing and haven't made it past the first few chapters.

The only good investment decision I've made is to take all my investment funds out of a managed fund in August 08. I call that a good investment decision because I actually made it on the basis of research. Just after I took the money out, the market started to rally. I thought "Oh, no, I've stuffed up again" but after a few days in turned around and continued heading south. When I checked the unit prices a couple of months later the price had fallen another 10% and then in November, it was one of the first funds to stop withdrawals. I don't know on what legal basis funds can just say "no, you can't have your money back", but I was glad I didn't have to sit by and watch my investment get smaller and smaller and not be able to do anything about it.

So, to set the context, I will be looking only at share investment and only at shares listed on the Australian Stock Exchange (ASX). The aim is to set up a portfolio on paper and hopefully, at some point, build up enough knowledge and confidence to throw some real cash at it.

The real issue with investment is deciding what to invest in. There are countless things to invest in from the Melbourne Cup to BHP. If we ignore the Melbourne Cup (and gambling in general) investment breaks down into three categories: cash (bank accounts and term deposits), property (everything from own home ownership to renting out office buildings and shopping centres) and shares (part ownship of a business).

I'm concentrating on shares here because:
(1) typically cash gives the lowest return and is fully taxed further reducing your return. I say typically gives the lowest return because over the past year (2008) I think it would have been the only category giving a positive return.
(2) I own an apartment (with mortgage) - which puts me overweight in property (add to this I work as a property financier which over exposes me even further, but I will get around to the principles of diversification some other time).

I read somewhere years ago that the ASX constitutes only 2% of the world's share markets. In this context, you shouldn't restrict your share trading to the ASX, but investing in foreign share markets introduces currency risk and generally makes life far more complicated. So I'm sticking to the ASX only for now at least.

That's about as far as my own knowledge has taken me. To continue, I'm going to work my way through all the books I've bought. The first is "The Motley Fool Investment Guide" by David and Tom Gardner (check out www.fool.com).

I won't be giving a summary of the book, just the points I've found useful, which is why I'm starting at Chapter 9 - How to Find Companies to Invest In. It recommends you look at:

- Your industry: I work in a bank lending money to property developers and investors, so I'm including both banking and property

- Your interests: I'm not sure that "American Dad" is going to provide many investment opportunity for me, but it did make me think of JB Hi Fi, which made me think of shopping / Retailing (and even though I'm a chick, I hardly ever shop - no really!). I also go to bootcamp, so I'll include Health.

- Your insight: ie look around and see whats thriving - I'm not sure anything is thriving at the moment, so I might let that one go

- Your investigation: The book recommends reading "Investor's Business Daily" every day. I will start reading the Financial Review everyday, but for now have no more categories to add.

To this list the book recommends adding blue-chip stocks (established leaders with largest market capitalisation, ie number of shares times share price) and small-cap stocks (which it defines as companies with a market capitalisation between $250 million to $1 billion). Given our stock market is somewhat smaller than the US market, I think these figures may be a little high in the Australian context.

Given all the above, I went to the ASX website (www.asx.com.au) and downloaded a list of all the listed shares. The list includes the name, ticker and GIS Industry Code. From the total list of shares I kept:

• the banks (eg Commonwealth Bank of Australia)
  
• consumer discretionary (eg Seven Network)
• consumer durables and apparel (eg Billabong)
• consumer services (eg Domino's Pizza)
• food and staples retailing (eg Woolworths)
• food beverage and tobacco (eg Coca-Cola Amatil)
• health care (eg Sigma Pharmaceuticals)
• health care equipment and services (eg Fisher & Paykel Healthcare)
• real estate (eg Bunnings Warehouse Property Trust)
• retailing (eg David Jones)

I then downloaded the list of companies included in the ASX 50 as representative of blue-chip shares and the ASX Small Ordinaries as representative of the small cap shares.

This gave me a list of 583 shares. I'm aiming for a portfolio of about 12 shares, so there is still a bit of work to do.

My next post will look at Chapter 13 - Selecting the Best Growth Stocks.