wcminvest&trade

Benefiting from share market Storing bullion p 72

Controlling leverage p 74

volatility with value investing

Stock tips p 80

By John Abernethy

While many investors are
nervous of the stock market at
the moment, the current market
volatility does in fact present
opportunities to invest in good
businesses, capable of delivering
high returns, at excellent prices.
But firstly, let me make an
important distinction. People
who buy shares with no real
knowledge or research in the
hope of selling them for a profit
at some future stage are in our
definition not investors, but
speculators.
This is not a tactic that should
be adopted by people who are
seeking to grow their SMSF
wealth.
Rather than speculating, an
investor needs to have the tools
and the patience to identify
quality companies that can be
purchased in the share market
at prices below their real value.
This is the crux of the rational
principle known as value
investing. So what do you need
to look for?
A quality company can be
defined as one that delivers
consistently high returns on
shareholder equity (ROE). Whilst
profits are important, the ratio
of that profit to shareholders
equity is the critical measure.
As a rule of thumb, a quality
company is one that achieves an
ROE in excess of 20% without
recourse to excessive debt.
In determining the value of a
business, there are a number of
key issues that investors need
to review:
a. Does the company report real
cash profits or do they include
revaluations of assets or the
understatement of expenses?
b. Has the company adopted
a sensible and rational dividend
payment
policy? Does the company retain
enough capital from profits to
grow the
business without borrowing
excessively?
c. Has the company in the past
bought back shares at prices in
excess of
its value?
d. Does the company pay tax
and does it deliver an enhanced
return to its
shareholders through franked
dividends?
Finally, the monitoring of your
investments is important. If you
have bought
a quality company at a margin
below what it is worth, you
should make good investment
returns.
Bear in mind that while good
companies will consistently
increase in value over time,
there are periods when markets
will severely over-value all
companies – good as well as
bad. A rational investor must
maintain a realistic assessment
of value. Should a company’s
share price excessively exceed
its real value then the most
sensible strategy is to sell and
revert to cash.

Will your investments grow in 2010?

In volatile times, pick your investments with care.
Clime has consistently outperformed the market, delivering positive returns
even during the GFC.
In the year to February 2010, Clime’s Australian share portfolio grew by 70%.
You can trust our investment process. Put simply, we value companies and
invest when the share price is lower than the value.
A conversation with Clime could be your best investment.
Contact Michael Kloeckner today
D 02 8917 2134
M 0488 188 309
michaelk@clime.com.au
www.clime.com.au
heading east
Australian investors pinning hopes
on China, not the US
Australian investors expect their personal financial situation to improve
thanks to the demand of commodities from China.
The Australians ranked equal second with China in investor
sentiment in the region in the latest report from ING Investment
Management.
With an overall score of 154 (optimistic) – up six points from the
pervious quarter – according to the Investor Dashboard Sentiment
Index survey 60% believe it will take the US more than two years
before a full recovery.
But more than half (58%) believe that the US economy has not
effected their investment decisions.
Despite this negative outlook toward the US recovery, 79% of
Australian investors still believe the US is one of the major countries
driving the world economy, with China slightly more influential at 80%
according to the ING Investment Management survey. The survey
measured 12 countries in the Asia Pacific region.
ING Investment Management deputy chief executive Martin
Donnelly said that only a year ago 72% of Australians surveyed were
experiencing a negative return on their investment. There has been a
complete turn around since with 72% of investors now experiencing
an increase on their return on investments.
“We are seeing Australian investors focus on the upside of China
driving our local economy rather than on focusing on the delayed US
economic recovery,” said Donnelly.
Investor appetite for medium and high risk investments has tripled
and doubled respectively.
As much as 91% of Australian investors expect inflation to rise
in 2010 as Australian recovery takes place. For most Australian
investors, the stock market is preferred as the most suitable counter-
inflation strategy followed by cash investments and property.
“We are also seeing a greater allocation to superannuation again.
When compared to their Asian counterparts, Australian investors
are content with the composition of their portfolios and we do not
expect to see major changes into different asset classes,” Donnelly
said.

Clime Asset Management Pty Ltd Real investing. Real value.

MAY/JUNE 2010 wealthcreator.com.au 71